Paper 1

Advanced
Accounting
Chapter-wise compilation
of RTPs, MTPs and PYPs

Modified as per Applicable for

new scheme Sept’24 & Jan’25

SAMPLE MATERIAL
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 Frequently Asked Questions
1. Why RTP’s, MTP’s and PYP’s?
RTP’s, MTP’s, and PYP’s are extremely important to ensure that you reproduce ICAI language.
These questions train you to understand what is important and what is expected of you.
At least 41% of questions* are asked from previous RTP’s, MTP’s and PYP’s.

2. What is included?
In this compiler, all questions from the last 3, 5 or 11 attempts depending on the one you have
selected will be available. There will be references to the marks and the attempt from which
they were asked. Identical or similar questions have been removed and references for both
attempts are mentioned.

3. What is the benefit of Chapter-wise?

We have categorized each and every question from all Old RTPs, MTP’s, and PYP’s into
chapters. This means that you don't have to wait until you've completed your entire syllabus
to tackle an RTP, MTP, or past paper. You can start solving these questions to check your
conceptual clarity right after finishing a particular chapter.

4. What does amended for the latest attempt mean?

When we reviewed all the questions from the past 11 attempts of RTP, MTP, and PYP’S, we
didn't just segregate them Chapterwise; we also updated them to reflect the latest provisions.
All the answers provided in the compilation are applicable for the May 2024 examination. So,
there's no need to stress about outdated or incorrect information.

5. How are Old RTP’s, MTP’s & PYP’s beneficial for me?
All old RTPs, MTPs, and PYPs have been organized according to the new syllabus issued by ICAI.
This means that if a specific chapter from the old scheme is not included in the new scheme,
it has been omitted. If a particular chapter in the new scheme is based on concepts from two
or more chapters in the old scheme, it has been adapted to align with how the chapter should
be in the new scheme. If a chapter is only partially included in the new scheme, the questions
related to those specific concepts are only included in the corresponding chapter of the new
scheme. A comprehensive reconciliation of the chapters between the new scheme and the old
scheme is provided on the following page.

6. What if a new attempt is added post my purchase?

If you have purchased materials for the May 2024 attempt, you will receive a file with the
questions segregated Chapterwise specifically for that attempt.

7. What does N/A mean?

It could mean any of the following:
1. No questions from that chapter have been included in the selected attempts.
2. The chapter is newly introduced, and as a result, no questions have been previously asked
in RTP’s, MTP’s, or PYP’s.

*This is on an average based on the last 11 attempts

 Advance Accountancy
Reconcilia on of chapters of the new scheme (May’24) with old course
New Chapter Chapter Name as per NEW Syllabus Paper No. Comparison
No. as per Old with chapters
Course of Old Scheme
1 Introduction to Accounting Standards Paper 1 Same
2 Framework for Preparation and Paper 1 Same
Presentation of Financial Statements
3 Applicability of Accounting Standards Paper 1 Same
4 Chapter 4: Presentation & Disclosures Same
Based Accounting Standards
4.1 AS 1- Disclosure of Accounting Policies Paper 1 Same
4.2 AS 3- Cash Flow Statement Paper 1 Same
4.3 AS 17- Segment Reporting Paper 5 Same
4.4 AS 18- Related Party Disclosures Paper 5 Same
4.5 AS 20- EPS Paper 5 Same
4.6 AS 24- Discontinuing Operations Paper 5 Same
4.7 AS 25- Interim Financial Reporting* Not a part of CA
inter syllabus in
the old scheme
5 Asset Based Accounting Standards
5.1 AS 2- Valuation of Inventory Paper 1 Same
5.2 AS 10-Property, Plant & Equipment Paper 1 Same
5.3 AS 13-Accounting for Investments Paper 1 Same
5.4 AS 16-Borrowing Costs Paper 1 Same
5.5 AS 19- Leases Paper 5 Same
5.6 AS 26- Intangible Assets Paper 5 Same
5.7 AS 28- Impairment of Assets* Not a part of CA
inter syllabus in
the old scheme
6 Liabilities based Accounting Standards
6.1 AS 15- Employee Benefits* Not a part of CA
inter syllabus in
the old scheme
6.2 AS 29- Provisions, Contingent Liabilities & Paper 5 Same
Contingent Assets
7 Accounting Standards based on Items
Impacting Financial Statement
7.1 AS 4- Contingencies & Events occuring after Paper 5 Same
the Balancesheet Date
7.2 AS 5- Net Profit or Loss for the period, Prior Paper 5 Same
period items & Changes in Accounting
policies
7.3 AS 11- The Effects of Changes in Foreign Paper 1 Same
Exchange rates
7.4 AS 22- Accounting for Taxes on Income Paper 5 Same
8 Revenue Based Accounting Standards
8.1 AS 7- Construction Contracts Paper 5 Same
8.2 AS 9- Revenue Recognition Paper 5 Same
9 Other Accounting Standards
9.1 AS 12-Accounting for Government Grants Paper 1 Same
9.2 AS 14- Accounting for Amalgamation Paper 5 Same
10 Accounting Standards for Consolidated
Financial Statement
10.1 AS 21- Consolidated Financial Statement Paper 5 Same
10.2 AS 23- Accounting for Investments in Paper 5 Same
Associates in Consolidated Financial
Statements
10.3 AS 27- Financial Reporting of Interests in Paper 5 Same
Joint Ventures
11 Financial Statements of Companies
11.1 Preparation of Financial Statements Paper 1 Same
11.2 Cash Flow Statement Paper 1 Same
12 Buyback of Securities Paper 5 Same
13 Amalgamation of Companies Paper 5 Same
14 Accounting for Reconstruction of Paper 5 Same
Companies
15 Accounting for Branches including Foreign Paper 1 Same
Branches

