Table of Contents
1. Prepare Balance Sheet from the balances extracted on 31st December 2010 in report form (vertical form):
Q.2. Explain briefly any five:
(a) Debentures:
A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds, debentures are documented in an indenture.A medium or long term debt format that large companies use to borrow money.
A debenture is one of the most typical forms of long term loans that a company can take.It is normally a loan that should be repaid on a specific date, but some debentures are irredeemable securities (sometimes referred to as perpetual debentures). The majority of debentures come with a fixed interest rate. This interest must be paid before dividends are paid to shareholders.
(b) Contingent liabilities:
A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated.
(c) Current assets:
A current asset is any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle (whichever period is longer). Typical current assets include cash, cash equivalents, short-term investments (marketable securities), accounts receivable, stock inventory, supplies, and the portion of prepaid liabilities, sometimes referred to as prepaid expenses, which will be paid within a year.
(d) Outstanding expenses:
Outstanding expenses are those expenses which have been incurred and consumed during an accounting period and are due to be paid, but are not paid. Examples include outstanding salary, outstanding rent, etc. Outstanding expenses are recorded in the books at the end of an accounting period to show true numbers of a business.Outstanding expense is a personal account and is shown on the liability side of a balance sheet.
(e) Fixed assets:
A fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year’s time. Fixed assets are sometimes collectively referred to as “plant.”
(f) Goodwill:
Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology represent goodwill. Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company’s balance sheet.
(g) Capital:
Capital refers to financial assets or the financial value of assets, such as cash and funds held in deposit accounts, as well as the tangible machinery and production equipment used in environments such as factories and other manufacturing facilities. Additionally, capital includes facilities, such as the buildings used for the
production and storage of the manufactured goods. Materials used and consumed as part of the manufacturing process do not qualify.
(h) Creditors:
A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. A business who provides supplies or services to a company or an individual and does not demand payment immediately is also considered a creditor, since the client owes the business money for services already rendered. Creditors can be classified as either personal or real. People who loan money to friends or family are personal creditors. Real creditors such as banks or finance companies have legal contracts with the borrower, sometimes granting the lender the right to claim
any of the debtor’s real assets (e.g. real estate or cars) if he fails to pay back the loan.
Q.3. (a) What do you understand by Auditing?
Auditing is a systematic examination of the books and records of a business or other organisation in order to ascertain or verify and to report upon the facts regarding its financial operation and the results thereof. R.B. Bose has defined as ‘audit may be said to be verification of the accuracy and correctness of the books of accounts by independent person qualified for the job and not in any way connected with the preparation of such accounts.Auditing is the verification of the correctness of accounts and reliability of accounting system, date and information. An auditing, therefore, includes verification of correctness of the accounts, statements, reports, data, etc. and finally checking these data to see that they adhere to accounting principles, plans, procedures and objectives.
(b) How Internal Audit is different from External Audit?
Auditing is the verification of the correctness of accounts and reliability of accounting system, date and information. An auditing, therefore, includes verification of correctness of the accounts, statements, reports, data, etc. and finally checking these data to see that they adhere to accounting principles, plans, procedures and objectives.Internal auditor is an integral part of company’s internal control system. Through it is optional but all large organization does have internal auditing
A person or a group of persons deputed to audit the accounts is / are called internal Auditor/ these persons may be an internal part of the organization (employees) or can be hired from outside agency to audit the account. Internal auditing of accounts is notcompulsory. The Internal Auditor may not be registered Chartered Accountant (C.A.).External auditing / statutory audit.It is a compulsory audit done by outside agency at least once, at the end of the financial
year. As per SEBI guidelines public limited companies are required to have the companies accounts audited after every three months. Only registered Chartered Accountant Auditors are authorised to audit the accounts and sign it .
Q.4. (a) What do you mean by Uniform System of Hotel Accounts?
