Yearly Archives: 2021

Short answer Type Question:

Q.1 What is meant by Management?

ANSWER: Management refers to the process of managing people and tasks efficiently and effectively using the right techniques and methods. It is an integrated process which involves a series of functions like Planning, Organising, Staffing, Directing and Controlling.

Q.2 Name any two important characteristics of management.

ANSWER: The two characteristics of management are as follows:

• Management is a goal-oriented process: Each and every organisation has a set of goals to be achieved in a certain period of time. Different organisations have different types of goals depending upon the reason for its existence.
• Management is a dynamic function: The world is changing at a very fast pace and has become very dynamic. Management has to adapt itself as per the changing environment. Various external factors like social, political, economic factors have to be taken into consideration in order to survive.

Q.3 Identify and state the force that binds all the other functions of management.

ANSWER: Coordination binds all the other functions of management. It is also considered as the essence of management. Coordination as a process begins from the first step of management i.e planning. This is the process through which all the activities are lined up and put to action.

Q.4 List any two indicators of growth of an organisation.

ANSWER: The two indicators are:

• Increase in the sales volume of an organisation.
• Increase in number of employees over a period of time.

Q.5 Indian Railways has launched a new broad gauge solar power train which is going to be a path breaking leap towards making trains greener and more environment friendly. The solar power DEMU (Diesel Electric Multiple Unit) has 6 trailer coaches and is expected to save about 21,000 liters of diesel and ensure a cost saving of Rs 12, 00,000 per year. Name the objectives of management achieved by Indian Railways in the above case.

ANSWER: Social objectives of the management of Indian Railways have been achieved in the above case, as the organisation succeeded in saving diesel and costs, by making the trains environment friendly. 

Q.6 Ritu is the manager of the northern division of a large corporate house. At what level does she work in the organisation? What are her basic functions?

ANSWER: Ritu works in the middle-level management, being the manager of the northern division of a large corporate house.

The basic functions of the middle level managers are:

• They interpretes and explain the organisational plans and policies to line managers.
• They recruit and select the appropriate personnel.
• They are responsible for organising required resources for effective implementation of plans.
• They assign duties and responsibilities to first line managers.
• They motivate lower level management to achieve the best of their potential.
• They represent the complaints and problems of lower level management to top level management.

Q.7 State the basic features of management as a profession.

ANSWER: The basic features of management as a profession are:

• Well defined body of knowledge: Manager is a professional who can acquire specialised knowledge through books for joining specific courses.
• Restricted entry: Professional degree is a must to become a professional but an individual with managerial skills can become a manager despite having no professional degree.
• Professional association: Professionals need to be associated with respective professional bodies. They are professional bodies for management as well but it is not compulsory for managers to join.
• Ethical code of conduct: Professionals are bound by the code of conduct laid bi associations they are associated with. Managers are expected to be ethical but there is no specifically laid down code of conduct for them.
• Service motive: A professional and a manager both aim to provide dedicated and committed services towards the increase of their clients.

Q.8 Why is management considered a multi-dimensional concept?

ANSWER: Management is considered to be a multi-dimensional concept because it involves:

• Management of work: Each and every organisation has some work to perform. The management translates the work into goals to achieve and also the means used to achieve it. 
• Management of people: Human Resource is an organisation’s greatest asset. The task of management involves making people work, dealing and communicating with them, strengthening their positive aspects, and working upon their weaknesses
• Management of operations: Each and every organisation has some basic products to serve and some services to provide for survival. This requires a process through which the input materials are transformed into desired output. 

Long Answer Questions:

Q.1 Management is considered to be both an art and science. Explain.
ANSWER: Art is the skillful and personal applications of existing knowledge to achieve desired goal.
Management is considered an art due to the following reasons
(i) Existence of Theoretical Knowledge :All art subjects are based on theoretical knowledge e.g., written material is available on dancing, time arts, music etc same way there is lot of literature available on management and its branches – finance, marketing, human resource etc.
(ii) Personalised Application :The use of this basic knowledge differs from one individual to the other. Two painters, two dancers or two singers all use their knowledge in their own way. Same way two managers who have acquired the same knowledge may use it in their own different ways to get the work done.
(iii) Based on Practice and Creativity : All art is practical. It involves creative practice. The more we practice it better we become at it. It also requires creativity.
Same way a manager applies his acquired knowledge in a unique manner.
More practice makes him a better manager and he also develops his own style of management.
Management is an In-exact Science
(i) Systematised Body of Knowledge :Science is a systematised body of knowledge. Its principles are based on cause and effect relationship, e.g., water evaporates on being heated. Same way management is a body stigmatised Knowledge. All managerial principles have cause and effect relationship.
(ii) Principles Based on Experimentation :Scientific principles are first developed through observation and then tested through repeated experimentation. Same way management principles are also propounded after observation and repeated experimentation.
(iii) Universal Validity :All scientific principles have universal validity. They give same result wherever applied.
Principles of management do not have Universal validity. They have to be adjusted and applied according to the need of the situation.
Thus, management is an in-exact science.

Q.2 Do you think management has the characteristics of a full fledged profession?
ANSWER:  No, management does not possess all the characteristics of a full fledged profession. The reasons go as follows
(i) Well-defined Body of Knowledge All professions are based on a well-defined body of knowledge that can be acquired teaching – learning process. This feature of a profession is possessed by management as well. There is vast knowledge available on management in the form of definitions, concepts, theories, principles etc.
(ii) Restricted Entry All professions have a restriction or the entry of its practitioners. They have to acquire a specific degree to be professional e.g., LLB for a lawyer MBBS for a doctor etc. But a manager can be an MBA qualified or not.
(iii) Professional Association All professions are affiliated to a professional association which regulates entry, grants certificate of practice and formulates a code of conduct e.g., ail lawyers have to be a member of Bar Council to practice law. It is not compulsory for all managers to be a member of AIMA.’
(iv) Ethical Code of Conduct All professions are bound by a ethical code of conduct which guides the behaviour of its members. But as it is not compulsory for all managers to be members of AIMA, they all may not be aware of the prescribed code of conduct of AIMA.
(v) Service Motive All basic motive to serve their client’s interest, e.g., -lawyers to get justice for their clients, doctors to treat the patients etc. All managers also work in a manner where by they show their effectiveness and efficiency in the form of good quality goods provided to the customer at a reasonable price.
Thus, management possesses some characteristics of a profession but not all.

Q.3 Co-ordination is the essence of management. Do you agree? Give reasons.
ANSWER: Co-ordination plays a vital role as it binds all the other functions of management. It is the common thread of all activities such as purchase, production, sales etc that runs through. Some of the basic features are as follows
(i) Integrates Group Efforts Co-ordination brings unity to all. It gives a common focus to group efforts.
(ii) Ensures Unity of Actions It acts as a binding force between departments and ensures that all action is aimed at achieving the goals of the organisation.
(iii) It is a Continuous Process Co-ordination is not a one time function but a continuous process. It begins at the planning stage and continues till controlling.
(iv) It is an All Pervasive Function Co-ordination is required at all levels of management due to the interdependent nature of activities of various departments. It integrates the efforts of different departments and different levels.
(v) It is the Responsibility of All Managers All managers need to co-ordinate something or the other. A manager of production department needs to co-ordinate the work within his department and also with the other departments at the same time.
(vi) It is a Deliberate Function Whatever the managers are doing in an organisation they are doing it knowingly. Co-ordination is one of the most important functions of all managers. Thus co-ordination is also done deliberately. Whatever the managers do, they do it deliberately to achieved the predetermined goals and objectives.
Thus, we can say co-ordination is the essence of managment after analysing these points.

Q.4 “A successful enterprise has to achieve its goals effectively and efficiently” Explain.
ANSWER: “A successful enterprise has to achieve its goals effectively and efficiently”. Thus, management has to see that task are completed and goals are achieved with the minimum resources.
Management is thus getting things done with the aim of achieving goals effectively and efficiently. Being effective or doing work effectively basically means finishing the given task. It is concerned with end result, it is achieved or not. Efficiency means doing the work correctly and with minimum cost. If by using less resources more benefits are derived then efficiency has increased. It is thus essential for any organisation to focus on efficiency as well as effectiveness. It is not only important to complete the work correctly but equally important to complete it with minimum cost. In the same manner, it is not only important to reduce cost but equally important to complete the work correctly.

Q.5 Management is a series of continuous inter-related functions. Comment.
ANSWER: Management is a series of continuous inter-related functions. Each one of them performed to guide and direct the efforts of others.
(i) Planning Planning is the primary function which runs through all other functions. It is the process of thinking before doing. It bridges the gap between where we are and where we want to go.
(ii) Organising It is the process of defining the formal relationship among people and resources to accomplish the desired goals. It involves
(a) Identification and division of work
(b) Departmentalisation
(c) Assigning of duties
(d) Establishing reporting relationships
(iii) Staffing Organisational goals can be achieved only through human efforts. It is the duty of management to make the best possible use of this resource. Thus, placing the right person on the right job is very important. Staffing helps management to motivate, select and place the right person on the right job.
(iv) Directing Directing involves leading, influencing and motivating employees to perform the tasks assigned to them. This requires establishing an atmosphere that encourages employees to do their best. Directing comprises of four elements; supervision, motivation, leadership and communication.
(v) Controlling Controlling is the management function of monitoring organisational performance towards the attainment of organisational goals. The task of controlling involves
(a) Establishing standards of performance
(b) Measuring current performance’
(c) Comparing this with established standards
(d) Taking corrective action

Short answer Type Question:

Q.1State the difference between dissolution of partnership and dissolution of partnership firm.

ANSWER:

Basis of Difference	Dissolution of Partnership	Dissolution of Partnership firm
Meaning	It means change in the partnership deed (or the agreement) among the partners.	It means that the business is wound up and the firm is dissolved.
Discontinuation	Business is not discontinued.	Business is discontinued, as the firm is dissolved.
Closure of Books of Accounts	Books of accounts are not closed, as there is only change in the existing agreement between the partners.	Books of accounts are closed, as the business is discontinued.
Assets and Liabilities	In this case, the assets and liabilities are revalued.	In this case, all the assets are sold off in order to pay the liabilities of the business.
Role of Court	There is no intervention by the court.	Dissolution of a partnership firm may be done with the consent of the court.
Nature	It is voluntary in nature.	It may be voluntary (as per the discretion of the partners) or compulsory (as per the order of the court).
Effect	It may or may not involve dissolution of the firm.	It necessarily involves dissolution of both the partnership as well as of the partnership firm.

Q.2 State the accounting treatment for:

i. Unrecorded assets

ii. Unrecorded liabilities

ANSWER:

i) Accounting Treatment for Unrecorded Assets

 Unrecorded asset is an asset, the value of which has been written off in the books of accounts but the asset is still in usable position. The accounting treatment for unrecorded asset is:

a) When the unrecorded asset is sold for cash

Cash A/c	Dr.
	To Realisation A/c
(Unrecorded assets sold for cash)

b) When the unrecorded asset is taken over by any partner

Partner’s Capital A/c	Dr.
	To Realisation A/c
(Unrecorded asset taken over by the partner)

ii) Accounting Treatment for Unrecorded Liabilities

 Unrecorded liabilities are those liabilities which are not recorded in the books of account. The accounting treatment for unrecorded liability is:

a) When the unrecorded liability is paid off

Realisation A/c	Dr.
	To Cash A/c
(Unrecorded liability paid in cash)

b) When the unrecorded liability is taken over by a partner

Realisation A/c	Dr.
	To Partner’s Capital A/c
(Unrecorded liability  taken over by the partner)

Q.3 On dissolution, how you deal with partner’s loan if it appears on the

(a) Assets side of the Balance Sheet

(b) Liabilities side of the Balance Sheet

ANSWER:

a) If partner’s loan appears on the assets side of the Balance Sheet then it implies that the partner has taken loan from the business and is liable to pay back to the business. In such case, the loan amount is transferred to his capital account. Thus the accounting entry will be:

Partner’s Capital A/c	Dr.
	To Partner’s Loan A/c
(Partner’s loan transferred to Partner’s Capital Account)

b) If partner’s loan appears on the liabilities side of the Balance Sheet then it implies that the partner has forwarded loan to the firm and the firm is liable to pay back the amount to the partner. In such case, partner’s loan is paid off after paying all the external liabilities. The partner’s loan is not transferred to the Realisation Account, in fact, it is paid in cash. The following accounting entry is passed.-

Partner’s Loan A/c	Dr.
	To Cash/Bank A/c
(Partner’s loan paid in cash)

Q.4 Distinguish between firm’s debts and partner’s private debts.

ANSWER:

Basis of Difference	Firm’s Debts	Partner’s Private Debts
Meaning	It refers to those debts that are borrowed against the name of the firm.	It refers to those debts that are borrowed personally by the partner.
Liability	All the partners of the firm are jointly and separately liable for the firm’s debt.	The concerned partner is personally liable for his private debts.
Settlement of debts by private assets	If the firm’s debt exceeds the firm’s assets, then private assets of the partners may be utilised to pay back the firm’s debt, if only  the partner’s  private assets exceeds his/her own private debts.	Private debts are settled against the partner’s private assets. Subsequently, if any surplus exists then this may be utilised to settle the firm’s debts.
Settlement of debts by firm’s assets	Firm’s debts are settled against the firm’s assets. Subsequently, if any surplus exists, then this is distributed among the partners.	After paying off firm’s debts, the surplus of firm’s assets, if any is distributed among the partners.  The personal share of the partner in this surplus can be utilised to settle his/her own private debts.

