CBSE Class 12 Accountancy Financial Statement Of Companies Important Questions Set 01

Very Short Answer Questions (1 Mark)

Question 1. State whether the following statement is True or False: Authorised Capital is authorised by the Memorandum of Association of a company.
Answer:
True

Teacher's Note:
1. Authorised capital is stated in the capital clause of the Memorandum of Association.

Question 2. State whether the following statement is True or False: Paid-up share capital is credited to Share Capital Account.
Answer:
True

Teacher's Note:
1. Only the amount called up (and paid) is credited to Share Capital Account; unpaid calls appear as calls-in-arrears.

Question 3. State whether the following statement is True or False: Loose Tools and Stores and Spares are shown as Inventories in the Balance Sheet.
Answer:
True

Teacher's Note:
1. Loose tools are not shown as fixed assets under Schedule III; they are inventories.

Question 4. State whether the following statement is True or False: Uncalled liability on partly paid shares is a contingent liability.
Answer:
True

Teacher's Note:
1. It becomes payable only if the company makes the call, so it is disclosed as a contingent liability (commitment) in the Notes.

Question 5. State whether the following statement is True or False: Interest paid on bank overdraft is shown as Notes to Accounts on Employees Benefit Expenses.
Answer:
False

Teacher's Note:
1. Interest on any borrowing, including bank overdraft, is a Finance Cost.

Question 6. Fill in the blank: Shares on which a company has called total nominal value and has also received the amount are shown in the Notes to Accounts on Share Capital under Subscribed Capital as __________.
Answer:
Subscribed and fully paid up

Teacher's Note:
1. If any call money is still unpaid, the shares are “subscribed but not fully paid”.

Question 7. Fill in the blank: When Accounting Income is more than taxable income. It is known as __________.
Answer:
Deferred Tax Liability

Teacher's Note:
1. Higher accounting income means more tax is payable later, hence a liability; the opposite case gives a Deferred Tax Asset.

Question 8. Fill in the blank: Proposed dividend of current year is shown as __________ in the Notes to Accounts.
Answer:
Contingent Liability

Teacher's Note:
1. Under AS 4 (Revised), no provision is made for proposed dividend of the current year.

Question 9. Fill in the blank: Premium on Redemption of Debentures is shown as __________.
Answer:
Other Long Term Liability

Teacher's Note:
1. Premium payable on redemption is shown under Other Long-term Liabilities until the debentures fall due within 12 months.

Question 10. Fill in the blank: Tax Reserves are shown on __________ side under main head __________.
Answer:
Equity and Liabilities, Shareholders’ Funds

Teacher's Note:
1. Reserves of any kind are part of Reserves and Surplus under Shareholders’ Funds.

Question 11. Is there any standard format of ‘Balance Sheet’ of a company?
Answer:
Section 129 of the Companies Act, 2013 requires that the Balance Sheet of a company should be prepared in the prescribed form, given in Part I of Schedule III of the Companies Act, 2013.

Teacher's Note:
1. Quote both the section (129) and the Schedule (III, Part I) for full marks.

Question 12. List the major heads under which the assets are presented in the Balance Sheet of a company as per Schedule III Part I of the Companies Act, 2013. [Question from CBSE Guiding Notes]
Answer:
(i) Non-current Assets, (ii) Current Assets.

Teacher's Note:
1. Fixed assets, investments, inventories etc. are sub-heads, not major heads.

Question 13. Give two examples each of Non-current Assets and Non-current Liabilities.
Answer:
(1) Non-current Assets: (i) Land and Building, (ii) Plant and Machinery.
(2) Non-current Liabilities: (i) Debentures, (ii) Public Deposits.

Teacher's Note:
1. Non-current means realisable or payable after 12 months (or the operating cycle) from the Balance Sheet date.

Question 14. What are contingent liabilities? How would you disclose ‘Contingent Liabilities’ in the Balance Sheet of a company?
Answer:
Contingent liabilities are those liabilities that may or may not arise because they are dependent on a happening in future. They are disclosed in the Notes to Accounts for providing information to users about impending liabilities.