*These Chapters were earlier a part of CA Final Paper 1: Financial Repor ng

 Table of Contents
Sr. Particulars Page Number
No
1 Introduction to Accounting Standards 1.1
2 Framework for Preparation and Presentation of Financial 2.1 - 2.14
Statements
3 Applicability of Accounting Standards 3.1 – 3.3
4 Presentation & Disclosure Based Accounting Standards
4.1 AS 1- Disclosure of Accounting Policies 4.1-1 – 4.1-5
4.2 AS 3- Cash Flow Statement 4.2-1 – 4.2-12
4.3 AS 17- Segment Reporting 4.3-1 – 4.3-5
4.4 AS 18- Related Party Disclosures 4.4-1 – 4.4-6
4.5 AS 20- Earning Per Share 4.5-1 – 4.5-8
4.6 AS 24- Discontinuing Operations 4.6-1 – 4.6-4
4.7 AS 25- Interim Financial Reporting 4.7-1 – 4.7-5
5 Asset Based Accounting Standards
5.1 AS 2- Valuation of Inventory 5.1-1 – 5.1-12
5.2 AS 10-Property, Plant & Equipment 5.2-1 – 5.2-11
5.3 AS 13-Accounting for Investments 5.3-1 – 5.3-47
5.4 AS 16-Borrowing Costs 5.4-1 – 5.4-14
5.5 AS 19- Leases 5.5-1 – 5.5-8
5.6 AS 26- Intangible Assets 5.6-1 – 5.6-8
5.7 AS 28- Impairment of Assets 5.7-1 -5.7-9
6 Liabilities Based Accounting Standards
6.1 AS 15- Employee Benefits 6.1-1 – 6.1-4
6.2 AS 29- Provisions, Contingent Liabilities & Contingent 6.2-1 – 6.2-11
Assets
7 Accounting Standards Based on Items Impacting Financial Statements
7.1 AS 4- Contingencies & Events occurring after the Balance 7.1-1 – 7.1-7
sheet Date
7.2 AS 5- Net Profit or Loss for the period, Prior period items & 7.2-1 – 7.2-6
Changes in Accounting policies
7.3 AS 11- The Effects of Changes in Foreign Exchange rates 7.3-1 – 7.3-10
7.4 AS 22- Accounting for Taxes on Income 7.4-1 – 7.4-6
8 Revenue Based Accounting Standards
8.1 AS 7- Construction Contracts 8.1-1 – 8.1-9
8.2 AS 9- Revenue Recognition 8.2-1 -8.2-10
9 Other Accounting Standards
9.1 AS 12-Accounting for Government Grants 9.1-1 -9.1-10
9.2 AS 14- Accounting for Amalgamation 9.2-1
10 Accounting Standards for Consolidated Financial Statements
10.1 AS 21- Consolidated Financial Statement 10.1-1 – 10.1-53
10.2 AS 23- Accounting for Investments in Associates in 10.2-1
Consolidated Financial Statements
10.3 AS 27- Financial Reporting of Interests in Joint Ventures *N/A
11 Financial Statements of Companies
11.1 Preparation of Financial Statements 11.1-1 – 11.1-39
11.2 Cash Flow Statement 11.2-1 – 11.2-14
12 Buyback of Securities 12.1-1 – 12.1-29
13 Amalgamation of Companies 13.1 – 13.59
14 Accounting for Reconstruction of Companies 14.1- 14.43
15 Accounting for Branches including Foreign Branches 15.1-15.35
16 Case Scenarios 16.1 – 16.8

MTPs: March’19, April’19, Oct’19, May’20, Oct’20, March’21, April’21, Oct ’21,
Nov ’21, March ’22, April ’22, Sep ’22, Oct ’22, March ’23, April '23,Sep ’23
,Oct ’23,March’24 & April ‘24
PYPs: May’19, Nov’19, Nov’20, Jan’21, July ’21, Dec ’21, May’22, Nov ’22, May’23,
Nov’23
RTPs: May’19, Nov’19, May’20, Nov’20, May’21, Nov ’21, May ’22, Nov ’22,
May ’23, Nov ’23, May’24
 1.1

Chapter 1
Introduction to Accounting Standards
Question 1
"Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements." Discuss and
explain the benefits of Accounting Standards. (MTP 5 Marks, Nov ’21 & Apr’23 , PYP 5 Marks, Nov’18)
Answer 1
Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. Accounting
Standards provide a set of standard accounting policies, valuation norms and disclosure requirements.
Accounting standards aim at improving the quality of financial reporting by promoting comparability,
consistency and transparency, in the interests of users of financial statements. The following are the
benefits of Accounting Standards:
(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a
reasonable extent confusing variations in the accounting treatment followed for the purpose of
preparation of financial statements.
(ii) Requirements for additional disclosures: There are certain areas where important is not statutorily
required to be disclosed. Standards may call for disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting standards would facilitate
comparison of financial statements of different companies situated in India and facilitate
comparison, to a limited extent, of financial statements of companies situated in different parts of
the world. However, it should be noted in this respect that differences in the institutions, traditions
and legal systems from one country to another give rise to differences in Accounting Standards
adopted in different countries.