Uniform account is used by several hotels / restaurants of the same accounting (costing and sale) principal and / or practices. Uniform accounting is thus not a separate technique or method. It simply denotes a situation in which number of hotels /restaurants may use the same accounting (costing and sales) principal in such a way as to produce sales, valuable conclusions can be drawn and one hotel can be compared to others. The extent of application of uniform accounting principles depends on the circumstance of each case.
(b) How it is helpful to the management?
The following are the advantages of uniform accounting system:
The Uniform System of Hotel Accounts is a standardized financial reporting system that can benefit hotel managers in several ways. Here are some of the key benefits:
- Improved Communication: The Uniform System of Hotel Accounts provides a common language for hotel managers to communicate financial information to each other, as well as to external stakeholders such as investors, lenders, and auditors. By using standardized accounting methods and terminology, hotel managers can ensure that financial information is accurate, reliable, and consistent, which in turn helps to build trust and confidence among stakeholders.
- Real-time Monitoring: The Uniform System of Hotel Accounts helps hotel managers to monitor their financial performance in real-time. By providing detailed information on revenues, expenses, and profitability, managers can make informed decisions about pricing, marketing, staffing, and capital investment. They can also use this information to identify trends, patterns, and anomalies, and to adjust their strategies accordingly.
- Benchmarking: The Uniform System of Hotel Accounts provides a valuable tool for benchmarking hotel performance against industry standards. By comparing their financial performance with that of other hotels, managers can identify areas where they are underperforming and take steps to improve their competitiveness. This can include everything from improving customer service and amenities to investing in new technologies and marketing initiatives.
- Improved Decision Making: Overall, the Uniform System of Hotel Accounts is an essential tool for hotel managers who want to make informed decisions and take proactive steps to improve their bottom line. By using the Uniform System of Hotel Accounts, managers can make informed decisions and take proactive steps to improve their financial performance.
(c) What are the requirements to adopt this system of Accounting?
The adoption of the Uniform System of Hotel Accounts can be a significant step for hotels seeking to improve their financial management and operational efficiency. Here are some requirements for adopting this system of accounting:
- Understanding of the USHA: To adopt the Uniform System of Hotel Accounts, hotel managers must have a solid understanding of the system’s requirements and procedures. They should be familiar with the USHA manual, which outlines the accounting procedures and reporting requirements for the hotel industry. Hotel managers may need to seek out training or consult with experts to ensure that they fully understand the USHA and how it works.
- Standardized Chart of Accounts: The Uniform System of Hotel Accounts requires hotels to use a standardized chart of accounts that includes a list of all the financial transactions that occur within the hotel. To adopt the USHA, hotels need to create or adopt a chart of accounts that meets the USHA standards. This chart of accounts should be organized and structured in a way that makes it easy to record and report financial transactions.
- Technology and Software: Adopting the Uniform System of Hotel Accounts may require hotels to upgrade their financial management systems and software. The USHA requires hotels to maintain detailed records of financial transactions, and this can be difficult to do without the right technology and software. Hotels may need to invest in accounting software and other financial management tools that are compatible with the USHA.
- Staff Training: Finally, hotels must train their staff on the Uniform System of Hotel Accounts procedures and requirements. All staff members who are involved in financial management should be trained on the USHA and its reporting requirements. This includes front office staff, accounting staff, and management staff.
Q.5. Prepare an Income Statement of Food & Beverage department from the following information under Uniform System of Hotel Accounts:
Particulars |
Amount ₹ |
Particulars |
Amount ₹ |
Food Revenue |
2,36,000/- |
Beverage cost |
23,000/- |
Cost of food sale |
92,600/- |
Employee benefits |
20,000/- |
Salaries & Wages |
30,800/- |
Rates & Taxes |
14,000/- |
China & Glassware |
29,000/- |
Interest paid |
5,000/- |
Laundry & Dry cleaning |
4,000/- |
Repairs |
1,500/- |
Operating supplies |
10,000/- |
Sundry expenses |
1,200/- |
Insurance |
10,000/- |
Beverage Revenue |
90,000/- |
Gas & Electricity |
27,000/- |
Publicity |
6,000/- |
Q.6. What do you mean by Departmental Income Statements and Expense Statements? What are its purposes? Make a full list of such statements.