Teacher's Note:
1. Contingent liabilities are never added to the Balance Sheet totals; they appear only in the Notes.

Question 15. Define ‘Authorised Capital’.
Answer:
As per Section 2(8) of the Companies Act, 2013, “Authorised Capital” or “Nominal Capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.

Teacher's Note:
1. Authorised capital is shown in the Notes on Share Capital only for information; it is not added to the total.

Question 16. Define ‘Paid-up Share Capital’.
Answer:
As per Section 2(64) of the Companies Act, 2013, “Paid-up Share Capital” or “Share Capital Paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of a company, but does not include any other amount received in respect of such shares, by whatever name called.

Teacher's Note:
1. Securities premium and calls-in-advance are received on shares but are not part of paid-up capital.

Question 17. What do you understand by ‘Capital Redemption Reserve’?
Answer:
When a company buys its own shares out of free reserves, capital redemption reserve is created. As per Section 69 of the Companies Act, 2013 a sum equal to the nominal value of shares so purchased shall be transferred to Capital Redemption Reserve.

Teacher's Note:
1. Capital Redemption Reserve is shown under Reserves and Surplus and can be used only for issuing fully paid bonus shares.

Question 18. Define ‘Operating Cycle’.
Answer:
As per Schedule III of the Companies Act, 2013, “Operating cycle is the time between the acquisition of an asset for processing and its realisation into cash and cash equivalents. If operating cycle cannot be identified, it is assumed to be of 12 months”.

Teacher's Note:
1. The operating cycle decides whether an item is current or non-current, so it can be longer than 12 months in some businesses.

Question 19. Name any four items of intangible assets.
Answer:
(i) Goodwill   (ii) Trademarks   (iii) Computer Software   (iv) Mining Rights

Teacher's Note:
1. Intangible assets have no physical existence; patents, copyrights and licences are also good examples.

Question 20. What are Appropriations of Profit? What is a reserve represented by investments termed as?
Answer:
Amount set aside out of profit for reserves, dividend, etc. are Appropriations of Profits. Profit is appropriated by adding profit of the current year to the opening balance of Surplus, i.e., Balance in Statement of Profit and Loss and thereafter transferring, i.e., appropriating amounts to other reserves such as General Reserve, Capital Redemption Reserve, etc.
A reserve which is represented by (invested in) specific outside investments is termed as Reserve Fund.

Teacher's Note:
1. Appropriations are shown in the Notes on Reserves and Surplus, not in the Statement of Profit and Loss.

Question 21. Give two examples of ‘Contingent Liabilities’.
Answer:
(i) Claims against the company not acknowledged as debt,
(ii) Uncalled liability on partly paid shares.

Teacher's Note:
1. Guarantees given by the company and arrears of cumulative preference dividend are other examples.

Question 22. Hazel Ltd. has been established by the persons who were earlier working as partners. They decided to follow the same Balance Sheet format as they used in their partnership firm. Can they follow the same format of Balance Sheet?
Answer:
Hazel Ltd. cannot follow the same Balance Sheet format as they used in their partnership firm. As per Section 129 of the Companies Act, 2013, a company is required to prepare its Balance Sheet every year in the format prescribed under Schedule III of the Companies Act, 2013.

Teacher's Note:
1. Partnership firms have no prescribed format, but every company must use the Schedule III vertical format.

Question 23. Multiple Paper Solutions Ltd. received applications for 5,00,000 preference shares against an issue of 4,00,000 preference shares of ₹ 10 each. Allotment has not been made against the applications yet. How will you show the amount in the Balance Sheet of company?
Answer:
₹ 40,00,000 (4,00,000 × ₹ 10) will be shown against ‘Share Application Money Pending Allotment’ and ₹ 10,00,000 (1,00,000 × ₹ 10) will be shown as ‘Other Current Liabilities’ under the head ‘Current Liabilities’.

Teacher's Note:
1. Only the application money up to the number of shares offered is “pending allotment”; the excess is refundable, hence a current liability.