Question 2
Explain the objective of 'Accounting Standards’ in brief. State the advantages of setting Accounting
Standards. (PYP 4 Marks, Nov ’22, Old & New SM)
Answer 2
Accounting Standards are the written policy documents issued by Government relating to various
aspects of measurement, treatment, presentation and disclosure of accounting transactions and
events.

Following are the objectives of Accounting Standards:

a) Accounting Standards harmonize the diverse accounting policies and practices followed by
different companies in India.
b) Accounting Standards facilitate the preparation of financial statements and make them
comparable.
c) Accounting Standards give a sense of faith and reliability to the users.
The main advantages of setting accounting standards are as follows:
a) Accounting Standards make the financial statements of different companies comparable which
helps investors in decision making.
b) Accounting Standards prevent any misleading accounting treatment.
c) Accounting Standards prevent manipulation of data by the management.

Question 3
What do you mean by Carve outs/ins in Ind AS? Explain (RTP May’24)(SM)
Answer 3
Certain changes have been made in Ind AS considering the economic environment of the country, which
is different as compared to the economic environment presumed to be in existence by IFRS. These
differences are due to differences in economic conditions prevailing in India. These differences which are
in deviation to the accounting principles and practices stated in IFRS, are commonly known as ‘Carve-outs’.
Additional guidance given in Ind AS over and above what is given in IFRS, is termed as ‘Carve in’.

Chapter 1 Introduction to Accounting Standards

 2.1

Chapter 2
Framework for Preparation and Presentation of Financial Statements
Question 1
Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss. (MTP 5 Marks, March ‘19 & April 19,
March ’21 ,Oct ‘23 ,RTP Nov 18)
Answer 1
The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in the
balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Current cost (iii)
Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an amount
of cash or cash equivalent paid or the fair value of the asset at the time of acquisition. Liabilities are
generally recorded at the amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the amount of
cash or cash equivalent that would have to be paid if the same or an equivalent asset was acquired
currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be
required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash or cash
equivalents that could currently be obtained by selling the assets in an orderly disposal. Liabilities are
carried at their settlement values; i.e. the undiscounted amount of cash or cash equivalents paid to satisfy
the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net cash flows
generated by the concerned assets in the normal course of business. Liabilities under this convention are
carried at present value of future net cash flows that are expected to be required to settle the liability in
the normal course of business.

Question 2
"One of the characteristics of financial statements is neutrality"- Do you agree with this statement?
Comment. [MTP March ‘18, 5 Marks, PYP Nov ’18 5 Marks, Old & New SM ,MTP 4 Marks Apr’24)
Answer 2
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained
in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of analysis
could shift from one area of business to another thereby arriving at a totally different conclusion on the
business results.
For example, if the assets of a company primarily consist of trade receivables and insurance claims and the
financial statements do not specify that the insurance claims have been lying unrealized for a number of
years or that a few key trade receivables have not given balance confirmation certificates, an erroneous
conclusion may be drawn on the liquidity of the company. Financial statements are said to depict the true
and fair view of the business of the organization by virtue of neutrality.
Question 3
Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs. 8
lakh, Rs. 3 lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has the following
transactions:
(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
(3) Rent of the premises is outstanding Rs. 10,000

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.2

(4) Mr. A withdrew Rs. 9,000 for his personal use.

You are required to show the effect of above transactions on Balance Sheet in the form of
Assets - Liabilities = Equity after each transaction. (MTP 5 Marks, April 21, April 22, Old & New SM,
MTP 4 Marks Apr’24)
Answer 3
Effects of each transaction on Balance sheet of the trader is shown below:
Transactions Assets - Liabilities = Equity
Rs. lakh Rs. lakh Rs. lakh
Opening 8.00 - 3.00 = 5.00
(1) Dividend earned 8.20 - 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 - 2.40 = 5.30
(4) Drawings 7.61 - 2.40 = 5.21

Question 4
State under which head the following accounts should be classified in Balance Sheet, as per Schedule III
of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Cash equivalents. (MTP 4 Marks, Mar’22, 5 Marks, April’19)
Answer 4
(i) Current Liabilities/Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
(vi) Property, Plant & Equipment
(vii) Shareholders' Fund/Money received against share warrants
(viii) Current Assets

Question 5
How will a company classify its investment in preference shares, which are convertible into equity
shares within one year from the balance sheet date? Will it classify the investment as a current asset or
a non-current asset? Explain. (MTP 5 Marks, March’19, Oct’18, Aug’18, Mar’18)
Answer 5
In accordance with the Schedule III, an investment realizable within 12 months from the reporting date is
classified as a current asset. Such realisation should be in the form of cash or cash equivalents, rather than
through conversion of one asset into another non-current asset. Hence, company must classify such an
investment as a non-current asset, unless it expects to sell the preference shares or the equity shares on
conversion and realise cash within 12 months.