Q.5 State the order of settlement of accounts on dissolution.

ANSWER:

The following are the rules of settlement of accounts on dissolution as per the Section 48 of Partnership Act 1932.

1. Application of Assets: Amount received by the realisation (sale) of the assets shall be used in the following order:

a) First of all the external liabilities and expenses are to be paid.

b) Then, all loans and advances forwarded by the partners should be paid.

c) Then, the capital of each partner should be paid off. If there remains any surplus after the payment of (a), (b) and (c), then it should be distributed among the partners in their profit sharing ratio.

2. Treatment of Loss: In case of loss and any deficiency of capital this should be paid in the following order:

a) First these should be adjusted against firm’s profits.

b) Then, against the total capital of the firm.

c)Even if  there exists any loss and deficiencies then it should be borne by all the partners individually in their profit sharing ratio.

Q.6 On what account realisation account differs from revaluation account.

ANSWER:

Basis of Difference	Realisation Account	Revaluation Account
Meaning	It records the sale of various assets and payment of various liabilities.	It records the effect of revaluation of assets and liabilities on the eve of admission, retirement, death and change in the profit sharing ratio.
Time	It is prepared at the time of dissolution of firm.	It is prepared when admission/retirement/death or change in profit sharing ratio takes place.
Objective	To find profit or loss on realisation of assets and payment of liabilities.	To find out profit or loss on revaluation of assets and liabilities.
Amount	Assets and liabilities are shown at the book value.	Increase or decrease in the value of assets and liabilities are shown in this account.
Records	All assets and liabilities are recorded here.	Only those assets and liabilities are recorded here whose values have changed over a period of time.
Effect	All accounts of assets and liabilities are closed.	No account is closed on revaluation of assets and liabilities.

LONG ANSWER TYPE QUESTIONS:

Q.1 Explain the process of dissolution of partnership firm.
ANSWER: Dissolution means breaking of relationship among the partners. As per Section 39 of the Indian Partnership Act 1932, the dissolution of firm implies that not only partnership is dissolved but the firm losses its existence, i.e., after dissolution the firm does not remain in business.
Dissolution of partnership firm implies discontinuation of the business of the partnership firm. Dissolution involves winding up of business, disposal of assets and paying off the liabilities and distribution of any surplus or borne of loss by the partners of the firm. As per the Partnership Act 1932, a partnership firm may be dissolved in the following manners.

(i) Dissolution by Agreement As a firm is formed with the consent of all partners with a mutual agreement. Dissolution can also be there with
the help of agreement. It happens in following two ways.
A firm may be dissolved
(a) When all the partners agree to dissolve the firm.
(b) When there is any term related to dissolution of firm in the partnership agreement.
(ii) Compulsory Dissolution A firm may be dissolved compulsorily in the following condition
(a) In case, all the partners or all except one partner become insolvent or insane.
(b) If the business becomes illegal.
(c) Where all the partners except one decide to retire from the firm.
(d) Where all the partners except one die.
(iii) Dissolution by Notice When partnership is at will then the partnership firm may be dissolved, if any partner give notice in writing to all the other partners expressing his/her intention to dissolve the firm.
(iv) Dissolution by Court A court may order for dissolution if a suit is filed by a partner, as per Section 44 of Indian Partnership Act, 1932. The court may order to dissolve a partnership in following conditions
(a) A partner becomes insane.
(b) A partner commits breach of agreement wilfully.
(c) When a partner’s conduct affects the business.
(d) When a partner transfers his interest to a third party.
(e) If business cannot be continued.
(f) If a partner becomes incapable of doing business.
(g) If court thinks dissolution to be just and equitable on any ground.
Besides these, above mentioned circumstances, a partnership firm may be dissolved if the court at any stage finds dissolution of the firm to be justified and inevitable.

Q.2 What is a Realisation Account?
ANSWER:  On dissolution of a firm, all the books of account are closed, all assets are sold and all liabilities are paid off. In order to record the sale of assets and discharge of liabilities, a nominal account is opened named realisation account. The main purpose to open realisation account is to ascertain the profit or loss due to the realisation of assets and liabilities. Realisation profit (if credit side > debit side) or realisation loss (if debit side > credit side) are transferred to the partner’s capital account in their profit sharing ratio.
Concisely, following are the important objectives of preparing realisation account
(i) To close all the books of account.
(ii) To record transactions relating to the sale of assets and discharge of liabilities.
(iii) To determine profit or loss due to the realisation of assets and liabilities.
Features of Realisation Account
(i) In realisation account, sale of assets is recorded at their realised value.
(ii) Payment to liabilities (creditors) is recorded at their settlement value.
(iii) After all the transactions have been recorded, there will be balance, which may be profit or loss.
(iv) Profit arises in two situations
(a) When assets are realised at more than their book value.
(b) When liabilities are settled at less than their book value.
(v) If the two conditions are vice versa, the net result will be loss.
(vi) The net profit or loss on realisation is to be transferred to the partner’s capital accounts in their profit sharing ratio.

The format for realisation account is as follows

Q.3 Reproduce the format of Realisation Account.
ANSWER:

Q.4 How deficiency of creditors is paid off?
ANSWER: When a firm gets into the situation of dissolution, first of all the amount received from the sale of firm’s assets are utilised to pay the creditors. After that, if the sale receipts of assets fall short, then partners’ private assets are used for settling the dues of the firm’s creditors. Even if some portion of the amount due to creditors is left unpaid, then there arises deficiency of
creditors. This deficiency is handled in the following two ways
(i) In first case, deficiency is transferred to the Deficiency Account.
(ii) In second case, the deficiency is transferred to the partner’s capital account.
In first case, a separate account is prepared for the firm’s creditors. Then in ‘ order to ascertain the firm’s cash balance accruing from the sale of the firm’s
assets and partners’ private assets, cash account is prepared. After ascertaining the cash availability with the firm, the creditors and the external liabilities are paid proportionately (partially). The remaining unpaid creditors or the deficiency is transferred to the Deficiency Account.
In the second case, the creditors are paid by the cash available with the firm
including the partners’ individual contribution. The deficiency or unpaid creditors amount .is transferred to the partner’s capital account. Thus, the deficiency of the creditors is borne by all the partners in their profit sharing ratio. If any partner becomes insolvent and is unable to bear the deficiency, then this will be regarded as a capital loss to the firm.
‘ If the partnership deed is silent, about such capital loss in the fact of insolvency of a partner, the deficiency on the insolvent partner’s capital ’ account must be borne by the other solvent partners, in proportion to their capital. In that case, we should apply Garner vs Murray decision in solving problems in partnership.

Short Answer Type Question:

Q.1 What are the different ways in which a partner can retire from the firm?

ANSWER: The following are the different ways in which a partner can retire from a firm.

i. With the consent of all other partners: A partner must take the consent of all the co-partners of the firm before his/her retirement. Thereafter, the partner can retire from the firm if and only if all the partners agree on the decision of his/her retirement.

ii) With an express agreement by all the partners: In case of written agreement among the partners a partner may retire from the firm by expressing his/her intention of leaving the firm though a notice to the other partners of the firm.

iii) By giving a written notice: If partnership among the partners is at will then a partner may retire by giving notice in writing to all the other partners informing them about his/her intention to retire.

Q.2 Write the various matters that need adjustments at the time of retirement of partner/partners.

ANSWER: The following are the various matters that need to be adjusted at the time of retirement of partners/partner.

1. Calculation of new gaining ratio of all the remaining partners of the firm.

2. Calculation of new ratio of the remaining partners of the firm.

3. Calculation of goodwill of the new firm and its accounting treatment.

4. Revaluation of assets and liabilities of the new firm.

5. Distribution of accumulated profits and losses and reserves among all the partners (including the retiring partner).

6. Treatment of Joint Life Policy

7. Settlement of the amount due to the retiring partner

8. Adjustment of capital accounts of the remaining partners in their new profit sharing ratio.

Q.3 Distinguish between sacrificing ratio and gaining ratio.

ANSWER:

Basis of Difference	Sacrificing ratio	Gaining Ratio
1. Meaning	It is the ratio in which old partners agree to sacrifice their share of profit in favour of new partners/partner	It is the ratio in which continuing partner acquires the share of profit from outgoing partner/partner
2. Calculation	Sacrificing Ratio = Old Ratio – New Ratio	Gaining Ratio = New Ratio – Old Ratio
3. Time	It is calculated at the time of admission of new partners/partner.	It is calculated at the time of retirement/death of old partners/partner.
4. Objective	It is calculated to ascertain the share of profit and loss given up by the existing partners in favour of new partners/partner.	It is calculated to ascertain the share of profit and loss acquired by the remaining partners (of the new firm in case of retirement) from the retiring or deceased partner.
5. Effect	It reduces the profit share of the existing partners.	It increases the profit share of the remaining partners.

Q.4 Why do firm revaluate assets and reassess their liabilities on retirement or on the event of death of a partner?

ANSWER: At the time of retirement or death of a partner, it becomes inevitable to revalue the assets and liabilities of the firm for ascertaining their true and fair values. The revaluation is necessary as the value of assets and liabilities may increase or decrease with the passage of time. Further, it may be possible that there are certain assets and liabilities that remained unrecorded in the books of accounts. The retiring or the deceased partner may be benefited or may bear loss due to change in the values of assets and liabilities. Therefore, the revaluation of the assets and liabilities is necessary in order to ascertain the true profit or loss that is to be divided among all the partners in their old profit sharing ratio.

Q.5 Why a retiring/deceased partner is entitled to a share of goodwill of the firm?

ANSWER: Goodwill is an intangible asset of a firm that is earned by the efforts of all the partners of the firm. After the retirement or death of a partner, the fruits of the past performance and reputation will be shared only by the remaining partners. Thus the remaining partners should compensate the retiring or the deceased partner by entitling him/her a share of firm’s goodwill.

Long answer Type Question:

Q.1 Explain the modes of payment to a retiring partner.
ANSWER: Payment to a retiring partner can be made in the following ways
(i) Lump Sum Payment : A lump sum payment can be made to the retiring partner in full settlement. In that case, the following Journal entry will be passed

(ii) Opening the Loan Account Sometimes the amount due to the retiring partner is paid in instalments then the balancing figure of his/her capital account is transferred to his/her loan account, in this case, the retiring partner receives equal instalments along with the interest on the amount outstanding. In that case the following journal entries will be passed for transferring the amount paid to him/her in retiring partner’s loan account.

(iii)Some Payment in Cash and Some in Instalment Sometimes the amount due to the retiring partner is paid partly in cash and partly in equal instalments in that case a certain amount is paid in cash to the retiring partner and the rest amount due to him/her is transferred to his/her loan account. The following necessary journal entry is to be passed.

Q.2 How will you compute the amount payable to a deceased partner?
ANSWER:  In case of a death, the legal executor of the deceased partner is entitled for a claim which includes his share of profit or loss, interest on capital, interest on drawings In that case for computing the amount payable is calculated by preparing the deceased partner’s capital account as follows

Note: In the above capital account, the legal executor will be entitled for the balancing
figure that is the excess of the credit side over the debit side of the deceased partner’s capital account.

Q. 3 Explain the treatment of goodwill at the time of retirement or on the event of death of a partner.
ANSWER:  At the time of retirement or is the event of death of a partner, the goodwill of the firm is adjusted among the partners in their gaining ratio with the share of goodwill of the retiring or the deceased partner. At the time of retirement or on the event of death of a partner, goodwill account is not opened hence only two situations are left for treating the goodwill first when
goodwill account is already there in the book or it appear in the books and second when the amount of goodwill is not appearing in the books.
The treatment of goodwill will be as follows in the above two situations
First Situation When Goodwill Already Appears in the Books of the Firm
Step 1 Write-off the Existing Goodwill When goodwill account already exist in the book of the firm or mentioned in the book first of all, it will be written oft and should be distributed among all the partners of the firm including the retiring or the deceased partner in their old profit sharing ratio. In that case, the journal entry will be as follows

Step 2 Adjusting Goodwill Through Partners’ Capital Account
After writing off the old goodwill, the amount of goodwill now needs to be adjusted through the partner’s capital account with the share of the goodwill of the retiring orthe deceased partner. The following journal entry is passed.