Departmental Income Statements and Expense Statements are financial reports that show the revenues and expenses associated with specific departments within a company or organization. These statements are used to track the financial performance of individual departments and help managers make informed decisions about how to allocate resources and improve efficiency. Here is a full list of departmental statements:
- Departmental Income Statement: This statement shows the revenue generated by each department, as well as any related expenses, to determine the net income or loss for that department. The purpose of this statement is to track the financial performance of each department and to identify areas where revenue can be increased or expenses can be reduced.
- Departmental Expense Statement: This statement shows the expenses incurred by each department, including direct and indirect costs. The purpose of this statement is to track the expenses associated with each department and to identify areas where costs can be reduced or eliminated.
- Departmental Profit and Loss Statement: This statement shows the net income or loss for each department over a specific period. The purpose of this statement is to provide a snapshot of the financial performance of each department and to help managers make informed decisions about resource allocation.
- Departmental Cash Flow Statement: This statement shows the cash inflows and outflows associated with each department. The purpose of this statement is to track the cash flow of each department and to identify areas where cash reserves may be needed to maintain operations.
- Departmental Balance Sheet: This statement shows the assets, liabilities, and equity of each department. The purpose of this statement is to provide a snapshot of the financial position of each department and to help managers make informed decisions about investments or divestments.
- Departmental Budgets: These statements show the projected revenues and expenses for each department over a specific period. The purpose of this statement is to help managers plan and allocate resources effectively, and to track the progress of each department against its budget.
- Departmental Performance Metrics: These statements track various performance metrics for each department, such as sales growth, customer satisfaction, and employee productivity. The purpose of these statements is to provide managers with a comprehensive overview of departmental performance and to identify areas where improvements can be made.
Q.7. Prepare Income Statement under suitable method of Departmental Accounting from the information given below:
| Sales | Amount in ₹ | Salaries & Wages | Amount in ₹ |
| Restaurant Coffee Shop Bar |
3,00,000/- 2,00,000/- 1,00,000/- |
Restaurant Coffee Shop Bar |
17,000/- 8,000/- 7,000/- |
| Cost of Sales | Unallocated expenses | ||
| Restaurant Coffee Shop Bar |
80,000/- 50,000/- 30,000/- |
Office expenses Advertisement Fixed charges Interest |
12,000/- 18,000/- 16,000/- 9,000/- |
Note: Unallocated expenses are to be allocated among departments on the following basis:
(a) Office Expense – apportioned equally among the departments
(b) Advertisement – Restaurant 50%, Coffee Shop 30%. Bar 20%
(c) Fixed Charges – In the ratio of 2:1:1
(d) Interest in the ratio of sales Departmental Income Statement
DEPARTMENTAL INCOME STATEMENT
| Restaurant | Coffee Shop | Bar | Total | |
| Sales | 3,00,000 | 2,00,000 | 1,00,000 | 6,00,000 |
| Cost of Sales | (80,000) | (50,000) | 30,000 | 1,60,000 |
| Gross Profit | 2,20,000 | 1,50,000 | 70,000 | 4,40,000 |
| Salary & Wages | (17,000) | (8,000) | (7,000) | (32,000) |
| Office expenses | (4,000) | (4,000) | (4,000) | (12,000) |
| Advertisement | (9,000) | (5,400) | (3,600) | (18,000) |
| Fixed charges | (8,000) | (4,000) | (4,000) | (16,000) |
| Interest | (4,500) | (3,000) | (1,500) | (9,000) |
| Net Profit | 1,77,500 | 1,25,600 | 49,900 | 3,53,000 |
Q.8. What do you mean by Internal Control? State the objectives of Internal Control.
The control is a continuous process. It is a part of routine in all types of organisations whether small or big. The word ‘control’ itself is disliked by one and all, nobody likes to be controlled by others no matter how small or big employee he maybe. The whole system of control, financial and otherwise, established by the management in order to carry on the business of the enterprises in an orderly and efficient manner, ensure adherence to management policies, safe-guard the assets and secure as far as possible the completeness and accuracy of the records.