Question 24. Anuj, the Accountant of Best Choice Furniture Ltd. has shown Building under ‘Inventories’ as the company has decided to sell one of its buildings next month. Is he correct in his approach?
Answer:
Stock held for the purpose of trade in the normal course of business is shown under ‘Inventories’. Building is shown under fixed tangible assets. ‘Sale of building’ is considered as sale of a fixed asset and not trading by the firm having a business of trading in furniture items.
Hence, Anuj is not correct.

Teacher's Note:
1. An asset becomes inventory only if it is held for sale in the normal course of business, not because it will be sold once.

Question 25. Unimax Finance Ltd., a finance company had received interest of ₹ 2,00,000 on the amount invested in Maxwell Sports Ltd. Is the interest received ‘Revenue from Operations’?
Answer:
Yes, the interest of ₹ 2,00,000 received by Unimax Finance Ltd. is classified under ‘Revenue from Operations’ as the company is a ‘Financing Company’.

Teacher's Note:
1. For a non-finance company the same interest would be Other Income.

Question 26. Cash and Cash Equivalents are always classified as current assets. Can they ever be shown as non-current assets? Give an example. [HOTS]
Answer:
If a company has a bank balance outside the country and a situation arises when the foreign country restricts the transfer of amount outside the country, then such bank balance is shown as non-current assets in the Balance Sheet.

Teacher's Note:
1. The test is availability: cash that cannot be used within 12 months is not a current asset.

Question 27. Domes Ltd. has issued 2,500, 12% Debentures of ₹ 100 each on 1st November, 2016 to be redeemed on 30th September, 2017. How will 12% Debentures be shown in the Balance Sheet as at 31st March, 2017?
Answer:
12% Debentures will be shown as Short-term Borrowings under head ‘Current Liabilities’ in the Balance Sheet as at 31st March, 2017 as they are redeemable within 12 months from the date of Balance Sheet.

Teacher's Note:
1. Debentures redeemable within 12 months of the Balance Sheet date are always current liabilities.

Short Answer Questions (2 Marks)

Teacher's Note:
1. Accrued income (income earned but not received) is an asset, shown under Other Current Assets.

Teacher's Note:
1. Loose tools are inventories under Schedule III even though they are used for several years.

Teacher's Note:
1. Discount or loss on issue of debentures is no longer shown as an asset; it is written off in the year of issue.

Teacher's Note:
1. Security deposits paid (telephone, electricity) are advances recoverable after more than 12 months, so they are long-term loans and advances.

Teacher's Note:
1. Bills of Exchange here means bills receivable, part of Trade Receivables under Current Assets.

Teacher's Note:
1. Shares of another company are non-current investments unless they are held for sale within 12 months.

Teacher's Note:
1. Even when the debit balance exceeds the reserves, the net negative figure stays under Reserves and Surplus; it is never shown as an asset.

Teacher's Note:
1. For a finance company, interest, dividend and commission are operating revenue, but profit on sale of land (a fixed asset) is Other Income.

Teacher's Note:
1. Inventories of finished goods are not used here; they go into “Changes in inventories of finished goods”.

Question 37. Under which sub-headings will the following items be shown in the Balance Sheet of a company as per Schedule III Part I of the Companies Act, 2013:
(i) Long-term Loans
(ii) Capital Redemption Reserve
(iii) Short-term Provisions
(iv) Goodwill
(v) Provisions for Warranties
(vi) Brand/Trademarks [CBSE (F) 2014]
Answer:
(i) Long-term Borrowings
(ii) Reserves and Surplus
(iii) Short-term Provisions
(iv) Fixed Assets (Intangible Assets)
(v) Long-term Provisions
(vi) Fixed Assets (Intangible Assets)

Teacher's Note:
1. Warranty provisions are long-term when the warranty claims are expected to be settled after 12 months.