Second Situation When No Goodwill Appears in the Books of the Firm
In second case, when no goodwill appears in the books of the firm, the amount of goodwill will be adjusted through the partner’s capital account with the share of the goodwill of the retiring or the deceased partner. The following journal entry’is passed

Q.4 Discuss the various methods of computing the share in profits in the event of death of a partner.
ANSWER:  Computation of profit will be different in case of death of a partner as compare to the retirement. The reason is that in case of retirement everything is pre-planned but in case of death nothing is planned. In case of death, the share of profit.can be calculated by one of the two methods.
(i) On the Basis of Time
In this method, profit upto the date of the death of the partner is calculated on the basis of time passed till the death of the partner from the beginning of the year on the bases of the last year’s/years’ profit or average profit of last few years.
The assumption in this method is that the profit will be uniform throughout the current year. The share of the deceased partner profit will be calculated as follows

Example A, B, C and D are equal partners. The profit of the firm for the years 2009, 2010 and 2011 are ? 5,00,000, ? 7,00.000 and <9,00,000 respectively. C dies on June 30, 2012. The share of C in the firm’s profit will be calculated on the basis of average profit of last three years. Firm closes its books every year on December 31.
In this case, C’s share in the profits will be calculated for four months. i e., from January 1. 2012

(ii) On the Basis of Sale
In this method, profit up to the date of the death of the partner is calculated on the basis of sales affected till the date of the’ death of the partner from the beginning of the year. The assumption in this method is that the net profit margin for current year will be same as the previous year. The share of the deceased partner profit will be calculated as follows

Example A, B and C are equal partners. The last year’s sales and profit were ? 40,00,000 and ? 4,00,000. C died on June, 2012. Sales of the current year till the date of C’s death amounts to ? 15,00,000. Firm closes its books on December 31 every year.

Short Answer Type Question:

Q.1Identify various matters that need adjustments at the time of admission of a new partner.

ANSWER: The following are the various items that need to be adjusted at the time of admission of a new partner.

1. Profit Sharing Ratio: Calculation of new profit sharing ratio.

2. Goodwill: Valuation and adjustment of goodwill among the sacrificing old partners.

3. Revaluation of Assets and Liabilities: Assets and liabilities are revalued to ascertain the current value of the assets and liabilities of the partnership firm. Moreover, the profit or loss due to the revaluation need to be distributed among the old partners.

4. Accumulated profits, losses and reserves are distributed among the old partners in their old ratio.

5. Adjustment of capital of the partners.

Q.2 Why i is it necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

ANSWER: When new partner/s is/are admitted, then the old partners in the partnership firm need to sacrifice their share of profit in favour of the new partner/s. This reduces the share of profit of the old partners ,hence, it is necessary to ascertain the new profit sharing ratio even for the old partners in the event of admission of new partner/s.

Q.3 What is sacrificing ratio? Why is it calculated?

ANSWER: Sacrificing ratio refers to the ratio in which the old partners of a partnership firm surrender their share of profit in favour of the new partner/s. It is calculated as a difference between the old ratio and the new ratio of the old partners.

Sacrificing Ratio = Old Ratio − New Ratio

It is very important to calculate this ratio, as the new partner need to compensate the old partners for sacrificing their share of profit. The new partner compensates the old partners by making payment to them in the form of goodwill that is transferred among the old partners in their sacrificing ratio

Q.4 On what occasions sacrificing ratio is used?

ANSWER: The following are the different situations when sacrificing ratio is used.

1. When the existing partners of a partnership firm agree to change the share of profit among themselves.

2. When a new partner is admitted in the partnership firm and the amount of the goodwill brought by him/her is transferred among the old partners in sacrificing ratio of the old partners.

Q.5 If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?

ANSWER: If goodwill already appears in the books of old firm (before the admission of new partner), then this should be written off among the old partners in their old profit sharing ratio. The following Journal entry is passed.

Old Partner’s Capital A/c	Dr.
To Goodwill A/c
(Goodwill written off in old ratio among the old partners)

Q.6 Why is there need for the revaluation of assets and liabilities on the admission of a partner?

ANSWER: At the time of admission of a new partner, it becomes very necessary to revalue the assets and liabilities of a partnership firm for ascertaining its true and fair values. This is done because the value of assets and liabilities may have increased or decreased and consequently their corresponding figures in the old balance sheet may either be understated or overstated. Moreover, it may also be possible that some of the assets and liabilities are left unrecorded. Thus, in order to record the increase and decrease in the market value of the assets and liabilities, Revaluation Account is prepared and any profits or losses associated with this increase or decrease are distributed among the old partners of the firm.

Long Answer Type Question:

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Q.1 Do you advise that Liabilities and Assets must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?

ANSWER: It is logical to revalue Liabilities and Assets when a new partner gets admitted in the firm, as it is helpful in determining the true value of them on that day. Revaluation is helpful as the value of Liabilities and Assets may increase or decrease and as such their values in existing balance sheet may be not justified, also some assets or liabilities may not be recorded at all. Hence, for recording the changes in market value for the Liabilities and Assets, a revaluation account is needed to be prepared and the associated profits or losses needs to be distributed between the existing partners of firm.

Following journal entries are added to the account on the date a new partner is admitted in a firm.

i. When asset value increases:

Assets A/c Dr.

To Revaluation A/c

(For increase in asset value)

ii) When asset value decreases:

Revaluation A/c	Dr.
	To Asset A/c
(For Decrease in asset value)

iii) When Liabilities increase:

Revaluation A/c	Dr.
	To Liabilities A/c
(For increase in liabilities value)

iv) When liabilities decrease:

Liability A/c	Dr.
	To Revaluation A/c
(For decrease in liabilities value)

v) To record assets that are unrecorded:

Unrecorded Assets A/c	Dr.
	To Revaluation A/c
(Recording unrecorded assets)

vi) To record liabilities that are unrecorded :

Revaluation A/c	Dr.
	To Unrecorded Liabilities A/c
(To record unrecorded liabilities)

vii) Transferring credit balance of Revaluation account:

Revaluation	Dr.
	To Old Partner’s Capital A/c
(Transfer of profit earned from Revaluation to Old Partners as per existing profit sharing ratio)

vii) Transferring debit balance of Revaluation account:

Old Partner’s Capital A/c	Dr.
	To Revaluation A/c
(Transfer of loss on revaluation to Old Partners as per existing profit sharing ratio)

Q.2 What is goodwill? What are the factors that affect goodwill?

ANSWER: Goodwill refers to the intangible asset that represents the firms value and reputation and the brand name that it carries in the market. Goodwill is earned by a firm from the work it does which helps earn people trust by meeting all customer demands both in quality and quantity. Having a positive goodwill is very much helpful for a firm to earn extraordinary profits in comparison to its competitors. It also ensures profits that keep coming in the future and helps in retaining old customers.

Factors affecting firms’ goodwill are:

1. Product Quality: A firm which is constantly delivering the best product for its customers will have a greater goodwill.

2. Location: A central location makes it easy to reach and attracts more footfalls which leads to higher sales and more goodwill.

3. Management: Cost efficiency and higher productivity can be achieved by having an efficient management in place, also it ensures quality products at less price which increases goodwill.

4. Market Structure: A firm will enjoy more benefits of goodwill if the market is monopolistic in nature and there are no substitutes, it will add more goodwill to the firm.

5. Other Advantages: A firm that is getting benefits such as continuous supply of fuel, power and raw materials and uses it to produce quality goods enjoys a higher goodwill.

Q.3 Explain various methods of valuation of goodwill.

ANSWER: There are four different methods of goodwill valuation:

1. Average Profit Method: In this method, the calculation of goodwill is done based on the average profits of the past years. It can be calculated as

Goodwill = Average Profit × No. of Years Purchase

Here, the number of years of purchase signifies the years till which the firm expects profits to generate in the same way as current period

Following steps are involved in this method

1. Determine total profit of past years

2. Add all losses which are abnormal in nature such as theft, fire etc.

3. Add all normal income, if not done previously

4. Deduct all incomes that are not obtained from business, and all such abnormal incomes for e.g winning a lottery

5. Deduct all normal expenses, if not deducted previously

6. Calculate the average profit, by dividing total profit determined in the previous step

7. Multiply the average profit hence obtained to the number of year’s purchases in order to determine goodwill.

Example:

Last 5 years profits are 3,00,000,  9,00,000,   (6,00,000),  15,00,000,  24,00,000.

Goodwill calculated as:

Goodwill = 9, 00,000 × 4 = 36, 00,000

2. Weight Average Method: In this method, weights are allocated to each year’s profit with the highest weight given to recent year’s profit and lower weights marked for past years profits. The product of the profits and weights are added and divided by the total weight to determine weighted average profits. It is a modified version of Average Profit Method. The following formulae is used.

The following steps are involved:

1. Assign highest weightage to recent year’s profit and lowest weightage to past years profits.

2. Multiply weights with the profits corresponding to each year

3. Determine product total

4. Divide the product total with total of weightage to find Weighted Average Profit

5. Multiply the weighted average profit with number of years purchase

For example:

Last 5 years profits are ₹ 3,00,000,   ₹ 9,00,000,   ₹ (6,00,000),   ₹ 15,00,000,   ₹ 24,00,000.

Goodwill calculated as:

Profit/Loss ₹	Weights	Product ₹
3,00,000	1	3,00,000 × 1 = 3,00,000
9,00,000	2	9,00,000 × 2 = 18,00,000
(6,00,000)	3	(6,00,000) × 3 = (18,00,000)
15,00,000	4	15,00,000 × 4  = 60,00,000
24,00,000	5	24,00,000× 5  = 1,20,00,000
Total	15	₹ 1,83,00,000

3. Super Profit Method:  In this method, goodwill is determined on excess profit earned by a firm as compared to profit earned by rivals in the same industry. The excess profit earned over normal profit is called as Super Normal Profit

Following steps are involved:

1. Calculate the average profit

2. Calculating average capital engaged

3. Calculating normal profit

4. Calculation of Super Normal Profit using the formulae: Super Normal Profit = Average Profit – Normal Profit

5. Multiply super normal profit with number of years purchase to determine goodwill.

4. Capitalisation Method: Goodwill is determined by two ways as follows:

a) By Average Profit capitalisation. b) By Super Profit capitalisation.

a) By Average Profit capitalisation

Following steps are involved:

1. Average profit is calculated

2. Calculating average profits capitalised value using the formulae

3. Determine Actual Capital Employed

4. Deduct Actual Capital Employed from Capitalised Average Profit to calculate goodwill.

Goodwill = Capitalised Average Profit – Actual Capital Employed

b) By Super Profit capitalisation.

Following steps are involved:

1. Capital Employed for calculation

2. Calculation of Normal profit

3. Calculation of average profit

4. Calculating Super Normal Profit:

Super Normal Profit = Average Profit – Normal Profit

Step 5: Goodwill calculation by the following formula:

4. If it is agreed that the capital of all the partners be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.

When a new partner is admitted to the firm, the capital of all partners must be determined using new profit sharing ratio. In such cases new capital of each partner is determined and is dependent on the following instances:

1. New partner’s capital is given

2. Firm’s total capital is given

1) New partner’s capital is given

It involves the following steps

1. Calculation of total capital of firm based on the new partners’ capital

2. Divide total capital of the firm by individual share of partner’s profits to determine each partner’s new capital

3. After posting adjustments determine each partner’s capital balance

4. The capital determined previously is written in Partners Capital account on the credit side

5. Calculation of surplus or deficit. If new capital is more than the old share, then it needs to be contributed by old partners and is termed deficit and if new capital is less than old capital, it is called surplus and the difference is paid to old partners.

Let us understand the above steps with the help of an example.

A & B are partners in business who share profits and losses equally. They agree to admit C for
share in profit. C brings ₹ 1, 00,000 as capital. A and B have old capital of ₹ 80,000 and ₹ 60,000 respectively, at the time admission of C.

Step 3:

	A	B
New Capital	100,000	100,000
Less: Existing Capital	(80,000)	(60,000)
Withdrawal (deposit)	(20,000)	(40,000)

So both A and B need to pay 20,000 and 40,000 more as share for their new capital.

2) When new firms’ total capital is known:

When new partner’s capital is not mentioned, then new capital is determined based on the total capital of the firm on a proportionate basis. The amount that is determined has to be brought in by the new partner as capital. Following steps are taken to determine the new partners’ capital:

1. Finding the total old capital of the existing partners after performing all adjustments.

2. Finding total capital of the new firm by multiplying old capital of existing partners with the reciprocal of old partners total share.

Q.4 The new capital of each partner is determined on the basis of total capital calculated which is multiplying new profit ratio with the total capital, individually for all partners. Here is an example to help understand the concept.

ANSWER: Ram and Shyam are partners in a firm sharing profit and loss equally. They agree to admit Anil for 1/3^rd share in profit and decided to share future profit and loss equally. X’s capital is ₹ 1, 00,000 and Y’s capital is ₹ 50,000. Z brings sufficient capital for his share in profit.

1. Old Capital= ₹ 1, 00,000 + 50,000 = 1, 50,000

2. Calculation of total capital

3. New Partners Capital

Q.5 Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash?

ANSWER: The situation in which a new partner is unable to bring his share of goodwill in cash, the goodwill account gets adjusted through Old Partners account. New partners’ capital account is debited with the share of goodwill and the same gets credited to Old Partner’s account.

New Partner’s Capital A/c	Dr.
	To Old Partners’ Capital A/c
(New Partner account debited)

Note: According to Para 16 of Accounting Standard 10, Goodwill is recorded only when it is any transaction equivalent to money or money’s worth. It is a mandatory practice that is followed.

Q.6 Explain various methods for the treatment of goodwill on the admission of a new partner?

