Question: 1 1(a) State with reason whether the following statements are true or false (No Marks shall be awarded without valid
reason): [2 x 5 =10 Marks]
(i) Change in Method of Depreciation is regarded as change in Accounting Policy of the entity.
(ii) Depreciation is non-cash and non- operating expense which is to be provided for whether there are profits/losses.
(iii) Net Profit is reflected in higher cash balances and net loss is reflected in lower net worth.
(iv) Contingent liability is an ascertained liability but its amount and due date are indeterminate.
(v) Fundamental Assumptions are always required to be disclosed in the financial statements.
(b) Explain the relevant accounting assumption or principle which is an exception to Full Disclosure Principle.
Answer:(A) I. True, Change in Method of Depreciation is regarded as change in Accounting Policy of the entity.
II. FALSE, Depreciation is non-cash and non- operating expense which is to be provided for whether there are profits/losses.
III. TRUE, there are profits/losses. Net Profit is reflected in higher cash balances and net loss is reflected in lower net worth.
IV FALSE Contingent liability is a unascertained liability but its amount and due date and indeterminate. The occurrence or non occurrence along with the amount of liability that might arise is not certain.
V False Fundamental Assumptions are always required to be disclosed in the financial statements
Question 1 (B)
Answer
According to GAAP, the full disclosure principle ensures that the readers and users of a business’s financial information are not mislead by any lack of information. This way you assure stakeholders such as creditors and investors that they are aware of the any relevant information and are fully informed about the company when making business decisions concerning the company.
The main purpose behind the full disclosure principle is to avoid managers or accountants not disclosing any information that could be of great importance and affect the businesses financial situation. The reason for not disclosing information could be to manipulate their financial statements to look stronger than the business actually is.
For businesses, the full disclosure principle means sharing your internal financial information with the outside world. This information can be anything from transactions that have already occured, to future events or expenses anticipated. In other words, the financial statements should be transparent and include any information that could potentially influence the judgement of an outsider on or about the company.
Information to be disclosed
Information that should be disclosed could include any of the following:
Accounting policies followed
Acknowledgement of any change in accounting system or principles, and justification
All financial statements (including footnotes or any supplementary notes)
Inventory losses (due to demand decrease, obsoleteness, or damage)
Nature of non-monetary transactions
Description of asset retirement obligations
Any future expectations of changes in VAT rates
Question (C) AnswerArrangement of Assets
The asset with the highest permanence is placed first (at the top) and the the asset with least permanence is placed last.
Goodwill is considered to be the asset with the highest permanence. It moves out of the organisation only when the organisation is dissolved.
Cash is considered to be the asset with the least permanence. It keeps moving in and out regularly.
Permanence can be understood as the inverse of liquidity. Though it is not a requirement that a less liquid asset should have greater permanence, this idea holds in most cases. Thus, the Order of permanence is considered to be the reverse of the Order of Liquidity.
Arrangement of Liabilities
Every liability is supported to the extent of its value, by one or more assets. Assuming all liabilities are cleared by paying out, we need cash to clear the liabilities. To clear short term liabilities we bank on assets that can be speedily converted to cash. Since short term liabilities are to be cleared at short notice, we use assets with a short life span, which are generally the ones that can be speedily converted to cash (more liquid assets) to clear the short term liabilities.
Short term liabilities like creditors, bank overdraft are matched with assets with a lesser permanence (i.e. assets which are more liquid), while long term liabilities are matched to assets with a higher permanence (i.e. assets which are less liquid).
Since assets with higher permanence are placed at the top (first), under this method, the liabilities with higher permanence are placed first (so that they match the assets with higher permanence) and the liabilities with lesser permanence are placed last.
Capital is considered to be the liability with highest permanence.
Paying out capital amounts to dissolving the organisation. It has to be paid out only after every other liability is paid out.
Bank Overdraft is considered to be the liability with the least permanence.
It has to be paid at the earliest. It gets transformed/adjusted with every transaction carried on that involves the organisation's bank account.
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1 Comments
1(b) answer plzz
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