Internal control definitions
Controls attempt to ensure that risks, those factors which stop the achievement of company objectives, are minimised.
An internal control system comprises the whole network of systems established in an organisation to provide reasonable assurance that organisational objectives will be achieved.
Internal management control refers to the procedures and policies in place to ensure that company objectives are achieved.
The control procedures and policies provide the detailed controls implemented within the company.
Objectives Of The Internal Control:
the orderly and efficient conduct of its business, including adherence to internal policies
the safeguarding of assets of the business
the prevention and detection of fraud and error
the accuracy and completeness of the accounting records, and
the timely preparation of financial information.
Benefits of an internal control system are therefore:
Effectiveness and efficiency of operations.
Reliability of financial reporting.
Compliance with applicable laws and regulations.
These may further give rise to improved investor confidence
OR (a) Internal Control is essential. Support your answer with reasons.
Internal control is essential for any organization as it helps to safeguard its assets, ensure the accuracy of financial information, and promote compliance with laws and regulations. Here are some reasons why internal control is crucial:
- Asset Protection: Internal control helps to protect an organization’s assets, including its financial resources, physical assets, and intellectual property. By establishing procedures to prevent theft, fraud, and other types of asset misappropriation, internal control can minimize financial losses and promote the efficient use of resources.
- Accurate Financial Information: Internal control ensures the accuracy of financial information by establishing procedures for recording, verifying, and reporting financial transactions. This helps to ensure that financial statements are reliable and can be used to make informed decisions.
- Compliance with Laws and Regulations: Internal control helps organizations to comply with laws and regulations by establishing procedures to ensure that they are followed. This includes procedures to prevent money laundering, ensure data privacy, and comply with tax laws, among others.
- Efficient Operations: Internal control promotes efficient operations by establishing procedures that ensure that resources are used effectively and that processes are streamlined. This helps organizations to reduce costs, improve productivity, and achieve their objectives more effectively.
- Risk Management: Internal control helps organizations to manage risks by identifying potential risks and establishing procedures to mitigate them. This includes risks related to financial reporting, fraud, data security, and operational risks, among others.
(b) Give the main requisites of Internal Control.
Requisites of Internal Control
1. Experienced, Qualified and Trustworthy Personnel.
2. Division of Duty.
3. Leadership.
4. Organisational Structure.
5. Sound Practice.
6. Authorised Personnel.
7. Records.
8. Manual Procedures.
9. Control.
10. Budget.
11. Reports.
12. Independent Checks
Q.9. Distinguish between (any two):
(a) Inter-firm and Intra-firm comparison.
Meaning of Inter-Firm Comparison
Inter firm comparison means a comparison of two or more similar business units with the objective of finding the competitive position to improve the profitability and productivity of those business units. Thus, inter firm comparison is a tool used by the management of a company to compare its operating performance and financial results with those of similar
companies engaged in the same industry.
Meaning of Intra-firm comparison
Intra-firm comparison means comparison of two or more departments or divisions of the same business unit with the objective of meaningful analysis in order to improve the operational efficiency of all the departments or divisions.
Both, the inter firm comparison and intra-firm comparison have the same objectives. The comparison may cover the financial position or operating results or both.
Need for Inter-firm & Intra-firm comparison
The survival and growth of any business unit are based on the competitive strength. The competitive strength is based on the financial position and solvency of the company. Some ratios are calculated to find out the financial position and solvency. A business unit can get success in market by knowing the strength and weakness of other similar
business units. In this situation, there is a need of inter-firm comparison. Besides, a business unit can identify the strength of its various departments and divisions before competing with other similar business units. In this context, there is a need of intra-firm comparison.
| Basis of Comparison | Inter-firm Comparison | Intra-firm Comparison |
|---|---|---|
| Definition | Comparison between companies | Comparison within a company |
| Focus | External factors | Internal factors |
| Purpose | Competitive analysis | Performance evaluation |
| Scope | Industry-wide analysis | Departmental analysis |
| Examples | Comparison of financial ratios between two competing companies | Comparison of financial ratios between different departments within the same company |
(b) Allocation and Apportionment.
