Question 1

What are the objectives of preparing financial statements ?

Accepted Answer

The objectives of preparing financial statements are:
1. To provide information about the financial position of the business.
2. To show the results of operations during a particular period.
3. To help users in making economic decisions.
4. To ascertain the profitability and financial stability of the business.
5. To comply with legal requirements.
6. To assist management in planning and controlling business activities. — Financial statements summarize the financial activities and position of a business, enabling stakeholders to understand its performance and make informed decisions.

Question 2

What is the purpose of preparing trading and profit and loss account?

Accepted Answer

The purpose of preparing Trading Account is to ascertain the gross profit or gross loss of a business during an accounting period by matching the cost of goods sold against the sales revenue.
The purpose of preparing Profit and Loss Account is to determine the net profit or net loss of the business by considering all incomes and expenses other than those related to the purchase and sale of goods. — Trading Account focuses on direct expenses and revenues related to goods, while Profit and Loss Account includes indirect expenses and incomes to find the overall profitability.

Question 3

Explain the concept of cost of goods sold?

Accepted Answer

Cost of Goods Sold (COGS) refers to the direct costs attributable to the production or purchase of goods that have been sold during an accounting period. It includes the cost of raw materials, direct labor, and direct expenses involved in bringing the goods to their present location and condition. It is calculated as:

Opening Stock + Purchases + Direct Expenses - Closing Stock = Cost of Goods Sold — COGS represents the actual cost incurred to produce or purchase the goods sold, which is deducted from sales revenue to find gross profit.

Question 4

What is a balance sheet. What are its characteristics?

Accepted Answer

A Balance Sheet is a financial statement that shows the financial position of a business at a particular point in time. It lists the assets owned by the business and the liabilities owed to outsiders along with the capital invested by the owners.

Characteristics of Balance Sheet:
1. It is a statement of assets and liabilities.
2. It is prepared at a particular date.
3. It shows the financial position of the business.
4. It follows the accounting equation: Assets = Liabilities + Capital.
5. It is used by various stakeholders to assess the financial health of the business. — Balance Sheet provides a snapshot of what the business owns and owes, helping users understand its solvency and liquidity.

Question 5

Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure :
(a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable.
(b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order.
(c) Registration fees paid at the time of purchase of a building
(d) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years.
(e) Depreciation charged on a plant.
(f) The expenditure incurred in erecting a platform on which a machine will be fixed.
(g) Advertising expenditure, the benefits of which will last for four years.

Accepted Answer

Capital Expenditure: Expenditure incurred to acquire or improve fixed assets or to increase the earning capacity of the business, which provides benefits over a long period.
Revenue Expenditure: Expenditure incurred for the day-to-day running of the business and is charged to the Profit and Loss Account, providing benefits for a short period.

Classification:
(a) Capital Expenditure - Repairs and whitewashing at purchase to make building usable.
(b) Capital Expenditure - Providing one more exit (improvement).
(c) Capital Expenditure - Registration fees on purchase.
(d) Revenue Expenditure - Maintenance of tea garden (recurring expense).
(e) Revenue Expenditure - Depreciation is a charge against profit.
(f) Capital Expenditure - Erecting platform for machine.
(g) Capital Expenditure - Advertising with benefits lasting four years. — Capital expenditures are investments in assets or improvements, while revenue expenditures are regular expenses for maintenance and operations. Each item is classified based on whether it creates or enhances an asset or is a recurring expense.

Question 6

What is an operating profit?

Accepted Answer

Operating Profit is the profit earned from the core business operations before deducting interest and tax. It is calculated by subtracting operating expenses (such as administrative and selling expenses) from the gross profit.

Operating Profit = Gross Profit - Operating Expenses — Operating profit indicates the profitability of the business's main activities, excluding non-operating incomes and expenses.

Question 7

What are financial statements? What information do they provide.

Accepted Answer

Financial statements are formal records of the financial activities and position of a business, person, or other entity. They provide a summary of the financial performance and financial position of the business.

Information provided by financial statements includes:
1. Profit or loss during a particular period.
2. Financial position of the business at a specific date.
3. Details of assets and liabilities.
4. Cash flows and changes in financial position.
5. Useful information for decision making by management, investors, creditors, and other stakeholders. — Financial statements help users understand how the business has performed and its current financial health, enabling informed decisions.

Question 8

What are closing entries? Give four examples of closing entries.

Accepted Answer

Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts (revenues, expenses, and drawings) to the capital account or profit and loss account, so that these accounts start with zero balance in the next period.

Examples of closing entries:
1. Transfer of revenue accounts to Profit and Loss Account.
2. Transfer of expense accounts to Profit and Loss Account.
3. Transfer of net profit or net loss to Capital Account.
4. Transfer of drawings account balance to Capital Account. — Closing entries reset the temporary accounts to zero for the next accounting period and update the capital account with the net result of operations.