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.3

Question 6
M/s Shyam, a proprietorship firm runs a business of stationary items. It provides you the following
information relating to assets and liabilities:
Assets & Liabilities As on 01.04.2019 As on 31.03.2020
Creditors 20,000 15,000
Outstanding Expenses 600 800
Property, Plant & Equipment 12,000 13,000
Stock 10,000 12,000
Cash in hand 7,500 2,000
Cash at Bank 2,500 10,000
Debtors ? 18,000
Details of the year’s transactions are as follows:
(1) Discounts allowed to Debtor 4,000
(2) Returns from debtors 1,450
(3) Bad debts 500
(4) Total sales (Cash and Credit) 72,000
(5) Discount allowed by creditors 700
(6) Returns to creditors 400
(7) Receipts from debtors paid into Bank 76,000
(8) Cash purchases 1,000
(9) Expenses paid by cash 9,000
(10) Drawings by cheque 500
(11) Purchase of Property, Plant & Equipment by cheque 4,000
(12) Cash deposited into bank 5,000
(13) Cash withdrawn from bank 9,000
(14) Payments to creditors by cheque 60,000
No Property, Plant & Equipment were sold during the year. Any difference in cash account to be
considered as cash sales. You are required to prepare Trading and Profit & Loss Account for the year
ended 31.03.2020 and the Balance Sheet as at 31.03.2020 from the given information. (MTP 16 Marks,
Oct ’21, May’20)
Answer 6
In the books of M/s Shyam Trading and Profit and Loss Account for the year ended 31st March, 2020
Particulars ₹ ₹ Particulars ₹ ₹
To Opening stock 10,000 By Sales:
To Purchases: Cash 500
Cash 1,000 Credit 71,500
Credit (W.N. 3) 56,100 Less: Returns (1,450) 70,550
57,100 By Closing Stock 12,000
Less: Returns (400) 56,700
To Gross Profit c/d 15,850
82,550 82,550
To Discount allowed 4,000 By Gross profit b/d 15,850
To Bad Debts 500 By Discount received 700
To General expenses (W.N. 5) 9,200 By Net Loss (balancing fig.) 150
To Depreciation (W.N. 4) 3,000
16,700 16,700
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.4

Balance Sheet as at 31st March, 2020

Liabilities ₹ Assets ₹
Capital (W.N. 1) 39,850 Property, Plant & Equipment 12,000
Less: Net loss 150 Add: New asset 4,000
39,700 16,000
Less: Drawings 500 39,200 Less: Depreciation 3,000 13,000
Sundry creditors 15,000 Stock in trade 12,000
Expenses outstanding 800 Sundry debtors (W.N. 2) 18,000
Cash in hand 2,000
Cash in Bank 10,000
55,000 55,000
Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19
Liabilities ₹ Assets ₹
Property, Plant &
Sundry creditors 20,000 12,000
Equipment
Outstanding expenses 600 Stock 10,000
Prasad’s Capital (Balancing figure) 39,850 Debtors 28,450
Cash in hand 7,500
Cash at Bank 2,500
60,450 60,450
(2) Sundry Debtors Account
₹ ₹
To Balance b/d (bal. fig) 28,450 By Cash 76,000
To Sales (72,000 – 500) 71,500 By Discount 4,000
By Returns (sales) 1,450
By Bad debts 500
By Balance c/d (given) 18,000
99,950 99,950
(3) Sundry Creditors Account
₹ ₹
To Bank – Payments 60,000 By Balance b/d 20,000
By Purchases – credit
To Discount 700 56,100
(Balancing figure)
To Returns 400
To Balance c/d (closing balance) 15,000
76,100 76,100
(4) Depreciation on Property, Plant & Equipment
₹
Opening balance of Property, Plant & Equipment 12,000
Add: Additions 4,000
16,000
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.5

Less: Closing balance of Property, Plant & Equipment (13,000)

Depreciation 3,000
(5) Expenses to be shown in profit and loss account
Expenses (in cash) 9,000
Add: Outstanding of 2020 800
9,800
Less: Outstanding of 2019 600
9,200
(6) Cash and Bank Account

Particulars Cash Bank Particulars Cash Bank

₹ ₹ ₹ ₹
To balance b/d 7,500 2,500 By Purchases 1,000 -
To debtors - 76,000 By Expenses 9,000
By Property, Plant
To Banks (C) 9,000 - 4,000
& Equipment
To Cash (C) - 5,000 By Drawings 500
To sales (balancing as
500 - By Creditors 60,000
cash sales)
By Cash (C) 9,000
By Bank (C) 5,000
By Balance c/d 2,000 10,000
17,000 83,500 17,000 83,500

