Question and Answer for Advanced Accounting

Question and Answer for Advanced Accounting

Write short notes on the Advantages and disadvantages of setting of Accounting Standards. Answer 1. The Accounting Standards seek to describe the accounting principles, the valuation techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in companies’ economic performance.

The setting of accounting standards has the following advantages: (I) Standards reduce to a seasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial Statements. (ii) There are certain areas where important information are not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law. (iii) The application of accounting standards would, to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same country.

However, it should be noted in this respect that differences in the institutions, radiations and legal systems from one country’ to another give rise to differences in accounting standards practices in different countries. However, there are some disadvantages of setting of accounting standards: (I) Alternative solutions to certain accounting problems may each have arguments to recommend them. Therefore, the choice between different alternative accounting treatments may become difficult. (ii) There may be a trend towards rigidity and away from flexibility in applying the accounting standards. Iii) Accounting standards cannot override the statute. The tankards are required to be framed within the ambit of prevailing statutes. Q. (a) Briefly indicate the items, which are included in the expression “borrowing cost” as explained in AS 16. (b) Explain the difference between direct and India erect methods of reporting cash flows from operating activities with reference to Accounting Standard 3(AS 3) revised. (c) Write short note on Effect of Uncertainties on Revenue Recognition. Answer 2. (a) Borrowing costs: Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds. 48

Reversionary Test Paper (Revised Syllabus-2008) As per Para 4 of AS 1 6 on Borrowing Costs, borrowing costs may include : (I) Interest and commitment charges on bank borrowings and other short-term and long-term borrowings; (ii) Amortization of discounts or premiums relating to borrowings ; (iii) Amortization of ancillary costs incurred in connection with the arrangement of borrowings; (iv) Finance charges in respect of assets acquired under finance leases or under other similar arrangements; and (v) Exchange differences arising from foreign currency borrowings to the extent that they re regarded as an adjustment to interest costs. B) As per Para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should report cash flows from operating activities using either: (I) The direct method whereby major classes of gross cash receipts and gross cash payments are disclosed; or (ii) The indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items Of income or expense associated With investing or financing cash flows.

The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method.

Gender the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either: (a) from the accounting records of the enterprise; or (b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statement of profit and loss for: (I) changes during the eroded in inventories and operating receivables and payable: (ii) other non- cash items; and (iii) other items for which the cash effects are investing or financing cash flows.

Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of: (I) changes during the period in inventories and operating receivables and payable; (ii) non-cash items such as depreciation, provisions, deferred taxes, and unrealized foreign exchange gains and losses; and (iii) all other items for which the cash effects are investing or financing cash flows.

Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the operating revenues and expenses, excluding non- cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payable. (c) Effect of Uncertainties on Revenue Recognition Para 9 of AS 9 on “Revenue Recognition” deals with the effect of uncertainties on Revenue Recognition.

The Para states: (I) Recognition of revenue requires that revenue is measurable and at the time of sale or the rendering of the service it would to be unreasonable to expect ultimate collection. (ii) Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e. G. , for escalation of price, export incentives, interest etc. Revenue recognition is postponed to the extent Of uncertainty involved.

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