Author name: Prasanna

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 2 Theory Base of Accounting Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Theory Base of Accounting NCERT Solutions for Class 11 Accountancy Chapter 2

Theory Base of Accounting Questions and Answers Class 11 Accountancy Chapter 2

Test Your Understanding – I
Choose the Correct Answer.

Question 1.
During the lifetime of an entity accounting produce financial statements in accordance with which basic accounting concept:
(a) Conservation
(b) Matching
(c) Accounting period
(d) None of the above
Answer:
(c) Accounting period

Question 2.
When information about two difference enterprises have been prepared presented in a similar manner the information exhibits the characteristic of:
(a) Verifiability
(b) Relevance
(c) Reliability
(d) None of the above
Answer:
(d) None of the above

Question 3.
A concept that a business enterprise will not be sold or liquidated in the near future is known as :
(a) Going concern
(b) Economic entity
(c) Monetary unit
(d) None of the above
Answer:
(a) Going concern

Question 4.
The primary qualities that make accounting information useful for decision-making are :
(a) Relevance and freedom from bias
(b) Reliability and comparability
(c) Comparability and consistency
(d) None of the above
Answer:
(b) Reliability and comparability.

Test Your Understanding – II
Fill in the correct word :
1. Recognition of expenses in the same period as associated revenues is called ……….. concept.
2. The accounting concept that refers to the tendency of accountants to resolve uncertainty and doubt in favour of understating assets and revenues and overstating liabilities and expenses is known as ………………
3. Revenue is generally recognised at the point of sale denotes the concept of ………………
4. The ……………… concept requires that the same accounting method should be used from one accounting period to the next.
5. The ………………. concept requires that accounting transaction
Answer:
1. Matching
2. Conservatism
3. Revenue Realisation
4. Consistency
5. Objectivity.

Short Answer Type Questions

Question 1.
Why is it necessary for accountants to assume that business entity will remains a going concern.
Answer:
The Going Concern Concept – The Going Concern Concept holds that a business shall continue for an indefinites period and there is no intention to close the business or reduce its size significantly. It is because of this concept that distinction is made between expenditure that will render benefit for a long period and that whose benefit will be exhausted quickly, say, within the year. Of course, if it is certain that the business will exist only for a limited time, the accounting recordwill keep the expected life in view.

On the basis of this assumption; fixed assets are recorded at their original cost and are depreciated in a systematic manner without reference to their market value. An example would be purchase of machinery which would last, say, for the next 10 years. The cost of machinery would be spread on a suitable basis over the next year for ascertaining the profit or los? of each year.

The full cost of the machine would not be treated as an expense in the year itself. In brief, an enterprise is said to be a going concern when there is neither the intention nor the necessity to wind up its affairs or curtail substantially the scale of its operation. In other words, it would continue to operate at its present scale in the foreseeable future.

Question 2.
When should revenue be recognised. Are there exceptions to the general rule.
Answer:
Meaning of Revenue- Revenue is the gross inflow of cash, receivables or other considerations arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by other of enterprise resources yielding interest, royalties and dividends.

Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration.

Meaning of revenue recognition – Revenue recognition means identifying the revenues for a particular accounting period. Revenue recognition is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainty may influence the timing of revenue recognition.

Specific Requirements of AS-9 issued by ICAI – The specific requirements of AS-9 issued by the Institute of Chartered

Accountants of India are as follows :
1. Regarding recognition of revenue from sales – Revenue from sale should be recognised when the following requirements as to performance are satisfied provided that at the time of performance it is not unreasonable to expect ultimate collection.

In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled :

• The seller of goods has transferred to the buyer the property in the goods for a price or all significant risks and rewards of ownership have been transferred to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership; and
• No significant uncertainty exists regarding the amount of the consideration that will be derived from the sale of the goods.

2. Regarding recognition of revenue from service transaction –
Revenue from service transactions should be recognised when the following requirements are satisfied provided that at the time of performance, it is not unreasonable to expect ultimate collection that at the time of performance, it is not unreasonable to expect ultimate collection.

In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates to the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.

Completed service contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed.

Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract.

3. Regarding postponement of revenue recognition – If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.

4. Regarding recognition of revenue arising from the use by other of enterprise resources – Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:

• Interest – On a time proportion basis taking into account the amount outstanding and the rate applicable.
• Royalties – On an accrual basis in accordance with the terms of the relevant agreement.
• Dividends from Investments in shares – When the owner’s right to receive payment is established.

Regarding disclosure – In addition to the disclosures required by Accounting Standard-1 on Disclosure of Accounting Policies (AS-1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.

Question 3.
What is the basis of accounting equation?
Answer:
Meaning of Accounting Equation – Accounting equation is based on dual aspect concept. In the dual aspect concept, every business transaction has a two-sided effect that is on the assets and also claims on assets.
The total claims (those of creditors & proprietor’s capital) will equal the total assets of the firm.
The claims known as equities:3
(a) Owner’s capital or equity, and
(b) Liabilities or amounts due to oysteries.

Question 4.
The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to determine when to include a transaction in the sales figure for the period. When the goods have been :
(a) Dispatched
(b) Invoiced
(c) Delivered
(d) Paid for
Answer:
The Revenue or Realisation Principle – The Revenue of Realisation Principle holds that revenue is considered to have been realised when either in cash or the form of legal obligation to receive the amount has been established. It is to be noted that recognizing revenue and receipt of amount are two separate aspects. Let us understand it with the help of an example. An enterprise sells goods in February 2009 and receives the amount for it in April 2009.

Revenue of this sale shall be recognised in February 2-009, i.e., when the goods are sold. It is so because a legal obligation has been established (upon sale) in February 2009. Taking another example, if an enterprise has received advance in March 2009 for the sale to be made in May 2009, revenue shall be recognised in May 2009, upon sale having been made. (Option B) Invoiced of the goods sent on credit to customer are to be included in the sales figure.

Question 5.
Complete the following work sheet:
(i) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that all possible losses
(ii) The fact that a business is separate and distinguishable
(iv) The concept states that if straight line method of
depreciation is used in one year, then it should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be
increased. Normal accounting procedure is to ignore this because of the
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the
(vii) The management of a firm is remarkably incompetent, but the firms accountants cannot take this into account while preparing book of accounts because of concept.
Answer:
(i) Conservation (Prudence)
(ii) Business Entity or Separate Entity
(iii) Dual Aspect
(iv) Consistency
(v) Conservatism
(vi) Realisation
(vii) Money Measurement.

Long Answer Type Questions

Question 1.
The accounting concepts and accounting standards are generally referred to as the essence of financial accounting. Comment.
Answer:
The accounting concepts or assumptions are basic assumptions or fundamental prepositions concerning the economic, political and sociological environment within which accounting must operate.

They are generally accepted set of accounting rules important to follow the generally accepted accounting rules because it will enable the user to understand the financial position of the enterprise better, which otherwise would be impossible. Accounting concepts have been defined as follows :

• The Going Concern Concept
• The Accrual Concept
• The Business or Accounting Entity Concept,
• The Money Measurement Concept, and
• The Accounting Period Concept.

Going Concern Assumption – It is also know as continuity assumption. According to this assumption, the enterprise is normally viewed as a going concern, that is, continuing in N operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation
or of curtailing materially the scale of its operations.

It is because of the going concern assumptions :

• That the assets are classified as current assets and fixed assets.
• The liabilities are classified as short-term liabilities and long term liabilities.
• The unused resources are shown as unutilized costs (or unexpired costs) as against the break-up values as in case of liquidating enterprise. Accordingly, the earning power and not the break-up value evaluates the continuing enterprise.

The Accrual Concept – The Accrual Concept holds that a transaction is recorded at the time when it has taken place and not when the settlement in cash takes place. The concept is particularly important because it recognises the assets, liabilities, incomes and expenses as and when the transactions relating to it are entered into. Under this concept, profit is regarded as earned at the time the goods or services are sold to the customer, i.e., legal title is passed to the customer who, in turn, has an obligation to pay for them.

Similarly, expense is regarded as spent when the goods or services are purchased and an obligation to pay for them has been assumed. For example, Puneet has worked for the month and thus, salary becomes due to him at the month end, which should be recorded in the books of account.

The Business or Accounting Entity Concept-The Business or Accounting entity Concept holds that business is separate from its owners. Transactions, therefore are recorded from the view point of business. The owners being considered separate from business, they are treated as creditors to the extent of their capital. Their account with the business entity is credited or debited when capital is introduced by them or drawings is made.

The Business or Accounting Entity Concept is an useful concept and from it has developed what may be called responsibility accounting. It has made possible to ascertain the results of operations of each department or division of an enterprise.

Money Measurement Assumption – According to this assumption. Only those transactions which are capable of being expressed in term of money are included in the accounting records. In other words, the information which cannot be expressed in terms of money is not included in accounting records. For example, if the sales director is not on speaking terms with the production director, the enterprise is bound to suffer.

Since, monetary measurement of this informations is not possible this fact is not recorded in accounting records. By expressing all transaction in terms of money, the different transactions expressed in different units are brought to a common unit of measurement (i.e., Money). Besides ignoring the non-monetary facts or attributes, this assumption also ignores the changes in the purchasing power of the monetary unit.

In other words, this assumption treats all rupees alike, whether it is a rupee of 1950 or 1999. Hence, now a days, it is considered to provide additional data showing the effect of price level changes on the reported income, assets and liabilities of the business.

The Accounting Period Concept – The accounts of an enterprise are maintained following the Going Concern Concept, i.e., assuming that the business shall continue to operate for an indefinite period. Thus, the period up to which the enterprise will continue to operate and thereafter preparing the accounts become meaningless to the users.

Thus, the life of the ‘enterprise is divided into time intervals termed ‘Accounting Period’, which usually is the ope year. The Accounting Period Concept is important as the users of accounting information can make an assessment of the enterprise at regular intervals.

Question 2.
Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Answer:
Consistency Principle – According to this principle, whatever accounting practices (whether logical or not) are selected for a given category of transactions, they should be followed on horizontal basis from one accounting period to another to achieve compatibility, for instance, if the inventory on LIFO basis, should be followed year after year and if a particular asset is depreciated according to WDV method, this method should be followed year after year.

If this principle of consistency is not followed, the intra-firm comparison (i.e., comparison of actual figures of one period with those of another period for the same firm), Inter-firm comparison (i.e., comparison of actual figures of one firm with those of another firm belonging to the same industry) and Pattern comparison-(i.ei, comparison of actual figures of one firm with those of industry to. which the firm belongs) cannot be made.

The consistency should not be confused with mere uniformity or inflexibility and -should not be allowed to become an impediment to the introduction of improved accounting standards. It is not appropriate for an enterprise to leave its accounting policies unchanged when more relevant and reliable alternatives exist.

The user should be informed of the accounting policies employed in the preparation of the financial statements, any change in these policies and the effects of such changes. However, consistency does not prohibit change in accounting policies, such changes which are necessary can be made provided these are fully disclosed while presenting the financial statements and preferable also their effect on the results.

Question 3.
Discuss the concept based on the premise “do not anticipate profits provide for all losses”.
Answer:
The prudence or conservatism concept provide the premise that do not anticipate a profit but provide for all possible losses. The Prudence (Conservation) Principle – The Prudence Principle is many a times described using the phrase “Do not anticipate a profit, and provide for all possible losses”.

The application of this principle ensures that the financial statements present a realistic picture of the state of affairs of the enterprise. In other words, the financial statements do not paint a better picture than what actually is and window dressing of financial statements is avoided.

In effect, the profit should be recognised when it is reasonable sure that it shall be realised and all known liabilities should be accounted for. It is because of this principle that provision is made for doubtful debts, when it is likely that a part of debtors shall not be realised. Similarly, closing stock is values at lower of cost or market value.

It is to be noted that this is an overriding principle over all other principles and whenever there is a clash on application of this principle with any other principle, principle of prudence shall prevail. For example, under the realisation principle, revenue is recognised as soon- as the title of goods is passed to the buyer, i.e., obligation to pay is established. But, it is likely that the amount shall not recovered, partly or fully.

The prudence principle holds that the unrecoverable amount be written off. This principle may be reflecting a generally pessimist attitude adopted by the accountants but is an important way of dealing with uncertain and protecting the interests of creditors against an unwanted distribution of firm’s assets. However, deliberate attempt to underestimate the value of assets should be discouraged as it will lead to hidden profit, called secret reserves.

Question 4.
What is matching concept? Why should a business concern follow this concept?
Answer:
The Matching Principle – The Matching Principle is based on the accrual system.of accounting and related to revenue or realisation principle. In the revenue or realisation principle, revenue is recognised as realised when amount is realised in cash or in the form of legal obligation to receive the amount is established. The matching principle requires that costs be associated with the revenues for the period. The effect of matching principle may. broadly be as follows :
(a) Revenue item, when entered in the Profit and Loss Account all costs, whether paid or not, should be set out on the expense side.

(b) A cost incurred, against which revenue will be earned in the following period should be carried forward to Balance Sheet as an asset to be treated as expense in the period of revenue. Therefore, it becomes necessary to provide for outstanding and prepaid expenses for period costs.

The concept emphasises that expenses incurred in an accounting period should be method with revenue during that period. Revenue is recognised when a sale is completed or service is rendered rather when cash is received. Similarly an expense is recognised not only when cash is paid out but when an asset or service has been used to generate revenue.

Matching concept implies that all revenues earned during an accounting year, whether received during that year, or not and all costs Incurred, whether paid during the year, or not should be taken into account while ascertaining profit or loss for that year.

Question 5.
What is the money measurement concept? Which one factor can make it difficult to compare the monetary value of one year with the monetary value of another year?
Answer:
The Money Measurement Concept – The Money Measurement Concept holds that transactions and events that can be expressed in monetary terms are recorded. In other words, accounting has money as the common denomination in recording and reporting all transactions.

The transactions and events howsoever important they may be, that cannot be measured iii monetary terms such as quality or loyalty of employees of the enterprise, increased competition due to new products or new enterprises are not recorded in accounting. Thus, accounting cannot give a complete state of affairs of the enterprise.

The another important aspect of the concept of money measurement is that the records of the transactions are to be kept not in the physical units but in the monetary unit for example an organisation may, on a particular day, have a factory on a price of land measuring 4 acres, office building containing 15 rooms, 35 personal computers, 50 office chairs and tables a bank balance of Rs. 10 Lakh, raw material of 30 tonnes and 120 containers of finished stock cannot be added to give any meaningful information about the local worth of the business unless and until expressed in monetary value, i.e., rupees.

Money measurement concept is not free from limitations. Because of changes in prices the value of money does not remain the same over a period of time.

The value of rupee today on account of rise in prices is much less than what was, say ten years back. As change in the value of money is not reflected in the books of accounts, the accounting data does not reflect the true and fair view of the affairs of an organisation.

Detailed, Step-by-Step NCERT Solutions for 11 Accountancy Chapter 1 Introduction to Accounting Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Introduction to Accounting NCERT Solutions for Class 11 Accountancy Chapter 1

Introduction to Accounting Questions and Answers Class 11 Accountancy Chapter 1

Test Your Understanding – I

Complete the following sentences with appropriate words :
(a) Information in financial reports is based on ……………. transactions.
(b) Internal users are the …………….of the business entity.
(c) A would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the …………. in issuing financial reports to users.
(e) …………….users are groups outside the business entity, who uses the information to make decisions about the business entity.
(f) Information is said to be relevant if it is …………
(g) The process of accounting starts with and ends with …………
(h) Accounting measures the business transactions in terms of ………….. units.
(i) Identified and measured economic events should be recording in ……………. order.
Answer:
(a) economic
(b) management/employees
(c) creditor
(d) time-gap
(e) external
(f) free from bias
(g) identifying the transactions, communicating information
(h) monetary
(i) chronological

Test Your Understanding – II

You are a senior accountant of Ramona Enterprises Limited. What three steps would you take to make your company’s financial statements understandable and decision useful?
1. ……………
2. ……………
3. ……………
[Hint : Refer to qualitative characteristics of accounting information] .
Answer:
1. Reliability i.e. verifiability, faithfulness, neutrality
2. Relevance i.e. timeliness
3. Understandability and comparability.

Test Your Understanding – III

Which stakeholder group ……. Would be most interested in
…………….. (a) the VAT and other tax liabilities of the firm .
…………….. (b) the potential for pay awards and bonus deals
…………….. (c) the ethical or environmental activities of the firm
…………….. (d) whether the firm has a long-term future
…………….. (e) profitability and share performance
…………….. (f) the ability of the firm to carry on providing a service or producing a product.
Answer:
(a) Government and tax-authorities
(b) Management
(c) Social responsibility groups or NGO
(d) Lenders
(e) Suppliers and creditors
(d) Customers

Test Your Understanding – IV
Tick the Correct Answer

Question 1.
Which of the following is not a business transaction?
(a) Bought furniture of Rs. 10,000 for business
(b) Paid for salaries of employees Rs. 5,000
(c) Paid sons fees from her personal bank account Rs. 20,000
(d) Paid sons fees from the business Rs. 2,000
Answer:
(c) Paid sons fees from her personal bank account Rs. 20,000

Question 2.
Deepti wants to buy a building for her business today. Which of the following is the relevant data for his decision?
(a) Similar business acquired the required building in 2000 for Rs. 10,00,000
(b) Building cost details of 2003
(c) Building cost details of 1998
(d) Similar building cost in August, 2005 Rs. 25,00,000
Answer:
(a) Similar business acquired the required building in 2000 for Rs. 10,00,000

Question 3.
Which is the last step of accounting as a process of information?
(a) Recording of data in the books of accounts
(b) Preparation of summaries in the form of financial statements
(c) Communication of information
(d) Analysis and interpretation of information
Answer:
(c) Communication of information

Question 4.
Which qualitative characteristics of accounting information is reflected when accounting information is clearly presented?
(a) Understandability
(b) Relevance
(c) Comparability
(d) Reliability
Answer:
(a) Understandability

Question 5.
Use of common unit of measurement and common format of reporting promotes;
(a) Comparability
(b) Understandability
(c) Relevance
(d) Reliability
Answer:
(a) Comparability

Test Your Understanding – V

Mr. Sunrise started a business for buying and selling of stationery “ with Rs. 5,00,000 as an initial investment. Of which he paid Rs. 1,00,000 for furniture. Rs. 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid Rs. 5,000 as their salaries. Out of the stationery bought he sold some stationery for Rs. 1,50,000 for cash and some other stationery for Rs. 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery’ items of Rs. 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost Rs. 30,000 worth of stationery. A part of the’machinery, which cost Rs. 40,000 was sold for Rs. 45,000.

From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business.
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.
Answer:
1. RS. 5,00,000
2. Rs. 1,00,000
3. Rs. 2,00,000
4. Mr. Peace, Rs. 1,50,000
5. Rs. 5,000 (salaries)
6. Rs. 5,000
7. Rs. 30,000
8. Mr. Ravi, Rs. 1,00,000
9. Rs. 35,000
10. Assets – Debtors
Liabilities – Creditors
drawings by the owner Revenue – sales
Expenses – salary to manager, discount to debtors.

