Question 1: What is the primary purpose of a Cash Flow Statement in financial reporting?
Answer: The primary purpose of a Cash Flow Statement is to provide information about a company's cash inflows and outflows during a specific period, helping stakeholders assess its liquidity, solvency, and ability to generate cash.
Question 2: Differentiate between cash flow from operating activities and cash flow from investing activities.
Answer: Cash flow from operating activities represents cash flows generated or used in a company's core business operations, while cash flow from investing activities includes cash flows related to the buying or selling of long-term assets like property, plant, and equipment.
Question 3: Why is the Cash Flow Statement considered a complementary statement to the Income Statement and Balance Sheet?
Answer: The Cash Flow Statement complements the Income Statement by showing how net income affects a company's cash position, and it complements the Balance Sheet by explaining changes in cash and cash equivalents over time.
Question 4: Explain the indirect method of preparing a Cash Flow Statement.
Answer: The indirect method starts with net income and adjusts for non-cash items (like depreciation and amortization) and changes in working capital (such as changes in accounts receivable or accounts payable) to determine the net cash provided by operating activities.
Question 5: What does a positive cash flow from financing activities indicate?
Answer: A positive cash flow from financing activities suggests that a company is raising more cash through financing activities like issuing bonds or taking out loans than it is repaying, which can indicate financial flexibility or expansion.
Question 6: Why is it important for investors and creditors to analyze a company's Cash Flow Statement in addition to the Income Statement and Balance Sheet?
Answer: Investors and creditors analyze the Cash Flow Statement to assess a company's cash management, its ability to meet short-term obligations, and its capacity to fund future growth, which provides a more comprehensive view of its financial health.
Question 7.: What are the three main categories of cash flows presented in a Cash Flow Statement?
Answer: The three main categories of cash flows in a Cash Flow Statement are:
Operating Activities
Investing Activities
Financing Activities
Question 8.: How does the Cash Flow Statement help assess a company's liquidity?
Answer: The Cash Flow Statement helps assess liquidity by showing the cash generated or used by operating activities, which indicates a company's ability to meet its short-term obligations and cover day-to-day expenses.
Question 9.: What is the purpose of the reconciliation of net income to net cash provided by operating activities in the Cash Flow Statement?
Answer: This reconciliation adjusts net income for non-cash expenses and changes in working capital to show how net income translates into actual cash generated by a company's core operations.
Question 10.: When would you typically find a negative cash flow from investing activities on a Cash Flow Statement?
Answer: A negative cash flow from investing activities often occurs when a company is investing heavily in long-term assets, such as purchasing new equipment or acquiring other businesses.
Question 11.: How can a company's financing activities impact its Cash Flow Statement?
Answer: Financing activities, such as issuing bonds or repurchasing shares, can impact the Cash Flow Statement by either increasing or decreasing a company's cash position depending on whether it's raising or repaying capital.
Question 12.: What does a significant increase in cash and cash equivalents from one period to another suggest?
Answer: A significant increase in cash and cash equivalents indicates that a company has generated more cash inflows than outflows during the period, potentially improving its financial stability.
Question 13.: Explain the concept of free cash flow and why it's important for investors.
Answer: Free cash flow is the cash left over after a company covers its operating expenses and capital expenditures. It's important for investors because it represents funds available for dividends, debt reduction, or future investments in the business.
Question 14.: How can a negative cash flow from financing activities impact a company's financial health?
Answer: A negative cash flow from financing activities may indicate that a company is repaying more debt or distributing more dividends than it's generating from its financing sources, which could raise concerns about its financial stability..
Issue of debentures chapter
15.What is a debenture?
Answer: A debenture is a long-term debt instrument issued by a company that acknowledges a debt owed by the company to the debenture holder.
16.Mention two types of debentures based on convertibility.
Answer: Two types of debentures based on convertibility are:
Convertible Debentures
Non-Convertible Debentures
17.What is the purpose of a Debenture Trust Deed?
Answer: A Debenture Trust Deed is a document that outlines the terms and conditions of the debenture issue and acts as a safeguard for debenture holders' interests.
18.Explain the difference between a secured debenture and an unsecured debenture.
Answer: A secured debenture is backed by specific assets of the company as collateral, while an unsecured debenture is not backed by any specific assets and relies solely on the company's creditworthiness.
19.What is the Redemption of Debentures?
Answer: Redemption of Debentures refers to the repayment of the principal amount of debentures by the company to the debenture holders upon maturity.
20.What is the Debenture Redemption Reserve (DRR)?
Answer: The Debenture Redemption Reserve (DRR) is a reserve created by a company to ensure that it has sufficient funds to redeem its debentures when they mature.