Question 9

Discuss the need of preparing a balance sheet.

Accepted Answer

The need for preparing a balance sheet includes:
1. To know the financial position of the business at a particular date.
2. To ascertain the solvency and liquidity of the business.
3. To provide information to investors, creditors, and management for decision making.
4. To comply with legal and regulatory requirements.
5. To help in obtaining loans and credit by showing the financial strength.
6. To assist in financial planning and control. — Balance sheet preparation is essential to provide a clear picture of what the business owns and owes, helping various stakeholders assess its financial health.

Question 10

What is meant by Grouping and Marshalling of assets and liabilities. Explain the ways in which a balance sheet may be marshalled.

Accepted Answer

Grouping of assets and liabilities means classifying similar items under appropriate heads and sub-heads to present them systematically in the balance sheet.

Marshalling refers to the order or sequence in which assets and liabilities are arranged in the balance sheet.

Ways in which a balance sheet may be marshalled:
1. Assets may be arranged in order of liquidity (most liquid to least liquid).
2. Liabilities may be arranged in order of their due dates (current liabilities first, then long-term liabilities).
3. Assets may be arranged in order of permanence (fixed assets first, then current assets).

The choice of marshalling depends on the purpose of the balance sheet and the preference of the business. — Proper grouping and marshalling help in better presentation and understanding of the financial position by organizing assets and liabilities logically.

Question 11

From the following balances taken from the books of Simmi and Vimmi Ltd. for the year ending March 31, 2026, calculate the gross profit.
(`)
Closing stock 2,50,000
Net sales during the year 40,00,000
Net purchases during the year 15,00,000
Opening stock 15,00,000
Direct expenses 80,000

Accepted Answer

To calculate Gross Profit:

Step 1: Calculate Cost of Goods Sold (COGS):
Opening Stock = ₹15,00,000
Add: Net Purchases = ₹15,00,000
Add: Direct Expenses = ₹80,000
Less: Closing Stock = ₹2,50,000

COGS = Opening Stock + Net Purchases + Direct Expenses - Closing Stock
= 15,00,000 + 15,00,000 + 80,000 - 2,50,000 = ₹28,30,000

Step 2: Calculate Gross Profit:
Gross Profit = Net Sales - COGS
= ₹40,00,000 - ₹28,30,000 = ₹11,70,000 — Gross Profit is calculated by deducting the cost of goods sold from net sales. Cost of goods sold includes opening stock, purchases, direct expenses, less closing stock.

Hence, Gross Profit = Net Sales - (Opening Stock + Purchases + Direct Expenses - Closing Stock)

Question 12

From the following balances extracted from the books of M/s Ahuja and Nanda. Calculate the amount of :
(a) Cost of goods available for sale
(b) Cost of goods sold during the year
(c) Gross Profit
`
Opening stock 25,000
Credit purchases 7,50,000
Cash purchases 3,00,000
Credit sales 12,00,000
Cash sales 4,00,000
Wages 1,00,000
Salaries 1,40,000
Closing stock 30,000
Sales return 50,000
Purchases return 10,000

Accepted Answer

Step 1: Calculate Net Purchases:
Credit Purchases = ₹7,50,000
Cash Purchases = ₹3,00,000
Less: Purchases Return = ₹10,000
Net Purchases = 7,50,000 + 3,00,000 - 10,000 = ₹10,40,000

Step 2: Calculate Cost of Goods Available for Sale:
Opening Stock = ₹25,000
Add: Net Purchases = ₹10,40,000
Cost of Goods Available for Sale = 25,000 + 10,40,000 = ₹10,65,000

Step 3: Calculate Net Sales:
Credit Sales = ₹12,00,000
Cash Sales = ₹4,00,000
Less: Sales Return = ₹50,000
Net Sales = 12,00,000 + 4,00,000 - 50,000 = ₹15,50,000

Step 4: Calculate Cost of Goods Sold:
Cost of Goods Available for Sale = ₹10,65,000
Less: Closing Stock = ₹30,000
Cost of Goods Sold = 10,65,000 - 30,000 = ₹10,35,000

Step 5: Calculate Gross Profit:
Gross Profit = Net Sales - Cost of Goods Sold
= ₹15,50,000 - ₹10,35,000 = ₹5,15,000

Note: The answer given in the book is (a) ₹11,65,000; (b) ₹11,35,000; (c) ₹4,15,000 which suggests wages and salaries might be included in cost of goods sold or other adjustments. Let's include wages in cost of goods sold:

Including Wages:
Cost of Goods Available for Sale = Opening Stock + Net Purchases + Wages
= 25,000 + 10,40,000 + 1,00,000 = ₹11,65,000

Cost of Goods Sold = 11,65,000 - 30,000 = ₹11,35,000

Gross Profit = Net Sales - Cost of Goods Sold
= 15,50,000 - 11,35,000 = ₹4,15,000

Salaries are not included in cost of goods sold but treated as operating expenses. — Cost of goods available for sale includes opening stock, net purchases and direct expenses like wages.
Cost of goods sold is cost of goods available for sale less closing stock.
Gross profit is net sales less cost of goods sold.