Short Answer Type Questions

Question 1.
Define accounting?
Answer:
Accounting – Defined
“Accounting is the art of recording classifying and summarising in a significant manner and in terms of money: transactions and events which are, in part at least, of financial character, and interpreting the results there of ”
– Committee on terminology of the American Institute of Certified Public Accountants

“Accounting is the science of recording and classifying business 1 transactions and events, primarily of a financial character, and the art of making significant summaries, analysis and interpretations of those transactions and events and communicating the results to persons who  must make decisions or form judgement ”. – Smith and Ashbourne

Accounting is a larger concept than book-keeping. Besides the function of book-keeping, accounting involves summarizing, analyzing, interpreting the financial statements and communicating the results to the users of these statements. Accounting is the language of business; it means that an enterprise communicates with the outside world, including the proprietors, through accounting statements. One cannot understand the affairs of an enterprise unless the enterprise prepares financial statements intelligibly.

Question 2.
State what is the end product of financial accounting?
Answer:
The basic purposes of financial accounting are the following :

• Calculating the result of business operations.
• Ascertaining the financial position.
• Communicating the information to the users.

To calculate the results of operations : To measure the financial performance of an enterprise, the results of operations are ascertained by preparing an Income Statement (also called Profit and Loss Account) which shows the matching of current costs with current revenues during a particular accounting period. A systematic record of incomes and expenses facilitates the preparation of the Income statement.

To ascertain the financial position : To evaluate the financial strength and weakness of an enterprise, the financial position is ascertained by preparing a Position Statement (also called Balance Sheet) which shows resources (assets) owned by an enterprise and the sources of financing those resources.

A businessmen wants to know what the business owes to other and what it owns, and what happened to his capital whether the capital has increased, decreased or remained constant. A systematic record of various assets and liabilities facilitates the preparation of a Position statement (also known as Balance Sheet) which answers all these questions.

To communicate the information to the users : Accounting communicates information to internal users and external users. The internal users include all the organisational participants at all levels of management (i.e., top, middle and lower).

Top level management requires information for planning, middle level management requires information for controlling the operations. For internal use, the information is usually provided in the form of reports, for instance Cash Budget Reports, Production Reports, Idle Time Reports, Feedback Reports, Whether to Retain or Replace an Equipment Decision Reports, Project Appraisal Reports, and the like.

Since the external users (e.g., Banks, Creditors) do not have direct access to all the records of an enterprise, they have to rely on financial statements as the source of information. External users are basically interested in the solvency and profitability of an enterprise.

Question 3.
Enumerate main objectives of accounting?
Answer:
The following objectives of accounting may be preceded in brief:
1. Maintenance of Business Records : Accounting is the language in which most of the business transactions (financial) and events are expressed. It is an objective to keep a systematic record of these financial transactions. It embraces proper recording to – transactions, classified under appropriate accounts and summarised 1 into financial statements Income Statement and the Position Statement.

2. Calculation of Profit or Loss : Another objective of accounting is to ascertain the net result of the day-to-day transactions for a period. In other words, to ascertain whether during the period the firm earned a profit or suffered a loss. For this purpose, a statement called the Incomes Statement or the Profit and Loss Account is prepared.

In this account, the revenues resulting from the transactions of the period and the consequent expenses incurred are recorded. A comparison of the period and the consequent expenses incurred are recorded.

A comparison of the two shows whether the business earned a profit or incurred a loss. In addition, information is available about sales; opening and closing stocks of goods and the significant factors leading to the profit or the loss of the business.

Such a profit or loss statement is useful for all parties having stake in business like the management, lenders, investors, the proprietor or the partners or the shareholders, tax authorities and workers, etc. It is so because from its study, the management, can know whether the policies adopted by it were fruitful or not and can decide upon and possible, a change in the selling price or the advertising policy, etc.

Lenders can know from its study whether the firm is likely to earn profits in future also. Investors may also decide on its basis whether or not they should keep their money invested in the firm. Shareholders can make an estimate of the efficiency, success, etc., of the management and may decide accordingly whether to invest or not in the business.

3. Depiction of Financial Position : For a businessman, it is not sufficient only to ascertain the profit & loss; it is also necessary to know the financial health of the firm. For this purpose, a statement listing assets, liabilities and the owner’s capital is prepared. Such a statement is called the Balance Sheet. An illustration of a Balance Sheet is as follows :

Just as a doctor will feel the pulse of a person and know whether he is enjoying good health or not, in the same manner by looking at the Balance Sheet one can know whether the firm is solvent or not. If the assets exceed liabilities, it is solvent. In the other case, it would be insolvent.

4. Provide information to various users : Making the information available to various groups and managers. This function of accounting is to communicate the financial facts about an enterprise to various interested parties like owners, investors, creditors, employees, government-offices, research scholar’s etc. The purpose of it is to enable these parties to take sound and realistic decision.

Question 4.
List any five users who have indirect interest in 7 accounting.
Answer:
Following are the interested parties or users of accounting informations other than the owners of a business :
1. Lenders: Lenders, i.e., the banks and financial institutions provide funds to the business. These funds may be provided at the time of setting-up the business or at a latter stage for the expansion and development. In practice, they lend money only after satisfying themselves about the repaying capacity, i.e., solvency of the ? business concern. Again, they know about this from the financial statements.

2. Managers : Managers have to take many decisions such as the determination of selling price, how can the cost be reduced, how 5 can the selling expenses and other expenses be controlled, etc. These decisions can be taken on the basis of the information available. This information is made available to them by the financial statements.

3. Government: The Government makes use of financial statements for compiling national accounts besides ascertaining the tax liability of the business, timely deposit of statutory and other dues.

4. Employees or Workers : Employees/workers may use the financial statements to know whether their dues like provident fund are being deposited regularly and also whether the bonus is being paid as per law.

5. Researchers : Last but not the least, the financial statements are of immense use to the researchers also undertaking researches in the typical areas like accounting theory, business affairs and practices.

Question 5.
State the nature of accounting information required by long-term lenders?
Answer:
In modem times, banks and financial institutions lend money f to the business; Before providing a loan to a business, they want to judge the repaying capacity of the business. Such information is provided by the accounting alone. Informations regarding the solvency of the financial business are made available only through statements. Financial statements help in assessing the financial capability of the business enterprise and also the expand to which the granting of credit will be safe.

Question 6.
Who are the external users of information regarding accounting?
Answer:
Users of Accounting Information and their Need : The users of accounting information include present and potential investors, management, employees, lenders, suppliers and other trade creditors, customers, government and their agencies and the public. These users use accounting information in order to satisfy some of their varied needs for information.

Question 7.
Enumerate informational needs of management.
Answer:
Management is interested to review the firm’s short-term solvency and long-term solvency, effective utilization of resources and profitability in relation to investments and turnover arid to decide upon the future course of action on the above decisions.

In addition to-the information about the profitability and financial soundness of business, management needs a lot of other informations for the efficient running of the business such as increase or decrease in sales, speed of increase in costs of production etc. All such informations are provided by the accounting which helps the management in planning, decision-making and controlling the business.

Question 8.
Give any three examples of revenues.
Answer:
Revenues are the amounts of the business earned by selling its products or providing services to customers, called sales revenue. Other items of revenue common to many businesses are:

• Commission
• Interest
• Dividends
• Royalties
• Rent received etc.
• Revenue is also called income.

Revenue in accounting is the income of a recurring (regular) nature from any source. It includes the amount received from sale of goods, rent receipt, commission, dividend and interest received. Any capital nature receipt is not a revenue item.

Question 9.
Distinguish between debtors and creditors.
Answer:
Following are the differences between debtors and creditors:

Question 10.
“Accounting information should be comparable.” Do you agree w’ith this statement. Give two reasons. .
Answer:
Comparability : Use must be able to compare the financial statement of an enterprise through time to identify trends in this financial position and performance. Users must also be able to compare the financial statements of different enterprise in order to evaluate their relative financial position, performance and changes in financial position.

Hence the measurement and display of the financial effect of such like transactions and other events must be carried out in a consistent way throughout an enterprise and over time for that enterprise and in a consistent way for different enterprises.

An important implication of this qualitative characteristic is that users be informed of the accounting policies employed in the preparation of financial statements, any changes in those policies and the effects of such changes so that users would be able to identify difference between the accounting policies for like transactions and other various events used by the same enterprise from period to period and by different enterprises, this qualitative characteristic requires pursuance of consistency in choosing accounting policies.

Lack of consistency may disturb the comparability quality of the financial statement information. Mere disclosure of accounting policies and changes therein may not be sufficient. Accordingly, accounting standard on disclosure of accounting policies consider consistency as a fundamental accounting assumption along with accrual, and going concern.

The basic reasons of comparing financial statement of two or more enterprises are the followings:

• Evaluating the financial position of different enterprise.
• Performance and changes in financial position of different firms.
• Accounting policies adopted by different firms.

Question 11.
If the accounting information is not clearly presented, which of the qualitative characteristics of the accounting information is violated?
Answer:
The qualitative characteristics of,both reliability and relevance are required to be followed so that truth and fairness of accounting informations be maintained. These may be explained in brief as follows:
Qualitative characteristics of Accounting information : The fundamental characteristics of the financial statement is truth and fairness. It means, Balance Sheet should give a true and fair view of the state of affairs and whereas the Profit and Loss Account should give the true and correct profit or loss for the period. Besides the above fundamental characteristics there are qualitative characteristics (attributes) that make the information content of the financial statements useful to its users.These are:
(i) Reliability;
(ii) Relevance.
(i) Reliability : An accounting information shall have the quality of reliability if it is free from material errors and also bias. The accounting information even if relevant can be of little use unless it is reliable also. Reliability of the information depends, on :
(a) Neutrality: Neutrality means that the accounting information made available does not suffer from bias. A biased accounting information will be misleading and lead to incorrect analysis and decisions.

(b) Prudence : The accounting information prepared on the principle of prudence (conservatism) means that the accounting information is prepared by providing all prospective losses while leaving all prospective profits. In other words, quality as to reliability increases if the accounting information does not paint a better picture than what actually is.

(c) Completeness : The accounting information given should be complete in all respects as incomplete
information may lead to wrong interpretation.

(d) Substance over form : The accounting information to be meaningful should be governed by the substance of the information and not by its legal form alone.

(ii) Relevance : The accounting information, besides disclosing statutorily required disclosures, should disclose other information, after judging its relevance to the decision making need of its users. For example, interest on borrowings is disclosed without stating the rate of interest. The users, therefore, cannot link interest cost to different types of borrowed funds. In the process, they fail to appreciate rationality of financing decisions. Generally, only the statutorily (legal) required information is disclosed.

The information disclosure requirements are set after a public debate reflecting the views of cross-sections of the users. But what is relevant information in a particular circumstance cannot be generalised and specified. It may be noted that relevance of the information is always guided by the principle of materiality.

Question 12.
The role of accounting has changed over the period of time. Do you agree? Explain.
Answer:
Today’s rapidly changing business environment has forced the accountants to reassess their roles and functions both within the organisation and the society. The role of an accountant has now shifted from that of a mere recorder of transactions to that of the member providing relevant information to the decision-making team. Broadly speaking, accounting today is much more that just book-keeping and the preparation of financial reports.

Accountant are now capable of working in exciting new growth areas such as forensic accounting (solving crimes such as computer hacking and the theft of large amounts of money on the internet), e-commerce (designing web-based payment system), financial planning, environmental account etc.

The realisation comes due to the fact that accounting is capable of providing the kind of information that managers and other interested persons need in order to make better decisions, this aspect of accounting gradually assumed so much importance that it was now been raised to the level of an information system.

As an information system, it collects data and communicates economic information about the organisation to a wide variety of users whose decisions and actions are related to its performance.

Question 13.
Giving examples and explain each of the following accounting terms:
(i) Fixed Assets
(ii) Gains
(iii) Profit
(iv) Revenue
(v) Expenses
(vi) Short-term liability
(vii) Capital
Answer:
Above-mentioned accounting terms may be explained as follows:
(i) Fixed Assets : Fixed assets refer to those assets which are held for the purposes of providing or producing goods or services and those that are not held for resale in the normal course of business. Fixed assets may be classified as follows:

• Tangible fixed assets : refer to those fixed assets which can be seen and touched. For example, Land and Building, Plant & Machinery and Furniture.
• Intangible fixed assets : refer to those fixed assets which cannot be seen and touched. For example, Goodwill, Patent, Trademarks, Copyrights etc.

(ii) Gains : Gains are increases in equity (not assets) from incidental transaction of an entity and from all other transactions and other events and circumstances affecting the entity during the accounting period except those that result from revenues or investment by equity participants. These gains may be operating or non-operating. Example 1 : Profit on sale of marketable securities is usually considered as operating gain.
Example 2 ; Profit on sale of a fixed asset is usually.considered as non-operating gain.

(iii) Profits: The excess of revenue of a period over its related expenses is accounting year profit. It is of two types:

• Net Profit : Net profit means the excess of revenue over expenses.
• Net Loss : Net loss means the excess of expenses and losses over revenue.

(iv) Revenue : The term ‘revenue’ refers to the amount charged for the goods sold or services rendered or permitting others to use enterprise’s resources yielding interest, royalty and dividend. For example, sales, commission earned, interest earned, royalty earned, dividend earned.

(v) Expenses : Expenses are decrease in economic benefits during an accounting period in the form of

• outflow or depletion of assets or
• incurrence of liabilities, that result in decrease in internal equity other relating to contribution from equity participant.

(vi) Liabilities : Liabilities refer to the financial obligations of an
enterprise other than owner’s funds. Liabilities may be broadly classified as follows:

• Current Liabilities/Short term Liabilities: Current liabilities refer to those liabilities which fall due for payment in a relatively short period, (normally, a period of not more than 12 months from the date of the Balance Sheet). For example, Bills payable, Trade Creditors, Outstanding Expenses, Bank. Overdraft and so on.
• Long-term Liabilities : Long-term liabilities refer to those liabilities which do not fall due for payment in a relatively short period. For example, Long-term loans.

(vii) Capital: Capital is the excess of assets over external liabilities. It refers to the amount invested in an enterprise by the proprietor (in case of proprietorship) or partners (in case of a partnership concern). This amount is increased by the amount of profits earned and amount of additional capital introduced and is decreased by the amount of losses incurred and the amount withdrawn (whether in the form of cash.or kind). It represents the owner’s claim on the assets of the enterprise. It is also known as owner’s equity or net assets or net worth.

Question 14.
How will you define revenue, expenses and income?
Answer:
Revenue : Revenue means the amount which, as a result of operations, is added to the capital. ‘Revenue is an inflow of assets which results in an increase in the owner’s equity.’ Examples of revenue are receipts from the sale of goods, rent, income, etc.

Expense : Expense is the amount spent in order to produce and sell the goods and services which produce the revenue. ‘Expenses is the cost of the use of things or services for the purpose of generating revenue.’ Examples are payment of salaries, wages, rent, etc.

Income : Income is the profit earned during a period of time. In other words, the difference between revenue and expense is called income. For example, goods costing Rs. 15,000 are sold for Rs. 21,000 the cost of goods sold, i.e., Rs. 15,000 is expense, the sale of goods, i.e., Rs. 21,000 is revenue and the difference, i.e., Rs. 6,000 is income.
It can, therefore, be expressed as: – Income = Revenue – Expense

Question 15.
What is the primary reason for the business students and other to familiarize themselves with the accounting discipline?
Answer:
In all activities whether business activities or non-business activities used by students of business and other interested groups like schools, colleges, hospitals, libraries, clubs, political parties etc. require accounting knowledge due to monetary transaction involved in these organisations. In other words, wherever money is involved or any economic activity is carried on, accounting is required to account for these economic resources. Accounting serves the basic purpose of information regarding flow of money and funds in the organisation. Following may be the reason for studying the accounting and familiarize with accounting discipline:

• Facilitates to replace memory.
• Facilitate to ascertain net result of operations.
• Facilitates the users to take decisions.
• Helpful in comparative study.
• Control over assets.
• Acts as legal evidence.

Long Answer Type Questions 

Question 1.
Explain the factors which necessitated systematic accounting.
Answer:
Accounting is a systematic process of identifying the transactions of financial nature measuring them in money terms, recording in primary books, classifying, summarizing, analysis and interpreting and finally communicating the results to parties interested in them.

Following are the factors or attributes for systematic accounting records :
1. It records transactions of financial character : Accounting records only those events and transactions which are of financial character. If a transaction has no financial character then it cannot be measured in terms of money and thus, shall not be recorded in the books of account. It is a serious limitation of accounting. For example, a quarrel between the Production Manager and the Sales Manager affects the earnings of the business but it is not recorded because it has no financial character, no economic value and no exchange value.

2. It records transactions in terms of money: Accounting records the transactions by expressing them in terms of money. This makes the transaction more meaningful. For example, if a business has 10 machines, 20 tonnes of raw material, 2 buildings, 20 tables and chairs, 20 fans etc. it is not possible to add them together or know which one is more valuable unless they are expressed in terms of money.

3. It is an art: Accounting is that part of knowledge which enables us to achieve our objective of ascertaining the financial results by recording, classifying and summarising the business transactions.

4. It is an art of recording : Accounting is an art of recording ‘business transactions in the books of account in a systematic
manner soon after the occurrence thereof. Recording is carried out in the book called “Journal”.

This book may be further sub¬divided into various subsidiary books such as Cash Book (for recording cash transactions), Purchases Book (for recording credit purchases of goods), Sales Book (for recording credit sales of goods), Purchases Returns Book (for recording credit purchases returns), etc. The number of subsidiary books to be maintained . depends upon the size and nature of business and type of transactions.

5. It is an art of classifying business transactions : Classifying is the process of grouping of transactions or entries of one nature at one place. This is done by opening accounts in a book called ‘Ledger’, it contains all the accounts of the business. To get the correct idea of the net effect of transactions already recorded in a journal or subsidiary book they are further processed and grouped.

Similar transactions relating to a particular account for a given period are brought together. Then finally they are recorded at one place in a Ledger. For example, cash transactions like cash sales, cash purchases, cash expenses are put in one place in the Ledger under Cash Account.

Transactions pertaining to different persons, whether custonters or suppliers, are recorded separately in the name of each person in the Ledger. Likewise, all expenses under various heads after being recorded in the Journal are classified under separate titles in the Ledger.

6. It is the art of summarising the business data : Summarising is
the art of presenting the classified data (Ledger) in a manner which is understandable and useful to management and other interested parties. This involves preparation of final accounts which includes –

• Trading and Profit and Loss Account, and
• Balance Sheet.

Trading account is prepared for calculating gross profit or gross loss. Gross profit or gross loss is the difference’ between the cost of goods sold and sales. Profit and Loss Account is prepared to ascertain whether during the period the firm earned a profit or suffered a loss. Net profit increases owner’s capital and net loss decreases it.

After Trading and Profit and Loss Account, Balance Sheet is prepared to show the financial position of the business. Some people call it position statement also. The techniques of recording, classifying and summarising the transactions have been explained in detail later in the book.

7. It is helpful in the analysis and interpretation of the results:
For purposes of analysis, the accounting record must be in such a way as to be able to portray the significance of all transactions and events individually and collectively. Thus, the analysis of accounting statements will help the management to judge the performance of business operations and for preparing the future plans.The results of analysis and interpretations are communicated to the proprietor and other interested parties such as creditors, investors, employees, etc.

Question 2.
Describe in brief history of accounting.
Answer:
History and development of Accounting – The history of accounting is as old as civilization. Historical evidences reveal that accounting was 4000 B.C. old in Egypt as treasuries where gold and other valuables were kept. The incharge of treasuries had reported their superiors known as wazirs or Minister. Accounting practices in India could be traced back to a period when twenty three centuries ago, Kautilya. a minister in Chandergupt’s Kingdom wrote a book named Arthashashtra.
Lucas Pacioli, an Italian writer first wrote a book on Double entry in 1494.

