Chapter financial-statements-i: Financial Statements - I Case Study Questions | accountancy Class 11 CBSE

Chapter financial-statements-i: Financial Statements - I Case Study Questions | accountancy Class 11 CBSE | ByteNotes.in

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Case Set 1

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Ravi runs a small grocery store in Pune. At the end of March 2017, his accountant prepares the Trial Balance. The debit side shows opening stock ₹20,000, purchases ₹1,50,000, wages ₹10,000, salaries ₹18,000, rent ₹12,000, and bad debts ₹2,000. The credit side shows sales ₹2,20,000 and commission received ₹5,000. Closing stock as on March 31, 2017 is ₹25,000. The accountant needs to prepare a Trading and Profit & Loss Account to determine the gross profit and net profit for the year. Ravi is curious to understand how his financial performance will be reported to the bank, which had advanced a short-term loan last year.

Question 1: What is the gross profit earned by Ravi for the year ended March 31, 2017?

Gross Profit = Sales – (Opening Stock + Purchases + Wages – Closing Stock)
= ₹2,20,000 – (₹20,000 + ₹1,50,000 + ₹10,000 – ₹25,000) = ₹2,20,000 – ₹1,55,000 = ₹65,000

Question 2: Calculate the net profit for Ravi's business for the year ended March 31, 2017.

Net Profit = Gross Profit + Other Incomes – Indirect Expenses
= ₹65,000 + ₹5,000 – (₹18,000 + ₹12,000 + ₹2,000) = ₹70,000 – ₹32,000 = ₹38,000

Question 3: Why is the bank interested in Ravi's financial statements, and what specific information does the bank look for when evaluating his business? Explain with reference to the concept of liquidity.

The bank is interested in safety of the principal advanced as a loan and periodic return in the form of interest.
The bank evaluates adequacy of profits only as assurance that principal and interest will be repaid in time.
Liquidity refers to the form in which assets are held; when more assets are in cash or near-cash form, the business has higher liquidity, which the bank considers favourably while evaluating creditworthiness.

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Case Set 2

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Sunita Textiles purchased a sewing machine worth ₹80,000 during the year. The machine is expected to last for 8 years. In the same year, the firm spent ₹5,000 on repairs to an existing machine and ₹40,000 on a large advertising campaign whose benefits are expected to last for 4 years. The accountant is unsure about how to classify and record these expenditures in the books of accounts. The owner wants to know the correct treatment so that the financial statements reflect a true and fair view of the business's financial performance and position for the year ending March 31, 2017.

Question 1: Classify the expenditure on the sewing machine and the repairs as capital or revenue expenditure and give one reason for each.

Sewing machine ₹80,000 is capital expenditure because it is a fixed asset that will benefit the business for more than one accounting period (8 years).
Repairs ₹5,000 is revenue expenditure because it is incurred to maintain the earning capacity of the existing machine and benefits only the current accounting period.

Question 2: How should the advertising expenditure of ₹40,000 be treated in the books of accounts? What is this type of expenditure called?

The advertising expenditure of ₹40,000 is a deferred revenue expenditure because although it is revenue in nature, its benefit is expected to last for more than one accounting period (4 years).
It should be written off over its expected benefit period, i.e., ₹10,000 per year should be charged to the Profit & Loss Account each year, and the remaining amount should be shown as an asset in the Balance Sheet.

Question 3: What would be the impact on profit and the balance sheet if the sewing machine purchase (capital expenditure) was wrongly treated as revenue expenditure? Explain the consequences in detail.

If ₹80,000 capital expenditure is wrongly debited to the Profit & Loss Account as revenue expenditure, expenses for the year would be overstated by ₹80,000.
This would result in an understatement of net profit by ₹80,000, leading to an incorrect picture of financial performance.
Additionally, the sewing machine (fixed asset) would not appear in the Balance Sheet, causing understatement of assets and an incorrect representation of the financial position of the business — the financial statements would not reflect a true and fair view.