ANSWER: Goodwill is treated in the following ways on introduction of a new partner:

1. Premium Method

2. Revaluation Method

When a new partner pays the share of goodwill in the form of cash, it is called as premium method. There can be two scenarios:

1. New partners pays directly to old partners

2. Partner brings goodwill in form of cash and it is retained in the business.

The corresponding entries are:

(i) When goodwill brought in cash by new partner

Cash/Bank A/c Dr.

To Premium for Goodwill A/c

(Amount of goodwill brought in by new partner)

(ii)When goodwill is retained by business:

Premium for Goodwill A/c Dr

To Sacrificing Partners’ Capital A/c

(Goodwill brought by new partner distributed among old partners as per the sharing ratio)

Revaluation Method: Situations when new partner is unable to bring goodwill in form of cash

New Partner’s Capital A/c Dr. (Goodwill amount not brought by new partner)

To Old Partners’ Capital A/c

(Goodwill of new partner distributed to old partners as per their sharing ratio)

Note: According to Para 16 of Accounting Standard 10, Goodwill is recorded only when it is any transaction equivalent to money or money’s worth. It is a mandatory practice that is followed.

Q.7 How will you deal with the accumulated profit and losses and reserves on the admission of a new partner?

ANSWER: A new partner is not entitled to bear the losses or enjoy the profits of a previous business. Hence, when a new partner is added to the firm, the accumulated profits or losses, reserves needs to be distributed to current partners (partners of old firm) in their profit sharing ratio.

Treatment of accumulated losses, profits and reserve

Profit and Loss A/C Dr.

General Reserve A/C Dr.

Contingency Reserve A/C Dr.

When losses accumulate over a period.

For Profits and losses

Deferred Advertising expense Dr.

(Losses accumulated shared to old partners as per sharing ratio)

Q.8 At what figures the value of Liabilities and Assets appear in the books of the firm after revaluation has been done? Show with the help of an imaginary balance sheet.

ANSWER: After revaluation has been done, the Liabilities and Assets appear at their current market values in the Balance Sheet of the reconstituted firm. This can be better explained with the help of the below explained example.

Anil & Bijay shares profit and loss equally.

Balance Sheet of A and B as on April 01, 2019
Liabilities	Amount ₹	Assets	Amount ₹
Sundry Creditors	1,00,000	Cash in Hand	8,000
Capital Accounts		Cash at Bank	1,78,000
Anil 1,50,000		Debtors	40,000
Bijay 1,50,000	3,00,000	Stock	36,000
				Furniture	38,000
			Plant and Machinery	1,00,000
	4,00,000		4,00,000

1) On that date Chetan is admitted as new partner for 1/3^rd share and offers 2, 00,000 as capital.

2) Value of stocks increased by ₹ 7,000.

3) A ₹ 2,000 provision has been created against Debtors.

4) ₹ 35,000 value obtained after revaluating furniture.

5) A machinery costing ₹ 100,000 purchased is not recorded in books.

6) Outstanding rent ₹ 2,000.

Prepare Revaluation Account, Partners’ Capital Account, Cash Account and Balance Sheet.

Revaluation Account
Dr.			Cr.
Particular	Amount ₹	Particular	Amount ₹
Rent Outstanding A/c	2,000	Stock	7,000
Provision for Debtors	2,000	Machinery	100,000
Furniture	35,000
Profit transferred:
	Anil’s Capital A/c	50,000
	Bijay’s Capital A/c	50,000	100,000
	107,000		107,000

Anil’s Capital Account
Dr.						Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance c/d		2,00,000		Balance b/d		150,000
					Revaluation A/c		50,000
			2,00,000				2,00,000

Bijay’s Capital Account
Dr.							Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance c/d		2,00,000		Balance b/d		150,000
					Revaluation A/c		50,000
			2,00,000				2,00,000

Chetan’s Capital Account
Dr.							Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance c/d		2,00,000		Cash A/c		2,00,000
			2,00,000				2,00,000

Cash Account
Dr.							Cr.
Date	Particular	J.F.	Amount ₹	Date	Particular	J.F.	Amount ₹
	Balance b/d		8,000		Balance c/d		2,08,000
	Chetan’s Capital A/c		2,00,000
			2,08,000				2,08,000

Balance Sheet of Anil, Bijay & Chetan as at April
Liabilities	Amount ₹	Assets	Amount ₹
Sundry Creditors	1,00,000	Cash in hand	2,08,000
Rent Outstanding	2,000	Cash at Bank	178,000
		Debtors	40,000
		Less: Provision	2,000	38,000
Capital Account
Anil	2,00,000		Stock	43,000
Bijay	2,00,000		Furniture	35,000
Chetan	2,00,000	6,00,000	Plant and Machinery	2,00,000
	7,02,000		7,02,000

Short Answer Type Question:

Q.1 Define Partnership Deed

ANSWER: Partnership Deed is a written agreement among the partners of a partnership firm. It includes agreement on profit sharing ratio, salaries, commission of partners, interest provided on partner’s capital and drawings and interest on loan given or taken by the partners, etc. Generally following details are included in a partnership deed.

1. Objective of business of the firm

2. Name and address of the firm

3. Name and address of all partners

4. Profit and loss sharing ratio

5. Contribution to capital by each partner

6. Rights, types of roles and duties of partners

7. Duration of partnership

8. Rate of interest on capital, drawings and loans

9. Salaries, commission, if payable to partners.

10. Rules regarding admission, retirement, death and dissolution of the firm, etc.

Q.2 Why it is considered desirable to make the partnership agreement in writing.

ANSWER: Partnership agreement may be oral or written. It is not compulsory to form partnership agreement in writing under the Partnership Act, 1932. However, written partnership deed is desirable than oral agreement as it helps in avoiding disputes and misunderstandings among the partners. Also, it helps in settling disputes (as the case may be) among the partners, as written partnership deed can be referred to anytime. If written partnership deed is duly signed and registered under Partnership Act, then it can be used as evidence in the court of law.

Q.3 List the items which may be debited or credited in the capital accounts of the partners when:

(i) Capitals are fixed

(ii) Capitals are fluctuating

ANSWER:

(i)When Capitals are fixed

The following items are credited in the Partner’s Capital Account when capital accounts are fixed.

(a) Opening balance of capital

(b) Additional capital introduced during an accounting year

The following items are debited in the Partner’s Capital Account when capital accounts are fixed.

(a) Part of capital withdrawn

(b) Closing balance of capital

(ii) When Capitals are fluctuating

The following items are credited in the Partner’s Capital Account when capital accounts are fluctuating.

(a) Opening balance of capital.

(b) Additional capital introduced during an accounting year

(c) Salaries to the partners

(d) Interest on capital

(e) Share of profit

(f) Commission and bonus to the partners

The following items are debited in the Partner’s Capital Account when capital accounts are fluctuating.

(a) Drawings made during the accounting period

(b) Interest on drawings.

(c) Share of loss.

(d) Closing balance of capital.

Q.4 Why is Profit and Loss Adjustment Account prepared? Explain.

ANSWER: The Profit and Loss Adjustment Account is prepared because of the following two reasons.

1. To record omitted items and rectify errors if any– After the preparation of Profit and Loss Account and Balance Sheet, if any error or omission is noticed, then these errors or omissions are adjusted by opening Profit and Loss Adjustment Account in the subsequent accounting period without altering old Profit and Loss Account.

2. To distribute profit or loss between the partners– Sometimes, besides adjusting the items and rectifying errors, this account is also used for distribution of profit (or loss) among the partners. In this situation, this account acts as a substitute for Profit and Loss Appropriation Account. The main rationale to prepare the Profit and Loss Adjustment Account is to ascertain true profit or loss.

Q.5 Give two circumstances under which the fixed capitals of partners may change.

ANSWER: The following are the two circumstances under which the fixed capitals of partner may change.

(i) If any additional capital is introduced by the partner during the year.

(ii) If any part of capital is permanently withdrawn by the partner from the firm.

Q.6 If a fixed amount is withdrawn on the first day of every quarter, for what period

the interest on total amount withdrawn will be calculated?

ANSWER: If a fixed amount is withdrawn on the first day of every quarter, then the interest is calculated on the amount withdrawn for a period of seven and half () months.

Example:

If a partner withdraws Rs 5,000 in the beginning of each quarter and the interest is charged @ 10% on the drawings, then interest on drawings is calculated as:

Total drawings made by the partner during the whole year are Rs 20,000, i.e. Rs 5000× 4.

Interest on drawings 

Q.7 In the absence of partnership deed, specify the rules relating to the following:

(i) Sharing of profits and losses.

(ii) Interest on partner’s capital.

(iii) Interest on Partner’s drawings.

(iv) Interest on Partner’s loan

(v) Salary to a partner.

ANSWER: (i) Sharing of profits and losses: If the partnership deed is silent on sharing of profit or losses among the partners of a firm, then according to the Partnership Act of 1932, profits and losses are to be shared equally by all the partners of the firm.

(ii) Interest on partner’s capital: If the partnership deed is silent on interest on partner’s capital, then according to the Partnership Act of 1932, no interest on capital should be given to the partners of the firm.

(iii) Interest on partner’s drawings: If the partnership deed is silent on interest on partner’s drawings, then according to the Partnership Act of 1932, no interest on drawing should be charged from the partners of the firm for the amount of capital withdrawn in form of drawings.

(iv) Interest on partner’s loan: If the partnership deed is silent on interest on partner’s loan, then according to the Partnership Act of 1932, the partners are entitled for 6% p.a. interest on the loan forwarded by them to the firm.

(v) Salary to a partner: If the partnership deed is silent on salary to a partner, then according to the Partnership Act of 1932, no salary should be given to any partner.

Long Answer Type Questions:

Q.1 What is partnership? What are its chief characteristics? Explain.
  ANSWER: According to the Section 4 of the Partnership Act, 1932
Partnership is an agreement between two or more persons who have agreed to share profits or losses of a business that will be carried by all or any one of them acting for all.
Person who joined their hands to set up the business are called ‘partners individually and ‘firm’ collectively and the name under which they carry out their business is termed as ‘firm name’.
The following are the important characteristics of partnership
(i) Two or More Persons
In order to form partnership, there should be at least two person coming together for a common goal In other words, the minimum number of partners in a firm can be two. There is however, a limit on their maximum number, if a firm is engaged in the banking business, it can have a maximum of ten partners while in case of any other business, the maximum number of partners can be twenty.
(ii) Partnership Deed
A partnership deed is an agreement among the partners which contains all the terms of the partnership. It generally contains the details about all the aspects affecting the relationship between the partners including the objective of business, contribution of capital by each partner, ratio in which the profits and the losses will be shared by the partners and entitlement of partners to interest on capital, interest on loan, etc.
(iii) Business
One of the important characteristics of a partnership is that it is formed to carry out a legal business. Partnership in case of illegal business is not valid.
(iv) Sharing of Profit
In case of a partnership the partners are suppose to share profit or loss on an agreed ratio or as per the provisions of the Partnership Act, 1932, as per which they will share profit equally.
(v) Liability
In the case of a partnership liability of partners are unlimited. If there is any obligation against the third party the partner will have to pay it out of his personal property.

Q.2 Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.
ANSWER: It is always suggested that there must be a partnership deed among the partners before getting into any partnership venture. But sometimes a partnership is started without signing any such document. In this case the rules of partnership will be applicable as per the provisions of the Indian Partnership Act, 1932. The following are the provisions that are relevant to the partnership accounts in absence of partnership deed.
(i) Profit Sharing Ratio When a partnership deed is not made or even if it is made and silent on sharing of profit or losses among the partners of a firm, then according to the Partnership Act 1932, profits and losses are to be shared equally among all the partner of the firm.
(ii) Interest on Capital When there is absence of partnership deed or the partnership deed is silent on the issue related to interest on partner’s capital, then according to the Partnership Act 1932, no interest on partners’ capital will be provided. However, if they mutually agree on this issue than they are free to give interest on capital out of the profit of the firm.
(iii)Interest on Drawings  there is no partnership Peed the issue ‘elated h die interest on drawing will be handled according to the provisions Partnership Act. 1932 According sc which no Interest on drawing will be charge loan the orders on withdraw in the form of drawings.
(iv) Interest on Partner’s Loan When there is no partnership deed among the partners or the partnership deed is silent on interest on partner’s loan then according to the Partnership Act, 1932. the partners are entitled for 6% pa interest on the loan forwarded by them to the firm
(v) Salary to Partner When partnership deed is not there or it is silent on the issue related to salary to a partner, then as per the rules of the partnership Act. 1932. no partner will be entitled to any salary.

Q.3 Explain why it is considered better to make a partnership agreement in writing.
ANSWER:  As per Partnership Act. 1932, it is not necessary that a partnership agreement must be in writing but still it is always suggested that it should be in written form. Because today there are very good relationship among the partners but in future there may be any dispute regarding any Issue a written partnership agreement will help in avoiding dusputes and misunderstandings among the partners.
In this way a written partnership deed is more desirable than the ora agreements. A written partnership agreement ensures the smooth functioning of the business of the partnership firm It aiso helps in settling the disputes among the partners. Moreover a duly signed and registered partnership deed can be used as evidence in the court of law. Therefore, it s desirable to form partnership deed in writing because of the moots associated with written documents over its oral counterparts.