Allocation and apportionment are methods that are used to divide up costs among various cost centers depending on which department or cost center each cost or portions of each cost belong. The major difference between allocation and apportionment methods are that allocation is used when the overhead can be directly related to one department and cost center, and apportionment is used when the overhead arises from a number of departments.
| Basis of Comparison | Allocation | Apportionment |
|---|---|---|
| Definition | Assignment of direct costs to specific cost centers or products | Assignment of indirect costs to multiple cost centers or products |
| Basis | Actual cost | Estimated cost |
| Nature of Cost | Direct costs | Indirect costs |
| Examples | Direct material cost allocated to a specific product | Indirect overhead cost is apportioned to multiple products based on usage or activity level |
(c) Direct expenses and Indirect expenses.
Direct Expenses
Direct, as the word suggests, are those expenses which are completely related or assigned to the core business operations. They are mainly related to purchases and production of goods/services. Direct expenses are a part of the prime cost or the cost of goods/services sold by a company.Direct expenses can differ for different types of companies, such as manufacturing
companies, construction companies, service companies, etc.Direct expenses are shown on the debit side of a trading account.
Examples Wages, Factory rent, Material Cost, Premises Renting, Fuel, Freight, Carriage Inwards etc.
Indirect Expenses
Unlike direct, indirect expenses are not directly related or assigned to the core business operations. Indirect expenses are necessary to keep the business up and running, but they can’t be directly related to the cost of the core revenue generating goods/services.Indirect expenses can be different for different types of companies such as manufacturing, construction, service companies etc.Indirect expenses are shown on the debit side of an income statement.
Example
Salaries, Telephone bills, Printing & Stationery, Legal & Accounting charges, Carriage Outwards etc
| Basis of Comparison | Direct Expenses | Indirect Expenses |
|---|---|---|
| Definition | Expenses that are directly related to the production of goods or services | Expenses that are indirectly related to the production of goods or services |
| Basis of Allocation | Easily allocable to a specific cost center or product | Must be allocated based on some predetermined basis |
| Examples | Raw materials, labor, commissions, packaging costs | Rent, utilities, office supplies, depreciation |
(d) Internal check and Internal audit.
Difference between Internal Check and Internal Audit
| Basis of Comparison | Internal Check | Internal Audit |
|---|---|---|
| Definition | A system of checks and controls designed to ensure the accuracy and reliability of financial records | A systematic and independent review of financial records and operations |
| Objective | To prevent errors and fraud by ensuring that all transactions are properly recorded and verified | To evaluate the effectiveness of the internal control system and provide recommendations for improvement |
| Nature of work | Continuous and routine | Occasional and in-depth |
| Scope | Covers all areas of the organization | Focuses on specific areas or functions |
| Conducted by | Employees of the organization | Independent professionals or employees |
Q.10. Fill in the blanks with one or more than one word.
(a) Cost of goods sold = opening stock + purchase less closing stock.
(b) Decline in the value of intangible assets is known as Amortization.
(c) Name the three Departmental Accounting methods 1. Gross Profit Method 2. Departmental Profit Method and 3. Net Profit Method.
(d) Internal control is based on systems, standards and policies laid by Management (Government/Management).
(e) Fixed charges in the business have to be paid whether there is Loss
(f) Arrangement of assets and liability items in Balance Sheet in proper order is termed as Marshalling of Balance Sheet.
(g) Audit is classified into two categories 1. Internal Audit and 2. External Audit.
(h) Apportionment means process of sharing a group’s expenditure among the individual funding streams / programmes being implemented.
(i) Night Auditor is employed by Hotel Management (Government/Hotel Management).
(j) Inter-firm comparison is comparison of two or more similar business units.