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Case Set 3

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M/s Gupta Brothers is preparing its Balance Sheet as on March 31, 2017. The items available are: Land ₹2,00,000; Building ₹1,50,000; Plant & Machinery ₹1,00,000; Furniture ₹30,000; Sundry Debtors ₹40,000; Cash in Hand ₹5,000; Cash at Bank ₹15,000; Closing Stock ₹25,000; Bills Receivable ₹10,000; Goodwill ₹20,000; Capital ₹3,00,000; Long-term Loan ₹1,50,000; Sundry Creditors ₹80,000; Bills Payable ₹25,000; Bank Overdraft ₹40,000. The accountant is asked to prepare the Balance Sheet in both the order of permanence and the order of liquidity.

Question 1: Which assets will appear at the top of the Balance Sheet when prepared in the order of permanence, and which will appear at the top when prepared in the order of liquidity?

In the order of permanence, the most permanent asset (Goodwill or Land) appears at the top, followed by other fixed assets in decreasing order of permanence.
In the order of liquidity, the most liquid asset (Cash in Hand) appears at the top, followed by assets in decreasing order of liquidity.

Question 2: Identify the current assets and current liabilities from the given information.

Current Assets: Sundry Debtors ₹40,000; Cash in Hand ₹5,000; Cash at Bank ₹15,000; Closing Stock ₹25,000; Bills Receivable ₹10,000. Total Current Assets = ₹95,000.
Current Liabilities: Sundry Creditors ₹80,000; Bills Payable ₹25,000; Bank Overdraft ₹40,000. Total Current Liabilities = ₹1,45,000.

Question 3: Explain the concept of grouping and marshalling of assets and liabilities in a Balance Sheet. How does proper grouping help users of financial statements?

Marshalling refers to the arrangement of assets and liabilities in the Balance Sheet in a specific order — either order of liquidity (from most liquid to least liquid) or order of permanence (from most permanent to least permanent).
Grouping means putting together items of similar nature under a common heading, e.g., cash, bank, debtors grouped under 'current assets'; land, building grouped under 'fixed assets'.
Proper grouping and marshalling help users make informed decisions by providing a clear and organised view of the financial position, enabling them to assess liquidity, solvency, and the nature of assets and liabilities at a glance.

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Case Set 4

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Priya is a commerce student studying the financial statements of her family's retail business. She notices that the Trial Balance has debit balances for opening stock, purchases, wages, carriage inwards, salaries, rent, and depreciation. The credit balances include sales, commission received, and discount received. She wants to understand which items go into the Trading Account and which go into the Profit & Loss Account. Her father explains that expenses are divided into direct and indirect expenses, and this determines their placement in the financial statements.

Question 1: Name any two items that will appear on the debit side of the Trading Account and any two items on the debit side of the Profit & Loss Account from the above list.

Debit side of Trading Account: Opening Stock and Wages (also Carriage Inwards/Purchases are correct).
Debit side of Profit & Loss Account: Salaries and Rent (also Depreciation is correct).

Question 2: Distinguish between direct expenses and indirect expenses with two examples each.

Direct expenses are those directly connected with the manufacture, purchase of goods and bringing them to the point of sale; e.g., wages, carriage inwards, freight, factory lighting.
Indirect expenses are those incurred for the general administration and selling activities of the business; e.g., salaries, rent, depreciation, advertising, bad debts.

Question 3: What are closing entries? Explain with journal entries how the purchases account and the sales account are closed at the end of the accounting period.

Closing entries are journal entries recorded at the end of an accounting period to transfer the balances of revenue and expense accounts to the Trading and Profit & Loss Account, thereby closing those accounts.
Closing entry for purchases: Trading A/c Dr. / To Purchases A/c — This transfers the debit balance of purchases to the debit side of the Trading Account.
Closing entry for sales: Sales A/c Dr. / To Trading A/c — This transfers the credit balance of sales to the credit side of the Trading Account, closing the sales account.