Question 38. Under what heads and sub-heads the following items will appear in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013:
(i) Mining Rights
(ii) Encashment of employees earned leave payable on retirement
(iii) Vehicles [CBSE Delhi 2013]
Answer:
(i) Non-Current Assets, Fixed Assets,
(ii) Non-Current Liabilities, Long-term Provisions,
(iii) Non-Current Assets, Fixed Assets

Teacher's Note:
1. Leave encashment payable on retirement is an employee benefit settled in the distant future, hence a long-term provision.

Question 39. Give the major headings under which the following items will be shown in a company’s Balance Sheet as per Schedule III, Part I of the Companies Act, 2013:
(i) Sundry Creditors; (ii) Provision for Tax; (iii) Preliminary Expenses; (iv) Loose Tools; (v) Interest accrued on investments and (vi) Goodwill. [CBSE (AI) 2011]
Answer:
(i) Current Liabilities
(ii) Current Liabilities
(iii) Not shown in Balance Sheet
(iv) Current Assets
(v) Current Assets
(vi) Non-current Assets

Teacher's Note:
1. Preliminary expenses are written off in the year they are incurred (AS 26), so they never appear in the Balance Sheet.

Short Answer Questions (3 Marks)

Teacher's Note:
1. A debit balance of Statement of Profit and Loss is never shown on the assets side; it is a negative figure under Reserves and Surplus.

Teacher's Note:
1. Loans repayable on demand are short-term borrowings even if no fixed date is given, because the lender can ask for them at any time.

Teacher's Note:
1. Words like “payable” and “repayable on demand” signal a liability; deposits accepted by the company are borrowings.

Teacher's Note:
1. Major heads are only four here: Non-current Liabilities, Current Liabilities, Non-current Assets and Current Assets (plus Shareholders’ Funds).

Teacher's Note:
1. Capital advances (advances paid for buying fixed assets) are always long-term loans and advances, never current assets.

Teacher's Note:
1. Advertising has no head of its own in Schedule III, so it goes to Other Expenses with a Note; a positive change in inventories is added to expenses.

Teacher's Note:
1. Change = Opening − Closing; an increase in inventory gives a negative figure, which reduces total expenses.

Question 47. Under which major heads, the following items will be placed in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013?
(i) Securities Premium Reserve
(ii) Balances with banks
(iii) Term loans from bank
(iv) Goods-in-transit
(v) Loans repayable on demand
(vi) Computer software
(vii) Unpaid dividends, and
(viii) Vehicles [CBSE Delhi 2015]
Answer:
(i) Shareholders’ Funds
(ii) Current assets
(iii) Non-current liabilities
(iv) Current assets
(v) Current liabilities
(vi) Non-current assets
(vii) Current Liabilities
(viii) Non-Current assets

Teacher's Note:
1. Goods-in-transit are part of inventories, so they are current assets.

Question 48. Under which heads, the following items will be placed in the Balance Sheet of a company as per Schedule III Part I of the Companies Act, 2013?
(i) Cash in hand
(ii) Mining Rights
(iii) Short-term deposits
(iv) Debenture Redemption Reserve
(v) Income received in advance
(vi) Balance of the Statement of Profit and Loss
(vii) Office Equipments, and
(viii) Work-in-progress. [CBSE Delhi 2015]
Answer:
(i) Current assets
(ii) Non-current assets
(iii) Current assets
(iv) Shareholders’ funds
(v) Current liabilities
(vi) Shareholders’ funds
(vii) Non-current assets
(viii) Current assets

Teacher's Note:
1. Income received in advance is a liability (Other Current Liabilities) because the service is still owed.

Question 49. Name the Major heads under which the following items will be shown in the Balance Sheet of a company as per Schedule III of the Companies Act, 2013:
(i) Work-in-Progress
(ii) Calls-in-Advance
(iii) Mining Rights
(iv) Trade Receivables
(v) Provision for Tax
(vi) Goodwill
(vii) Loose Tools
(viii) Accrued Income [CBSE Delhi 2016 (C)]
Answer:
(i) Current Assets
(ii) Current Liabilities
(iii) Non-current Assets
(iv) Current Assets
(v) Current Liabilities
(vi) Non-current Assets
(vii) Current Assets
(viii) Current Assets

Teacher's Note:
1. Calls-in-advance is a liability (Other Current Liabilities), not part of share capital.