This book contains knowledge of business and book-keeping. Contents of the book even relied in current accounting world as the popular terms Debit (Dr.) and Credit (Cr.), while preparing accounts of a business enterprise. These concepts were used in Italian terminology. Debit comes from the Italian word Debito or debeo which means owed to the proprietor, credit comes from the Italian word Credito or credo which means trust or belief in the proprietor.

In explaining double entry system Pacioli wrote that “All entries have to be double entries that is if you make one creditor, you must make some debtor.” He also stated that a merchant’s responsibility include to give glory to God in their enterprise, to be ethical in all business activities and to earn a profit. He discussed the details of memorandum, Journal, ledger and specialised accounting practice. Today the accounting information’s plays a vital role in a business enterprise.

Question 3.
Explain the development and role of accounting.
Answer:
A sound theory is the base for development of any discipline. Accounting assumes importance because the financial statements are useful to a number of users such as owners, investors, creditors, lenders, Government etc. Accounting is the language of business, it means that an enterprise communicates with the outside world, including the proprietors through accounting statements. One cannot understand the affairs of an enterprise unless the enterprise prepares financial statements intelligently.

Following are the reasons assisted in the development of accounting as a separate discipline :
1. Assistance to Management : Accounting, in addition to ascertaining the financial results of operations, also performs the significant function of providing information. The information provided enables the management to arrive at a decision and to do it’s work properly. Such information helps in the following:
(a) Planning : Management would like to estimate the sales, output, expenses, etc. For the following year and also the flow of cash. For this purpose, accounting would enable them to collect the necessary information and make the realistic estimates.

(b) Decision-Making : Management is faced at a times, with a number of problems requiring an appropriate decision. For example: What should be the selling price of goods produced? Should a concession be offered to a special customer and, if so, how much? Should a part be made in the factory or purchase from outside? For making such decisions only accounting can provide the relevant information.

(c) Controlling : Management would like to see that –

• the work is performed according to the plan, and
• the cost incurred is reasonable.

Accounting collects information to help management in this regard. For instance, management would be able to know which department is overspending.

2. Replacement of Memory : No businessman can remember everything about his business since memory has limitations. It is necessary to record transactions in the books of account promptly. This will obviate the necessity of remembering the various transactions since on need, the record will furnish the necessary information.

3. Comparative Study : A systematic record will enable a businessman to compare one year’s results with those of other . years and locate significant factors leading to the change, if any.

4. Settlement of Taxation Liability : If accounts are maintained properly, they will be of great assistance when the firm is assessed to income tax or sales tax.

5. Evidence in Court: Systematic record of transactions is often treated by the Courts as good evidence.

6. Sale of Business : If someone desires to sell his business, the accounts maintained by him will enable the ascertainment of the proper purchase price.

7. Assistance to an Insolvent Person : In case one becomes insolvent, one has to explain many things about the past. Proper accounting helps him to do that.

Question 4.
Define Accounting and state its objectives.
Answer:
Accounting : Accounting refers to the actual process of preparing and presenting the accounts, in other words, it is the art of putting the academic knowledge of accountancy into practice. It covers the following activities :
1. Identifying the transactions and events.
2. Measuring the identified transaction and events in a common measuring unit.
3. Recording the identified and measured transactions and events 1 in Journal.
4. Classifying the recorded transactions and events in ledger.
5. Summarising the classified transactions and events in the form
of Income Statement and Position Statement.
6. Analysing the summarised results,
7. Interpreting the analysed results.
8. Communicating the interpreted information of the interested ‘ parties.

Objectives or Functions of Accounting :
The following are the main objectives, functions or utility of accounting:
(1) To keep systematic record of business transaction : The main objective of accounting is to keep complete record of business transactions according to specified rules. Complete record of business transaction helps to avoid the possibility of omission and fraud. For this purpose, all the business transactions are first of all recorded in Journal or Subsidiary Books and then posted into Ledger.

(2) To calculate profit or loss : The second main objective of accounting is to ascertain the net profit earned or loss suffered on account of business transactions during a particular period for this purpose trading and profit and loss account of the business is prepared at the end of each accounting period. All the items relating to purchases, sales, expenses and revenues (incomes) of the business are recorded in trading and profit & loss account. If the amount of revenue exceeds the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. In addition, a businessman is able to get the following informations by preparing a trading and profit & loss account:

• How much goods have been purchased during a particular period.
• How much goods have been sold during a particular period.
• How much goods have remained unsold and what is its value.
• How much amount has been spent on various heads of expenditure and how much amount has been earned by various heads of revenues.By attaining these informations a businessman can keep effective control on expenditure.

(3) To know the exact reasons leading to net profit or net loss.
(4) To ascertain the financial position of the business : For a businessman, merely ascertaining profit or loss of the business is not sufficient. The businessman must also know the financial health of the business. For this purpose, after preparingthe Profit & Loss Account a statement called ‘Balance Sheet’ is prepared which shows the assets and their values on the one hand and the liabilities and capital on the other hand. A Balance Sheet is actually a screen picture of the financial position of the business. At one glance, one would know the following by looking at the Balance Sheet:

• How much the business has to recover from Debtors.
• How much the business has to pay to Creditors.
• How much the business has in the form of –

(a) Cash in hand
(b) Cash at Bank
(c) Closing Stock, and
(d) Fixed Assets.
(5) To ascertain the progress of the business form year to year.
(6) To prevent and detect errors and frauds.
(7) To provide informations to various parties : Another main objective of accounting is to communicate accounting information to various interested parties like owners, investors, creditors, banks, employees and government authorities etc. The information helps them in taking sound and judicious decisions about the business entity.

Question 5.
Describe the informational needs of external and internal users. .
Answer:
Accounting as an Information System : Accounting is often regarded as the language of business. Since the main aim of a language is to serve as a means of communication, accounting communicates the result of business activities to management, owners, investors, creditors, lenders, Government etc.

Accounting as an information system is a process of identifying, measuring, recording, summarising and communicating the information about business to interested users of such information. Different groups of persons have vested interests in a business organisation. Accounting provides useful information to all these interested parties. Following Parties are interested in Accounting Information :

(1) Management : In addition to the information about the profitability and financial soundness of the business, management needs a lot of other informations for the efficient running of the business such as increase or decrease in sales, speed of increase in the cost of production etc. All such informations are provided by the accounting which helps the management in planning, decision making and controlling the business.

(2) Owners : Owners want to know about the profitability and financial soundness of the business. They also want to know whether the profits are increasing or decreasing. What are the reasons for the increase or decrease in profits? What is the value of fixed assets and floating assets of the business? All such information is provided by accounting.

(3) Investors : Investment of money in a business enterprise involves risk. Hence, those who want to invest money in a business enterprise need, information to judge how safe and rewarding the proposed investment will be. The financial statements, i.e., accounting provides them such information. On the basis of such information they decide whether to become a partner in a firm or whether they should buy, hold or sell the shares of a company..

(4) Creditors: Creditors are the persons who supply goods or services on credit. Before granting credit, creditors want to be satisfied about the creditworthiness of the business enterprise. Financial statements help them in assessing the financial capability of the business enterprise and also the extent upto which the granting of credit will be safe.

(5) Lenders : In modern times, banks and financial institutions lend money to the business. Before providing a loan to a business, they want to judge the repaying capacity of the business. Such information is provided by the accounting alone.

(6) Employees : Employees need information about the profits of a business to assess the ability of the business to pay higher wages and bonuses. They may also use the financial statements to ascertain whether various amounts due to them such as provident fund is being deposited regularly.

(7) Government : The Government is interested in the financial statements of a business on account of assessment of income tax, sales tax, excise duty etc. As such, the Government wants that the accounts are maintained in a true and fair manner.

Question 6.
What do you understand by an Assets and what are different types of assets?
Answer:
Assets: Anything which is in the possession or is the property of a business enterprise including the amounts due to it from others, is called an asset. In other words; anything which will enable a business enterprise to get cash or a benefit in future is an asset. Thus, Cash and Bank balances, Stock, Furniture, Machinery, Land and Building, Bills Receivable, Money owing by Debtors etc., are all assets.
Assets arefuture economic benefits, the rights of which are owned or controlled by an organisation or individual. – Finney & Miller
“Assets are valuable resources owned by a business which are acquired at a measurable money cost. ” – Prof. R.N. Anthony

According to the above definitions there are three main characteristics to an asset:

• The resources must be valuable.
• The resources must be owned by the business.
• The resources must be acquired at a measurable money cost. Assets may be classified into the following categories :

(i) Fixed Assets : Fixed assets refer to those assets which are held for continued use in the business for the purpose of producing goods or services and are not meant for resale. Examples of fixed assets are:
Land and Building, Plant and Machinery, Motor Vehicles, Furniture etc.

(ii) Current Assets : Current assets are those assets which are meant for sale or which the management would want to convert into cash within one year. As such, these assets are also named as ‘short-lived or active assets’. For example, ‘Debtors’ are expected to be converted into cash within a reasonable short period, Stock is continuously sold and Bills receivables are also converted into cash.

According to the Institute of Certified Public Accountants, U.S.A “Current assets include cash and other assets or resources commonly identified as those which are reasonable expected to be realised in cash or sold or consumed during the normal operating cycle of the business.” Although ‘Prepaid Expenses’ will never be realised in Cash, these are also included in Current Assets, since service or benefit will be available against these without further payment.

Current assets are also known as floating assets or circulating assets as the amount and nature of such assets keeps changing continuously. For example, a businessman purchases goods for cash and these goods are sold to X. X becomes our debtors and it means that the stock has been converted into Debtors. Again, if a bill receivable from X, it means that the bills are converted into ‘Bills Receivable’ and after some time Bills Receivable will be converted into cash. It shows that all Current assets are finally converted into Cash.

Current assets are usually shown in the balance sheet in the ‘Liquidity Order’. Liquidity is the facility with which the asset may be converted into cash. Those assets which are most difficult to be converted into cash are written lost. Following are the current assets in order of liquidity : Cash in Hand, Cash at Bank, Bills Receivable, Short-term Investments, Debtors, Stock and Prepaid Expenses.

Out of the above assets, Stock and Investments are shown in the balance sheet at Cost or Market price whichever is less. Bills Receivable and Debtors are shown at the estimated realisable . values and the Cash in Hand and Cash at Bank are shown at the actual figure.

(iii) Tangible and Intangible Assets : Tangible assets are those assets which can be seen and touched. In other words, which have a physical existence such as Land, Building, Plant, Furniture, Stock, Cash etc. Intangible assets are those assets which do not have a physical existence and which cannot be seen or felt.

Examples of such assets are Goodwill, Patents, Trade Marks and Prepaid expenses. Intangible assets are also valuable assets. For example, with the help of patent rights businessman is able to produce goods and his goodwill helps in attracting customers easily. Therefore, the intangible assets help the firm in earning profits as much as the tangible assets.

Question 7.
Explain the meaning of gain and profit. Distinguish between these two terms.
Answer:
Profit : The excess of revenue of a period over its related expenses during an accounting year is called profit. Profit increases the investment of the owners. Surplus of revenue over expenses is also known as Profit. For example, the goods costing Rs. 5,00,000 are sold for Rs. 6,50,000. The sale amount of Rs. 6,50,000 is the revenue and Rs. 5,00,000-cost of goods purchased is the expense and the surplus amount of Rs. 1,50,000 is the accounting profit.

Gain : A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a Court case, appreciation in the value of assets is known as Gain. For example if a building costing Rs. 5,00,000 is sold for Rs. 6,00,000, Rs. 1,00,000 will be gain on sale of building.

The only difference between Profit and Gain is the source of revenue earned. The profit is the amount of excess of income over expenditure, w’here as the amount of gain is the result of transactions incidental to business other than operating transactions.

Question 8
Explain the qualitative characteristics of accounting information.
Answer:
Qualitative characteristics of financial statements :
Qualitative characteristics are the attributes that make the information provided in financial statements useful to users.

The four principal qualitative characteristics are:

Let us discuss these qualitative characteristics one by one :
1. Understandability : An essential .quality of the information provided in financial statements is that it is readily understandable by users. For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable ‘ diligence.

However, information about complex matters that should be include in the financial statements because of its relevance to the decision-making needs of user should not be excluded merely on the grounds that it may be too difficult for certain users to understand.

2. Relevance : To be useful, information must be relevant to the decision-making need of users. Information has the quality of relevance when it influences the economic decisions of the users by helping them to evaluate past, present or future events or confirming or correcting their past evaluation.

The productive and confirmatory roles of information are interrelated. For example, information about the current level and structure of asset-holding has value to users when they endeavour to predict the ability of the enterprise to take advantage of opportunities and its ability to react to adverse situations.

The same information plays a confirmatoty role in respect of past prediction about, for example, the way in which the enterprise would be structured or the outcome of planned operations.

Materiality: The relevance of information is affected by its nature and materiality. Information is material if its omission or mis-statement could influence the economic decisions of users made on the basis of financial statements. Materiality depends on the size of the item or error judged in the particular circumstance of its omission or mis-statement. Thus, materiality provides a threshold or a cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.

3. Reliability : To be useful, information must also be reliable. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent.

Faithfully that which it either purpose to represent or could reasonable be expected to represent. Information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading and so it becomes useless.

Reliability of the financial statements is dependent on the following:

(i) Faithful representation : To be reliable, information must represent faithfully the transactions and other events which either purports to represent or could reasonably be expected to repeat. Most financial information is subject to some risk of being less than a faithful representation of that which it purports to portray. This is not due to bias but rather to enhance difficulties either in identifying the transactions or other events to be measured in devising or applying measurements and presentation techniques that can convey messages that correspond with those transaction and events.

(ii) Substance over form : If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely by their legal forms. The substance of transactions or other events is not always consistent with that which is apart from their legal or contrived form.

(iii) Neutrality : To be reliable the information contained in financial statements must be neutral. Financial statements are not neutral if by selective presentation of information, they influence the making of a decision or judgement in order to achieve a predetermined result or outcome.

(iv) Prudence : The preparers of financial statements have to contend with uncertainties that inevitably surround many events and circumstances. Such uncertainties are recognised by the disclosure of their nature and extent and by exercise of prudence in the financial statements. Prudence is the inclusion of a degree of caution.

In the exercise of judgement needed in making the estimate required under conditions of uncertainties so that assets or income are not overstated and liabilities or expenses are not understated. However, the exercise of prudence does not allow the creation of hidden reserves or excessive provisions, the deliberate understatement of assets or income or deliberate over statement of liabilities or expenses.

(v) Completeness : To be reliable the information in the financial • statements must be complete within the bounds of materiality and cost. An omission can cause information to be false or misleading and thus, unreliable and deficient in terms of its relevance.

4. Comparability : Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other’periods, known as intra-firm comparison or with the accounting information that of other enterprises, known as interfirm comparison. It is, therefore, necessary to follow standardised accounting policies consistently to the extent possible.

Accounting measurement and treatment of any transaction depends, to a large extent, on the nature of the enterprise, conditions of the occurrence of transactions and the legal frame work. It is, therefore, difficult to follow one single accounting policy for recording a transaction or an event. To uphold the quality of comparability, it is necessary to disclose the accounting policies followed in relation to all important elements of financial statements. In case the enterprise switch over from one policy to another, the effect of such change should be quantified and disclosed.

In practice, it has also become necessary to achieve an appropriate balance among the qualitative characteristics in order to meet the objective of financial statements. Assessment of the relative importance of the characteristics is a matter of professional judgment.

Question 9.
Describe the role of accountant in the modern world.
Answer:
Role of an accountant in the society: An accountant with his education, training, analytical mind and experience is best qualified . to provide multiple need-based service to the end growing society The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial layout, company legislation and procedures but they can act in the fields relating to financial policies, budgetary policies and even economic principles, the services rendered by accountants to the society include the following:
(a) To maintain the Books of Accounts in a systematic manner
(b) To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, Co-operative Societies Act)
(c) To act as an Internal Auditor
(d) To act as Social Auditor
(e) To act as Taxation Adviser
(f) To act as Management Accountant
(g) To act as Financial Advisor
(h) To provide Management Consultancy Services
(i) To act as Company Law Advisor
(j) To act as Liquidator
(k) To act as Arbitrator
(l) To act as Receiver
(m) To act as Management Information System Consultant.

Detailed, Step-by-Step NCERT Solutions for 12 Accountancy Chapter 11 Cash Flow Statement Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Cash Flow Statement NCERT Solutions for Class 12 Accountancy Chapter 11

Cash Flow Statement Questions and Answers Class 12 Accountancy Chapter 11

Test your Understanding-1 (Page No. 287)

Classify the following activities into operating activities, investing activities, financing activities, cash activities.
1. Purchase of machinery
2. Proceeds from issuance of equity share capital
3. Cash Sales
4. Proceeds from long-term borrowings .
5. Proceeds from sales of old machinery
6. Cash receipt from debtors
7. Trading commission received
8. Purchase of investment
9. Redemption of preference shares
10. Cash purchase
11. Proceeds from sale of Investment
12. Purchase of goodwill
13. Cash paid to supplier
14. Interim dividend paid on equity shares
15. Wages and salaries paid .
16. Proceeds from sale of patents
17. Interest received on debentrues held as investments
18. Interest paid on long-term borrowings
19. Office and administrative expenses paid
20. Manufacturing overhead paid
21. Dividend received on shares held as investment
22. Rent received on property held as investment
23. Selling and distribution expenses paid
24. Income tax paid
25. Dividend paid on preferences shares
26. Underwriting commission paid
27. Rent paid –
28. Brokerage paid on purchase of investment
29. Bank overdraft
30. Cash credit ‘
31. Short-term deposit
32. Marketable securities
33. Refund of income-tax received.
Answer:
(a) Operating Activities—
3. Cash sales
6. Cash .receipts from debtors
7. Trading commission Received
10. Cash purchases
13. Cash paid to supplier
15. Wages and salaries paid
19. Office and administrative expenses
20. Manufacturing overhead paid
23. Selling and distribution expenses paid
24. Income tax paid
27. Rent paid

(b) Investing Activities—
1. Purchase of machinery
5. Proceeds from sale of old machinery
8. Purchases of investment
11. Proceeds from sale of investment
12. Purchase of goodwill
16. Proceeds from sale of patents
17. Interest received on debentures held as investments
21. Dividend received on shares held as investment
22. Rent received on property held as investment
29. Bank overdraft

(c) Financing Activities—
2. Proceeds from issunace of equity share
4. Proceeds from long-term borrowing
9. Redemption of preference shares
14. Interim dividend paid on equity shares
18. Interest paid on long-term borrowings
25. Dividend paid on preferences shares
26. Underwriting commission paid
28. Brokerage paid on purchase of investment

(d) Cash Equivalents—
30. Cash credit
31. Short-term deposit
32. Marketable securities
33. Refund of income-tax received.