Q.4 Illustrate how interest on drawings will be calculated under various situations.
ANSWER: When a partner withdraws any amount, either in cash or in any other form, from the firm for his/her personal use, then it is termed as drawings. The interest charged by the firm on the amount of drawings is termed as interest on drawings. The method of calculating interest on drawings depends on the information available for time and frequency of the drawings made by the partner. The following different situations of drawings made illustrate the calculation of interest charged on drawings.
Situation I When ail the information regarding amount, date and rate of interest on drawings is given
When a partner withdrew Rs 10,000 on July 01 and interest on drawings is charged at 12% pa and the firm closed its books on December 31 every year then interest on drawings amount to Rs 600.

Situation(II) When information regarding amount, rate of interest on drawings is given
Case I Sometimes amount and rate of interest on drawings (per annum) is given but date is not mentioned
in this case when the details regarding the amount of drawings and rate of interest on drawings (pa) is given but the date of drawings is not given then interest will be charged on average basis and the period of drawings will be taken as 6 months

Case II Sometimes the amount and rate of is interest on drawings is given but the date and per anum rate of interest is not mentioned.
In this case when the date and the rate of interest aim given but per annum is not specified, then annual interest is charged.
e.g., If a partner withdrewRs 10 000 and interest rate is 12%, then the interest on drawings amounts to Rs.12,000.

Situation III When a fixed amount is withdrawn at regular interval
Case I Sometimes a fixed amount is withdrawn at the beginning of each month and the rate of interest is given then the interest is calculated for 6 5 months.
e.g.. If a partner withdraws Rs1,000 in the beginning of every month and the rate of interest is 12% pa, then the interest on drawings amount to RS 780.

Case II Sometimes a fixed amount is withdrawn at the end of each month and the rate of interest is given then the interest is calculated for 5.5 months.
e.g.. if a partner withdraws Rs 1.000 at the end of each month arid rate of interest is 12% pa then the interest on drawings amount to Rs 660.

Case III Sometimes a fixed amount is withdrawn at the mid of each month and the rate of interest is given then the interest is calculated for 6 months.
e g. if a partner.withdraws Rs.1,000 on 15th of every month and the rate of in’crest is 12% pa then the interest on drawings amount to Rs 720.

Case IV If a fixed amount is withdrawn in the beginning of every quarter then the interest is calculated for 7.5 months.
e.g.. If a partner withdraws Rs.5,000 in the beginning of every quarter and the rate of interest is 12% pa then the interest on drawings amount to Rs 1,800.

Case V If a fixed amount is withdrawn at the end of every quarter, then the interest is calculated for 4.5 months.
e.g., If a partner withdraws Rs. 5,000 at the end of every quarter and the rate of interest is 12% pa then the interest on drawings amounts to Rs. 900

Situation IV When different amount is at different intervals
When different amount is withdrawn by a partner at different dates then the interest is calculated by product method. The period of drawings is calculated from the date of withdrawal to the last date of the accounting year,
e.g., A partner withdraws?6,000 on March 01, Rs.4,000 on June 01, Rs.5,000 on Aug 30 and Rs.2,000 on Nov 30 and the rate of interest on drawings is 12% pa. The firm closes its book on December 31.

Q.5 How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.
ANSWER:  Change in the profit sharing ratio occurs only in case of the admission, retirement or death of a partner or sometimes due to the general agreement among the partners in which they may decide to change the profit sharing ratio. There may be number of issues that should be considered during the change in the profit sharing ratio such as goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capital, etc.
As far as the issue related to general reserve is concerned it is basically the accumulated profits (if any) and profit (or loss) on revaluation of assets and liabilities and should be distributed in the partner’s capital account in partners old profit sharing ratio.
Sometimes the existing partners may decide to change the profit sharing ratio then some partners gain at the cost of other partners. In other words one partner gain and other one sacrifice equal to the gain. In that case the former should compensate the latter. Therefore, the gaining partner’s capital account’s are debited to the extent of their gain and sacrificing partner’s capital accounts are credited to the extent of their sacrifice .The following journal entry is passed

Example Ram. Mohan and Shyam are partners in a firm sharing profit and loss in 3 2 :1 ratio. They decide to share profit and loss equally in future. On dm: date, the books of the firm showsRs.2.40.000 as general reserve, profit on ^evaluation of Plant and Machinery Rs.60.000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.

Hence, in the above example. Shyam gains at the cost of Ram. so the Ram needs to be compensated by Shyam with the amount of Rs.50.000. The following adjustment entry is passed.

In This Post we are  providing Chapter-1 The Portrait of a Lady NCERT MCQ for Class 11 English Hornbill which will be beneficial for students. These solutions are updated according to 2021-22 syllabus. These MCQS  can be really helpful in the preparation of Board exams and will provide you with a brief knowledge of the chapter.

NCERT MCQ ON THE PORTRAIT OF A LADY

Q1. Where was the author’s grandfather’s portrait placed?

(i) on a shelf
(ii) hung above the mantelpiece
(iii) put on the mantelpiece
(iv) on a table

Answer (ii) hung above the mantelpiece

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Q2. How do you feel about the character of the grandmother in the chapter?

(i) Emotional
(ii) Strong
(iii) Selfless
(iv) Loving

Answer (ii) Strong

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Q3. When was their common link of friendship snapped?

(i) when he went to college
(ii) When he went to the university, they were given separate rooms
(iii) when he started working
(iv) When he went abroad

Answer (ii) When he went to the university, they were given separate rooms

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Q4. Did the author bother to learn the morning prayers that his grandmother recited?

(i) yes
(ii) he listened but did not bother to learn
(iii) he could not learn
(iv) no

Answer (ii) he listened but did not bother to learn

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Q5. What was her reaction when he came back after 5 years?

(i) Overwhelmed
(ii) clasped the author in her arms and said prayers
(iii) happy
(iv) sentimental

Answer (ii) clasped the author in her arms and said prayers

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Q6. What was grandmother’s reaction when the author was going abroad?

(i) Happy
(ii) sad
(iii) not even sentimental
(iv) Sentimental

Answer (iii) not even sentimental

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Q7. What happened when they took the grandmother’s corpse away?

(i) Neighbors visited them to pay condolences
(ii) they mourned her death in her room
(iii) birds flew away quietly
(iv) Nothing happened

Answer (iii) birds flew away quietly

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Q8. How did the sparrows express their sorrow at the death of their grandmother?

(i) They didn’t come that day
(ii) they came and sat silently in the verandah
(iii)They ate the bread crumbs
(iv) they chirruped a lot

Answer (ii) they came and sat silently in the verandah

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Q9. How did the grandmother die?

(i) during telling beads laying on the bed
(ii) In the hospital
(iii) While sleeping
(iv) None of the above

Answer (i) during telling beads laying on the bed

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Q10. What did the grandmother do in her final hours?

(i) Talked to everyone in the house
(ii) worried about everyone
(iii) Silently praying and telling her beads
(iv) Went to temple

Answer (iii) Silently praying and telling her beads

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Q11. How did the grandmother react to her illness?

(i) She said her end was near
(ii) She ignored her health
(iii) She took care of her
(iv) She was admitted to the hospital

Answer (i) She said her end was near

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Q12. What happened when the grandmother didn’t pray for the first time?

(i) She fell ill the next day
(ii) She made this her routine
(iii) She took a break and went to the village
(iv) None of the above

Answer (i) She fell ill the next day

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Q13. What change came in the grandmother’s evening schedule?

(i) She collected the women of the neighborhood
(ii) She would go for a walk
(iii) She would sleep early
(iv) She would talk to his parents

Answer (i) She collected the women of the neighborhood

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Q14. What happened when the author moved abroad to study for five years?

(i) grandmother bid goodbye by silently kissing his forehead
(ii) No one came to see him
(iii) Grandmother moved back to village
(iv) Parents moved with him

Answer (i) grandmother bid goodbye by silently kissing his forehead

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Q15. How did the grandmother spend her afternoon everyday?

(i) by feeding hundred of sparrows
(ii) by taking a nap
(iii) by talking to author’s mother
(iv) by going to temple

Answer (i) by feeding hundred of sparrows

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In This Post we are  providing Chapter-22 Chemical Coordination and Integration NCERT MCQ for Class 11 Biology which will be beneficial for students. These solutions are updated according to 2021-22 syllabus. These MCQS  can be really helpful in the preparation of Board exams and will provide you with a brief knowledge of the chapter.

NCERT MCQ ON CHEMICAL COORDINATION AND INTEGRATION

Question 1.
Philips collip discovered which of the following hormones:
(a) Parathyroid hormone
(b) Thyroxine
(c) A.D.H.
(d) Oxytocin

Answer: (a) Parathyroid hormone

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Question 2.
Goiter is a pathological condition associated with:
(a) Glucagon
(b) Thyroxine
(c) Progesterone
(d) Testosterone

Answer: (b) Thyroxine

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Question 3.
The other name of internal ear is:
(a) Utriculus
(b) Membranous labyrinth
(c) Saccules
(d) Ductus endolymphatic

Answer: (b) Membranous labyrinth

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Question 4.
Who is known as the ‘father of endocrinology’?
(a) Thomas Addison
(b) Pasteur
(c) R. H. Whittaker
(d) Einthoven

Answer: (a) Thomas Addison

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Question 5.
Which of the following is stirrup shaped ear ossicle
(a) Incus
(b) Stapes
(c) Malleus
(d) Humerus

Answer: (b) Stapes

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Question 6.
By the stimulation of which structure of human ear, the sound waves are perceived by brain :-
(a) Basilar membrane
(b) Tectorial membrane
(c) Meissner’s membrane
(d) Sensory hair cells of organ of cortex

Answer: (d) Sensory hair cells of organ of cortex

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Question 7.
Rabbit has:
(a) Monocular vision
(b) Binocular vision
(c) Conjunctiva
(d) Cornea

Answer: (a) Monocular vision

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Question 8.
Chemically, hormones are
(a) Proteins, steroids and biogenic amines
(b) Steroids only
(c) Biogenic amines only
(d) Proteins only

Answer: (a) Proteins, steroids and biogenic amines

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Question 9.
Cochlea of mammalian ear is concerned with:
(a) Balancing of body
(b) Hearing
(c) Perception of atmospheric pressure
(d) Both (a) and (b)

Answer: (b) Hearing

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Question 10.
The ‘islets of Langerhans’ are found in
(a) Alimentary canal
(b) Stomach
(c) Liver
(d) Pancreas

Answer: (d) Pancreas

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Question 11.
Meibomian gland are associated with:
(a) Eyes
(b) Ears
(c) Reproductive organ
(d) Skin

Answer: (a) Eyes

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Question 12.
Injection of which of the following increases metabolic rate :-
(a) STH
(b) Insulin
(c) Thyroxine
(d) Testosterone

Answer: (c) Thyroxine

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Question 13.
Parathormone regulates:
(a) Blood calcium level
(b) Calcium phosphate level
(c) Body temperature
(d) None of the above

Answer: (a) Blood calcium level

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Question 14.
Steroid hormones easily pass through the plasma membrane by simple diffusion because they
(a) Are water-soluble
(b) Are lipid-soluble
(c) Enter through pores
(d) Contain carbon and hydrogen

Answer: (b) Are lipid-soluble

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Question 15.
BMR is increased due to:
(a) Sympathetic nervous system
(b) Adrenaline
(c) Parasympathetic nervous system
(d) Thyroxine

Answer: (d) Thyroxine

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Short Answer Type question:

Q.1 State the meaning of ‘Not-for-Profit’ Organisations.

ANSWER: Not-for-Profit Organisations (NPO) are set up with the prime objective of providing services and not to earn profit thereby enhancing the welfare of society. Such organisations include schools, hospitals, trade unions, religious organisations, etc. The person/s or the groups of individuals who govern and manage the working of an NPO are known as trustees. NPO’s main sources of income are donations, subscriptions, life membership fees, grants etc. As these organisations are not set up with profit motive, they do not prepare Trading and Profit and Loss Account. Instead, they maintain Receipt and Payments Account, Income and Expenditure Account and Balance Sheet. 

Q.2 State the meaning of Receipt and Payment Account.

ANSWER: Receipts and Payments Account is a summary of the Cash Book. All cash receipts are recorded on the Receipts side (i.e. Debit side) and all cash payments are recorded on the Payments side (i.e. Credit side) of Receipts and Payments Account. It is prepared on the basis of cash and bank transactions recorded in the Cash Book. It begins with the opening balance of cash and bank and ends with the closing balances of cash and bank (balancing figure) at the end of the accounting period. It records all cash and bank transactions both of capital and revenue nature. It not only records the cash and bank transactions relating to the current accounting period, but also the cash and bank receipts (or payments) received during the current accounting period that may be related to the previous or next accounting period.

This account only helps us to ascertain the closing balance of the cash and bank and helps in assessing the cash position of an NPO.

Q.3 State the meaning of Income and Expenditure Account.