Question 7
The following extract of Balance Sheet of Ram Ltd. (a non-investment company) was obtained:
Balance Sheet (Extract) as on 31st March ,2022
Liabilities ₹
Issued and subscribed capital:
20,000, 14% Preference shares of ₹ 100 each fully paid 20,00,000
1,20,000 Equity shares of ₹ 100 each, ₹ 80 paid-up 96,00,000
Capital reserves (₹ 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000
You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act, 2013.
(MTP 5 Marks, Sep 22 & Oct ‘23)
Answer 7
Computation of Effective capital
₹
Paid-up share capital-
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.6

Capital reserves (excluding revaluation reserve) 45,000

Securities premium 50,000
15% Debentures 65,00,000
Public Deposits 3,70,000
(A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effective capital (A–B) 95,65,000

Question 8
Futura Ltd. had the following items under the head “Reserves and Surplus” in the Balance Sheet as on
31st March, 2022:
Amount ₹ in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
The company had an accumulated loss of ₹ 250 lakhs on the same date, which it has disclosed under the
head “Statement of Profit and Loss” as asset in its Balance Sheet. Comment on accuracy of this
treatment in line with Schedule III to the Companies Act, 2013. (MTP 4 Marks Oct ’22)
Answer 8
Schedule III to the Companies Act, 2013 provides that debit balance of Statement of Profit and Loss (after all
allocations and appropriations) shall be shown as a negative figure under the head ‘Surplus’. Similarly, the
balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, shall be shown under the
head ‘Reserves and Surplus’ even if the resulting figure is in the negative. In this case, the debit balance of
profit and loss i.e. ₹ 250 lakhs exceeds the total of all the reserves i.e. ₹ 230 lakhs. Therefore, balance of
‘Reserves and Surplus’ after adjusting debit balance of profit and loss is negative by ₹ 20 lakhs, which should
be disclosed on the face of the balance sheet. Thus the treatment done by the company is incorrect.
Question 9
The following is the Balance Sheet of Manish and Suresh as on 1 st April, 2021:
Equity and Liabilities ₹ Assets ₹
Capital Accounts: Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000
2,80,000 2,80,000
They give you the following additional information:
(i) Creditors' Velocity 1.5 month & Debtors' Velocity 2 months. Here velocity indicates the no. of times
the creditors and debtors are turned over a year.
(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase by
25% in volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are ₹ 50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.7

(viii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading, Profit and Loss Account, Trade Debtors Account and Trade Creditors
Account for the year ending 31.03.2022.
(MTP 16 Marks April 23 & Nov ‘21)
Answer 9
Trading and Profit and Loss account for the year ending 31st March, 2022
Particulars Rs. Particulars Rs.
To Opening Stock 40,000 By Sales 4,31,250
To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
To Gross Profit c/d
86,250
(20% on sales)
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750
86,250 86,250
Trade Debtors Account
Particulars Rs. Particulars Rs.
To Balance b/d 50,000 By Bank (bal. fig.) 4,09,375
By Balance c/d (1/6 of
To Sales 4,31,250 71,875
4,31,250)
4,81,250 4,81,250
Trade Creditors Account
Particulars Rs. Particulars Rs.
To Bank (Balancing figure) 3,31,875 By Balance b/d 30,000
To Balance c/d/ (1/8 of Rs. 3,45,000) 43,125 By Purchases 3,45,000
3,75,000 3,75,000
Working Note:
Rs.
(i) Calculation of Rate of Gross Profit earned during previous year

A Sales during previous year (= 50,000 x 12/2) 3,00,000

B Purchases (Rs. 30,000 x 12/1.5) 2,40,000
C Cost of Goods Sold (Rs. 40,000 + Rs. 2,40,000 — Rs. 40,000) 2,40,000
D Gross Profit (A-C) 60,000
E 20%
Rate of Gross Profit X 100
(ii) Calculation of sales and Purchases during current year Rs.
A Cost of goods sold during previous year 2,40,000
B Add: Increases in volume @ 25 % 60,000
3,00,000
C Add: Increase in cost @ 15% 45,000
D Cost of Goods Sold during Current Year 3,45,000
E Add: Gross profit @ 25% on cost (20% on sales) 86,250
F Sales for current year [D+E] 4,31,250

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.8

Question 10
What is meant by ‘Measurement’? What are the bases of measurement of Elements of Financial
Statements? Explain in brief. (RTP Nov 21, PYP 5 Marks Dec ’21)
Answer 10
Measurement is the process of determining money value at which an element can be recognized in the
balance sheet or statement of profit and loss. The framework recognizes four alternative measurement
bases for the purpose. These bases can be explained as:
Historical cost This is the Acquisition price. According to this, assets are recorded at an
amount of cash and cash equivalent paid or the fair value of the assets
at time of acquisition.
Current Cost Assets are carried out at the amount of cash or cash equivalent that
would have to be paid if the same or an equivalent asset was acquired
currently. Liabilities are carried at the undiscounted amount of cash or
cash equivalents that would be required to settle the obligation
currently.
Realizable (Settlement) Value For assets, amount currently realizable on sale of the asset in an orderly
disposal. For liabilities, this is the undiscounted amount expected to be
paid on settlement of liability in the normal course of business.
Present Value Assets are carried at present value of future net cash flows generated by
the concerned assets in the normal course of business. Liabilities are
carried at present value of future net cash flows that are expected to be
required to settle the liability in the normal course of business.
In preparation of financial statements, all or any of the measurement basis can be used in varying
combinations to assign money values to financial items.