Test your Understanding-11 (Page No. 297-298)

Question 1.
Choose one of the two alternatives given below and fill in the blanks in the following statements:
(a) If the net profits earned during the year is Rs. 50,000 and the amount of debtors in the beginning and the end of the year is Rs. 10,000 and Rs. 20,000 respectively, then the cash from operating activities will be equal to Rs (Rs. 40,000/Rs. 60,000)
(b) If the net profits made during the year are Rs. 50,000 and the bills receivables have decreased by Rs. 10,000 during the year then the cash flow from operating activities will be equal to Rs (Rs. 40,000/Rs.60,000)
(c) Expenses paid in advance at the end of the year are the profit made during the year (added to/deducted from).
(d) An increase in accrued income during the particular year is the net profit (added to/deducted from.)
(e) Goodwill written off is the profit made during the year for calculating the cash flow from operating activities (added to/deducted from)
(f) For calculating cash flow from operating activities, provision for doubtful debts is the profit made during
the year (added to/deducted from).
Answer:
(a) Rs. 40,000
(b) Rs. 60,000
(c) deducted from
(d) deducted from
(e) added to
(f) added to

Question 2.
While computing cash from operating activities, indicated whether the following items will be added or subtracted from the net profit—if not to be considered write NG.

Answer:
(a) Increase in the value of creditors will be added to net profit, while computing cash from operating activities.
(b) Increase in the Value of patents will not to be considered (NC) while computing cash from operating activities.
(c) Decrease in prepaid expenses will be added to the net profit while computing cash from operating activities.
(d) Decrease in income received in advance will be subtracted
from the net profit while computing cash from operating activities.
(e) Decrease in value of stock will be added to the net profit while computing cash from operating activities.
(f) Increase in Share Capital will not to be considered (NC) while computing cash from operating activities.
(g) Increase in the value of bills receivables will be subtracted from the net profit while computing cash from operating activities.
(h) Increase in the amount of outstanding expenses will be added to the net profit while computing cash from operating activities.

(i) Conversion of debenture into share will not be considerd (NC) while computing cash from operating activities.
(j) Decrease in the value of bills payables will be subtracted from the net. prof it while computing cash from operating activities.
(k) Increase in the value of debtors will be subtracted from net profit while computing the cash from operating activities.
(l) Decrease in the amount of accrued income will be added to net profit while computing the cash from operating activities.

Do it Yourself (Page No. 296-297)

Question 1.
The Profit and Loss Account of Raj Limited is given here under:


Ascertain Cash from Operations. Show your workings clearly.
Answer:
Cash Flows from Operating Activities

Working Note
1. Net Profit before taxation and extra-ordinary item
= Rs. 15,80,000 + Rs. 8,00,000

2.

Question 2.
From the following information calculate net cash from operations:

Answer:

Do it Yourself (Page No. 300-301)

Question 1.
From the following particulars, calculate cash flows from investing activities:

Interest received on debentures held as investment Rs. 60,000
Dividend received on shares held as investment Rs. 10,000
A plot of land had been purchased for investment purposes and was let out for commercial use and rent received Rs. 30,000.
Answer:
Cash Flow from Investing Activities

Question 2.
From the following information, calculate cash flows from investing and the financing activities

In year 2006, machine costing Rs. 2,00,000 was sold at a profit of Rs. 1,50,000, Depreciation charged on machine during the year 2006 amounted to Rs. 2,50,000.
Answer:

Short Answer Type Questions

Question 1.
What is a Cash Flow Statement?
Answer:
Cash Flow Statements—-Cash Flow Statement is a statement which shows Inflows (receipts) and Outflows (payments) of cash and its equivalents in an enterprise during a specified period of time. Accounting Standard (AS-3) Revised issued by the Institute of Chartered Accountant of India on Cash How Statement in March 1997 has defined Cash Flow Statement as “A statement which shows inflows (receipts) and outflows (payment) of cash and its equivalents in an enterprise during a specified period of time.”

According to the Revised Accounting Standard 3, an enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented.

The terms, Cash, Cash-Equivalents and Cash Flows explained below:

Cash: It comprises cash in hand and demand deposits with bank.

Cash-Equivalents: They are short term highly liquid investments that are readily convertible into cash and which are subject to an insignificant risk of change in value. An investment normally qualifies as cash equivalent only when it has a short maturity, of say three months or less from the date of acquisition. Cash equivalent are held for the purpose of meeting short term cash commitments rather than for investment or other purpose.

Cash-Flows : These are inflows and outflows of cash and cash- equivalents. An inflows increases the total cash and cash-equivalents at the disposal of the enterprise whereas an outflow decrease them.

As per AS-3, cash flows exclude movements between items that contribute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing or financing activities.

Benefits of Cash Flow Statement:
Cash Flow Statement is a useful financial statement and provides the following benefits:
(a) It enables the management to identify the magnitude and directions of changes in cash.

(b) It enables the users to evaluate the changes in economic resources of an enterprise.

(c) It enables the users to evaluate the changes in financial structure.

(d) It enables the users to evaluate the changes in net assets of an enterprises.

(e) It enables the users to evaluate the enterprise’s ability to alter the amounts and timings of cash flows in order to adapt to changing circumstances and opportunities.

(f) It is useful in assessing the ability of the enterprise to generate Cash and Cash Equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises.

(g) As a tool of planning, the projected Cash Flow Statement enables the management to plan its future investment, operating and financial activities such as repayment of long term loans and interest there on, modernisation or expansion of plant, payment of cash dividend etc.

(h) It helps in efficient cash management. The management can know the adequacy or other wise of cash and can plan for the effective use of surplus cash or can make the necessary arrangement in case of an inadequacy of Cash.

(i) It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminate the effects of using different accounting treatments for the same trasactions and events.

Question 2.
How the various activities are classfied (as per AS-3 revised) while preparing cash flow statement?
Answer:
Classification of Cash Flows :
A cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. As per AS-3, these activities can be classified in to three categories which are following :
1. Operating Activities
2. Investing Activities
3. Financing Activities

1. Operating Activities—Operating activities are the principal
revenue producing activities of the enterprise and other activities that are not investing or financing activities. Cash flows from operating activities generally result from the transactions and other events that enter into the determination of net profit or loss. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise to pay dividend, repay loans and make investments without resources to extent source of financing.

2. Investing Activities—As per AS-3 Investing activities are the acquisition and disposal of long-term assets (such as land, building, plant, machinery etc.) and other investment not included in cash equivalent. It is important to make a separate disclosure of cash flows arising from investing activities because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

3. Financing Activities—As per AS-3, Financing activities are activities that result in changes in the size and composition of the owner’s capital (including preference share capital in the case of a company) and borrowings of the enterprise. The separate disclosure of cash flows from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

Question 3.
State the uses of cash flow statement?
Answer:
Along with balance sheet and income statement, the statement of cash flows would assists the users of financial statements in the following way :
1. To analyse the reasons for change in cash balance of the enterprise.
2. To judge the enterprise ability to pay its debts, to pay dividends to its shareholders and to pay interest on loans.
3. To assess the enterprise’s need to borrow cash.
4. To find out the reasons for difference between the enterprise net income, cash payment and cash receipts.
5. To analyse reasons for change in enterprise’s financial position including investing and financial activities during a period of time.

Question 4.
What are the objectives of preparing cash flow statement?
Answer:
Objectives of Cash Flow Statement:
The basic objectives of Cash Flow Statement is to highlight the change in the cash position including the sources from which cash was obtained by the enterprise and specific uses to which cash was applied. The cash flow statement serves a number of objectives which are following:

1. Depict Inflows and Outflows of Cash :
Cash flow statement gives information about cash inflows and cash outflows of an enterprise during a particular period from operating activities, investing activities and financing activities. It is an effective tool of managing cash.

2. Cash flow information helps in Planning :
Cash flow statement provide information for planning for short range cash needs of the enterprise. It helps in formulation of financial policies.

3. Helping in understanding the Liquidity of the Enterprise : Cash Flow Statement helps the enterprise to assess whether it would meet its current obligation or not. It also helps the lending institution like banks etc. to ascertain the liquidity of the enterprise.

4. Help pi preparing Cash Budget:
Cash Flow Statement helps the management of the firm in preparing Cash Budget.

5. Analysis Management of cash :
Cash flow statement reveal good and bad points relating to the management of cash.
According to AS-3 (Revised) the objectives of cash flow statement are as follows : “Information about the cash flow of an enterprise is useful in providing users of financial statement with a basis to assess the ability of the enterprise to generate cash and cash equivalent and the needs of the enterprise to utilise these cash flows.

The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The statement deals with the provision of information about the historical changes in cash and cash equivalent of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

Question 5.
Explain the terms: Cash Equivalents, Cash Flows.
Answer:
(i) Cash Equivalents—They are short term highly liquid investments that are readily convertible into cash and which are subject to an insignificant risk of change in value. An investment normally qualifies as cash equivalents only when it has a short term maturity, of say three months or less from the date of acquisition.

Cash equivalent are held for die purpose of meeting short term cash commitments rather than for investment or other purpose. Examples of cash equivalents are treasury bills, commercial papers etc. which are purchased with cash that is in excess of immediate needs.

(ii) Cash Flows—Cash Hows are inflows and outflows of cash and cash equivalents. An inflow increases the total cash and cash equivalents at the disposal of the enterprise where as an outflow decreases them. As per AS-3, Cash Flow include movements between items that constitute cash or cash equivalents because the components are part of the cash management of an enterprise rather than part of operating, investing or financing activities.

Question 6.
Prepare a format of cash flow from operating activities under direct method and indirect-method.
Answer:
Cash Flows From Operating Activities—Operating activities are the main source of revenue and expenditure in an enterprise. Therefore,the ascertainment of Cash Flows From Operating Activities is of prime importance.

As per AS-3, an enterprise should report Cash Flow From Operating Activities using either by
Direct Method
OR
Indirect Method
In direct method, major classes of gross cash receipts and gross cash payments are disclosed.
OR
In indirect method, net profit or loss is adjusted for the effects of
(i) transaction of a non-cash nature.
(ii) any deferrals or accruals of past/future operating Cash receipts.
(iii) Items of income or expenses associated with investing or financing cash flows.

Direct Method
As we know that items are recorded on accrual basis in Profit and Loss Account therefore certain adjustments are made to convert them into cash basis. These adjustments are discussed below :
1. Cash Inflow from Sales—Total Sales include Cash Sale and Credit Sale both. Cash sales is a cash inflow, but in case of credit sales, cash receipts from Debtors is calculated as follows—
Cash receipts from Customers
= Credit Sales + Opening Debtors and Bills Receivable – Closing Debtors and Bills Receivable – Bad Debts – Discount Allowed – Sales Returns.

2. Cash Ouflow from Purchases—Total Purchases include both cash purchases and credit purchases. Cash purchases are cash outflow, but in case of credit purchases, cash paid to the suppliers is calculated as follows—
Cash paid to Suppliers = Credit purchases + Opening
Creditors and Bills Payable – Closing Creditors and Bills Payable – Discount received – Purchases Returns.
Purchases = Cost of Goods sold – Opening Stock + Closing Stock

3. Cash Outflow on Expenses Incurred—The figures of expenses given in the Profit and Loss Account have to be adjusted to find out cash outflow. The amount outstanding and the amount paid in-advance have to be adjusted for this purpose.

Cash paid for Expenses = Expenses as given in Profit & Loss A/c – Prepaid Expenses in begining and Outstanding Exp. at the end + Prepaid Expenses at the end and Outstanding Expenses in the begining.

However, following items are not to be considered—
1. All non-cash items are ignored as no cash is involved in them. Examples are—
(a) Depreciation
(b) Discount on Issue of Shares written off
(c) Goodwill written off
(d) Preliminary Expenses written off
(e) Discount on Issue of Debenture written off
(f) Patents and Copyright written off
(g) Underwriting commission written off.

2. Appropriations of tiansfer to different reserves and provision like to General Reserve, Provision for Taxation and Proposed Dividend should be ignored.

3. Items which are classified as investing or financing activities like profit or loss on sale of fixed assets, interest received, dividend paid etc are also ignored.

Indirect Method
In this method, net profit or loss is adjusted for the effects of transactions of a non-cash nature flow. In other words, Net profit or loss is adjusted for items which affected net profit but did not affect cash.

As per AS-3, (Revised), under indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:

1. Non-cash items are to be added back. Non-cash items like
(a) Depreciation
(b) Goodwill written off
(c) Patents and Copyrights written off
(d) Appropriation to General Reserve
(e) Interim dividend
(f) Deferred taxes etc.

2. All other items for which the cash effects are investing or financing cash flows. The treatment of such items depend upon their nature. All investing and financing incomes are to be deducted, from the amount of net profits while all such expenses are to be added back.

3. Changes in current assets and liabilities during the period. Increase in current assets and decrease in current liabilities are to be deducted while increase in current liabilities and decrease in current assets are to be added up.

Question 7.
Now that you know the meaning of operating activities, state clearly what would constitute the operating activities for the following types of enterprises :
(1) Hotel
(ii) Film production house
(iii) Financial enterprise
(iv) Media enterprise
(v) Steel manufacture unit
(iv) Software business unit
Answer:
(i) Hotel (1) Payment of salary and wages to staff.
(2) Payment for the electricity, water, vegetables and other items for the Hotel.
(3) Payment for the items purchase for the Hotel accomodation.
(4) Receipts from the customer for staying in Hotel.
(5) Receipts from the other companies for taking Hotel for rent.

(ii) Film production house—Payment for the set, staff, actors and actress, director, music directors etc. Receipt from the distibutors for selling rights of the film.

(iii) Financial Enterprises—Payment for the loan, buying shares and payment for dividend and interest.
Receipt for the repayment of loan, interest, dividend etc.

(iv) Media Enterprise—Payment to the staff, reporters, photographers etc.
Receipts from the companies who advertise their products through media.

(v) Steel manufacturing unit—Payment for the raw material (iron), salary and Wages for staff, coal and other materials. Receipts from the market by selling steel.

(vi) Software business unit—Payment of salary to their staff. Receipts from the customer for selling their softwares and maintaining their computers.

Question 8.
“The nature/type of enterprise can change altogether the category into which a particular activity may be classified.” Do you agree? Illustrate your answer.
Answer:
Yes, it is true that the nature/type of enterprise can change altogether the category into which a particular activity may be classified. For example, in case of a financial enterprise (whose main business is lending and borrowing), interest paid, interest-received and dividend received are classified as operating activities while dividend paid is the financing activity but in case of a non-financial enterprise, as per AS-3, it is considered more appropriate that payment of interest and dividend paid are classified as financing activities whereas receipt of interest and dividends are classified as investing activities.

Long Answer Type Questions

Question 1.
Describe the procedure to prepare Cash Flow Statement.
Answer:
Procedure of preparation of Cash Flow Statement—The Institute of Chartered Accountants of India has issued Accounting Standard (AS-3) Revised, for preparing a Cash Flow Statement. This Accounting Standard has been made mandatory in repect of accounting periods commencing on or after 1st April, 2001, for certain enterprises. These enterprises are:

(i) Enterprises whose equity or debt securities are listed on a recognised stock exchange in India, and enterprises that are in process of isuing equity or debt securities that will be listed on a recognised Stock Exchange in India.

(ii) All other commercial, industrial and business enterprises, whose turnover for the accounting period exceeds Rs. 50 Crores. As such, the cash flow statement has been prepared according to AS-3 Revised. According to AS-3 Revised, the cash flow statement summarizes the cash inflows and cash outflows and the net changes (increase or decrease) in cash and cash equivalents resulting from operating, investing and financial activities of a firm duririg a period.

The following terms are used for preparing a cash flow statement:
Cash: It comprises cash in hand and demand deposits with banks.

Cash Equivalents—These are short-term, highly liquid investments that are readily convertible into known amounts of cash and which present insignificant risk of changes in their values. Normally, an investment will be termed as cash equivalent only if it has a short maturity period, say three month or less, from the date of its acquisition.

Examples of cash equivalents are treasury bills, commercial papers etc. which are purchased with cash that is in excess of immediate needs. Investment in shares are excluded from cash equivalents unless they are cash equivalents in reality.

For example the preference shares of a company which are purchased shortly before their redemption date will be included in cash equivalents provided there is only an insignificant risk of failure of the company in repaying the amount at the date of maturity.

Classification of Cash Flow—According to AS-3 (Revised), a cash flow statement should be presented in a manner that it reports inflows and outflows of cash by classifying them into three categories, namely : operating, investing and financing activities.

Classification of all activities into these three categories helps the users of cash flow statement to assess the effect of these activities on the cash and cash equivalents of the enterprise. Such information will be helpful in evaluating the relationship among these three activities. These three activities are explained as below :

(i) Cash Flow from Operating Activities—Operating activities are the main revenue generating activities of an enterprises. As such they include cash flows from those transactions and events which enter into the ascertainment of net profit or loss of the enterprise. Examples of cash flows arising from operating activities are :
(a) Cash receipts from the sale of goods and rendering of services
(b) Cash receipts from royalities, fees, commissions and other revenue
(c) Cash payment to suppliers for goods and services
(d) Cash payment to and on behalf of employees
(e) Cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits
(f) Cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
(g) Cash receipts and payments relating to future contracts, forward contracts, option contracts and swap contracts when the contracts are held for dealing or trading purposes.

(ii) Cash Flow from Investing Activities—Investing activities include the purchase and sale of long-term assets such as land, buildings, plant and machinery etc. not held for resale. These activities also include the purchase and sale of such investments which are not inlcuded in cash equivalents. Cash flow from investing activities discloses the expenditures incurred for resources intended to generate future income and cash flows. Examples of such cash flows arising from investing activities are:

(a) Cash payment to aquire fixed assets (including intangibles) and also payments for capitalised research and development costs and self constructed fixed assets
(b) Cash receipts from sale of fixed assets (including intangibles)
(c) Cash payments to aquire shares, warrants or debt instruments of other enterprises (other than payments for those instruments considered to be cash equivalents);
(d) Cash receipts from sale of shares, warrants or debt instruments of other enterprises (other than receipts for those instruments considered to be cash equivalent);
(e) Cash advances and loans made to third parties (other than advances and loans made by a financial enterprise).
(f) Cash receipts from the repayment of advances and loan made to third parties (other than advances and loans of a financial enterprise);
(g) Cash payments for future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financial activities;
(h) Cash receipts of insurance claim for property involved in accident; and
(i) Cash receipts of interest and dividend.

(iii) Cash Flows from Financing Activities—Financing activities are the activities that result in change in capital’and borrowings of the enterprise. Examples of cash flows arising from financial activities are—
(a) Cash receipts from issuing shares or other similar instruments;
(b) Cash receipts from issuing debentures, loans, notes, bonds and other short term or long term borrowings;
(c) Cash repayments of amounts borrowed, buy-back of equity shares, redemption of preferene shares, debentures, notes, bonds etc., and
(d) Cash payment of interest and dividend.

Question 2.
Describe ‘Direct’ and ‘Indirect’ method of ascertaining cash flows from operating activities.
Answer:
Cash from Operating Activities—The net income is computed on the basis of accrual. To compute cash provided by operating activities we need to convert the operating activities being considered from accrual basis to cash basis. For this purpose, we can follow either ‘Direct Method’ or ‘Indirect Method’. The cash provided will be same, whatever method is used for computation. Accounting Standard 3 allows both methods for reporting cash from operating activities among Indian Companies.

Cash from Operating Activities-Direct Method—Under this method, we need to adjust each item in the income statement from accrued basis to cash basis. Cash receipts and cash payments related to revenues and expenses are determined and listed as cash inflows and outflows from operating activities. The net amount is reported in the last column as cash provided from operations.

Step 1: Determine cash provided by operating activities
(i) Cash receipts from customers : The revenue from sales is reported on accrual basis in the income statement. We add the amount of opening receivables to the net sales and to this we subtract amount or receivable at the end, bad debts written-off during the period and discount allowed to customers.