Question 13

Calculate the amount of gross profit and operating profit on the basis of the following balances extracted from the books of M/s Rajiv & Sons for the year ended March 31, 2026.
`
Opening stock 50,000
Net sales 11,00,000
Net purchases 6,00,000
Direct expenses 60,000
Administration expenses 45,000
Selling and distribution expenses 65,000
Loss due to fire 20,000
Closing stock 70,000

Accepted Answer

Step 1: Calculate Cost of Goods Sold (COGS):
Opening Stock = ₹50,000
Add: Net Purchases = ₹6,00,000
Add: Direct Expenses = ₹60,000
Less: Closing Stock = ₹70,000

COGS = 50,000 + 6,00,000 + 60,000 - 70,000 = ₹6,40,000

Step 2: Calculate Gross Profit:
Gross Profit = Net Sales - COGS
= ₹11,00,000 - ₹6,40,000 = ₹4,60,000

Step 3: Calculate Operating Profit:
Operating Profit = Gross Profit - Operating Expenses
Operating Expenses = Administration Expenses + Selling and Distribution Expenses + Loss due to Fire
= 45,000 + 65,000 + 20,000 = ₹1,30,000

Operating Profit = 4,60,000 - 1,30,000 = ₹3,30,000

Note: The answer given is Operating profit ₹3,50,000, possibly loss due to fire is treated differently or partially included. If loss due to fire is excluded from operating expenses:
Operating Expenses = 45,000 + 65,000 = ₹1,10,000
Operating Profit = 4,60,000 - 1,10,000 = ₹3,50,000 — Gross profit is net sales less cost of goods sold.
Operating profit is gross profit less operating expenses (administration and selling expenses).
Loss due to fire is a non-operating expense and may or may not be included in operating expenses depending on treatment.

Question 14

Operating profit earned by M/s Arora & Sachdeva in 2025-26 was `17,00,000. Its non-operating incomes were `1,50,000 and non-operating expenses were `3,75,000. Calculate the amount of net profit earned by the firm.

Accepted Answer

Net Profit = Operating Profit + Non-operating Income - Non-operating Expenses
= ₹17,00,000 + ₹1,50,000 - ₹3,75,000
= ₹17,00,000 + 1,50,000 - 3,75,000 = ₹14,75,000 — Net profit is calculated by adding non-operating incomes to operating profit and subtracting non-operating expenses.

Question 15

The following are the extracts from the trial balance of M/s Bhola & Sons as on March 31, 2026
Account title Debit Credit
` `
Opening stock 2,00,000
Purchases 8,10,000
Sales 10,10,000
10,10,000 10,10,000
(only relevant items)
Closing Stock as on date was valued at `3,00,000.
You are required to record the necessary journal entries and show how the above items will appear in the trading and profit and loss account and balance sheet of M/s Bhola & Sons.

Accepted Answer

Step 1: Journal Entries
1. Closing Stock Entry:
Closing Stock A/c Dr. 3,00,000
To Trading A/c 3,00,000
(Closing stock transferred to trading account)

Step 2: Trading Account
Opening Stock: ₹2,00,000
Add: Purchases: ₹8,10,000
Less: Closing Stock: ₹3,00,000
Cost of Goods Sold = 2,00,000 + 8,10,000 - 3,00,000 = ₹7,10,000

Sales: ₹10,10,000

Gross Profit = Sales - Cost of Goods Sold = 10,10,000 - 7,10,000 = ₹3,00,000

Step 3: Profit and Loss Account
Gross Profit: ₹3,00,000
(Other expenses not given, so Net Profit = Gross Profit)

Step 4: Balance Sheet
Assets:
Closing Stock: ₹3,00,000
Other assets not given

Liabilities:
Capital + Reserves + Creditors (not given)

Note: Since only relevant items are given, the focus is on recording closing stock and showing gross profit in trading account. — Closing stock is recorded by debiting closing stock account and crediting trading account.
Trading account shows cost of goods sold and gross profit.
Profit and loss account shows net profit.
Balance sheet includes closing stock as current asset.

Financial Statements – I

Financial Statements – I — Study Notes

8.1 Meaning of Financial Statements

8.2 Users of Financial Statements and Their Information Requirements

8.3 Distinction between Capital and Revenue Items

Practice Questions — Financial Statements – I

All 2 Chapters in Accountancy-II