21.What are the accounting entries for the issue of debentures at par?
Answer: The accounting entries for the issue of debentures at par are:
Debit: Bank Account (for the amount received)
Credit: Debenture Subscription Account (for the face value of debentures)
22.What is the difference between a fixed charge and a floating charge?
Answer: A fixed charge is a specific charge on a company's assets, such as land or buildings, while a floating charge is a charge on assets that change in nature and value, such as inventory or accounts receivable.
23.Explain the concept of Debenture Redemption Reserve (DRR).
Answer: The Debenture Redemption Reserve (DRR) is a statutory requirement in India. It mandates that companies must set aside a certain percentage of their profits each year to create a reserve for the redemption of debentures.
24.What is the significance of a Debenture Trustee in the issue of debentures?
Answer: A Debenture Trustee is appointed to protect the interests of debenture holders. They ensure that the company complies with the terms of the debenture issue and represents the debenture holders in case of defaults or disputes.
ISSUE OF SHARES
Question 25. What is meant by the "issue of shares" in accounting?
Answer . The issue of shares refers to the process by which a company raises capital by offering shares to investors or the public. It involves creating and selling new shares or transferring existing shares to shareholders.
Question 26. What are the two primary types of shares that a company can issue?
Answer .The two primary types of shares that a company can issue are:
Equity Shares: These represent ownership in the company and provide voting rights to shareholders.
Preference Shares: These carry fixed dividend rights and usually do not grant voting rights or limited voting rights to shareholders.
Question 27. Explain the term "Authorized Capital" concerning the issue of shares.
Answer .Authorized Capital refers to the maximum amount of capital that a company is legally allowed to raise by issuing shares. It is specified in the company's Memorandum of Association and can be increased through a formal process.
Question 28..What is the significance of the "Face Value" of a share?
Answer .The Face Value of a share represents the nominal or par value of the share as stated in the company's Memorandum of Association. It is used to calculate the legal capital of the company and is important for various accounting and legal purposes.
Question 29.Describe the process of issuing shares at a premium.
Answer .When shares are issued at a premium, it means they are sold at a price higher than their face value. The premium received is added to a separate account called the "Securities Premium Account," which can be used for specific purposes allowed by law, such as writing off preliminary expenses.
Question 30. What is a "Rights Issue" of shares, and how does it differ from a "Bonus Issue"?
Answer .A "Rights Issue" is when a company offers its existing shareholders the opportunity to purchase additional shares in proportion to their current shareholding. A "Bonus Issue" is the issuance of additional shares to existing shareholders for free, in proportion to their existing holdings, as a form of reward or capitalization of profits.
Question 31.: Explain the term "Underwriting" in the context of the issue of shares.
Answer 31.Underwriting is a financial arrangement where a third party, typically an underwriter or a financial institution, guarantees to purchase any unsold shares in a public issue. This provides assurance to the company that the issue will be fully subscribed.
Question 32.What is the significance of the "Allotment of Shares" in the process of issuing shares?
Answer .Allotment of shares is the formal process of allocating shares to shareholders who have applied for them. It involves determining the specific number of shares each applicant will receive.
Question 33.Explain the concept of "Calls in Arrears" and "Calls in Advance" concerning issued shares.
Answer 34.Calls in Arrears" refer to the amount that shareholders have not paid on their shares. "Calls in Advance" refer to the amount paid by shareholders in advance of the due date for payment of calls.
Question 35.What is the "Forfeiture of Shares," and under what circumstances does it occur?
Answer .Forfeiture of shares happens when a shareholder fails to pay the calls or installments on shares as per the company's requirements. The shares are then forfeited by the company, and the shareholder loses their ownership rights.
Question 36.Define the term "Share Certificate."
Answer . A share certificate is a legal document issued by a company to its shareholders as evidence of their ownership of shares. It typically includes details such as the shareholder's name, the number of shares held, and the distinctive number of the shares.
Question 37..What is the purpose of maintaining a "Register of Members" in a company?
Answer 38. The Register of Members is a record that contains the names, addresses, and shareholdings of all the company's shareholders. It is essential for maintaining accurate ownership records and for communication between the company and its shareholders.
Question 39. Explain the term "Sweat Equity Shares."
Answer . Sweat Equity Shares are shares issued to employees or directors of a company as a reward for their contributions to the company's growth and success, typically in the form of skills, knowledge, or intellectual property.
Question 40.What is the role of the "Debenture Redemption Reserve" in the issuance of debentures?
Answer .The Debenture Redemption Reserve is a fund created by a company to ensure that it has sufficient funds available to redeem its debentures when they mature. It is a mandatory requirement under company law.