(ii) Other cash receipts—The amount of other revenue like rent, income, commission earned, etc. are adjusted for any amounts not received or received in advance to determine cash received.

Step 2: Cash used in operating activities :
(i) Cash payment to suppliers—The income statement reports cost of goods sold on accrual basis. To determine the cash paid to suppliers, we need to first ascertain purchases. The closing stock of goods is added to cost of goods sold and opening stock is subtracted there from to compute the purchases during the period.

We need to add the creditors (Account Payables) in the beginning of the period to the amount of purchases and subtract closing creditors (Accounts Payables) therefrom for computing the amount paid to suppliers.

(ii) Cash payment for operating expenses—Operating expenses are reported in the income statement on accrual basis. We need to adjust the operating expenses for outstanding expenses and prepaid expenses to ascertain cash payment for operating expenses.

(iii) Cash payment for income tax—The income statement indicates the provision made for income tax. The comparative balance sheet indicates the amount of tax payable in the beginning and at the end of the period. We can compute the cash payment for income tax as follows:

(iv) Payments for Interest—Though interest expense is subtracted from revenues to compute net income, according to Accounting Standard 3 cash flows arising from interest paid and interest/dividend received in cash of financial enterprise should be reported as cash flow from operating activities. In the case of other enterprises, cash flows from interest paid should be classified as financing activities and cash flows from interest and dividends received should be reported as cash flows from investing activities.

Indirect Method
In this method, net profit or loss is adjusted for the effects of transactions of a non-cash nature flow. In other words, Net profit or loss is adjusted for items which affected net profit but did not affect cash. As per AS-3, (Revised), under indirect method, net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:

1. Non-cash items are to be added back. Non-cash items like
(a) Depreciation
(b) Goodwill written off
(c) Patents and Copyrights written off
(d) Appropriation to General Reserve
(e) Interim dividend
(f) Deferred taxes etc.

2. All other items for which the cash effects are investing or financing cash flows. The treatment of such items depend upon their nature. All investing and financing incomes are to be deducted from the amount of net profits while all such expenses are to be added back.

3. Changes in current assets and liabilities during the period. Increase in current assets and decrease in current liabilities are to be deducted while increase in current liabilities and decrease in current assets are to be added up.

Question 3.
Explain the major Cash Inflow and outflow from investing activities.
Answer:
Cash Flows from Investing Activities—Investing activities mean the acquisition and disposal of long-term assets and other investments not included in cash equivalent. Hence, investing activities include transactions that involve the purchase and sale of long-term assets like land, building, plant and machinery, etc, not held for resale and other investments.

The separate disclosure of cash flows arising from investing activities is significant because the cash flow represent the exent to which expenditures have been made for resources to generate future income and cash flows.

Examples of cash arising from investing activities are :
(a) Cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and development costs and self-constructed fixed assets
(b) Cash receipts from disposal of fixed assets (including intangibles)
(c) Cash payments to acquires shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes)
(d) Cash receipts from disposal of shares, warrants, or debt instruments of other enterprises and interests in joint ventures (other than receipts from those instruments considered to be cash equivalents and those held for dealing or trading purposes)
(e) Cash advances and loans made to third parties (other than advances and loans made by a financial enterprises)
(f) Cash receipts from the repayment of advances and loans made to third parties (other than advances and loans of a financial enterprise)
(g) Cash payments for future contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and
(h) Cash receipts from future contracts, forward contracts, option contracts, and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.

Question 4.
Explain the major Cash Inflows and outflows from financing activities.
Answer:
Cash Flows from Financing Activities—financing activities are activities that cause changes in the size and composition of capital and borrowings of the firm. The examples of cash flows arising from financing activities are
(a) Cash proceeds from issuing shares or similar other instruments;
(b) Cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings;
(c) Cash repayments of amount borrowed, and
(d) Payment of Dividend.

Special Items—AS-3 (Revised) provides for the treatment of certain special items as under :
(a) Foreign Currency Cash Flows—Cash flows arising from transactions in a foreign currency should be recorded in an enterprise’s reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and foreign currency at the date of cash flow. A rate that approximates actual rate may be used if the result is substantially the same as would arise if the rates at the date of cash flows were used. Unrealised gains and losses arising from changes in foreign exchange rate changes on cash and cash equivalent held or due in foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period.

(b) Extraordinary items—Cash flows associated with extraordinary items such as claims from insurance company, compnay’s winning a law suit or lottery, etc. should be classified as arising from operating, investing or financing activities and separately disclosed in cash flow statement.

(c) Interest and Dividends—Cash flow from interest and dividends received and paid should each be disclosed separately. Cash flows arising from interest paid and interest and dividends received in the case of a financial enterprise should be classified as cash flow arising from operating activities. In case of other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends paid should be classified as cash flow from financing activities.

(d) Taxes on Income—Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

(e) Acquisition and disposals of Subsidiaries and other Business Units—Tire aggregate cash flows arising from acquisition and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities.

(f) Non-cash Transactions—Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. The exclusion of non-cash transactions from the cash flow statement is consistent with the objective of a cash flow statement as these do not involve cash flows in the current period. Examples of non¬cash transactions are :
(i) the acquisition of assets by assuming directly related liabilities;
(ii) the acquisition of an enterprise by means of issue of shares; and
(iii) the conversion of debt to equity.

Numerical Questions

Question 1.
Anand Ltd. arrived at a net income of Rs. 5,00,000 for the year ended March 31,2007. Depreciation for the year was Rs. 2,00,000. There was a gain of Rs. 50,000 on assets sold which was credited to profit and loss account. Bills Receivables increased during the year Rs. 40,000 and Bills Payables also increased by Rs. 60,000. Compute the cash flows operating activities by the indirect approach.
Answer:

Question 2.
From the information given below you are required to prepare the cash paid for the inventory :

Answer:

Question 3.
For each of the following transactions, calculate the resulting cash flow and state the nature of cash flow viz., operating, investing and financing.
(a) Acquired machinery for Rs. 2,50,000 paying 20% drawn and executing a bond for the balance payable.
(b) Paid Rs. 2,50,000 to acquire shares in Informa Tech, and received a dividend of Rs. 50,000 after acquisition.
(c) Sold machineary of original cost Rs. 2,00,000 with an accumulated depreciation of Rs. 1,60,000 for Rs. 60,000.
[Ans. Rs. 50,000 investing flow (out flow); Rs. 2,00,000 investing flow (outflow); Rs. 60,000 investing flow (outflow).]
Answer:

Question 4.
The following is the Profit and Loss Account of Yamuna Limited:

Additional Information:
(i) Trade debtors decrease by Rs. 30,000 during the year.
(ii) Prepaid expenses increase by Rs. 5,000 during the year.
(iii) Trade creditors decrease by Rs. 15,000 during the year.
(iv) Outstanding expenses increase by Rs. 3,000 during the year.
(v) Operating expenses included depreciation of Rs. 25,000. Compute net cash provided by operations for the year ended
March 31,2007 by the indirect method.
Answer:

Question 5.
Compute cash from operations from the following figures:
(i) Profit for the year 2005-06 is a sum of Rs. 10,000 after providing for depreciation of Rs. 2,000.
(ii) The current assets of the business for the year ended March 31,2006 and 2007 are as follows:

Answer:

Question 6.
From the following particulars of Bharat Gas Limited, calculate Cash Flows from Investing Activities. Also show the workings clearly preparing the ledger accounts.

Additional Information
1. Patents were written off to the extent of Rs. 40,000 and some Patents were sold at a profit of Rs. 20,000.
2. A Machine costing Rs. 1,40,000 (Depreciation provided thereon Rs. 60,000) was sold for Rs, 50,000. Depreciation charged during the year was Rs. 1,40,000.
3. On March 31, 2007, 10% Investments were purchased for
Rs. 1,80,000 and some Investments were sold at a profit of Rs. 20,000. Interest on Investment was received on March 31, 2007.
4. Amartax Ltd. paid Dividend @ 10% on its shares.
5. A plot of Land had been purchased for investment purposes and let out for commercial use and rent received Rs. 30,000.
Answer:

Question 7.
From the following Balance Sheet of Mohan Ltd. Prepare cash flow Statement:

Additional Information:
Machine Costing Rs. 80,000 on which accumulated depreciation
was Rs. 50,000 was sold for Rs. 20,000.
(Ans. : Cash flow from Operating Activity — Rs. 1,80,000
Cash flow from Investing Activity — Rs.(2,60,000)
Cash flow from Financing Activity — Rs. 20,000)
Answer:

Question 8.
From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash Flow Statement:
Answer:

Additional Information:
Depreciation Charge on Land & Building Rs. 20,000, and Plant Rs. 10,000 during the year.
(Ans.: Cash flow from Operating Activities — Rs. 34,800
Cash flow from Investing Activities — Rs. (50,400)
Cash flow from Financing Activities — Rs. 20,000)
Answer:

Question 9.
Prepare Cash Flow Statement from the following Information:

Additional Information:
Depreciation Charge on Plant amount of — Rs. 80,000.
(Ans.: Cash Inflow from Operating Activities Rs. 3,80,000 Cash Inflow from Investing Activities — Rs. (2,80,000)
Cash Inflow from Financing Activities — Rs. — NIL)
Answer:

Question 10.
From the following Information Prepare Cash flow Statements for Yogeta Ltd.

Additional Information:
Net Profit for the year After Charging Rs. 50,000 as Depreciation was Rs. 1,50,000. Dividend paid on Share was Rs. 50,000, Tax Provision created during the year amounted toRs. 60,000.
[Ans.: Cash from Operating Activities — Rs.-2,20,000
Cash from Investing Activities — Rs. (3,50,000)
Cash from Financing Activities — Rs. (80,000)]
Answer:

Question 11.
Following is the Financial Statement of Garima Ltd. Prepare Cash flow Statements.

Answer:
Cash Outflow (use) from Operating Activities Rs. (12,000)
Cash flow from Investing Activities Rs. (1,90,000)
Cash flow from Financing Activities Rs. (1,56,000).]

Question 12.
Following as the Balance Sheets of Computer India Ltd.:

Additional Information:
Interest paid on Debenture Rs. 600
[Ans.: Net Cash from Operating Activities — Rs. 2,100
Net Cash from Investing Activities — Rs. 1,000
Net Cash from Financing Activities — Rs.4,900]
Answer:

Detailed, Step-by-Step NCERT Solutions for 12 Accountancy Chapter 10 Accounting Ratios Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Accounting Ratios NCERT Solutions for Class 12 Accountancy Chapter 10

Accounting Ratios Questions and Answers Class 12 Accountancy Chapter 10

Test Your Understanding-I (Page No. 241)

State which of the following statements are True or False :

(a) The only purpose of financial reporting is to keep the managers informed about the progress of operations.
(b) Analyses of data provided in the financial statements as is termed as financial analysis.
(c) Long-term creditors are concerned about the ability of a firm to discharge its obligations to pay interest and repay the principal amount of term.
(d) A ratio is always expressed as a quotient of one number divided by another
(e) Ratios help in comparisons of a firm’s results over a number of accounting periods as well as with other business enterprises.
(f) One ratio reflect both quantitative and qualitative aspects.
Answer:
(a) False
(b) True
(c) True
(d) False
(e) True
(f) False.

On Test Your Understanding-II (Page No. 255)

Question 1.
The following groups of ratios primarily measure risk—
(a) liquidity, activity, and profitability
(b) liquidity, activity and common stock
(c) liquidity, activity and debt
(d) activity, debt and profitability
Answer:
(d) activity, debt and profitability

Question 2.
The ratios are primarily measures of return.
(a) liquidity
(b) activity
(c) debt
(d) profitability
Answer:
(b) activity

Question 3.
The of a business firm is measured by its ability to satisfy its short-term obligations as they come due.
(a) activity
(b) liquidity
(c) debt
(d) profitability
Answer:
(b) liquidity

Question 4
ratios are a measure of the speed with which various accounts are converted into sales or cash.
(a) Activity
(b) Liquidity
(c) Debt
(d) Profitability
Answer:
(a) Activity

Question 5.
The two basic measures of liquidity are
(a) inventory turnover and current ratio
(b) current ratio and liquid ratio
(c) gross profit margin and operating ratio
(d) current ratio and average collection period
Answer:
(b) current ratio and liquid ratio.

Question 6.
The is a measure of liquidity which excludes generally the least liquid asset.
(a) current ratio, accounts debtors
(b) liquid ratio, accounts debtors
(c) current ratio, inventory
(d) liquid ratio, inventory
Answer:
(d) liquid ratio, inventory.

Test Your Understanding-III (Page No. 262)

Question 1.
The ……….. is useful in evaluating credit and collection policies.
(a) average payment period
(b) current ratio
(c) average collection period
(d) current asset turnover
Answer:
(c) average collection period

Question 2.
The measures the activity of a firm’s inventory.
(a) average collection period
(b) inventory turnover
(c) liquid ratio
(d) current ratio
Answer:
(b) inventory turnover

Question 3.
The ratio may indicate the firm is experiencing stock outs and last sales.
(a) average payment period
(b) inventory turnover
(c) average collection period
(d) quick
Answer:
(a) average payment period

Question 4.
ABC Co. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its average collection period was …….
(a) 30 days
(b) 36 days
(c) 47 days
(d) 57 days
Answer:
(c) 47 days

Question 5.
………… are especially interested in the average payment period, since it provides them with a sense of the bill-paying patterns of the firm.
(a) Customers
(b) Stockholders
(c) Lenders and suppliers
(d) Borrowers and buyers
Answer:
(c) Lenders and suppliers

Question 6.
The ………… ratios provide the information critical to the long-run operation of the firm.
(a) liquidity
(b) activity
(c) solvency
(d) profitability
Answer:
(c) solvency

Do it Yourself (Page No. 247)

Question 1.
Current ratio = 4.5 :1, quick ratio = 3:1. Inventory is Rs. 36,000. Calculate the current assets and current liabilities.
Answer:

Question 2.
Current liabilities of a company are Rs. 5,60,000, current ratio is 5:2 and quick ratio is 2 :1. Find the value of the stock.
Answer:

Question 3.
Current assets of a company are Rs. 5,00,000. Current ratio is 2.5 : 1 and quick ratio is 1 : 1. Calculate the value of current liabilities, liquid assets and stock.
Answer:

Do it Yourself (Page No. 257)

Question 1.
Calculate the amount of gross profit:
Average stock = Rs. 80,000
Stock turnover ratio = 6 times
Selling price = 25% above cost
Answer:

Question 2.
Calculate Stock Turnover Ratio :
Annual sales = Rs. 2,00,000
Gross Profit = 20% on cost of Goods Sold
Opening stock = Rs. 38,500
Closing Stock = Rs. 41,500
Answer:

Short Answer Type Questions

Question 1.
What do you mean by Ratio Analysis?
Answer:
Ratio Analysis: The English word ratio comes directly from Latin. The Latin word has many derivates in the English language, among them are reason/ratio, rational and relational. Ratio is defined formally as “the indicated quotient of two mathematical expressions”— and indeed, a ratio does result from the division of one number into another—and as “the relationship between two or more things”.

An operational definition of a financial ratio is the relationship between two financial values. The word “relationship” implies that a financial ratio is the result of comparing mathematically two values.

And this numerical comparison is important, for these ratios are used as indexes, and as indexes, they are used to make qualitative judgements about the financial health of the firm.

Analysis of the firm by financial ratios enables the financial manager as well as interested external parties, to evaluate the firm’s financial performance and condition rapidly by making comparisons of ratios obtained from the firm with ratios obtained from comparable firms. Financial ratio also presents ready comparison of firm’s financial performance and condition over time as a way of identifying and evaluating performance trends.

Ratio analysis requires considerable judgement and direction by the analyst if it is to serve as a basis for future financial and operating decisions. Rule of thumb and other mechanical interpretations may produce disastrous decisions by those who are ill-informed about the ambiguity of information that may be contained in ratios.

Financial and operating relationships expressed in terms of ratios or otherwise have little significance except as they are judged on the basis of appropriate standards of comparison. Therefore, in interpreting the ratios of a particular business, the analyst cannot determine whether the ratios of a particular business indicates favourable or unfavourable conditions unless there are available measuring devices standards of comparison may consist of

• Mental standard of the analyst i.e., general conception of what is adequate or normal which has been gained by his personal experience and observation.
• Ratios and percentages based on the records of the past financial and operating performance of the individual business.
• Ratios and percentages of selected competing companies, especially the most progressive and successful ones.
• Ratios and percentages developed by using the data included in the current budgets.
  Such ratios would be based on the individual company’s past experience modified by anticipated changes during the accounting period. These ratios would properly be called “good ratios”.
• Ratio and percentages of the industry of which the individual company is a member.

Question 2.
What are various types of ratios?
Answer:
Ratios can be classified from various points of view. In reality, the classification depends on the objectives and available data. Thus, accounting ratio may be classified as under :
(i) Traditional Classification
(ii) Functional Classification
(i) Traditional Classification : Traditional classification of accounting ratios is based on the statement from which the ratios are calculated. Ratios may be based on figures in the balance sheet, in the profit and loss account or in both. On this basis the various types of accounting ratios are as follows :

(a) Balance Sheet Ratios: In case both variables are from balance sheet, it is classified as Balance Sheet Ratios. For example ratio of current assets to current liabilities known as current ratio is calculated using both figures from Balance Sheet. Some other ratios are following which comes under this category :

• Current Ratio
• Quick Ratio
• Debt Equity Ratio
• Proprietary Ratio

(b) Income Statement Ratios : A ratio of two variables from the Income Statement (Profit and Loss A/c) is known as Income Statement Ratio. For example ratio of Gross Profit to Sales known as Gross Profit Ratio is calculated using both figures from the income statement. Some other ratios are :

• Gross Profit Ratio
• Net Profit Ratio
• Operating Ratio
• Stock Turnover Ratio

(c) Composite or Inter-Statement Ratios : If a ratio is computed with one variable from Income Statement and another variables from Balance Sheet, it is called composite ratio. For example, ratio of credit sales to debtors and bills receivable known as debtors turnover ratio is calculated using one figure from income statement (credit sale) and another figure from balance sheet (Debtors and Bills receivable). Some other ratios are :

• Return on Investment
• Return on Equity
• Fixed Assets Turnover Ratio
• Debtors Turnover Ratio
• Creditors Turnover Ratio

(ii) Functional Classification : The most popular and useful classification of ratios is the functional classification. Functional classification is the classification of ratios according to functions. Accounting ratios are classified as under :

(a) Liquidity Ratios: It measures the short term solvency i.e. the firm ability to pay its current dues. The term liquidity means the conversion of the assets into cash without much loss. The objective is to find the ability of the business enterprise to meet short term liabilities. The ratios included in this category are :

• Current Ratio
• Liquid Ratio

(b) Solvency Ratios : These ratios are computed to judge the ability of a firm to pay off its long-term liabilities. It shows the proportion of the fund which is provided by outside creditors in comparison to owners. These ratios shown the long term financial solvency and measures the enterprise’s, ability to pay the interest regularly and of repay the principal on maturity or in pre-determined installments at due dates. The following ratios are normally computed for solvency analysis:

• Debt Equity Ratio
• Total Assets to Debt Ratio
• Proprietary Ratio
• Interest Coverage Ratio

(c) Activity (or Turnover) Ratios : Activity ratios are used to indicate the efficiency with which assets such as stock, debtors, fixed assets etc. of the firm are being utilised. These ratios are also known as Turnover Ratios because they indicate the speed with which assets are being converted or turned over into sales. These ratios, thus express the relationship between cost of goods sold or sales various assets and arte expressed in number of times. The following are the important ratios of this category:

• Stock Turnover Ratio
• Debtors Turnover Ratio
• Creditors Turnover Ratio
• Working Capital Turnover Ratio
• Fixed Assets Turnover Ratio
• Current Assets Turnover Ratio

(d) Profitability Ratios : Efficiency of a business is measured in term of profits. Thus profitability ratio are computed to measures the efficiency of a business. Profit earning capacity may be expressed in the form of sales. Some important profitability ratios are :

• Gross Profit Ratio
• Operating Ratio
• Net Profit Ratio
• Return on Investment Ratio
• Earning Per Share Ratio
• Dividend Per Share Ratio

Question 3.
What relationship will be established to study:
(a) Inventory Turnover
(b) Debtors Turnover
(c) Payable Turnover
(d) Working Capital Turnover
Answer:
These all four ratios are Turnover or Activity Ratios. These ratios measures the effectiveness with which a firm uses its available resources. These ratios are called ‘Turnover Ratios’ since they indicate the speed with which the resources are being turned into sales. These ratios, thus express the relationship between cost of goods sold or sales and various assets and are expressed in number of times.