ANSWER: Income and Expenditure Account (I&E) is similar to the Profit and Loss Account in the sense that while the former is prepared to ascertain surplus or deficit during an accounting period, the latter is prepared to ascertain net profit or net loss incurred during an accounting period. I&E Account is a nominal account and is prepared on the accrual basis. It records all transactions of revenue nature that are related to the current accounting period (whether outstanding or prepaid) for which the books are maintained. All expenses and losses are recorded on the debit side (Expenditure side) and all income and gains are recorded on the credit side (Income side) of I&E Account. The closing balance or the balancing figure of I&E Account is termed as surplus (or deficit), if the sum total of the Income side exceeds (is lesser than) the sum total of the Expenditure side.

Q.4 What are the features of Receipt and Payment Account?

ANSWER: The following are the features of Receipt and Payment Account:

1. Nature: It is a Real Account. It is a summarised version of Cash Book.

2. Nature of Transactions: It records only cash and bank transactions. Transactions other than cash and bank like depreciation, loss/ profit on sale of assets, etc. are not recorded in this account.

3. No distinction between Capital and Revenue items: It records all cash and bank receipts and payments of both capital and revenue nature.

4. Opening and closing balance: It begins with the opening balance of cash and bank and ends with the closing balance of the cash and bank (balancing figure) at the end of the accounting period.

5. Purpose: It reveals the cash position of an organisation. It helps to ascertain the total amount paid and received during an accounting period.

Q.5 What steps are taken to prepare Income and Expenditure Account from a Receipt and Payment Account?

ANSWER: The following steps are taken to prepare Income and Expenditure Account (I&E) from Receipts and Payment Account (R&P).

Step 1: All the revenue expenditures paid for the current accounting period are transferred from the Payments side of R&P to the Expenditure side of I&E.

Step 2: All the revenue receipts for the current accounting period are transferred from the Receipts side of R&P to the Income side of I&E.

Step 3: Expenses outstanding for the current period and expenses paid in advance (prepaid expenses) for the current period in the preceding accounting periods are to be added (adjusted) to their related expenses in the Step 1.

Step 4: Income outstanding (accrued income) for the current period and income received in advance for the current period in the preceding accounting periods are to be added (adjusted) to their related incomes in Step 2.

Step 5: Non-cash items like depreciation, appreciation for the current accounting period are to be adjusted in the I&E.

Step 6: After adjusting all the revenue items for the current accounting period, the Income and the Expenditure sides are totaled. If the sum total of the Income side exceeds (or is lesser than) the sum total of the Expenditure side, then the balancing figure is termed as surplus (or deficit).

Q.6 What is subscription? How is it calculated?

ANSWER: Subscription is the main source of income for an NPO besides entrance fees, donations, grants, etc. Subscriptions refer to the amount of money paid by the members on periodic basis for keeping their membership with the organisation alive. It is paid monthly, quarterly, half yearly or annually by the members.

It is shown in the debit side of the Receipt and Payment Account with the total amount received during the year that may be related to the current period and to the previous and next accounting period.

While calculating subscription for the current period, advance subscription received for the current period in the previous period and outstanding subscription for the current period are added to the subscription received during the current period. Whereas, on the other hand, advance subscription received for the next accounting period during the current period and outstanding subscription for the preceding period are deducted from the subscription received during the current period.

Calculation of Subscription

Subscription received during the year		***
Add: Subscription received (in advance) during previous year for current year	***
Add: Subscription outstanding at the end of the year	***
		***
Less: Subscription received in advance for the next year	***
Less: Subscription outstanding for the previous year	***	***
## Subscription shown in Income and Expenditure Account		***

## This subscription is related to the current accounting period and is shown in the Income side of the Income and Expenditure Account.

Q.7 What is Capital Fund? How is it calculated?

ANSWER: Capital fund is the excess of NPOs’ assets over its liabilities. In other words, the excess of assets over the liabilities for a profit earning organisation is termed as capital and the same for an NPO is termed as capital fund. Any surplus or deficit ascertained from Income and Expenditure account is added to (deducted from) the capital fund. It is also termed as Accumulated Fund.

Calculation of Capital Fund

Capital Fund at the beginning of the year		**
Add: Surplus from Income and Expenditure Account	**
Add: Subscription Amount (Capitalised amount)	**
Add: Life membership fee.	**	**
Less: Deficit from Income and Expenditure Account		**
Capital Fund at the end of the year		***

Long Answer Type Question.

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Q.1 Explain the statement: “Receipt and Payment Account is a summarised version of Cash Book”.

ANSWER: A receipts and payments account (R & P Account) is a summary of actual cash receipts and payments that is extracted from the cash book over a certain time period. All the cash received is recorded on the Receipts and all cash payments are recorded in Payments side of the R & P Account. All the cash and bank transactions are recorded in Cash Book and this book is created on the basis of all these transaction. All cash and bank transactions that are of revenue and capital nature gets recorded. It records all transactions i.e. bank receipts and cash receipts.

This account helps in determining the closing balance of bank and cash receipts and thereby assess cash position of a Not-for-profit organisation or NPO.

Here are some similarities between Cash Book and Receipts and Payments Account:

1. Both are real accounts.

2. Only transactions of cash and bank are recorded

3. There is no distinction between Revenue and Capital Items

4. Helps in assessing the cash position of an organisation

5. Starts with an opening balance consisting of cash and bank and concludes with closing balance of cash and bank.

Therefore, it can be said that Receipt and Payments Account is a summarised version of cash book.

Q.2 “Income and Expenditure Account of a Not-for-Profit Organisation is akin to Profit and Loss Account of a business concern”. Explain the statement.

ANSWER: The account containing all expenses and losses for current accounting period prepared by a Not-for-profit organisation is called as Income and Expenditure (I & E) account, while a similar account prepared by profit earning organisation is called as Profit and Loss Account (P & L).

Here are some of the similarities between I & E and P & L accounts:

1. Accrual basis is followed for the preparation of both accounts.

2. Expenses and losses are recorded on Expenditure (debit) side and gains and income are recorded on Income (credit) side.

3. Records only revenue items related to current accounting period.

4. Both exhibit nature similar to nominal accounts

Therefore, it can be said that from the above statements that Income and Expenditure account of a Not-for-Profit Organisation is akin to Profit and Loss Account of a business concern.

Q.3 Distinguish between Receipts and Payments Account and Income and Expenditure Account.

ANSWER:

Basis of Comparison	Receipts and Payments Account	Income and Expenditure Account
Nature	Contains bank and cash transaction summary.	Contains summary of income and expenses of current year
Revenue and Capital	Both revenue and capital transactions are recorded	Only revenue transactions are recorded
Debit Side	Records cash and bank receipts are recorded	Records expenses and losses incurred for the current accounting year
Credit side	Records payments received in form of cash and cheques	Records incomes and gains during the current accounting year
Account Type	Real Account	Nominal Account
Accounting Period	Records receipts and payments made during the year which may be related to current, previous or next accounting year	Records only the expenditure and income made during the current accounting year
Object	Shows the cash position of NPO	Shows the net results in terms of deficits or surplus
Depreciation	Non-cash items like depreciation is not included	Includes non-cash items like depreciation, bad-debts for determining net profit or loss.
Adjustment	Before preparing financial statements the Payments and Receipts received during the year can be adjusted.	Cash and non-cash transactions can be adjusted
System	Cash basis	Accrual Basis

Q.4 Explain the basic features of Income and Expenditure Account and of Receipt and Payment Account.

ANSWER: Income and Expenditure account is similar to the P & L account (Profit and Loss Account). In an income and expenditure account surplus and deficit is determined during the accounting period while in a P& L account the net profit or loss is determined during an accounting period. It is a nominal account and records transactions that are of revenue nature. The closing balance is called deficit or surplus based.

Basic Features of I & E Account are:

1. It is a nominal account

2. Prepared on the basis of R & P (Receipt and Payment Account). All revenue items irrespective of income or expenditure get transferred.

3. Transactions that are of capital nature are not included in the account.

4. It is similar to P & L account

5. Records only current accounting year items and excludes any other transactions

6. Items like prepaid expenses, depreciation, income received in advance can be adjusted.

7. Balancing figure is expressed as surplus or deficit based on the status of expenses and income.

A receipts and payments account is a summary of actual cash receipts and payments that is extracted from the cash book over a certain time period. All the cash received is recorded on the Receipts and all cash payments are recorded in Payments side of the Receipts and Payments Account. This account is prepared on the basis of all the cash and bank transactions that are recorded in Cash Book. It records all cash and bank transactions that are of revenue and capital nature. It records all transactions i.e. bank receipts and cash receipts.

This account helps in determining the closing balance of bank and cash receipts and thereby assess cash position of an NPO.

Basic Features of R & P Account are:

1. It is a real account also known as summarised version of Cash Book

2. It records only bank and cash transactions.

3. Non-cash transactions like depreciation is not recorded

4. It begins with an opening balance of cash and bank and ends with closing balance of cash and bank.

5. Helps in assessing the cash position of an organisation

6. It does not distinguish between capital and revenue items

Q.5 Show the treatment of the following items by a Not-for-Profit Organisation

ANSWER:

(i)	Annual subscription
(ii)	Specific donation
(iii)	Sale of fixed assets
(iv)	Sale of old periodicals
(v)	Sale of sports materials
(vi)	Life membership fee

i) Annual Subscription

1. Subscriptions that are obtained during an accounting year (it may be related to current, previous or upcoming year) are reflected on the debit side of R & P Account.

2. Subscriptions related to the present year whether yet to be received or already received reflects on the credit side of I & E account (Income and Expenditure)

3. Advance subscriptions received for the following year are reflected on Liabilities side of balance sheet.

4. Subscriptions which are due but yet to be received are shown on Assets part of Balance Sheet.

5. Subscriptions that are due but yet to receive are reflected on asset side of balance sheet.

ii) Specific donation

1. Specific donation amount is reflected on Debit side of R & P Accounts.

2. Specific donation amount is shown on Liabilities side of Balance Sheet. Because it is used for that specific purpose for which it is received.

iii) Sale of fixed assets

1. Amount received recorded on debit side of R & P Account.

2. Profit/Loss is credited/debited to I & E Account.

3. Book value of asset deducted from the respective asset on Asset side of Balance Sheet

iv) Sale of old periodicals

1. Amount received reflects on the debit side of R & P Account.

2. Sale of old periodical is counted as revenue receipts, hence reflects on credit side of I & E Account.

v) Sale of sport Materials

1. Amount received is debited to R & P Account

2. Sport material sale is revenue earned, hence reflects on credit side of I & E Account.

vi) Life Membership Fees

1. It is considered as a receipt for a NPO. Hence, debited to R & P Account

2. It is one-time fee and hence treated as Capital receipts, hence, added to Capital Fund on liabilities side of Balance Sheet

Q.6 Show the treatment of items of Income and Expenditure Account when there is a specific fund for those items.

ANSWER: A NPO (Not-for-Profit organisation) has different sources of receipts in the form of subscriptions, donations, government grants etc. Of these some receipts are general while some are specific. Specific receipts are used only for the purpose for which it is received while general receipts can be used for any purpose. The specific receipts are not considered as revenue income for the Not-for-Profit organisation and therefore are reflected in I & E account.

In a way, specific receipts are considered as liabilities to the Not-for-Profit organisation as these amounts are received for specific purpose and cannot be used elsewhere. These are reflected in Liabilities side of Balance Sheet, until and unless it is completely used for the purpose it was received. If such amount is invested in the form of shares or debentures, then it is known as funds such as prize funds, match funds etc. The interest earned on such investment are not credited to I & E Account, instead it is credited to the respective fund account.

Similarly, any expense that is incurred for such funds gets debited from respective fund account. Such funds are shown in the liabilities side of Balance Sheet. If the expenses exceed the receipts of the fund, the difference gets reflected in I & E Account.

Treatment for items received for specific purpose

(Tournament/Match/Prize, etc.) Fund Account
Dr.	Cr.
Date	Particulars	L.F.	Amount	Date	Particulars	L.F.	Amount
	Expenses (expenses incurred like, match expenses, tournament expenses)				Balance b/d
					Incomes (Income or interest earned on funds invested in the form of donation, interests, dividends, etc.)
	Balance c/d (see explanation)		(a)		Income and Expenditure A/c (see explanation)		(b)

Explanation (a)

When receipts are more than expenses meant for specific purpose, that time the difference between receipts and expenses is shown on balance sheet in the liabilities side.

Balance Sheet
Specific Fund (i.e. Tournament, Match, Prize Fund, etc.)		Tournament Fund Investment

Explanation (b)

When expenses are more than receipts meant for specific purpose, that time the difference between expenses and receipts is shown in I & E account at the expenditure side.

Income and Expenditure A/c
Expenditure	Amount	Income	Amount
Expenses (I.e. Tournament, Match, Prize Expenses etc. except capital expenditure like, i.e.  expenses on construction of building)

Q.7 What is Receipt and Payment Account? How is it different from Income and Expenditure Account?

ANSWER: A receipts and payments account is a summary of actual cash receipts and payments that is extracted from the cash book over a certain time period. All the cash received is recorded on the Receipts and all cash payments are recorded in Payments side of the Receipts and Payments Account. This account is prepared on the basis of all the cash and bank transactions that are recorded in Cash Book. It records all cash and bank transactions that are of revenue and capital nature. It records all transactions i.e. bank receipts and cash receipts.