Question 41.How does a company use the "Securities Premium Reserve" generated from the issue of shares?
Answer .The Securities Premium Reserve can be used for various purposes allowed by law, such as writing off preliminary expenses, issuing bonus shares, or buying back shares. It cannot be used for regular business expenses.
Question 42. Differentiate between "Private Placement" and "Public Issue" of shares.
Answer : Private Placement involves the sale of shares to a select group of investors or institutions without making a public offer, while a Public Issue is the sale of shares to the general public through a prospectus and listing on a stock exchange.
Question 43..What is the significance of the "Stipulation of Rights" in a rights issue of shares?
Answer . The stipulation of rights specifies the terms and conditions under which existing shareholders can exercise their right to purchase additional shares in a rights issue. It includes details such as the subscription price and the deadline for exercising the rights.
Comparative &Common Size Income
& Balance sheet(Financial Statement)
Question44.: What is a common size income statement, and how is it calculated?
Answer: A common size income statement is a financial statement that expresses each line item as a percentage of total revenue. To calculate it, you divide each line item on the income statement by the total revenue and multiply by 100 to get the percentage.
Question:45. Why is a common size income statement useful for financial analysis?
Answer: A common size income statement helps in comparing the relative proportions of different expense and income categories within a company. This makes it easier to identify trends, evaluate cost structures, and assess the overall financial health of a business.
Question46.: What is a common size balance sheet, and how is it calculated?
Answer: A common size balance sheet is a financial statement that expresses each line item as a percentage of total assets. To calculate it, you divide each line item on the balance sheet by the total assets and multiply by 100 to get the percentage.
Question47.: What is the primary benefit of using a common size balance sheet?
Answer: A common size balance sheet is beneficial for analyzing the composition of a company's assets, liabilities, and equity. It helps in understanding the relative importance of different items on the balance sheet and evaluating a company's liquidity, leverage, and financial structure.
Question48.: How can common size financial statements be used in comparing companies?
Answer: Common size financial statements can be used to compare companies of different sizes and industries by focusing on the percentage composition of key financial elements. This allows for a more standardized comparison, making it easier to identify differences and similarities in their financial structures.
Question49: In a common size income statement, if the cost of goods sold (COGS) is 40%, what does this mean?
Answer: If COGS is 40% in a common size income statement, it means that the cost of producing or acquiring the goods sold by the company represents 40% of its total revenue.
Question50.: Why is it important for investors and analysts to use common size financial statements when assessing a company's performance?
Answer: Common size financial statements provide a standardized view of a company's financial data, making it easier to compare across time periods or with other companies. This assists investors and analysts in making informed decisions and assessing the company's financial health and efficiency.
Question51: What is the purpose of preparing a comparative income statement?
Answer: The purpose of preparing a comparative income statement is to analyze and compare a company's financial performance over multiple periods, typically two or more years. This helps in identifying trends, changes in revenue, expenses, and profitability, which can be crucial for decision-making and financial planning.
Question 52: How is the information presented in a comparative income statement different from a single-period income statement?
Answer: In a comparative income statement, financial data for multiple periods (e.g., two or more years) is presented side by side, allowing for a direct comparison of revenues, expenses, and net income across those periods. In contrast, a single-period income statement only provides data for a specific accounting period, without any historical comparison.
Question 53: Why is it important to analyze the percentage change in key income statement line items between two comparative periods?
Answer: Analyzing the percentage change in key income statement line items between two comparative periods is important because it helps assess the rate of growth or decline in those items. It provides insights into which aspects of the business are improving or deteriorating, aiding management in making informed decisions to address areas that need attention.
Question 54: What is the purpose of preparing a comparative balance sheet?
Answer: The purpose of preparing a comparative balance sheet is to show a snapshot of a company's financial position at the end of multiple periods (e.g., two or more years). It allows stakeholders to assess changes in a company's assets, liabilities, and equity over time, which is crucial for understanding its financial stability and growth.
Question 55: How is the presentation of information in a comparative balance sheet different from a single-period balance sheet?
Answer: A comparative balance sheet presents the financial position of a company at the end of two or more periods side by side, facilitating a direct comparison of assets, liabilities, and equity. In contrast, a single-period balance sheet provides a snapshot of the financial position for a specific date without any historical comparison.
Question 56: What can be inferred if a company's total assets have increased over the comparative periods in a balance sheet?
Answer: If a company's total assets have increased over the comparative periods in a balance sheet, it generally indicates growth and expansion. It suggests that the company has acquired more resources, which could be used for investments, expanding operations, or paying off debts, depending on the specific changes in asset categories.