(a) Inventory Turnover: This is also called Stock Turnover Ratio. This ratio establishes a relationship between cost of goods sold and average inventory. The objective of computing this ratio is to determine the efficiency with which the inventory is utilised.

This ratio shows the rate at which stocks are converted into sales. The higher the ratio, the better it is for the business, since it means that stock is being quickly converted into sales. Industries which has very high stock turnover ratio may be operating with low margin of profits and vice-versa.

(b) Debtors Turnover Ratio: This ratio is computed to establishes the relationship between net credit sales and average debtors (or receivable) of the year. It shows the rate at which cash is generated by the turnover ratio of debtors.

This ratio indicates the number of times the receivable are turned over in a year in relations to sales. It shows how quickly debtors are converted into cash. The higher the ratio, the better it is, since it means speedier collection and lesser amount being blocked up in debtors and vice versa.

(c) Payable Turnover Ratio : It is also called Creditors Turnover Ratio. It indicates the pattern of payment of accounts payable. An accounts payable arise on account of credit purchase, it expresses relationship between credit purchases and accounts payable.

It shows average payment period. By comparing it with the credit period allowed by the suppliers,-conclusion may be drawn. Lower ratio means credit allowed by the supplier is not enjoyed by the business. Higher ratio means delayed payment to supplier which is not a very good policy as it may affect the reputation of the business.

(d) Working Capital Turnover: This ratio indicates whether the working capital has been effectively utilized or not in making sales. In fact, in the short run, it is the current assets and current liabilities which plays a major role. A careful handling of current assets and current liabilities will mean a reduction in the amount of capital employed thereby improving turnover.

Working Capital Turnover Ratio \(=\frac{\text { Net Sales }}{\text { Working Capital }}\)
A high working capital turnover ratio show the efficient utilisation of working capital in generating sales. A low ratio, on the other hand, may indicate excess of working capital or has not been utilized efficiently.

Question 4.
Why would the Inventory Turnover Ratio be more important wrhen analysing a grocery store than an insurance company?
Answer:
Inventory turnover is more important for a grocery store being a trading concern rather than insurance company, contracting for indemnity. Inventory is an element of current assets.

Inventory is needed for smooth flow of production and sales inventory is of three types i.e. raw material, work-in-progress and finished goods. Raw- material and work-in-progress inventory is maintained for the uninterrupted flow of production. Finished goods inventory is kept for meeting the demands of customers.

Inventory turnover ratio measures the efficiency with which inventory has been converted into sales. Inventory is generally valued at cost.

This ratio indicates the speed with which the goods have been sold. Low ratio means low speed of sales and high ratio indicates that goods have not been retained in the godown for a longer period. Higher ratio is considered good from the view point of liquidity.

Question 5.
The liquidity of a business firm is measured by its ability to satisfy its long term obligations as they come due. Comment.
Answer:
The term solvency means the ability of the enterprise to meet its obligations on the due date. Some payments have short-term maturity and some have long term maturity. Long-term liquidity means ability to meet long term commitments or obligations, long term lenders are primarily interested in this type of analysis.

Leverage or Capital Structure Ratio : Solvency of business is related to its debt paying capacity. Normally, the ordinary shareholders, debenture holders, financial institutions and other long term creditors are interested in these ratios. With the help of these ratios, long term creditors can analysis the capacity of business to pay interest and the principal. Therefore, long term solvency of business means its ability to pay the long term debts and interest thereon regularly.

Therefore, the long term solvency or financial position has two aspects—
(i) The ability to repay principal on due date.
(ii) The ability to pay interest regularly.

(i) Debt-Equity Ratio – In any business, there should be equitable balance between owned capital and debt capital because it affects long term solvency of business. If a business procures more funds from the owners of business, it will secure the interest of creditors.

(ii) Proprietary Ratio – This ratio is another form of debt equity ratio. It is also known as Net Worth to Total Assets Ratio. This ratio establishes relationship between shareholders’ funds and total assets of business.

The higher ratio, the more profitable it is for the creditors. If the ratio is low, the creditors can be suspicious about the repayment of their debt on liquidation of company.

Coverage Ratio – To evaluate the long term solvency, coverage ratios are calculated. In the ordinary course of business, the claims of creditors are’ not met by selling the fixed assets. Rather, these claims are paid out of income of the firm. If the firm is able to pay these claims in time, the finanacial position of the firm will be considered sound. The coverage ratio includes

(i) Interest Coverage Ratio—With the help of this ratio, it can be ascertained whether the interest on long term debts of business can be paid out of profits or not. The higher the ratio, the safer will be the interests of creditors.
Interest Coverage Ratio =\(\frac{\text { EBIT }}{\text { Interest }}\)
EBIT = Earning before Interest and Taxes.

(ii) Dividend Coverage Ratio—This ratio measures the dividend paying capacity of the firm.
Dividend Coverage Ratio = \(\frac{\text { Earnings after Taxes }}{\text { Preference Dividend }}\)

(iii) Fixed Charges Coverage Ratio—This ratio considers both interest on long term loans and dividend on preference share capital.
Fixed Charge Coverage Ratio = \(\frac{\text { EBIT }}{\text { Interest + Preference Dividend }}\)

Question 6.
The average age of inventory is viewed as the average length of time inventory held by the firm or as the average number of days sales in inventory. Explain.
Answer:
Inventory is an element of current assets. Inventory is needed for smooth flow of production and sales. Inventory is of three types i.e., raw-material, work-in-progess and finished goods. Raw-material and work-in-progress inventory is maintained for the uninterupted flow of production.

Finished goods inventory is kept for meeting the demands of customers. The firms usually maintain finished goods inventory. Inventory is generally valued at cost. Firstly, to calculate inventory turnover ratio and then convert it into number of days for the calculation of average age of inventory.

If the Inventory Turnover ratio goes up, the average age of inventory will go down and vice versa.

Aging Schedule of Inventory—According to the time, Inventory can be calculated and classified to find out those items which are used in the production process at a slow rate or which are sold at slow rate. By preparing aging schedule of Inventory, the dates of their purchase or manufacture are taken note of. A specimen of aging schedule of inventory is as under :

From the above table, it is clear that 50% of total inventory is in stocks for more than 80 days.

Long Answer Type Questions

Question 1.
Who are the users of financial ratio analysis? Explain the significance of ratio analysis to them?
Answer:
The following are the main users of financial ratio analysis.
1. Investors and Owners
2. Management
3. Short Term Creditors
4. Long Term Creditors
Tire significance of ratio analysis for the various groups may be discussed as under:
1. Investors and Owners : Investors and Owners are primarily interested in the Profitability and safety of their investments. Hence they calculate profitability ratios such as earning per share, dividend per share, return on investment, return on equity, dividend yielded etc. On the basis of these ratios, investors.decide whether to buy or retain the shares of the company.

2. Management: Management makes the use of ratio analysis as a means of self-evaluation. Management assesses its managerial skill and performance on the basis of profitability ratios and turnover ratios. Management uses different ratios for forecasting to events. Management can assess its performance by making inter-firm comparison and intra-firm comparison.

3. Short Term Creditors : Short term creditors like suppliers of goods and lenders supplying short term loans, uses liquidity ratio such as current ratio and acid test ratio to assess the liquidity position of the company. Liquidity ratios give them an idea of company’s ability to repay their claims at the time of maturity of the claims.

4. Long Term Creditors : Long term creditors are the creditors who provide funds to the company for a period over one year. Long term creditors are interested in the solvency of the company and the company’s ability of pay its interest obligations. Solvency ratios such as debt equity ratio, proprietary ratio and interest coverage ratio are calculated by long term creditors.

Question 2.
What are liquidity ratios? Discuss the importance of current and liquid ratio.
Answer:
Liquidity Ratios : It measures the short term solvency i.e. the firm’s ability to pay its current dues. The term liquidity means the conversion of the assets into cash without much loss. The objective is to find out the ability of the business enterprise to meet short term liabilities. The ratios included in this category are :
(i) Current Ratio
(ii) Liquid Ratio

(i) Current Ratio: Current ratio is the proportion of current assets to current liabilities.
\(\text { Current Ratio }=\frac{\text { Current Assets }}{\text { Current Liabilities }}\)
Current assets which means the assets which are held for their conversion into cash with in a year. The following are the examples of current assets:

Cash Balances – Accurred Income
Bank Balances – Marketable Securities
Debtors – Bills Receivable
Stock – Prepaid Expenses etc.
Short term loans

Current Liabilities which mean the liabilities which are expected to be matured within a year. The following are the example of current liabilities:

Creditors – Provision for Tax
Bank Overdraft – Unclaimed dividend
Bills Payable – Income received in advance etc.
Short Term Loans

Importance : An ideal ratio is 2 :1. A higher ratio indicates poor investment policies of the management and poor inventory control while a low ratio indicates lack of liquidity and shortage of working capital. The current ratio, thus, throws a good light on the short term financial position and policy of a firm.

(ii) Liquid Ratio or Quick Ratio: It is the ratio of quick (or liquid) assets to current liabilities.
\(\text { Quick Ratio }=\frac{\text { Quick Assets }}{\text { Current Liabilities }}\)
Quick Assets (or liquid Assets) = Current Assets – Stock – Prepaid expenses.

The objectives of computing this ratio is to measures the ability of the firm to meet its short term obligation as and when due without relying upon the realization of stock.

Importance : A quick (or liquid) ratio of 1 : 1 is supposed to be good for the reason that it indicates availability of funds to meet the liabilities 100%. If this ratio is more than 1 : 1 it can be said that the financial position of the business enterprise is sound and good.

On the other hand. If the ratio is less than 1 :1 i.e. liquid assets are less than current liabilities the financial position of the concern shall be deemed to be unsound and additional cash will have to be provided for the payment of current liabilities.

Question 3.
How would you study the solvency position of a firm?
Answer:
Solvency position of a firm may be studied with the help of solvency ratios. These solvency or leverage ratios are important to creditors, since they reflect the capacity of firm’s revenue to support interest and other fixed charges, and whether there are sufficient assets to pay-off the debt in the event of liquidation.

Shareholders, are concerned with leverage, since interest payments increases with greater debt. If borrowing and interest are excessive, the company can even experience bankruptcy.

(i) Total Debt to Total Assets Ratio—The ratio of total debt to total assets, generally, called the debt ratio, measures the percentage total funds provided by creditors. Debts includes current liabilities and all creditors, moderate debt ratio, since the lower the ratio, the greater the cushion against creditors losses in the event of liquidation. In contrast to the creditors preference of low debt ratios the owners may seek high leverage either.
(i) to magnify earnings or
(ii) because raising new equity means giving up some degree of control. If the debt ratio is too high, there is a degree of encouraging irresponsibility on the part of the owners.

The stake of the owners can become so small that speculative activity, if it is successful, will yield a substantial return to the owners. If the venture is unsuccessful, however, only a concrete loss is incurred by the Owners because there investment is small.

(ii) Capitalisation Ratio : Another widely used measure of financial or solvency position is the capitalisation ratio, which is derived by dividing long-term debt by the total of long-term debt plus owner’s equity. Since the sum of debt and owner’s equity represents the permanent capital of the firm, this ratio indicates the portion of the permanent capital that is financed with debt.

(iii) Earning Coverage Ratio—This in many ways a superior measure of financial risk to the leverage ratio as it attempts to measure the company’s ability to avoid future financial difficulties which can arise because of its use of debt finance. The larger this ratio, the greater the reduction of the company’s earnings which can occur before the company will default on its interest payments.

EBIT = Earnings before Interest & Taxes.

(iv) Ratio of Owner’s-Equity to Total Assets—The ratio of owner’s equity to total assets shows the percentage of the total investment. This ratio often called the “Proprietary ratio” or Shareholder Equity Ratio.

The larger amount of owner’s equity indicates an improvement in the long term financial position, since there is relatively greater margin of safely for outside creditors and less long-term pressure from the point of view of the owners. The most conservative, although not always the most profitable, basis of financing when broad or other long term obligations are used in place of capital stock is to provide for the gradual retirement of the debt.

From the point of view of creditors, the larger the percentage of assets that is supplied by shareholders, the more satisfactory the fianancial structure of the business. Since owner’s equity is a “Cushion” that first absorbs losses.

However, an upward trend in this ratio is usually considered by creditors to be favourable, and the larger the percentage of funds, supplied by outside creditors, the less ‘conservative’ the financial structure is likely to be especially in periods of poor business, because of the fixed interest and necessity of paying or refunding maturing debts.

Question 4.
What are important profitability ratios? How are they worked cut?
Answer:
Efficiency of a business is measured in terms of profits. Thus profitability ratio are computed to measure the efficiency of a business. Profit earning capacity may be expressed in the form of sales. Some important profitability ratios are :
(i) Gross Profit Ratio
(ii) Operating Ratio
(iii) Operating Profit Ratio
(iv) Net Profit Ratio
(v) Overall Profitability Ratio
(vi) Return of Shareholder fund
(vii) Return on Capital Employed etc.

(i) Gross Profit Ratio: The main objective of computing tl us ratio is to be determine the efficiency with which production and/or purchase operations are carried on. It establishes relationship of gross profit on sales of a firm, which is calculated

Gross Profit = Net Sales – Cost of Goods Sold
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses – Closing Stock
Net Sales = Total Sales – Sales Return

(ii) Operating Ratio : This ratio establishes the relationship between the cost of goods sold plus other operating expenses to net sales. The lower the percentage of operating ratio, the higher the net profit ratio.


Operating Expenses = Office and Financial Expenses + Administrative Expenses + Selling and Distribution Expenses + Discount + Bad Debts + Interest on Short Term Loans Cost of Goods Sold = Sales – Gross Profit

(iii) Operating Profit Ratio : It is calculated to reveal operating margin. It may be computed directly or as a residual of operating ratio.
Operating Profit Ratio = 100 – Operating Ratio Alternatively,

(iv) Net Profit Ratio : Net profit ratio is based on all inclusive concept of profit JH: relates sales to net profit after operational as well as non-operational expenses and income
\(\text { Net Profit Ratio }=\frac{\text { Net Profit }}{\text { Sales }} \times 100\)
Net Profit is taken after income tax.

(v) Overall Profitability Ratio : The Overall Profitability Ratio establishes the relationship of profit to the amount of funds employed.
\(\text { Overall Profitability Ratio }=\frac{\text { Profit }}{\text { Investment of Funds }} \times 100\)

(vi) Return of Shareholder’s fund: This ratio reflects the return on shareholder’s fund that the business enterprise was able to earn. Return on Shareholder’s Fund =

(vii) Return on Equity Shareholders’ fund : It is computed to draw an idea about the return available to equity shareholders.

Profit after appropriation less Preference dividend

(viii) Return on Capital Employed or Investment (ROCE or ROI): This ratio, also known as return on investment, is a basic ratio of profitability. It is calculated by establishing a relationship between the profit earned and the capital employed to earn the profit. It is therefore an indicator of the earning capacity of the capital invested in the business.

Return on Capital Employed
Capital Employed = Fixed Assets + Working Capital = Long Term Funds + Share Capital + Reserves and Surplus – Ficitious Assets (Miscellaneous Expenditure)

Question 5.
Financial ratio analysis are conducted by four groups of analysis : Managers, equity investors, long term creditors and short term creditors. What is the primary emphasis of each of these groups in evaluating ratios?
Answer:
Financial ratio analysis are conduced by four groups of analysis : Managers, equity investors, long term creditors and short term creditors. The primary emphasis of each these groups in evaluating ratios are following

(i) Managers : Manager’s makes the use of ratio analysis as a means of self evaluations. Managers assesses their managerial skill and performance on the basis of profitability ratios and turnover ratio. They uses different ratios for forecasting of events. They can assess their performance by making inter-firm comparison and intra-firm comparison.

(ii) Equity Investors : They are primarily interested in the profitability and safety of their investments. Hence they calculate profitability ratios such as earning per share, dividend per share, return on investment, return on equity, divided yield etc. On the basis of these ratios, investors decide whether to buy or retain the share of the company.

(iii) Long Term Creditors: Long term creditors are the creditors who provide funds to the company for a period over one year. Long term creditors are interested in the solvency of the company and the company’s ability to pay its interest obligations. Solvency ratios such as debt equity ratio, proprietary ratio and interest coverage ratio are calculated by long term creditors.

(iv) Short Term Creditors: Short Term creditors like suppliers of goods and lenders supplying short term loans, uses liquidity ratios such as current ratio and acid test ratio to assess the liquidity position of the company. Liquidity ratios give them an idea of company’s ability to repay their claims at the time of maturity of the claims.

Question 6.
The current ratio provides a better measure of overall liquidity only when a firm’s inventory cannot easily be converted into cash. If inventory is liquid, the quick (liquid) ratio is a preferred measure of overall liquidity. Explain.
Answer:
(i) Current Ratio : This ratio establishes the relationship between current assets and current liabilities. With its help, the ability of the business to pay-off its short-term liabilities is determined. It helps to find out how many times current assets are there in business as compared to current liabilities. This ratio is calculated by dividing current assets by current liabilities. Current ratio of 2 :1 is considered ideal i.e. The current assets should be twice the current liabilities.
\(\text { Current Ratio }=\frac{\text { Current Assets }}{\text { Current Liabilities }}\)
Current assets are those assets which are converted into cash within one year or an operating cycle. They include cash in hand, bank balance, stock, debtors, prepaid expenses, bills receivable, short-term investments etc. Current Liabilities are those liabilities which have to be paid during one year.

These include, creditors, bills payable, outstanding expenses, dividend payable, short-term loans, bank overdrafts etc. This ratio is also called Working Capital Ratio. Because working capital is the difference between current assets and current liabilities.

This ratio gives us the information as to whether the business has adequate current assets to pay-off its current liabilities. Current assets should be more than current liabilities so that despite fall in their prices, current liabilities could be paid easily. If current ratio is 2 :1, it means that the current liabilities would be paid even if there is 50% fall in the prices of current assets.

The greater this ratio, better will be the short term solvency of the firm and more safe will be the interests of the short term creditors.

This ratio should neither be too high nor too low. High ratio is an indicator of weak investment policy of the firm and low ratio increases the risk in payment of short term debts. High ratio also means that funds of the firm are lying surplus and unutilised.

