1. What are the objectives of preparing Financial Statements?

Describe the basic concepts

of income determination.

Financial statements are essential for providing financial information about an organization to
various stakeholders, including investors, creditors, management, and regulatory authorities. The
primary objectives of preparing financial statements are to assess the financial performance,
position, and cash flows of a business over a specific period. They help stakeholders make informed
decisions regarding investments, credit approvals, and operational strategies. Financial statements
also ensure compliance with statutory and regulatory requirements, such as taxation laws and
corporate governance policies. Additionally, they assist management in planning, forecasting, and
evaluating business operations, enabling effective resource allocation and financial control.

The determination of income in financial accounting is based on several fundamental concepts. The
revenue recognition principle states that revenue should be recognized when it is earned and
realizable, regardless of when the cash is received. The matching principle ensures that expenses are
recorded in the same period as the revenues they help generate, allowing for an accurate
representation of profitability. The accrual basis of accounting records income and expenses when
they are incurred rather than when cash is exchanged, which provides a more accurate financial
picture. The conservatism principle ensures that financial statements do not overstate income or
assets and recognize expenses or losses as soon as they are anticipated. Furthermore, the
consistency principle requires that accounting methods and policies remain unchanged over time to
allow for meaningful comparisons of financial performance across different periods.

2. In context of Cash Flow Statement, what is cash and cash equivalent? In what categories
cash flows are classified and explain how cash flow in each activity is calculated as per
AS-3. Describe how cash flow statement is prepared under Direct Method.

A Cash Flow Statement is a financial report that provides information on the cash inflows and
outflows of an organization over a specific period. It is essential for understanding the liquidity
position of a business, enabling management to assess whether the company can meet its short-
term obligations, finance its investments, and maintain stable operations. According to Accounting
Standard (AS) 3, cash flows are classified into three categories: operating activities, investing
activities, and financing activities.

Cash and Cash Equivalents refer to highly liquid assets that can be easily converted into cash within a
short period, typically three months or less. Cash includes physical currency, bank balances, and
demand deposits, while cash equivalents include short-term investments such as treasury bills,
money market funds, and commercial papers. These assets are crucial for maintaining liquidity and
ensuring that the business can meet its immediate financial commitments.

The three categories of cash flows under AS-3 are:

1. Operating Activities: These are cash flows related to the core business operations of a
company. They include cash receipts from customers, payments to suppliers, wages paid to
employees, and taxes paid. Operating cash flow can be calculated using either the direct
method (which lists actual cash receipts and payments) or the indirect method (which
adjusts net profit for non-cash expenses and changes in working capital).
 2. Investing Activities: These cash flows arise from the purchase and sale of long-term assets,
such as property, plant, and equipment. They also include investments in securities and the
proceeds from the disposal of such investments. Investing cash flows indicate the company’s
capital expenditure and its long-term investment strategies.

3. Financing Activities: These include cash flows related to raising and repaying capital.
Examples include issuing or repurchasing shares, taking or repaying loans, and paying
dividends to shareholders. Financing activities reflect how a company funds its operations
and growth.

The Direct Method of preparing a cash flow statement explicitly lists cash receipts from customers
and cash payments for expenses, giving a clear view of actual cash transactions. It involves summing
up cash received from operating revenues and deducting cash payments made for operating
expenses, wages, and taxes. This method is considered more transparent as it shows the actual cash
movements, but it requires detailed records of cash transactions.

3. What is an Annual Report? Discuss in brief the contents of an annual report and describe
the non audited information contained in an Annual Report of any company.

An Annual Report is a comprehensive document that provides a summary of a company's financial

performance, strategic initiatives, and corporate governance for a particular fiscal year. It is prepared
for shareholders, investors, and regulatory bodies to assess the company’s financial health and
operational efficiency. The annual report includes audited financial statements, management
discussions, risk disclosures, and corporate governance details.

The key contents of an annual report typically include:

 Chairman’s Message: A summary of the company’s achievements, challenges, and strategic

direction.

 Management Discussion & Analysis (MD&A): A detailed overview of business operations,

industry trends, financial performance, and risks.

 Financial Statements: Includes the Balance Sheet, Profit & Loss Account, and Cash Flow
Statement, which provide insights into the company’s financial health.

 Corporate Governance Report: Details on the board of directors, management policies, and
compliance with corporate regulations.

 Notes to Financial Statements: Explanations of accounting policies, significant transactions,

and other financial disclosures.

Apart from audited financial data, an annual report also contains non-audited information, which
includes corporate social responsibility (CSR) activities, future business outlook, management’s
strategic vision, sustainability initiatives, and employee engagement programs. For example, a
company may include its efforts towards environmental conservation, community service, and
employee development, which provide investors with a broader perspective on the company’s long-
term vision and ethical commitments.
4. What is an Annual Report? Discuss in brief the contents of an annual report and describe
the non audited information contained in an Annual Report of any company.

Human Resource Accounting (HRA) is the process of identifying, measuring, and reporting the value
of human capital in financial statements. It recognizes employees as valuable assets, similar to
physical or financial assets, and aims to quantify their contribution to the organization. HRA includes
methods such as cost-based valuation (where costs incurred on hiring, training, and retaining
employees are recorded) and value-based valuation (where employees’ future economic
contributions are estimated).

HRA serves as a vital decision-making tool for management by helping in workforce planning, talent
retention, and performance evaluation. It enables businesses to analyze the return on investment in
human resources and optimize training and development programs. Additionally, HRA helps in
budgeting HR costs, identifying skill gaps, and formulating competitive compensation strategies.
Companies that implement HRA effectively can enhance employee satisfaction, reduce turnover
rates, and improve overall productivity, leading to long-term business success.

5. A) Compute Profit when

 Sales = Rs. 4,00,000

 Fixed Cost = Rs. 80,000

 BEP = Rs. 3,20,000

(B) Compute Sales when

 Fixed Cost = Rs. 40,000

 Profit = Rs. 20,000

 BEP = Rs. 80,000