This account helps in determining the closing balance of bank and cash receipts and thereby assess cash position of an NPO.

Basis of Comparison	Receipts and Payments Account	Income and Expenditure Account
Nature	Contains bank and cash transaction summary.	Contains summary of income and expenses of current year
Revenue and Capital	Both revenue and capital transactions are recorded	Only revenue transactions are recorded
Debit Side	Records cash and bank receipts are recorded	Records expenses and losses incurred for the current accounting period
Credit side	Records payments received in form of cash and cheques	Records incomes and gains during the current accounting period
Account Type	Real Account	Nominal Account
Accounting Period	Records receipts and payments made during the year which may be related to current, previous or next accounting year	Records only the expenditure and income made during the current accounting year
Object	Shows the cash position of NPO	Shows the net results in terms of deficits or surplus
Depreciation	Non-cash items like depreciation is not included	Includes non-cash items like depreciation, bad-debts for determining net profit or loss.
Adjustment	Before preparing financial statements the Payments and Receipts received during the year can be adjusted.	Cash and non-cash transactions can be adjusted
System	Cash basis	Accrual Basis

Short Answer Type Question:

Q.1 What is a Cash Flow Statement?

ANSWER: A Cash Flow Statement is a statement showing inflows and outflows of cash and cash equivalents from operating, investing and financing activities of a company during a particular period. It explains the reasons of receipts and payments in cash and change in cash balances during an accounting year in a company.

Q.2 How are the various activities classified (as per AS-3 revised) while preparing cash flow statement?

ANSWER: As per the Revised Accounting Standard 3 (AS-3), preparation of Cash Flow Statement for each period is mandatory. AS-3 also specifies the classification of all inflows and outflows basically under the following heads:

1. Cash Flow from Operating Activities

2. Cash Flow from Investing Activities

3. Cash Flow from Financing Activities

Q.3 State the uses of cash flow statement?

ANSWER: The uses of cash flow statement are as follows:

1. It is useful for short term financial planning about inflows and outflow of cash.

2. It helps in analysing the reason for the change in cash and cash equivalent balances of a company

3. It assists in determining and assessing liquidity and solvency positions of a company.

4. It enables to analyse and study the trends of receipts and payments of cash from various activities of a company and thereby helps in drafting various policy measures and short term planning.

5. It enables the segregation of cash flows from operating, investing and financing activities of the business separately.

6. It assists in making decision about distribution of profit with reference to the availability of cash.

Q.4 What are the objectives of preparing cash flow statement?

ANSWER: The important objectives for preparing Cash Flow Statement are as follows:

1. The most important objective that is fulfilled by preparing Cash Flow Statement is to ascertain the gross inflows and outflows of cash and cash equivalents from various activities.

2. Secondly, Cash Flow Statement helps in analysing various reasons responsible for change in the cash balances during an accounting year.

3. This statement helps in analysing and understanding the liquidity and solvency of a company , thereby, depicting the true liquidity position to the creditors and the investors.

4. Cash Flow Statement also helps in ascertaining the requirement and availability of cash in near future.

Q.5 State the meaning of the terms: Cash Equivalents, Cash flows.

ANSWER: Cash equivalents are short term, highly liquid investments that are easily convertible into cash and which are subject to an insignificant risk of change in value. In other words, cash equivalents are held for the purpose of meeting short term cash commitments rather than for investment or any other purpose. An investment held for short-term maturity, say three months can be regarded as cash equivalent. Some examples of cash equivalents are treasury bills, commercial papers, etc. On the other hand, cash flows are inflows and outflows of cash and cash equivalents. A cash inflow results in increase in the total cash balance and a cash outflow results in decrease in the total cash balance.

Q.6 Prepare a format of cash flow from operating activities under indirect method.

ANSWER: The format of cash flow from operating activities under Indirect method is as follows:  

Indirect Method
Cash Flow from Operating Activities:
Net Profit before tax and extraordinary items		***
	Add:	Non-Cash Expenses and Non-Operating Expenses
		Depreciation	**
		Goodwill	**
		Interest paid	**
		Loss on sale of fixed assets	**
		Foreign exchange	**	**
	Less:	Non Operating Incomes.
		Dividend received	**
		Profit on sale of fixed assets	**
		Interest received	**	**
Operating profit before working capital changes		***
	Add: Decrease in Current Assets	***
		Increase in Current Liabilities	***	***
	Less: Increase in Current Assets	***
		Decrease in Current Liabilities	***	***
Cash generated from Operating Activities		***
Income tax paid		***
Cash Flow before Extraordinary Items		***
	Add/Less: Extra ordinary Items		***
Net Cash Flow from Operating Activities		***

Note: Preparation of Cash Flow Statement using Direct Method has been excluded from the prescribed syllabus. The format is given since the question has not specified the method explicitly. Students can refer to the direct method for the knowledge purpose.

Q.7 State clearly what would constitute the operating activities for each of the follow in the following of enterprises:

(i) Hotel

(ii) Film production house

(iii) Financial enterprise

(iv) Media enterprise

(v) Steel manufacturing unit

(vi) Software development business unit.

ANSWER:

(i) Hotels

1. Receipts from sale of goods to customer.

2. Payment of wages and salaries, electricity, food items and other items used in accommodation.

(ii) Film Production House:

1. Receipts from selling film rights of a film to the distributors.

2. Payment to the staff, actors, actresses, directors, etc.

(ii) Financial Enterprises:

1. Receipts from repayment of loans, interest incomes from investments, etc.

2. Repayment of loans, recovery expenditure for recover of loans etc, salaries of employees.

(iv) Media Enterprises:

1. Receipts from advertisements.

2. Payments to staff, reporters, photographers, etc.

(v) Steel Manufacturing Unit:

1. Receipts from sale of steel sheets, steel castings, steel rods, etc.

2. Payment for iron, coal, salaries to staff, etc.

(vi) Software Development Business Unit:

1. Receipts from sale of software and renewal of licenses.

2. Payment of salaries to their employees, etc.

“Q.8 The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.

ANSWER: Yes, the nature or type of an enterprise can change the category into which a particular activity may be classified. This can be better understood with the help of an example of two firms. One engaged in financial services and the other engaged in manufacturing services. For the firm that is engaged in financial services, interests received or paid are classified under operating activities whereas for the firm that is engaged in manufacturing business, interests paid are classified under financing activities and interest received as investing activities. Therefore, the classification of activities depends on the nature and type of enterprise.

LONG ANSWER TYPE QUESTIONS:

Q.1 Describe the procedure to prepare cash flow statement.
  ANSWER: The procedure for preparing cash flow statement is as follows
Step 1 First of all cash flows from operating activities is ascertain.
Step 2 After that cash flows from investing activities is ascertain.
Step 3 The third step is to ascertain the cash flows from financing activities.
Step 4 Sum up the total of all the three steps and ascertain net increase or decrease.
Step 5 Write the opening balance of cash and cash equivalents and deduct it from the amount ascertained in Step 4. The resulting figure arrived is the closing balance of cash and cash equivalents.
There are two methods viz Direct Method and Indirect Method for the preparation of cash flow statement. The main difference in direct and indirect method is to calculate the cash flow from operating activities. Computation of rest of the two activities will remain same. Here are the Proforma of cash flow statement from both the methods.

Q.2 Describe “Direct” and “Indirect” method of ascertaining cash flow from operating activities.
Answer
Computation of Cash Flow From Operating Activities
The first section of cash flow statement, known as cash flow from operating activities, can be prepared by two methods known as direct method and indirect method.
(i) Direct Method :In the direct method format, each line of the operating activities section represents a sum of all cheques or deposits in a particular category, e.g., the operating activities section would include such items as cash received from customers; cash paid to suppliers; cash paid for interest; cash paid for wages; cash paid for research and development; cash paid for selling, general, and administrative costs; and any other relevant summary lines.
Direct Method Format: Cash flow from operating activities is calculated by direct method as follows

(ii) Indirect Method: In indirect method, the net income figure from the income statement is used to calculate the amount of net cash flow from operating activities. Since income statement is prepared on accrual basis in which revenue is recognised when earned and not when received therefore net income does not represent the net cash flow from operating activities and is necessary to adjust EBIT for those items which effect net income although no actual cash has been paid or received against them.
Indirect Method :Following is the indirect method formula which is used to calculate cash flow from operating activities

Q.3 Explain the major cash inflows and outflows from investing activities.
ANSWER: Cash Flows from Investing Activities: The next step in building cash flow statement is to look at money a company spent on new capital investments. If a company capitalizes an investment, then that outflow of money does not show up on the income statement. That’s because accounting rules allow the company to depreciate (expense) the cost of the investment over time.
From a practical standpoint, if a company purchase an asset such as new plant equipment or machinery, then they most likely paid for that asset in cash. When monpy leaves a company, we have an outflow of cash that we need to show in our statement.
Example In this example, let’s say ‘X’ Company purchased a new computer system for Rs. 15,00,000 along with an assembly line machine for Rs. 20,00,000. These were the only two capital investments made by ‘X’ Company for the year. In this example, the company was also required to buy a new Machinery worth Rs. 5,00,000 into a special decommissioning fund.
Normally, a company might show one line item for the capital investments and label that line item as additions to plant. In this example, we are going to show these items separately

In the above example, we saw that the company made investment in fixed assets and used Rs.40,00,000.

Q.4 Explain the major Cash inflows and outflows from financing activities.
ANSWER:
Cash Flows from Financing Activities :The final category of adjustments we need to address on a statement of cash flows is money raised by financing activities. As was the case with cash from operations, we can have both positive and negative adjustments to cash flow depending on the financing activities the company is engaged during the year.

Typical adjustments appearing here include changes in long and short term debt (issuing and redemption), issuing of preferred stock, issuing of common stock, retirement of stock, and stock dividends paid in cash.
Example In our example, ‘X’ Company decided to raise Rs. 2,50,000 by issuing common stock. They also issued around Rs.5,00,000 in preference share, and redeemed around Rs. 3,00,000 in long term debt. Finally, they paid a cash

In this example, ‘X’ Company used less money in their financing activities than they generated during the year.

Short Answer Type Question:

Q.1 What do you mean by Ratio Analysis?

ANSWER: Ratio Analysis is a technique of financial analysis. It describes the relationship between various items of Balance Sheet and Income Statements. It helps us in ascertaining profitability, operational efficiency, solvency, etc. of a firm. It may be expressed as a fraction, proportion, percentage and in times. It enables budgetary controls by assessing qualitative relationship among different financial variables. Ratio Analysis provides vital information to various accounting users regarding the financial position and viability and performance of a firm. It also lays down the basic framework for decision making and policy designing by management.

Q.2 What are the various types of ratios?

ANSWER: Accounting ratios are classified in the following two ways.

I. Traditional Classification

II. Functional Classification

I. Traditional Classification: This classification is based on the financial statements, i.e. Profit and Loss Account and Balance Sheet. The Traditional Classification further bifurcates accounting ratios on the basis of the accounts to which the elements of a ratio belong. On the basis of accounts of financial statements, the Traditional Classification bifurcate accounting ratios as:

a. Income Statement Ratios: These are those ratios whose all the elements belong only to the Trading and Profit and Loss Account, like Gross Profit Ratio, etc.

b. Balance Sheet Ratios: These are those ratios whose all the elements belong only to the Balance Sheet, like Current Ratio, Debt Equity Ratio, etc.

c. Composite Ratios: These are those ratios whose elements belong both to the Trading and Profit and Loss Account as well as to the Balance Sheet, like Debtors Turnover Ratio, etc.

II. Functional Classification: This classification reflects the functional need and the purpose of calculating ratio. The basic rationale to compute ratio is to ascertain liquidity, solvency, financial performance and profitability of a business. Consequently, the Functional Classification classifies various accounting ratios as:

a. Liquidity Ratio: These ratios are calculated to determine short term solvency.

b. Solvency Ratio: These ratios are calculated to determine long term solvency.

c. Activity Ratio: These ratios are calculated for measuring the operational efficiency and efficacy of the operations. These ratios relate to sales or cost of goods sold.

d. Profitability Ratio: These ratios are calculated to assess the financial performance and the financial viability of the business.

Q.3 What relationships will be established to study:

a. Inventory Turnover

b. Trade Receivables Turnover

c. Trade Payables Turnover

d. Working Capital Turnover

ANSWER:

a. Inventory Turnover Ratio: This ratio is computed to determine the efficiency with which the stock is used. This ratio is based on the relationship between cost of goods sold and average stock kept during the year.

b. Debtors Turnover Ratio or Trade Receivables Turnover Ratio: This ratio is computed to determine the rate at which the amount is collected from the debtors. It establishes the relationship between net credit sales and average accounts receivables.

c. Trade Payables Turnover Ratio: This ratio is known as Creditors Turnover Ratio. It is computed to determine the rate at which the amount is paid to the creditors. It establishes the relationship between net credit purchases and average accounts payables.

d. Working Capital Turnover Ratio: This ratio is computed to determine how efficiently the working capital is utilised in making sales. It establishes the relationship between net sales and working capital.