Although, the current ratio should be 2 :1 but it is not a fixed or certain rule because it depends on the nature of business, its working conditions and availableHinancial resources.

For public utility companies, a current ratio of less than 2 : 1 may also be satisfactory because in such business, the amount of current assets is normally low. Contrarily, for a wholesaler who purchases goods on cash or on credit of small period and sells on credit to the retailers, the current ratio should be high.

Current Ratio’s main limitation is that is a quantitative measure, not a qualitative one. To ascertain this ratio, all current assets are given equal importance. In other words, the liquidity of individual current asset is given no attention. But there is difference in the liquidity of various current assets.

Cash is the most liquid asset. On the other hand, stock is the least liquid of all current assets. Debtors, B/Rs etc. are more liquid as compared to stock but less liquid than cash. The current ratio of two firms can be similar. But if the current assets of a firm consist of stock as a major proportion, it will be less liquid as compared to other firm.

This ratio can be easily altered for window dressing. Window dressing means manipulation in current assets and current liabilities to show favourable position as compared to the actual one.

This manipulation is done by higher valuation the stock, lesser provision for bad and doubtful debts, lesser amount of provisions and transferring a current liability to a long term liability. All this will raise the Current Ratio. Therefore, the current ratio can’t be an absolute measure of short term solvency of the firm.

(ii) Liquidity Ratio or Acid Test Ratio or Quick Ratio—With the help of this ratio, the capacity of the firm to pay off its current liabilities immediately is measured. This ratio is calculated by dividing liquid assets by current liabilities.
Liquid assets are those assets which can immediately or in a short period be converted into cash without much loss Liquid assets do not include stock and prepaid expenses because stock is less liquid and its price fluctuates. Prepaid expenses can’t be realised

A liquid ratio of 1 :1 is considered as standard ratio. The higher this ratio, more will be the short term solvency of the business. This ratio is calculated to remove the shortcomings of the current ratio. Tins ratio is considered better than current ratio. Sometimes, the current ratio is high because of large proportion of stock but due to low liquidity ratio, the short term financial position of business is weak.

If liquid assets are less than current liabilities, the management should manage cash. According to some authors to calculate this ratio, liquid liabilities should be used in place of current liabilities. Liquid liabilities are those liabilities which are to be paid in near future. Bank overdraft and cash credit are not included in them because they are not immediately payable.
\(\text { Liquidity Ratio }=\frac{\text { Liquid Assets }}{\text { Liquid Liabilities }}\)

Although liquid ratio is considered better than current ratio, but to analysis short term financial position of the business both ratios should be used simultaneously.

Numerical Questions

Question 1.
Following is the Balance Sheet of Rohit and Co. as on March 31, 2006.

Calcuate Current Ratio
(Ans. Current Ratio 2:1)
Answer:

Question 2.
Following is the Balance Sheet of Title Machine Ltd. as on March 31, 2006.

Calculate Current Ratio and Liquid Ratio.
(Ans. Currcnt Ratio 0.8, Liquid Ratio 0.37: 1)
Answer:

Question 3.
Current Ratio is 3 : 5. Working Capital is Rs. 90,000. Calculate the amount of Current Assets and Current Liabilities.
(Ans. Current Assets Rs. 1,26, 000 and Current Liabilities Rs. 36,000)
Answer:

Question 4.
Shine Limited has a current ratio 4.5 :1 and quick ratio 3 : 1; If the stock is 36,000, calculate current liabilities and current assets. (Ans. Current Assets Rs. 1,08,000, current liabilities Rs. 24,000)
Answer:

Question 5.
Current liabilities of a company are Rs. 75,000. If current ratio is 4:1 and liquid ratio is 1:1, calculate value of current assets, liquid assets and stock. (Ans : Current Assets Rs. 3,00,000. Liquid Assets Rs. 75,000 and stock Rs. 2,25,000
Answer:

Question 6.
Handa Ltd. has stock of Rs. 20,000. Total liquid assets are Rs. 1,00,000 and quick ratio is 2 :1. Calculate current ratio. (Ans : Current Ration 2.4 :1)
Answer:

Question 7.
Calculate debt equity ratio from the following information:
Total Assets – Rs. 15,00,000
Current Liabilities – Rs. 6,00,000
Total Debts – Rs. 1200,000
(Ans : Debt Equity Ratio 2 : 1)
Answer:

Question 8.
Calculate Current Ratio if: Stock is Rs. 6,00,000; Liquid Assets Rs. 24,00,000; Quick Ratio (Ans. Current Ratio 2.5 :1)
Answer:

Question 9.
Compute Stock Turnover Ratio from the following information:
Net Sales – Rs. 2,00,000
Gross Profit – Rs. 50,000
Closing Stock – Rs, 60,000
Excess of Closiiig Stock – Rs. 20,000
over Opening Stuck
(Ans : Stock Turnover Rho 3 times)
Answer:

Question 10.
Calculate following ratios from the following information:
(i) Current ratio
(ii) Acid test ratio
(iii) Operating Ratio
(iv) Gross Profit Ratio
Current Assets – Rs. 35,000
Current Liabilities – Rs. 17,500
Stock – Rs. 15,000
Ope rating Expences – Rs. 20,000
Sales – Rs. 60,000
Cost of Goods Sold – Rs. 30,000
(Ans: Current Ratio 2:1; Liquid Ratio 1.14: 1; Operating Ratio
83.3%: Gross Profit Ratio 50%)
Answer:

Question 11.
From the following information calculate :
(i) Gross Profit Ratio
(ii) Inventory Turnover Ratio
(iii) Current Ratio
(iv) Liquid Ratio
(v) Net Profit Ratio
(vi) Working capital Ratio :

(Ans: Gross Profit Ratio 23.81; Inventory Turnover Ratio 2.4 times; Current Ratio 2.6 : 1; Liquid Ratio 1.27 : 1; Net Profit Ratio 14.21%; forking Capital Ratio 2.625 times)
Answer:

Question 12.
Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:

(Ans : Gross Profit Ratio 40%; Working Capital Ratio 8.33 times; Debt Equity Ratio 2:5; Proprietary Ratio 25:49)
Answer:

Question 13.
Calculate Stock Turnover Ratio if :
Opening Stock is Rs. 76,250, Closing Stock is 98,500, Sales is Rs. 5,20,000, Sales Return is Rs. 20,000, Purchases is Rs. 3,22,250. (Ans : Stock Turnover Ratio 3.43 times)
Answer:

Question 14.
Calculate Stock Turnover Ratio from the data given 1 below:

Answer:

Question 15.
A trading firm’s average stock is Rs. 20,000 (cost). If the stock turnover ratio is 8 times and the firm sells goods at a profit of 20% on sale, ascertain the profit of the firm. (Ans : Profit Rs. 40,000)
Answer:

Profit = Sales – Cost of Goods Sold
= Rs. 2,00,000 – Rs. 1,60,000
= Rs. 4,000

Question 16.
You are able to collect the following information about a company for two years :

Calculate Stock Turnover Ratio and Debtor Turnover Ratio if in the year 2004 stock in trade increased by Rs. 2,00,000
(Ans. Stock Turnover Ratio 2.4 times, Debtors Turnover Ratio 4.52 times)
Answer:

Question 17.
The following Balance Sheet and other information, calculate following ratios:
(i) Debt Equity Ratio
(ii) Working Capital Turnover Ratio
(iii) Debtors Turnover Ratio.

(Ans : Debt Equity 12 :19; Working Capital Turnover 1.4 times; Debtors Turnover 2 times)
Answer:

Question 18.
The following is the summerised Profit and Loss account and the Balance Sheet of Nigam Limited for the year ended March 31, 2007:

Answer:
Calculate (i) Quick Ratio
(ii) Stock Turnover Ratio
(iii) Return on Investment
(Ans: Quick Ratio 7:13; Stock Turnover Ratio 3.74 times; Return on Investment 41.17%) .
Answer:

Question 19.
From the following, calculate
(a) Debt Equity Ratio
(b) Total Assets to Debt Ratio
(c) Proprietary Ratio.

Answer:

Question 20.
Cost of Goods Sold is Rs. 1,50,000. Operating expenses are Rs. 60,000, Sales is Rs. 2,60,000 and Sales Return is Rs. 10,000. Calculate Operating Ratio.
(Ans. Operating Ratio 84%)
Operating Ratio
Answer:

Question 21.
The following is the summerised transactions and Profit and Loss Account for the year ending March 31,2007 and the Balance Sheet as on that date.


Calculate (i) Gross Profit Ratio, (ii) Current Ratio, (iii) Acid Test Ratio, (iv) Stock Turnover Ratio, (v) Fixed Assets Turnover Ratio.
(Ans : Gross Profit Ratio 50%; (ii) Current Ratio 3 : 2; (iii) Acid Test Ratio 1.125 :1; (iv) Stock Turnover Ratio 4 times; (v) Fixed Assets
Answer:

Question 22.
From the following information calculate Gross Profit Ratio, Stock Turnover Ratio and Debtors Turnover Ratio.

(Ans : Gross Profit Ratio 20%; Stock Turnover Ratio 4 times; Debtors Turnover Ratio 9.4 times)
Answer:

Detailed, Step-by-Step NCERT Solutions for Class 6 Sanskrit Ruchira Chapter 15 मातुलचन्द्र Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

NCERT Solutions for Class 6 Sanskrit Ruchira Chapter 15 मातुलचन्द्र

अभ्यासः

प्रश्न 1.‌ ‌
बालगीतं‌ ‌साभिनयं‌ ‌सस्वरं‌ ‌गायत।।‌ ‌
‌(बाल‌ ‌गीत‌ ‌को‌ ‌अभिनय‌ ‌के‌ ‌साथ‌ ‌सस्वर‌ ‌गाइए)‌ ‌

प्रश्न 2.‌ ‌
पद्यांशान्‌ ‌योजयत‌‌‌
(पद्यांशों‌ ‌को‌ ‌जोड़ो)‌
‌(क)‌ ‌मातुल!‌ ‌किरसि‌‌‌ सितपरिधानम्‌ ‌…………….।‌
‌(ख)‌ ‌तारकखचितं‌‌‌ श्रावय‌ ‌गीतिम्‌ ‌……………।‌ ‌‌
(ग)‌ ‌त्वरितमेहि‌ ‌मां‌ चन्द्रिकावितानम्‌ ‌…………….।‌ ‌‌
(घ)‌ ‌अतिशयविस्तृत‌‌‌ कथं‌ ‌न‌ ‌स्नेहम्‌ ‌‌………………‌ ‌‌।‌
‌(ङ)‌ ‌धवलं‌ ‌तव‌‌‌ नीलाकाशः‌ ‌….‌……..
उत्तर:
‌(क)‌ ‌मातुल!‌ ‌किरसि‌ ‌कथं‌ ‌न‌ ‌स्नेहम्।‌‌‌
(ख)‌ ‌तारकखचितं‌ ‌सितपरिधानम्।‌
‌(ग)‌ ‌त्वरितमेहि‌ ‌मां‌ ‌श्रावय‌ ‌गीतिम्।‌
‌(घ)‌ ‌अतिशयविस्तृत‌ ‌नीलाकाशः।‌ ‌
(ङ)‌ ‌धवलं‌ ‌तव‌ ‌चन्द्रिकावितानम्‌ ‌।‌‌‌

प्रश्न 3.‌
‌पद्यांशेषु‌ ‌रिक्तस्थानानि‌ ‌पूरयत‌‌‌
(पद्यांशों‌ ‌में‌ ‌रिक्तस्थान‌ ‌भरो)‌ ‌
(क)‌ ‌प्रिय‌ ‌मातुल!‌ ‌…………….‌ ‌प्रीतिम्।‌ ‌
(ख)‌ ‌कथं‌ ‌प्रयास्यसि‌ ‌…………‌‌‌……!‌
‌‌(ग)‌ ‌………………….‌ ‌क्वचिदवकाशः।‌ ‌‌
(घ)‌ ‌……………..‌ ‌दास्यसि‌ ‌मातुलचन्द्र!‌ ‌‌
(‌ङ)‌ ‌कथमायासि‌ ‌न‌ ‌…………….‌ ‌गेहम्।‌‌‌
उत्तर:
‌(क)‌ ‌वर्धय‌ ‌मे‌ ‌
(ख)‌ ‌मातुलचन्द्र‌
‌(ग)‌ ‌नैव‌ ‌दृश्यते।‌
‌(घ)‌ ‌मह्यं‌ ‌
(ङ)‌ ‌भो!‌ ‌मम।‌

प्रश्न ‌‌4.‌
‌प्रश्नानाम्‌ ‌उत्तराणि‌ ‌लिखत‌‌‌
(प्रश्नों‌ ‌के‌ ‌उत्तर‌ ‌लिखो)‌

‌‌(क)‌ ‌अस्मिन्‌ ‌पाठे‌ ‌‌कः‌ ‌मा‌तु‌लः‌?‌ ‌
(ख)‌ ‌नीलाका‌शः‌ ‌कीदृशः‌ ‌अस्ति‌?‌
‌(ग)‌ ‌मातुलचन्द्रः‌ ‌किं‌ ‌न‌ ‌किरति?‌
‌‌(घ)‌ ‌किं‌ ‌श्रावयि‌तुं‌ ‌शिशुः‌ ‌‌चन्द्रं‌ ‌कथयति?‌ ‌‌
(ङ)‌ ‌चन्द्रस्य‌ ‌सितपरिधानं‌ ‌कथम्‌ ‌अस्ति?‌ ‌‌
उत्तर:
(क)‌ ‌अस्मिन्‌ ‌पाठे‌ ‌चन्द्रः‌ ‌मातुलः‌ ‌।‌‌‌
(ख)‌ ‌नीलाकाशः‌ ‌अतिशयविस्तृतः‌ ‌अस्ति।‌
‌‌(ग)‌ ‌मातुलचन्द्रः‌ ‌स्नेहं‌ ‌न‌ ‌किरति‌ ‌।‌ ‌‌
(घ)‌ ‌गीतिं‌ ‌श्रावयितुं‌ ‌शि‌शुः‌ ‌‌चन्द्रं‌ ‌कथयति।‌‌‌
(ङ)‌ ‌चन्द्रस्य‌ ‌सितपरिधानं‌ ‌तारकखचितम्‌ ‌अस्ति।‌

प्रश्न ‌‌5.‌
‌उदाहरणानुसारं‌ ‌निम्नलिखितपदानि‌ ‌सम्बोधने‌ ‌परिवर्तयत‌‌‌
(उदाहरण‌ ‌के‌ ‌अनुसार‌ ‌निम्नलिखित‌ ‌पदों‌ ‌को‌ ‌सम्बोधन‌ ‌‌में‌ ‌‌बदलो)‌ ‌‌

यथा‌-चन्द्रः‌‌‌ — चन्द्र!‌
‌‌(क)‌ ‌शिष्यः‌ — …………
‌‌(ख)‌ ‌गोपा‌लः‌ ‌‌– …………
उत्तर:
(क)‌ ‌शिष्य!‌‌‌
(ख)‌ ‌गोपाल!‌‌‌

यथा‌-बालिका‌‌‌ — बालिके!‌ ‌‌
(क)‌ ‌प्रियंवदा‌ ‌‌‌‌– …………
(ख)‌ ‌लता‌ ‌‌– …………
उत्तर:
(क)‌ ‌प्रियंवदे!‌‌‌
(ख)‌ ‌लते!‌ ‌‌

यथा-‌फलम्‌‌‌ — फल!‌
‌‌(क)‌ ‌मित्रम्‌ ‌‌– …………
‌‌(ख)‌ ‌पु‌स्त‌कम्‌‌‌ ‌‌– …………
उत्तर:
‌(‌क‌)‌ ‌‌मित्र!‌‌‌
(‌ख‌)‌ ‌‌पुस्तक!‌

‌‌यथा‌-‌र‌विः‌‌‌ — रवे!‌
‌‌(क)‌ ‌मुनिः‌ — …………….
‌‌(‌ख‌)‌ ‌‌कविः‌‌‌ — …………….
उत्तर:
(क)‌ ‌मुने!‌‌‌
(ख‌)‌ ‌‌कवे!‌

‌‌यथा‌-सा‌धुः‌‌‌ — साधो‌!‌
‌‌(क‌)‌ ‌‌भा‌नुः‌ – …………..
‌‌(‌ख‌)‌ ‌प‌शुः‌ ‌‌- …………..
उत्तर:
(‌क‌)‌ ‌‌भानो!‌‌‌
(ख)‌ ‌पशो‌!‌ ‌‌

यथा-नदी‌‌‌ — नदि!‌
‌‌(‌क‌)‌ ‌‌देवी‌ ‌– ……………..
(ख)‌ ‌मानिनी‌ ‌– ……………..
उत्तर:
(‌क‌)‌ ‌‌देवि‌!‌‌‌
(ख‌)‌ ‌‌मानिनि!‌ ‌‌

प्रश्न 6.‌ ‌
मञ्जूषातः‌ ‌उपयुक्तानाम्‌ ‌अव्ययपदानां‌ ‌प्रयोगेण‌ ‌रिक्तस्थानानि‌ ‌पूरयत‌‌‌
(मंजूषा‌ ‌से‌ ‌उपयुक्त‌ ‌अव्ययों‌ ‌के‌ ‌प्रयोग‌ ‌से‌ ‌रिक्तस्थान‌ ‌‌पूरे‌ ‌‌करो‌)‌ ‌‌|

‌‌कुतः‌ ,‌‌कदा‌ ‌,कुत्र‌ ,‌‌कथं‌ ,‌‌किम्‌ ‌‌

‌‌(क)‌ ‌जगन्नाथपुरी‌ ‌…………………‌ ‌अस्ति?‌
‌‌(‌ख‌)‌ ‌‌त्वं‌ ‌…..‌.‌…………….‌ ‌पुरीं‌ ‌गमिष्यसि‌?‌
‌‌(‌ग‌)‌ ‌गङ्गानदी‌ ‌‌.‌..‌.‌.‌.‌.‌.‌.‌.‌.‌.‌.‌.‌ ‌‌प्रवहति?
(‌घ‌)‌ ‌तव‌ ‌स्वास्थ्यं‌ ‌………………….‌ ‌अस्ति?‌
‌(ङ)‌ ‌वर्षाकाले‌ ‌मयूराः‌ ‌……………….‌ ‌कुर्वन्ति?‌
उत्तर:
‌‌(‌क‌)‌ ‌‌जगन्नाथपुरी‌ ‌कुत्र‌ ‌‌अस्ति‌?‌‌‌
(‌ख‌)‌ ‌‌त्वं‌ ‌कदा‌ ‌‌पुरीं‌ ‌गमिष्यसि‌?‌
‌‌(‌ग‌)‌ ‌‌गङ्गानदी‌ ‌कुतः‌ ‌प्रवहति‌?‌ ‌‌
(‌घ‌)‌ ‌‌तव‌ ‌स्वास्थ्यं‌ ‌कथम्‌ ‌अस्ति‌?‌‌‌
(ङ)‌ ‌वर्षाकाले‌ ‌मयूराः‌ ‌किं‌ ‌कुर्वन्ति?‌