Question 11
With regard to financial statements, name any five qualitative characteristics and elements. (RTP May’21)
Answer 11
(i) Qualitative Characteristics of Financial Statements: Understandability, Relevance, Comparability, Reliability
& Faithful Representation
(ii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss

Question 12
Shiva started a business on 1st April 2022 with ₹ 15,00,000 represented by 80,000 units of ₹ 25 each.
During the financial year ending on 31st March, 2023, he sold the entire stock for ₹ 35 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Shiva in the year
2022-23 if Financial Capital is maintained at historical cost. (RTP May’24) (RTP May’21, Nov’19) (Same
concept different figures Old & New SM, RTP Nov’18)
Answer 12
Particulars Financial Capital Maintenance at Historical Cost (₹)
Closing equity (₹ 35 x 80,000 units) 28,00,000 represented by cash
Opening equity 80,000 units x ₹ 25 = 20,00,000
Permissible drawings to 8,00,000 (28,00,000 – 20,00,000)
keep Capital intact

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.9

Question 13
With regard to financial statements name any four.
(i) Users
(ii) Qualitative characteristics
(iii) Elements (RTP Nov 20, RTP May 19, MTP 5 Marks Mar’23)
Answer 13
(i) Users of financial statements:
Investors, Employees, Lenders, Supplies/Creditors, Customers, Government & Public
(ii) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(iii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss

Question 14
A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine
Rs.1,00,000. At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of
production. The new method will not require the machine ordered and it will be scrapped after delivery.
The expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-X2.
(RTP May’20, May’23 & Nov ‘23)
Answer 14
A liability is recognized when outflow of economic resources in settlement of a present obligation can be
anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should recognize a
liability of Rs.1,00,000 to Gamma Ltd.
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the present
case, flow of future economic benefit from the machine to the enterprise is improbable. The entire amount
of purchase price of the machine should be recognized as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
(Loss transferred to profit and loss account)

Question 15
What are fundamental accounting assumptions? (RTP May 19)
Answer 15
Fundamental Accounting Assumptions: Accrual, Going Concern and Consistency

Question 16
Explain main elements of Financial Statements. (RTP May 18) (PYP 5 Marks May ’18)

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.10

Answer 16
Elements of Financial Statements
The Framework for preparation and Presentation of financial statements classifies items of financial
statements can be classified in five broad groups depending on their economic characteristics: Asset,
Liability, Equity, Income/Gain and Expense/Loss.
Asset Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow of a resource embodying economic
benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain Increase in economic benefits during the accounting period in the form of inflows
or enhancement of assets or decreases in liabilities that result in increase in equity
other than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrence of liabilities that result in decrease
in equity other than those relating to distributions to equity participants.

Question 17
Summarised Balance Sheet of Cloth Trader as on 31.03.2021 is given below:
Equity & Liabilities Amount (₹) Assets Amount (₹)
Proprietor's Capital 3,00,000 Property, plant and equipment 3,60,000
Profit & Loss Account 1,25,000 Closing Inventory 1,50,000
10% Loan Account 2,10,000 Trade receivables 1,00,000
Trade payables 50,000 Deferred Expenses 50,000

Cash & Bank 25,000

6,85,000 6,85,000
Additional Information is as follows:
(1) The remaining life of Property, plant and equipment is 8 years. The pattern of use of the asset is
even. The net realisable value of Property, plant and equipment on 31.03.2022 was ₹ 3,25,000.
(2) Purchases and Sales in 2021-22 amounted to ₹ 22,50,000 and ₹ 27,50,000 respectively.
(3) The cost and net realizable value of inventory on 31.03.2022 were ₹ 2,00,000 and ₹ 2,50,000
respectively.
(4) Expenses including interest on loan for the year amounted to ₹ 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2022 are ₹ 1,50,000 of which ₹ 5,000 is doubtful. Collection of another ₹
25,000 depends on successful re-installation of certain product supplied to the customer;
(7) Closing Sundry Creditors are ₹ 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2022 is ₹ 4,22,000.
(9) There is an early repayment penalty for the loan of ₹ 25,000. You are required to prepare: (Not
assuming going concern)
(1) Profit & Loss Account for the year 2021-22.
(2) Balance Sheet as on 31st March, 2022. (RTP May’22, Nov’22, PYP 5 Marks May’19) (Same concept
different figures PYP 4 Marks Nov’20, Old & New SM)
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.11

Answer 17
Profit and Loss Account for the year ended 2021-22(not assuming going concern)