Q.4 The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?

ANSWER: The liquidity of a business firm is measured by its ability to pay its long term obligations. The long term obligations include payments of principal amount on the due date and payments of interests on the regular basis. Long term solvency of any business can be calculated on the basis of the following ratios.

a. Debt-Equity Ratio– It depicts the relationship between the borrowed fund and owner’s funds. The lower the debt-equity ratio higher will be the degree of security to the lenders. A low debt-equity ratio implies that the company can easily meet its long term obligations.

b. Total Assets to Debt Ratio- It shows the relationship between the total assets and the long term loans. A high Total Assets to Debt Ratio implies that more assets are financed by the owner’s fund and the company can easily meet its long-term obligations. Thus, a higher ratio implies more security to the lenders.

c. Interest Coverage Ratio– This ratio depicts the relationship between amount of profit utilised for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit.

Q.5 The average age of inventory is viewed as the average length of time inventory is held by the firm for which explain with reasons.

ANSWER: Inventory Turnover Ratio: This ratio is computed to determine the efficiency with which the stock is used. This ratio is based on the relationship between cost of goods sold and average stock kept during the year.

It shows the rate with which the stock is turned into sales or the number of times the stock in turned into sales during the year. In other words, this ratio reveals the average length of time for which the inventory is held by the firm.

LONG ANSWER TYPE QUESTIONS:

Q.1 Who are the users of financial ratio analysis? Explain the significance of ratio analysis to them.
  ANSWER: Financial ratios help their users to take various managerial decisions. In this context there are four categories of users who are interested in financial ratios. These are the management, investors, long term creditors and short term creditors. The significance of ratios to the above mentioned users is as follows
(i) Management :Management calculate ratios for taking various managerial decisions. Management is always interested in future growth of the organisation. In this regard management design various policy measures and draft future plans. Management wish to know how effectively the resources are being utilised conseguently, they are interested in Activity Ratios and Profitability Ratios like Net Profit Ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratios, etc. ‘
(ii) Equity Investors :The prime concern of investors before investing in shares is to ensure the security of their principle and return on investment. It is a well known fact that the security of the funds is directly related to the profitability and operational efficiency of the business. In this way they are interested in knowing Earnings per Share, Return on Investment and Return on Equity.
(iii) Long Term Creditors: Long term creditors are those creditors who provide funds for more than one year, so they are interested in long term solvency of the firm and in assessing the ability of the firm to pay interest on time. In this way they are interested in calculating Long term Solvency Ratios like, Debt-Equity Ratio, Proprietory Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio, etc.
(iv) Short Term Creditors :Short term creditors are those creditors who provide financial assistance through short term credit (Generally less than one year). That’s why short-term creditors are interested in timely payment of their debts in short run. In this way they are always interested in Liquidity Ratios like, Current Ratio, Quick Ratios etc. These ratios reveal the current financial position of the business. It is always observed that short term obligations are paid through current assest.

Q.2 What are liquidity ratios? Discuss the importance of current and liquid ratio.
ANSWER:  Liquidity ratios are calculated to determine the short-term solvency of the business. Analysis of current position of liquid funds determines* the ability of the business to pay the amount due as per commitment to stakeholders. Included in this category are current ratio, Quick ratio and Cash Fund Ratios.

Current Ratio/Working Capital Ratio: This ratio establish relationship between current assets and current liabilities. The standard for this ratio is 2 : 1. It means a ratio 2 : 1 is considered favourable. It is calculated by dividing the total of the current assets by total of the current liabilities. The formula for the current ratio is as follows
Current Ratio = Current Assets/Current Liabilities Or
Current Assets : Current Liabilities
Importance of Current Ratio Current Ratio Provides a measure of degree to which current assets cover current liabilities. The excess of current assets over current liabilities provides a measure of safety margin available against uncertainty in realisation of current assets and flow of funds. However, it must be interpreted carefully because window-dressing is possible by manipulating the components of current assets and current liabilities, e.g., it can be manipulated by making payment to creditors. A very high current ratio is not a good sign as it reflects under utilisation or improper utilisation of resources.
Liquid/Acid Test/Quick Ratio This ratio establishes relationship between Quick assets and Current liabilities. Quick assets are those assets which can get converted into cash easily in case of emergency. Out of current assets it is believed that stock, and prepaid expenses are not possible to convert in cash quickly. The standard for this ratio is 1:1. It means if quick assets are just equal to the current liabilities they will be considered favourable with the view point of company’s credibility. The formula for the quick ratio is as follows

Importance of Current Ratio: Current Ratio Provides a measure of degree to which current assets cover current liabilities. The excess of current assets over current liabilities provides a measure of safety margin available against uncertainty in realisation of current assets and flow of funds. However, it must be interpreted carefully because window-dressing is possible by manipulating the components of current assets and current liabilities, e.g., it can be manipulated by making payment to creditors. A very high current ratio is not a good sign as it reflects under utilisation or improper utilisation of resources.
Liquid/Acid Test/Quick Ratio:This ratio establishes relationship between Quick assets and Current liabilities. Quick assets are those assets which can get converted into cash easily in case of emergency. Out of current assets it is believed that stock, and prepaid expenses are not possible to convert in cash quickly. The standard for this ratio is 1:1. It means if quick assets are just equal to the current liabilities they will be considered favourable with the view point of company’s credibility. The formula for the quick ratio is as follows

Importance of Quick Ratio :It helps in determining whether a firm has sufficient funds if it has to pay all its current liabilities immediately. Because of exclusion of non-liquid current assets, it is considered better than current ratio as a measure of liquidity position of the business. Standard for liquid ratio is 1:1. Sometimes quick ratio is calculated on the basis of quick liability instead of current liabilities. Quick liabilities are calculated by ignoring bank overdraft, if any. It means to get the figure of quick liabilities from current liabilities; bank overdraft is deducted from current liabilities.

Q.3 How would you study the solvency position of the firm?
ANSWER: The solvency position of any firm is determined and measured with the help of solvency ratios. In this way we can say that the ratios which throw light on the debt servicing ability of the businesses in the long run are known as solvency ratios. Solvency of a concern can be measured in two ways first to check the security of Debt and second is to check the security of return on Debt. For calculating the security of debt we calculate Debt-Equity Ratio, Proprietory Ratio, Fixed Assets – Proprietory Fund Ratio, etc. And for calculating Security of Return on Debt we calculate Interest Coverage Ratio. A brief description of the above mentioned ratios is as follows

Debt Equity Ratio :Debt Equity Ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company.

Proprietory Ratio/ Total Assets to Debt Ratio: Total assets to Debt Ratio or Proprietory Ratio are a variant of the debt equity ratio. It is also known as equity ratio or net worth to total assets ratio. This ratio relates the shareholder’s funds to total assets. Proprietory/Equity Ratio indicates the long-term or future solvency position of the business. Formula of Proprietary/Equity Ratio

Shareholder’s funds include equity share capital plus all reserves and surpluses items. Total assets include all assets, including Goodwill. Some authors exclude goodwill from total assets. In that case the total shareholder’s funds are to be divided by total tangible assets. The total liabilities may also be used as the denominator in the above formula.

Fixed Assets to Proprietor’s Fund Ratio: Fixed Assets to Proprietor’s Fund Ratio establish a relationship between fixed assets and shareholders’ funds. The purpose of this ratio is to indicate the percentage of the owner’s funds invested in fixed assets. The formula for calculating this ratio is as follows

The fixed assets are considered at their book value and the proprietor’s funds consist of the same items as internal equities in the case of debt equity ratio.

Interest Coverage Ratio :This ratio deals only with servicing of return on loan as interest. This ratio depicts the relationship between amount of profit utilise for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit.

Q.4 What are important profitability ratios? How are they worked out? ‘
ANSWER:  Profitability Ratios Profitability ratios measure the results of business operations or overall performance and effectiveness of the firm. Some of the most Important and popular profitability ratios are as under
Gross Profit Ratio: Gross Profit Ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. The basic components for the calculation of gross profit ratio are gross profit and net sales. Net sales mean sales minus sales returns.

Gross profit would be the difference between net sales and cost of goods sold. Cost of goods sold in the case of a trading concern would be equal to opening stock plus purchase, minus closing stock plus all direct expenses relating to purchases. In the case of manufacturing concern, it would be equal to the sum of the cost of raw materials, wages, direct expenses and all manufacturing expenses. In other words, generally the expenses charged to profit and loss account or operating expenses are excluded from the calculation of cost of goods sold.
Following formula is used to calculate gross profit ratios

Net Profit Ratio :Net Profit Ratio is the ratio of net profit to net sales. It is expressed as percentage. The two basic components of the net profit ratio are the net profit and sales. The net profits are obtained after deducting income-tax and, generally, non-operating expenses and incomes are excluded from the net profits for calculating this ratio. Thus, incomes such as interest on investments outside the business, profit on sales of fixed assets and losses on sales of fixed assets, etc are excluded.

Operating Profit Ratio :Operating Profit Ratio is the ratio of operating profit to net sales. There are many non operating expenses and incomes included in the profit and loss account which has nothing to do with the operations of the business such as loss by fire, loss by theft etc. On the other had in credit side of the P&L account, there are so many incomes
which can be considered as operating incomes such as dividend, bank interest, rent etc. In this way net profit ratio will not tell the truth about the profit of the organisation. Hence operating profit ratio will be helpful in that case. The formula for calculating operating ratio is as follows

Operating Ratio :Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales. It is generally expressed in percentage, Operating ratio measures the cost of operations per dollar of sales. This is closely related to the ratio of operating profit to net sales. The two basic components for the calculation of operating ratio are operating cost (cost of goods sold plus operating expenses) and net sales. Operating expenses normally include (a) administrative and office expenses and (b) selling and distribution expenses. The formula for calculating the operating ratio is as follows

Q.5 Financial ratio analysis are conducted by four groups of analysts : managers, equity investors, long term creditors and short term creditors. What is the primary emphasis of each of these groups in evaluating ratios?
ANSWER:  This is very much true that the financial ratio analysis is conducted by four groups of analysts : managers, equity investors, long term creditors and short term creditors. The primary emphasis of each of these groups in evaluating these ratios are as follows
(i) Management: Management calculate ratios for taking various managerial decisions. Management is always interested in future growth of the organisation. In this regard management design various policy measures and draft future plans. Management wish to know how effectively the resources are being utilised Consequently, they are interested in Activity Ratios and Profitability Ratios like Net Profit Ratio, Debtors Turnover Ratio, Fixed Assets Turnover Ratios, etc.
(ii) Equity Investors: The prime concern of investors before investing in shares is to ensure the security of their principle and return on investment. It is a well known fact that the security of the funds is directly related to the profitability and operational efficiency of the business. In this way they are interested in knowing Earnings per Share, Return on Investment and Return on Equity.
(iii) Long Term Creditors: Long term creditors are those creditors who provide funds for more than one year, so they are interested in long term solvency of the firm and in assessing the ability of the firm to pay interest on time. In this way they are interested in calculating Long term Solvency Ratios like, Debt-Equity Ratio, Proprietory Ratio, Total Assets to Debt Ratio, Interest Coverage Ratio, etc.
(iv) Short Term Creditors: Short term creditors are those creditors who provide financial assistance through short term credit (Generally less than one year). That’s why short term creditors are interested in timely payment of their debts in short run. In this way, they are always interested in Liquidity Ratios like, Current Ratio, Quick Ratios etc. These ratios reveal the current financial position of the business. It is always observed that short term obligations are paid through current assest.

Q.6 The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick ratio is a preferred measure of overall liquidity. Explain.
ANSWER:  The above mentioned statement is true. There are two different ways to measure the liquidity of a firm first through current ratio of the firm and second through quick ratio of the firm. The second one is considered the more refine form of measuring the liquidity of the firm.
The current ratio ‘explains the relationship between current assets and current liabilities. If current assets are quite capable to pay the current liability the liquidity of the concerned firm will be considered good. But here generally one question arises there are certain assets which cannot be converted into cash quickly such as stock and prepaid expenses.
As far as the matter of prepaid expenses is concerned it’s ok but what about the stock if we measure the liquidity on the basis of conversion of current assets in cash there are many firms where conversion of stock is not possible into cash frequently say e.g., heavy machinery manufacturing companies, locomotive companies, etc. This is because, the heavy stocks like machinery, heavy tools etc. cannot be easily sold off. In this case it is always advisable to follow the current ratio for measuring the liquidity of a firm.

But on the other hand, in case of those firms where the stock can be easily realised or sold off consideration of stock should be avoided and to measure the liquidity of that firm Quick ratio should be calculated, e.g., the inventories of a service sector company are very liquid as there are no stocks kept for sale, so in that case liquid ratio must be followed for measuring the liquidity of the firm.
We can understand from the above mentioned statement in the light of another example where stock contribute the major portion in current assets in that case to find out the liquidity of that firm stock cannot be avoided to measure the liquidity of the firm. On the other hand where stock contributes a reasonably less amount it can be avoided and liquidity of that firm can be measured with the help of quick ratio. On the other hand where there is a lot of fluctuation in the price of stock it is always advisable to compute quick ratio and avoid the stock figure because it will reduce the authenticity of liquidity measure.