प्रश्न ‌‌7‌.‌
‌‌तत्समशब्दान्‌ ‌लिखत‌‌‌
(तत्सम‌ ‌शब्दों‌ ‌को‌ ‌लिखो)‌‌‌
मामा‌, ‌‌मोर‌, ‌तारा‌, ‌कोयल‌, ‌‌कबूतर‌
उत्तर:
‌मामा‌‌‌ — मातुलः‌‌‌
मोर‌‌‌ — मयूरः‌
तारा‌‌‌ — ‌‌तारकम्‌
कोयल‌ — ‌‌कोकिलः‌ ‌‌
कबूतर‌‌‌ – कपोतः।‌‌‌

पठित‌-‌अवबोधनम्‌‌‌
‌I.‌ ‌‌पठित-सामग्रीम्‌ ‌आधृत्य‌ ‌अवबोधनकार्यम्‌‌‌

निम्नलिखितं‌ ‌पठितं‌ ‌प्रश्नानाम्‌ ‌उत्तराणि‌ ‌लिखत‌ ‌‌
(‌निम्नलिखित‌ ‌‌को‌ ‌पढ़कर‌ ‌‌प्रश्नों‌ ‌‌के‌ ‌‌उत्तर‌ ‌‌लिखें)‌‌‌

धवलं‌ ‌तव‌ ‌चन्द्रिकावितानम्‌
‌‌तारकखचितं‌ ‌सितपरिधानम्‌
‌मह्यं‌ ‌दास्यसि‌ ‌मातुलचन्द्र!‌‌‌
कुत‌ ‌‌आगच्छसि‌ ‌मातुलचन्द्र?‌‌‌

I‌.‌ ‌‌एकपदेन‌ ‌उत्तरत‌‌‌
(‌क‌)‌ ‌चन्द्रिकावितानं‌ ‌‌कीदृशम्‌ ‌‌अस्ति?‌‌‌
(ख)‌ ‌परिधानम्‌ ‌कीदृशम्‌ ‌अस्ति?‌
उत्तर:
‌(क)‌ ‌धवलम्।‌‌‌
(ख)‌ ‌सितम्।‌

‌‌II.‌ ‌पूर्णवाक्येन‌ ‌उत्तरत‌‌‌
तारकखचितं‌ ‌किम्‌ ‌अस्ति‌?‌ ‌‌
उत्तर:
(‌ii‌)‌ ‌‌’आगच्छसि‌’‌ ‌‌इत्यत्र‌ ‌को‌ ‌लकार:?‌‌‌

III.‌ ‌यथानिर्देशम्‌ ‌उत्तरत‌‌‌
(i)‌ ‌’सितः’‌ ‌इत्यस्य‌ ‌विलोमशब्दं‌ ‌लिखत।‌‌‌
(क)‌ ‌कृष्णः‌ ‌‌
(‌ख‌)‌ ‌‌हरितः‌‌
(‌ग‌)‌ ‌पीतः‌ ‌‌
‌‌(घ)‌ ‌नील:‌‌‌
उत्तर:
(ख)‌ ‌लट्‌ ‌

(‌ii‌)‌ ‌‌’आगच्छसि‌’‌ ‌‌इत्यत्र‌ ‌को‌ ‌लकार:?‌‌‌
(‌क)‌ ‌‌लोट‌‌‌
(ख)‌ ‌लट्‌ ‌
(‌ग‌)‌ ‌लृट्‌ ‌
(घ)‌ ‌लङ्‌‌‌
उत्तर:
(घ)‌ ‌लङ्‌‌‌

II.‌ ‌अन्वयः‌‌‌

अधोलिखितस्य‌ ‌श्लोकस्य‌ ‌अन्वयं‌ ‌लिखत‌
‌‌(निम्नलिखित‌ ‌श्लोक‌ ‌‌का‌ ‌‌अन्वय‌ ‌लिखें।)‌‌‌

अतिशयविस्तृतनीलाका‌शः‌
‌‌नैव‌ ‌दृश्यते‌ ‌क्वचिदवकाशः‌
‌‌कथं‌ ‌‌प्रयास्यसि‌ ‌‌मातुलचन्द्र‌!‌
‌‌कुत‌ ‌‌आगच्छसि‌ ‌‌मातुलचन्द्र‌!‌
उत्तर:
अतिशय‌ ‌विस्तृत‌ ‌नीलाकाशः‌ ‌(अस्ति)‌ ‌क्वचित्‌ ‌अवकाशः‌ ‌नैव‌ ‌दृश्यते।‌ ‌‌(‌हे)‌ ‌मातुलचन्द्र‌!‌ ‌‌कथं‌ ‌प्रयास्यसि‌?‌ ‌‌(‌हे‌)‌ ‌मातुलचन्द्र!‌ ‌कुतः‌ ‌आगच्छसि‌?‌‌‌

बहुविकल्पीयप्रश्नाः‌‌‌

अधोलिखितेषु‌ ‌विकल्पेषु‌ ‌समुचितम्‌ ‌उत्तरं‌ ‌चित्वा‌ ‌लिखत‌‌‌
(निम्नलिखित‌ ‌विकल्पों‌ ‌‌में‌ ‌‌से‌ ‌‌उचित‌ ‌उत्तर‌ ‌चुनकर‌ ‌लिखें।)‌ ‌‌

1.‌ ‌‌अस्मि‌न्‌ ‌पाठे‌ ‌क‌:‌ ‌‌मातु‌ल‌?‌‌‌
(‌क‌)‌ ‌‌चन्द्रः‌‌‌
(‌ख‌)‌ ‌‌सूर्यः‌‌‌
(ग)‌ ‌तारकः‌ ‌‌
(‌घ)‌ ‌मोहनः‌।‌‌‌
उत्तर:
(‌क‌)‌ ‌‌चन्द्रः‌‌‌

2‌.‌ ‌‌अस्मि‌न्‌ ‌‌पा‌ठे‌ ‌चन्द्रः‌ ‌‌कः‌?‌ ‌‌___‌
‌‌(‌क‌)‌ ‌‌पिता‌‌‌
(ख‌)‌ ‌‌मातुलः‌ ‌‌
(‌ग‌)‌ ‌‌मित्रम्‌ ‌‌
(‌घ‌)‌ ‌‌भ्रा‌ता‌।‌‌‌
उत्तर:
(ख‌)‌ ‌‌मातुलः‌ ‌‌

3‌.‌ ‌‌अतिशय‌विस्तृतः‌ ‌कः‌ ‌अस्ति?‌‌‌
(‌क)‌ ‌गृहम्‌‌‌
(ख‌)‌ ‌‌रक्ताम्बरम्‌
‌‌(ग‌)‌ ‌‌नीलाकाशः‌
(घ‌)‌ ‌‌पृथ्वी‌।‌‌‌
उत्तर:
‌‌(ग‌)‌ ‌‌नीलाकाशः‌

‌‌4.‌ ‌‌नीलाकाशः‌ ‌कीदृशः‌ ‌अस्ति‌?‌‌‌
(‌क‌)‌ ‌विशा‌लः‌‌‌
(‌ख)‌ ‌अत्यल्पः‌
‌‌(‌ग‌)‌ ‌‌सूक्ष्मः‌ ‌‌
(‌घ‌)‌ ‌‌अतिशयविस्तृतः।‌‌‌
उत्तर:
(‌घ‌)‌ ‌‌अतिशयविस्तृतः।‌‌‌

5.‌ ‌‌मा‌तुलचन्द्रः‌ ‌‌किं‌ ‌‌न‌ ‌‌किरति‌?‌‌‌
(‌क‌)‌ ‌स्नेहम्‌ ‌‌
(‌ख)‌ ‌दुःखम्‌
‌‌(‌ग‌)‌ ‌‌सुखम्‌ ‌‌
(घ)‌ ‌असत्यम्।‌‌‌
उत्तर:
(‌क‌)‌ ‌स्नेहम्‌ ‌‌

6‌.‌ ‌किम्‌ ‌श्रावयितुं‌ ‌‌शिशुः‌ ‌‌चन्द्रं‌ ‌कथय‌ति‌?‌‌‌
(क‌)‌ ‌‌उपन्यासम्‌‌‌
(‌ख)‌ ‌गीतिम्‌
‌‌(‌ग‌)‌ ‌‌काव्यम्‌ ‌‌
(घ)‌ ‌कलुषम्।‌‌‌
उत्तर:
(‌ख)‌ ‌गीतिम्‌

7.‌ ‌चन्द्रस्य‌ ‌सितप‌रिधानं‌ ‌कथ‌म्‌ ‌‌अ‌स्ति?‌‌‌
(क‌)‌ ‌‌मनोहरम्‌‌‌
(ख)‌ ‌सुन्दरम्‌‌‌
(ग)‌ ‌तारकखचितम्‌ ‌‌
(घ)‌ ‌धवलम्।‌‌‌
उत्तर:
(ग)‌ ‌तारकखचितम्‌

8.‌ ‌चन्द्रिकावितानम्‌ ‌कीदृशम्‌ ‌अस्ति‌?‌‌‌
(क‌)‌ ‌‌मनोहरम्‌‌‌
(‌ख)‌ ‌सुन्दरम्‌
‌‌(‌ग‌)‌ ‌कलुषम्‌ ‌‌
(‌घ‌)‌ ‌‌धवलम्‌।‌‌‌
उत्तर:
(‌घ‌)‌ ‌‌धवलम्‌।‌‌‌

Detailed, Step-by-Step NCERT Solutions for Class 6 Sanskrit Ruchira Chapter 14 अहह आः च Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

NCERT Solutions for Class 6 Sanskrit Ruchira Chapter 14 अहह आः च

अभ्यासः

प्रश्न 1.
अधोलिखितानां पदानां समुचितान् अर्थान् मेलयत
(निम्नलिखित पदों के उचित अर्थों का मेल करें)

क — ख
हस्ते — अकस्मात्
सघा: — पृथ्वीम्
सहसा — गगनम्
धनम् — शीघ्रम्
आकाशम् — करे
धराम् — द्रविणम्
उत्तर:
क – ख
हस्ते — करे
सघा: — शीघ्रम
सहसा — अकस्मात्
धनम् — द्रविणम्
आकाशम् — गगनम्
धराम् — पृथ्वीम्

प्रश्न 2.
मञ्जूषातः उचितं विलोमपदं चित्वा लिखत
(मंजूषा से उचित विलोम शब्द चुनकर लिखें)।
प्रविशति, सेवकः, मूर्खः, नेतुम् नीचैः दुःखितः
(क) चतुरः …………
(ख) आनेतुम् …………
(ग) निर्गच्छति …………
(घ) स्वामी …………
(ङ) प्रसन्नः …………
(च) उच्चैः …………
उत्तर:
(क) चतुरः – मूर्खः
(ख) आनेतुम् – नेतुम्
(ग) निर्गच्छति – प्रविशति
(घ) स्वामी – सेवकः
(ङ) प्रसन्नः – दुःखितः
(च) उच्चैः – नीचैः

प्रश्न 3.
मञ्जूषातः उचितम् अव्ययपदं चित्वा रिक्तस्थानानि पूरयत
(मंजूषा से उचित अव्यय पद चुनकर रिक्त स्थान की पूर्ति करें)
इव , अपि , एव, च, उच्चैः
(क) बालकाः बालिकाः …………………. क्रीडाक्षेत्रे क्रीडन्ति।
(ख) मेघाः …………………. गर्जन्ति ।
(ग) बकः हंसः ……………….. श्वेतः भवति।
(घ) सत्यम् ………………… जयते।
(ङ) अहं पठामि, त्वम् …………….. पठ।
उत्तर:
(क) बालकाः बालिकाः च क्रीडाक्षेत्रे क्रीडन्ति।
(ख) मेघाः उच्चैः गर्जन्ति।
(ग) बकः हंसः इव श्वेतः भवति।
(घ) सत्यम् एव जयते।
(ङ) अहं पठामि, त्वम् अपि पठ।

प्रश्न 4.
अधोलिखितानां प्रश्नानाम् उत्तरं लिखत
(निम्नलिखित प्रश्नों के उत्तर लिखें)
(क) अजीजः गृहं गन्तुं किं वाञ्छति?
(ख) स्वामी मूर्खः आसीत् चतुरः वा?
(ग) अजीजः कां व्यथां श्रावयति?
(घ) अन्या मक्षिका कुत्र दशति?
(ङ) स्वामी अजीजाय किं दातुं न इच्छति?
उत्तर:
(क) अजीजः गृहं गन्तुम् अवकाशं वाञ्छति।
(ख) स्वामी चतुरः आसीत्।
(ग) अजीजः वृद्धां व्यथां श्रावयति।
(घ) अन्या मक्षिका मस्तके दशति।
(ङ) स्वामी अजीजाय धनं दातुं न इच्छति।

प्रश्न 5.
निर्देशानुसारं लकारपरिवर्तनं कुरुत
(निर्देशानुसार लकारपरिवर्तन करें)
यथा- अजीजः परिश्रमी आसीत्- (लट्लकारे) — अजीजः परिश्रमी अस्ति।
(क) अहं शिक्षकाय धनं ददामि। (लुट्लकारे) ………………….
(ख) परिश्रमी जनः धनं प्राप्स्यति। (लट्लकारे) ………………….
(ग) स्वामी उच्चैः वदति। (लङ्लकारे) ………………….
(घ) अजीजः पेटिकां गृह्णाति। (लुट्लकारे) ………………….
(ङ) त्वम् उच्चैः पठसि। (लोट्लकारे) ………………….
उत्तर:
(क) अहं शिक्षकाय धनं दास्यामि।
(ख) परिश्रमी जनः धनं प्राप्नोति।
(ग) स्वामी उच्चैः अवदत्।
(घ) अजीजः पेटिकां ग्रहीष्यति।
(ङ) त्वम् उच्चैः पठ।

प्रश्न 6.
अधोलिखितानि वाक्यानि घटनाक्रमानुसारं लिखत
(निम्नलिखित वाक्यों को घटनानुसार लिखें)
(क) स्वामी अजीजाय अवकाशस्य पूर्णं धनं ददाति।
(ख) अजीजः सरलः परिश्रमी च आसीत्।
(ग) अजीजः पेटिकाम् आनयति।
(घ) एकदा सः गृहं गन्तुम् अवकाशं वाञ्छति।
(ङ) पीडितः स्वामी अत्युच्चैः चीत्करोति।
(च) मक्षिके स्वामिनं दशतः।
उत्तर:
(क) अजीजः सरलः परिश्रमी च आसीत्।
(ख) एकदा सः गृहं गन्तुम् अवकाशं वाञ्छति।
(ग) अजीजः पेटिकाम् आनयति।
(घ) मक्षिके स्वामिनं दशतः।
(ङ) पीडितः स्वामी अत्युच्चैः चीत्करोति।
(च) स्वामी अजीजाय अवकाशस्य पूर्णं धनं ददाति।

पठित-अवबोधनम्

I. पठित-सामग्रीम् आधृत्य अवबोधनकार्यम्
अधोलिखितं पठित्वा प्रश्नानाम् उत्तराणि लिखत
(निम्नलिखित को पढ़कर प्रश्नों के उत्तर लिखें)
अजीजः परिश्रमी आसीत्। सः स्वामिनः एव सेवायां लीनः आसीत्। एकदा सः गृहं गन्तुम्

अवकाशं वाञ्छति। स्वामी चतुरः आसीत्। सः चिन्तयति-‘अजीजः इव न कोऽपि अन्यः कार्यकुशलः। एष अवकाशस्य अपि वेतनं ग्रहीष्यति।’

I. एकपदेन उत्तरत
(क) सः कस्य सेवायां लीनः आसीत्?
(ख) चतुरः कः आसीत्?
उत्तर:
(क) स्वामिनः।
(ख) स्वामी।

II. पूर्णवाक्येन उत्तरत
कः परिश्रमी आसीत्?
उत्तर:
अजीजः परिश्रमी आसीत्।

III. यथानिर्देशम् उत्तरत
(i) ‘चतुरः’ इत्यस्य विलोमशब्दं लिखत।
(क) मूर्खः
(ख) अलसः
(ग) लोभी
(घ) दयालुः
उत्तर:
(क) मूर्खः

(ii) ‘स्वामिनः’ इत्यत्र का विभक्तिः?
(क) चतुर्थी
(ख) षष्ठी
(ग) सप्तमी
(घ) प्रथमा
उत्तर:
(ख) षष्ठी

(iii) ‘आसीत्’ इत्यत्र को लकार:?
(क) लट्
(ख) लोट
(ग) लङ्
(घ) लृट्
उत्तर:
(ग) लङ्

II. प्रश्ननिर्माणम्
(क) अधोलिखितेषु वाक्येषु स्थूलपदानि आधृत्य प्रश्ननिर्माणं कुरुत
(निम्नलिखित वाक्यों में स्थूलपदों को आधार बनाकर प्रश्न निर्माण करें।)
(i) अजीज स्वामिनः सेवायां लीनः आसीत्।
(ii) कुत्रचित् एका वृद्धा मिलति।
(iii) पेटिकायां लघुपात्रद्वयम् आसीत्।
उत्तर:
(i) अजीजः कस्य सेवायां लीनः आसीत्?
(ii) कुत्रचित् एका का मिलति?
(iii) कस्याम् लघुपात्रद्वयम् आसीत्?

III. कथापूर्तिः
अधोलिखिते संदर्भे रिक्तस्थानानि मञ्जूषायाः उचितपदैः पूरयत
(निम्नलिखित संदर्भ में रिक्तस्थान पूर्ति मंजूषा में दिए गए उचित पदों से करें।)

सहसा एका ……………… निर्गच्छति। तस्य च हस्तं …………..। स्वामी …………. वदति। द्वितीयं ……………… पात्रं उद्घाटयति। एका अन्या ……………… निर्गच्छति। सा ……………… दशति।

मञ्जूषा- लघु, दशति, ललाटे, मधुमक्षिका, उच्चैः, मक्षिका।

उत्तर:
सहसा एका मधुमक्षिका निर्गच्छति। तस्य च हस्तं दशति। स्वामी उच्चैः वदति। द्वितीयं लघु पात्रं उद्घाटयति। एका अन्या मक्षिका निर्गच्छति। सा ललाटे दशति।

बहुविकल्पीयप्रश्नाः

अधोलिखितेषु विकल्पेषु समुचितम् उत्तरं चित्वा लिखत
(निम्नलिखित विकल्पों में से उचित उत्तर चुनकर लिखें।)

1. ‘परिश्रमी’ इत्यस्य विलोमशब्दं लिखत।
(क) अलसः
(ख) चतुरः
(ग) लोभी
(घ) निद्रालुः
उत्तर:
(क) अलसः

2. ‘आनय’ इत्यत्र को लकार:?
(क) लट्
(ख) लोट्
(ग) लङ्
(घ) लोट्
उत्तर:
(ख) लोट्

3. ‘नैव’ इत्यत्र सन्धिविच्छेदः कार्यः।
(क) न + इव
(ख) ना + इव
(ग) न + एव
(घ) ने + एव।
उत्तर:
(ग) न + एव

4. ‘अहम्’ इत्यस्य बहुवचनांतरूपं लिखत।
(क) त्वम्
(ख) आवाम्
(ग) यूयम्
(घ) वयम्।
उत्तर:
(घ) वयम्।

5. ‘धरा’ इत्यस्य पर्याय शब्दं लिखत।
(क) पृथ्वी
(ख) शाला
(ग) माला
(घ) शाखा।
उत्तर:
(क) पृथ्वी

6. कुत्रचित् का अमिल?
(क) लता
(ख) वृद्धा
(ग) नर्तकी
(घ) गौः।
उत्तर:
(ख) वृद्धा