Particulars Amount ₹ Particulars Amount ₹

To Opening Stock 1,50,000 By Sales 27,50,000

To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred expenses 50,000
To Loan penalty 25,000
To Net Profit (b.f.) 3,89,500
30,07,500 30,07,500
Balance Sheet as at 31st March, 2022 (not assuming going concern)
Liabilities Amount ₹ Assets Amount ₹
Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss A/c 5,14,500 Inventory 2,50,000
10% Loan 2,35,000 Trade receivables (less provision) 1,20,000
Trade payables 67,500 Deferred expenses Nil
Bank 4,22,000
11,17,000 11,17,000

Question 18
What are the qualitative characteristics of the Financial Statements which improve the usefulness of the
information furnished therein? (PYP 4 Marks Nov ’20, Old & New SM) (MTP 4 Marks Mar’24)
Answer 18
The qualitative characteristics are attributes that improve the usefulness of information provided in financial
statements. Financial statements are required to show a true and fair view of the performance, financial
position and cash flows of an enterprise. The framework for Preparation and Presentation of Financial
Statements suggests that the financial statements should maintain the following four qualitative
characteristics to improve the usefulness of the information furnished therein.
1. Understandability: The financial statements should present information in a manner as to be readily
understandable by the users with reasonable knowledge of business and economic activities and
accounting.
2. Relevance: The financial statements should contain relevant information only. Information, which is likely to
influence the economic decisions by the users, is said to be relevant. Such information may help the users to
evaluate past, present or future events or may help in confirming or correcting past evaluations. The
relevance of a piece of information should be judged by its materiality. A piece of information is said to be
material if its misstatement (i.e., omission or erroneous statement) can influence economic decisions of a
user.
3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from material
error and bias. The information provided are not likely to be reliable unless transactions and events reported
are faithfully represented. The reporting of transactions and events should be neutral, i.e. free from bias
and be reported on the principle of 'substance over form'. The information in financial statements must be
complete. Prudence should be exercised in reporting uncertain outcome of transactions or events.
4. Comparability: Comparison of financial statements is one of the most frequently used and most effective
tools of financial analysis. The financial statements should permit both inter-firm and intra-firm comparison.
One essential requirement of comparability is disclosure of financial effect of change in accounting policies.

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.12

Question 18
Explain how financial capital is maintained at historical cost? Kishore started a business on 1st April, 2019
with ₹ 15,00,000 represented by 75,000 units of ₹20 each. During the financial year ending on 31st March,
2020, he sold the entire stock for ₹ 30 each. In order to maintain the capital intact, calculate the maximum
amount, which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is maintained at
historical cost. (PYP 4 Marks Jan 21)
Answer 18
Financial capital maintenance at historical cost: Under this convention, opening and closing assets are stated
at respective historical costs to ascertain opening and closing equity. If retained profit is greater than or
equals to zero, the capital is said to be maintained at historical costs. This means the business will have
enough funds to replace its assets at historical costs. This is quite right as long as prices do not rise.
Maximum amount withdrawn by Kishore in year 2019-20 if financial capital is maintained at historical cost
Particulars Financial Capital Maintenance at
Historical Cost (₹)
Closing equity (₹ 30 x 75,000 units) 22,50,000 represented by cash
Opening equity 75,000 units x ₹ 20 = 15,00,000
Permissible drawings to keep Capital intact 7,50,000 (22,50,000 – 15,00,000)
Thus ₹ 7,50,000 is the maximum amount that can be withdrawn by Kishore in year 2019-20 if financial
capital is maintained at historical cost.

Question 19
A trader commenced business on April 1, 2020 with ₹ 120,000, represented by 6000 units of a certain
product at ₹ 20 per unit. During the year 2020-21 he sold these units at ₹ 30/- per unit and had withdrawn
₹ 60,000. The price of the product at the end of financial year was ₹ 25/- per unit. Compute retained profit
of the trader under the concept of physical capital maintenance at current cost. Also, state, whether
answer would be different if the trader had not withdrawn any amount. (PYP July’21, 5 Marks) (MTP 5
Marks Sep ’23)
Answer 19
Physical Capital Maintenance at Current Cost
In the given case, the specific price index applicable to the product is 125 (25/20X100). Current cost of
opening stock = (₹ 1, 20,000 / 100) x 125 Or 6,000 unit’s x ₹ 25 = ₹ 1,50,000
Current cost of closing cash = ₹ 1,20,000 (₹ 1,80,000 – ₹ 60,000) Opening equity at closing current costs
= ₹ 1,50,000
Closing equity at closing current costs = ₹ 1,20,000 Retained Profit = ₹ 1,20,000 – ₹ 1,50,000 = (-) ₹ 30,000
The negative retained profit indicates that the trader has failed to maintain his capital. The available fund of
₹ 1,20,000 is not sufficient to buy 6,000 units again at increased price of ₹ 25 per unit. The drawings should
have been restricted to ₹ 30,000 (₹ 60,000 – ₹ 30,000).
If the trader had not withdrawn any amount, then the answer would have been as below:
Current cost of opening stock = ₹ 1,80,000
Opening equity at closing current costs = ₹ 1,50,000
Retained Profit = ₹ 1,80,000 – ₹ 1,50,000 = ₹ 30,000
If the trader had not withdrawn any amount, then the retained profit would have been₹ 30,000.