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Case Set

Case Set 5

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The Trial Balance of M/s Sharma Traders as on March 31, 2017 shows the following: Opening Stock ₹15,000; Net Purchases ₹1,20,000; Net Sales ₹2,00,000; Carriage Inwards ₹3,000; Wages ₹7,000; Salaries ₹20,000; Rent ₹10,000; Bad Debts ₹3,000; Discount Received ₹2,000; Closing Stock ₹18,000. The firm also has non-operating income from sale of old furniture ₹5,000 and non-operating expense of loss by fire ₹8,000.

Question 1: Calculate the Cost of Goods Sold for M/s Sharma Traders.

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock
= ₹15,000 + ₹1,20,000 + (₹3,000 + ₹7,000) – ₹18,000 = ₹1,27,000

Question 2: Calculate the Gross Profit and Net Profit for M/s Sharma Traders.

Gross Profit = Net Sales – Cost of Goods Sold = ₹2,00,000 – ₹1,27,000 = ₹73,000.
Net Profit = Gross Profit + Discount Received – (Salaries + Rent + Bad Debts + Loss by Fire) + Sale of Furniture = ₹73,000 + ₹2,000 + ₹5,000 – (₹20,000 + ₹10,000 + ₹3,000 + ₹8,000) = ₹39,000.

Question 3: Calculate the Operating Profit of M/s Sharma Traders and explain why the sale of old furniture and loss by fire are excluded while computing operating profit.

Operating Profit = Net Profit + Non-Operating Expenses – Non-Operating Incomes = ₹39,000 + ₹8,000 – ₹5,000 = ₹42,000.
Sale of old furniture is a non-operating income (capital receipt from sale of a fixed asset) that does not arise from the normal operations of the business, so it is excluded.
Loss by fire is an abnormal/non-operating expense that does not relate to the regular business activities; operating profit measures performance of normal operations only (EBIT), hence such items are excluded.

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Chapter sections

Chapter financial-statements-i: Financial Statements - I | Case Study Questions

Passage

Question 1: What is the gross profit earned by Ravi for the year ended March 31, 2017?

Question 2: Calculate the net profit for Ravi's business for the year ended March 31, 2017.

Question 3: Why is the bank interested in Ravi's financial statements, and what specific information does the bank look for when evaluating his business? Explain with reference to the concept of liquidity.

Passage

Question 1: Classify the expenditure on the sewing machine and the repairs as capital or revenue expenditure and give one reason for each.

Question 2: How should the advertising expenditure of ₹40,000 be treated in the books of accounts? What is this type of expenditure called?

Question 3: What would be the impact on profit and the balance sheet if the sewing machine purchase (capital expenditure) was wrongly treated as revenue expenditure? Explain the consequences in detail.

Passage

Question 1: Which assets will appear at the top of the Balance Sheet when prepared in the order of permanence, and which will appear at the top when prepared in the order of liquidity?

Question 2: Identify the current assets and current liabilities from the given information.

Question 3: Explain the concept of grouping and marshalling of assets and liabilities in a Balance Sheet. How does proper grouping help users of financial statements?

Passage

Question 1: Name any two items that will appear on the debit side of the Trading Account and any two items on the debit side of the Profit & Loss Account from the above list.

Question 2: Distinguish between direct expenses and indirect expenses with two examples each.

Question 3: What are closing entries? Explain with journal entries how the purchases account and the sales account are closed at the end of the accounting period.

Passage

Question 1: Calculate the Cost of Goods Sold for M/s Sharma Traders.

Question 2: Calculate the Gross Profit and Net Profit for M/s Sharma Traders.

Question 3: Calculate the Operating Profit of M/s Sharma Traders and explain why the sale of old furniture and loss by fire are excluded while computing operating profit.

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