Teacher's Note:
1. A term loan is a borrowing, so it goes under Long-term Borrowings, not Other Long-term Liabilities.

Question 51. Give the major headings under which the following items will be shown in a Company’s Balance Sheet as per Schedule III, Part I of the Companies Act, 2013:
(i) Long-term Loans; (ii) Loose Tools; (iii) Trade Marks; (iv) Drafts in Hand; (v) Bank Overdraft; (vi) Stores and Spares; (vii) Bonds; (viii) Capital Reserve. [CBSE (AI) 2015 (C)]
Answer:
(i) Non-Current Liabilities
(ii) Current Assets
(iii) Non-current Assets
(iv) Current Assets
(v) Current Liabilities
(vi) Current Assets
(vii) Non-Current Liabilities
(viii) Shareholders’ Funds

Teacher's Note:
1. Drafts and cheques in hand are cash and cash equivalents.

Teacher's Note:
1. Long-term debt falling due within 12 months is shown as current maturities under Other Current Liabilities.

Question 53. Financial statements are prepared following the consistent accounting concepts, principles, procedures and also the legal environment in which the business organisations operate. These statements are the sources of information on the basis of which conclusions are drawn about the profitability and financial position of a company so that their users can easily understand and use them in their economic decisions in a meaningful way.
From the above statement, identify any two values that a company should observe while preparing its financial statements. Also, state under which major headings and sub-headings the following items will be presented in the Balance Sheet of a company as per Schedule III of the Companies Act, 2013.
(i) Capital Reserve
(ii) Calls-in-Advance
(iii) Loose Tools
(iv) Bank Overdraft
Answer:
Values: (i) Consistency in following accounting concepts, principles and procedures; (ii) Compliance with the law (legal environment) and transparency, so that users get true and fair information.
(i) Shareholders’ funds under Reserves and surplus
(ii) Current Liabilities under other Current Liabilities
(iii) Current Assets under Inventories
(iv) Current Liabilities under Short-term Borrowings

Teacher's Note:
1. For value-based parts, pick the values from the words of the passage itself (consistency, legal compliance, understandability).

Question 54. On 1st April, 2016, Ashok Ltd. was formed with an authorised capital of ₹ 1,00,00,000 divided into 2,00,000 equity shares of ₹ 50 each. The company issued prospectus inviting applications for 1,50,000 shares. The issue price was payable as under:
On application : ₹ 15
On allotment : ₹ 20
On call : Balance
The issue was fully subscribed and the company allotted shares to all the applicants. The company did not make the call during the year.
The company also issued 5,000 shares of ₹ 50 each fully paid up to the vendor for purchase of office premises.
Show the:
(a) Share capital in the Balance Sheet of the company as per Schedule III.
(b) Also prepare ‘Notes to Accounts’. [Question from CBSE Guiding Notes]
Answer:
Share capital ₹ 55,00,000
(Subscribed and fully paid: 5,000 shares issued to vendor × ₹ 50 = ₹ 2,50,000; Subscribed but not fully paid: 1,50,000 shares × ₹ 35 called up = ₹ 52,50,000)

Teacher's Note:
1. Shares issued to a vendor for consideration other than cash are shown separately as fully paid in the Notes on Share Capital.

Long Answer Questions (5 Marks)

Teacher's Note:
1. Always total both halves of the Balance Sheet before writing the Notes; here both sides come to 4,00,000.

Teacher's Note:
1. Only the forfeited shares that are not yet reissued remain in Share Forfeited A/c; the gain on reissued shares goes to Capital Reserve.

Teacher's Note:
1. Each reserve is shown as opening balance plus transfer; the transfers are then deducted from Surplus so that profit is not counted twice.

Teacher's Note:
1. Figures given in ’000 must be multiplied by 1,000 when stating the total in rupees.