Question 20
Mrs. A is showing the consolidated aggregate opening balance of equity, liabilities and assets of ₹ 6 lakh, 4
lakh and 10 lakhs respectively. During the current year Mrs. A has the following transactions:
Chapter 2 Framework for preparation and presentation of Financial Statements
 2.13

1. Received 20% dividend on 10,000 equity shares of ₹ 10 each held as investment.

2. The amount of ₹ 70,000 is paid to creditors for settlement of ₹ 90,000.
3. Salary is pending by ₹ 20,000.
4. Mrs. A’s drawing ₹ 20,000 for her personal use.
You are required to prepare the statement of the effect of aforesaid each transaction on closing balance
sheet in the form of Assets – Liabilities = Equity after each transaction. (PYP 5 Marks, Dec ‘21)
Answer 20
Effect of each transaction on Balance sheet of Mrs. A is shown below:
Transactions Assets - Liabilities = Equity
₹ lakh ₹ lakh ₹ lakh
Opening 10.00 - 4.00 = 6.00
(1) Dividend earned 10.20 - 4.00 = 6.20
[10.00+0.20] [6.00+0.20]
(2) Settlement of Creditors 9.50 - 3.10 = 6.40
[10.20-0.70] [4.00-0.90] [6.20+0.20]
(3) Salary Outstanding 9.50 - 3.30 = 6.20
[3.10+0.20] [6.40-0.20]
(4) Drawings 9.30 - 3.30 = 6.00
[9.50-0.20] [6.20-0.20]

Question 21
As on 1st April, 2021 opening Balance Sheet of Mr. Mohanty is showing the aggregate value of Assets,
Liabilities and Equity ₹ 12 Lakhs, 3 Lakhs and 9 lakhs respectively.
During the accounting period 01/04/2021 to 31/03/2022, Mr. Mohanty has the following transactions:
(1) A liability of ₹ 50,000 was finally settled at a discount of 2%.
(2) Dividend earned @ 15% on 1,000 (F.V 100 each) Equity shares held @ ₹ 12,000.
(3) Rent of the premises paid ₹ 20,000.
(4) Mr. Mohanty withdrew ₹ 10,000 for personal purposes and also withdrew Goods worth
₹ 5,000 for personal purposes.
(5) ₹ 15,000 were received against Bill Receivables.
You are required to show the effect of the above transactions on Balance Sheet in the form of Assets -
Liabilities = Equity equation after each transaction. .(PYP 4 Marks Nov ’22)
Answer 21
Effects of each transaction on Balance sheet of the trader is shown below:
Assets Liabilities Equity
Transactions - =
₹ lakh ₹ lakh ₹ lakh
Opening 12 - 3 = 9
12 – 0.49 3 – 0.50 9.0 + 0.01
(1) Settlement of Creditors - =
11.51 2.5 9.01
11.51 + 0.15 9.01+ 0.15
(2) Dividend earned - 2.5 =
11.66 9.16
11.66 -0.20 9.16 -0.20
(3) Rent paid - 2.5 =
11.46 8.96
11.46 -0.15 8.96 -0.15
(4) Drawings - 2.5 =
11.31 8.81

Chapter 2 Framework for preparation and presentation of Financial Statements

 2.14

(5) *Money received against 11.31+0.15 -0.15

- 2.5 8.81
Bills receivables 11.31
=
*No change as cash received from bills receivable will have impact on individual asset only (will reduce bill
receivables with corresponding increase in cash).
Question 22
Mille started a business on 01.04.2022 with a capital of ₹ 15,00,000. She purchased ₹ 1,500 units of stock
at ₹ 1,000 each. She sold the entire stock for ₹ 1,500 each unit till 31.03.2023.
You are required to calculate the maximum amount which can be withdrawn by Mille in order to keep her
capital intact, if Financial Capital is maintained at:
(i) Historical Cost
(ii) Current Purchasing Power (opening index at 100 and closing index at 125)
(iii) Physical Capital Maintenance
(Price per unit at the end of year is ₹ 1,350) (PYP 5 Marks May ‘23)

Answer 22
Financial Capital Maintenance at historical Costs
Sr. No. Particulars Computation ₹

(i) Opening Equity 1,500 x 1,000 15,00,000

(ii) Closing Equity 1,500 x 1,500 22,50,000

(iii) Maximum Drawing (ii)- (i) 7,50,000

Financial Capital Maintenance at current purchasing power

Sr. No. Particulars Computation ₹

(i) Opening Equity 1,500 x 1,000 x 125/100 18,75,000

(ii) Closing Equity 1,500 x 1,500 22,50,000

(iii) Maximum Drawing (ii)- (i) 3,75,000

Financial Capital Maintenance at Physical Capital Maintenance

Sr. No. Particulars Computation ₹

(i) Opening Equity 1,500 x1,350 20,25,000

(ii) Closing Equity 1,500 x 1,500 22,50,000

(iii) Maximum Drawing (ii)- (i) 2,25,000

Chapter 2 Framework for preparation and presentation of Financial Statements