CA Foundation PAPER 1: ACCOUNTING Flashcards

24 sample cards from the PAPER 1: ACCOUNTING deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. For a manufacturing entity, what additional account is prepared and what does it show?

   A Manufacturing Account is prepared to ascertain the Cost of Goods Manufactured (cost of production), including raw material consumed, direct wages, direct/factory expenses and factory overheads; this cost is then transferred to the Trading Account.

2. Define a Receipt and Payment Account.

   A summarised cash book of a not-for-profit organisation showing all cash and bank receipts (debit side) and payments (credit side) during a period, irrespective of whether they are capital/revenue or relate to past/current/future periods. It begins with the opening cash/bank balance and ends with the closing balance.

3. Define an Income and Expenditure Account.

   A nominal account (akin to a P&L account) of a not-for-profit organisation, prepared on accrual basis, recording only revenue items relating to the current period to ascertain the Surplus (excess of income over expenditure) or Deficit.

4. State two key differences between a Receipt & Payment Account and an Income & Expenditure Account.

   (1) R&P records all cash transactions (capital and revenue, all periods) on cash basis; I&E records only revenue items of the current period on accrual basis. (2) R&P shows opening and closing cash/bank balances; I&E shows surplus or deficit. (R&P is a real account; I&E is a nominal account.)

5. Distinguish a Profit and Loss Account from an Income and Expenditure Account.

   A P&L Account is prepared by trading/profit-seeking entities to find net profit or loss; an Income and Expenditure Account is prepared by not-for-profit organisations to find surplus or deficit. The format and accrual basis are similar but the objective and entity type differ.

6. In the absence of a partnership deed, what are the default provisions of the Indian Partnership Act regarding profit sharing, interest on capital, interest on loan and salary?

   Profits/losses shared EQUALLY; NO interest on capital; NO partner's salary/remuneration; interest on a partner's LOAN to the firm allowed at 6% per annum; no interest charged on drawings.

7. What is the formula for the interest on a partner's loan and the treatment of partner's salary?

   Interest on partner's loan (in absence of agreement) = Loan amount × 6% p.a., charged to the P&L Account (an expense before profit distribution). Partner's salary, if allowed by the deed, is an appropriation of profit, debited to the Profit & Loss Appropriation Account.

8. What is goodwill and name two methods of valuing it.

   Goodwill is the value of a firm's reputation/earning capacity in excess of normal return on capital employed — an intangible asset. Methods: Average Profit Method, Super Profit Method, Capitalisation Method (and Annuity Method).

9. Give the formula for Super Profit and goodwill under the Super Profit Method.

   Super Profit = Average (actual) Profit − Normal Profit, where Normal Profit = Capital Employed × Normal Rate of Return. Goodwill = Super Profit × Number of years' purchase.

10. On admission of a partner, how is goodwill brought in by the new partner (premium method) treated?

    The premium (goodwill) brought in by the new partner is credited to the OLD partners in their SACRIFICING RATIO. Sacrificing ratio = Old ratio − New ratio.

11. How is the gaining ratio used on the retirement or death of a partner?

    On retirement/death, the retiring/deceased partner's share of goodwill is debited to the continuing partners in their GAINING RATIO (Gaining ratio = New ratio − Old ratio) and credited to the outgoing partner.

12. What is the treatment of the deceased partner's share of profit up to the date of death?

    It is calculated on a time basis or sales/turnover basis (as agreed) from the last balance sheet date to the date of death, credited to the deceased partner's capital account and debited to P&L Suspense Account (or continuing partners).

13. What is dissolution of a partnership firm, and which account is prepared to close the books?

    Dissolution means the complete closure/winding up of the firm where all assets are realised, all liabilities paid off, and the firm ceases to exist. A REALISATION ACCOUNT is prepared to record the sale of assets, payment of liabilities, and the resulting profit or loss on realisation.

14. State the order of distribution of cash on dissolution of a firm (Section 48).

    (1) Pay outside (third-party) creditors; (2) repay partners' loans/advances to the firm; (3) repay partners' capital; (4) distribute any surplus among partners in their profit-sharing ratio.

15. What is piecemeal distribution of assets and name its two methods.

    Distributing cash to partners in instalments as and when assets are realised gradually (rather than all at once) on dissolution. Methods: (1) Maximum Loss Method and (2) Surplus Capital (Highest Relative Capital) Method.

16. Define a share and distinguish equity shares from preference shares.

    A share is a unit of the share capital of a company representing ownership. Equity (ordinary) shares carry no fixed dividend, get residual profits and voting rights. Preference shares carry a fixed rate of dividend, have preferential right to dividend and to repayment of capital on winding up, but usually no voting rights.

17. Define a debenture and how it differs from a share.

    A debenture is an instrument acknowledging a debt of the company, usually carrying a fixed rate of interest. A shareholder is an OWNER (gets dividend out of profits); a debenture holder is a CREDITOR (gets interest as a charge against profit whether or not there are profits).

18. What is calls-in-arrears and calls-in-advance?

    Calls-in-arrears: the amount called up by the company but not yet paid by shareholders (shown by deduction from called-up capital). Calls-in-advance: amount paid by a shareholder in excess of what has been called up (a liability; interest may be paid on it).

19. What is forfeiture of shares and what happens to the amount already received?

    Forfeiture is the cancellation of shares due to non-payment of allotment/calls money. On forfeiture, the share capital account is debited with the called-up value, the unpaid calls are removed, and the amount already received is transferred to the Forfeited Shares (Share Forfeiture) Account.

20. How is profit on re-issue of forfeited shares treated?

    When forfeited shares are re-issued, the balance left in the Forfeited Shares Account (after meeting any discount allowed on re-issue) is a CAPITAL PROFIT and is transferred to the Capital Reserve Account.

21. What are the legal conditions for redemption of preference shares (Companies Act)?

    Only fully paid-up preference shares can be redeemed; they are redeemed either out of profits available for dividend or out of a fresh issue of shares; and where redeemed out of profits, an amount equal to the nominal value of shares redeemed must be transferred to the Capital Redemption Reserve (CRR) Account.

22. What is the purpose and permitted use of the Capital Redemption Reserve (CRR)?

    CRR is created to maintain the company's capital base when preference shares are redeemed out of profits (so that capital is not reduced). It can be used only for issuing fully paid-up bonus shares to members.

23. What is a bonus issue and from which sources can it be made?

    A bonus issue is the issue of fully paid-up shares to existing shareholders free of cost, in proportion to their holdings, by capitalising reserves. Sources: free reserves, securities premium, and capital redemption reserve.

24. What is a rights issue?

    A rights issue is the offer of new/additional shares to EXISTING shareholders in proportion to their current holdings (pre-emptive right), usually at a price lower than the market price; shareholders may accept, reject, or renounce the rights.

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PAPER 1: ACCOUNTING flashcards FAQ