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Thread: Notes For CA Final - Advanced Accounting Notes.

  1. #1
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    Advanced Accounting – CA Final – Useful Notes


    Chapter 2 – COMPANY ACCOUNTS

    Chapter – 2, Unit 1 – Statutory Financial Statements

    Question: 1

    What are the limitation of Financial Statements?

    Answer: 1

    (a) Financial statements provide mostly historical data since its elements like assets & liabilities etc are measured mostly using historical cost.
    (b) In India financial statements are prepared recognizing legal form of the transactions and ignoring the substance.
    (c) They are essentially based on going concern assumption, the applicability of which may sometimes be highly illogical & misleading.
    (d) They don’t reflect and include a cash flow report to explain movement of cash.
    (e) They are over generatised as sometimes interests of different sectors may be conflicting in nature.
    (f) It can’t be understood by all.
    (g) It doesn’t show all information at one place as they may also be given in notes & explanation.
    (h) It different companies follow different accounting policies comparison becomes different.

    Question: 2

    What are the advantages of Vertical Financial Statements?

    Answer: 2

    (a) Financial position can be readily comprehended by a layman.
    (b) Profit & loss A/c. clearly shows amount of Trading / Non Trading profit earned during the year, previous year B/F figures and appropriation proposed by directors.
    (c) It clearly shows amount of debt by shareholders equity and correspondence position of assets regregated into FA and WC.

  2. #2
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    Chapter – 2, Unit 3 – Best Presented Accounts

    Question: 1

    What are the conditions for entry to the annual competion for the Best Presented Accounts?

    Answer: 1

    (a) The entities are divided into 4 categories:-
    (i) Category I – Includes all non financial public/joint sector companies an also non financial statutory corperations.
    (ii) Category II – It includes all non financial private/joint sector.
    (iii) Category III – Include financial institutions, banks and financial companies in both public, private & joint sectors.
    (iv) Category IV – it includes entities like Port Trusts, Municipal Corporation, Public Utilities not reqd under the Company Accounts, Co.-operative solution.

    (b) Awards are as follows:-

    Category I - A silver (First) shield & one plaque (2nd highly commended)
    Category II - - do -
    Category III - A silver shield for Best Present Accounts
    Category IV - A plaque for the Best Presented Accounts.

    (c) Accounts should relate to any day between 1st April and 31st March of next year.
    (d) Six copies of the specified documents has to be sent before the specified date.
    (e) Cyclostyled copies of Accounts & Reports wont be accepted except far those covered under category IV.
    (f) Decision taken by the panel of judges appointed by the institute in their regard will be final.

    Question: 2

    Important factors generally considered for the Award of shields and plaque for the Best Presented Accounts.

    (a) Compliance with the legal requirements in the preparation and presentation of financial statements as specified by the relevant statutory
    (b) Basic quality of Accounts as judged from the qualification of auditors in their reports etc & compliance with reference to other AS, SAP, Guidance Notes etc given by the ICAI.
    (c) The nature quality of information presented in the accounts to make the disclosure meaningful.
    (d) How information one directors report and/or chairman’s statements.
    (e) The quality of printing and general presentation.

  3. #3
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    Chapter – 2, Unit – 4 Accounting for Amalgamations

    Question: 1

    Define the term Amalgamation.

    Answer: 1

    Amalgamation is blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry blended undertakings. There may be (shareholders in the company) amalgamation either by the transfer of 2 or more undertakings to an existing company. The term amalgamation contemplates not only state of things in which too companies are so joined as to form a new company but also the absorption & blending of one by the other.

    Question: 2

    Explain the types of Amalgamation.

    Answer: 2

    Basically there are 2 types of Amalgamation namely

    (i) Amalgamation in the nature of merger where there is genuine pooling not merely in Assets & Liabilities but also in share holders interests of business of these companies. The following conditions are a pre requisite.

    (a) All assets & liabilities of transferor company become after amalgamation assets & liabilities of the transferee company respectively.

    (b) Shareholder holder holding not < 90% of the FV of the equity shares of the transferor Co. become equity share holder of the transferee Co. after amalgamation.

    (c) The consideration for the amalgamation is discharged by the transferee wholly by issue of equity shares, except that cash may be paid in respect of any fractional shares.

    (d) The business of transferor is intended to be carried on after the annual generation by the transferee company.

    (e) All assets and liabilities are to be taken over at Book Values except to ensure uniformity of Accounting policies.

    (ii) Amalgamation in the nature of purchases. Those amalgamations which don’t satisfy any one or more of the conditions specified in (a) through (c) above are known as Amalgamation in the nature of purchases.

    Question: 3

    List down the methods of Accounting for Amalgamation.

    Answer : 3

    (a) The pooling of Interests Methods and
    (b) The Purchase method.

  4. #4
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    Chapter – 2, Unit – 5 Corporate Restructuring

    Question: 1

    What are the different methods of Restructuring?

    Answer : 1

    Restructuring can be broadly classified into:

    (a) External Restructuring:- This uniform is further classified into (I) Asset Based (Portfolio) restructuring and (ii) Financial or Capital restructuring.

    (b) Internal Restructuring:- This is twin is further divided into (I) portfolio restructuring and (ii) Organisational restructuring.

    Its to be noted that Asset Based restructuring is of vital importance as it includes the following:-

    (1) Mergers and Acquisitions (M & A)
    (2) Divestitores and Asset – Swap.
    (3) Demergers or spin-offs.

  5. #5
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    Chapter 3 – Unit 2 – Valuation of Business

    Question: 1

    What is the need for valuation of Business ?

    Answer: 1

    The following represent the need for business valuation –

    (a) In Merger & Take overs valuation of business plays a key role for setting the purchase consideration and value of proportion that is taken over respectively.

    (b) In the case of sale of business it’s needed to fix up the bargaining limit.

    (c) At the time of liquidation it’s needed to determine the amount which the shareholders would get on liquidation.

    Question: 2

    What valuation box should you adopt while valuing a business as going concern?

    Answer: 2

    Under the going concern approach it is important to understand what benefit the business is able to generate in future out of its existing stock of exists although value of existing assets is not ignored by the accountants.

    Question: 3

    What are the different valuation method under a going concern concept?

    Answer: 3

    (i) Historical cost valuation
    (ii) Current cost valuation
    (iii) Economic valuation
    (iv) Asset valuation

    Question: 4

    Explain briefly the relative advantage and disadvantages of valuation of business following economic valuation or
    (i) Capitalisation of future maintainable Profit
    (ii) P.V of future earnings
    (iii) PV of future cash flows.

    Answer: 4

    The following are the advantage & disadvantage of the above mentioned methods of economic valuation.

    (i) Its may logical and based on scientific principle.
    (ii) If inputs are accurate then it can provide very accurate results.
    (iii) Its simple to calculate and easy to understand.

    (i) Difficulties involved in estimating future cash flows.
    (ii) Subjectivity involved in choice of the future period for which cash flows to be estimated.
    (iii) Subjectivity is involved in the selection of discount rate.

    Question: 5

    Why does valuation of business differ if done is isolations compared to that when done in combination of another business? What is meant by value of control?

    Answer: 5

    (a) Main difference between the value of a business in isolation & that of a combination of another business is the value of voting control.

    (b) The value of control is the present value of the change in cash flows which will be realised – from exercising control.

    (c) Controlling interests enable the owner of that interest to arrange the affairs of the business in a way that best suits his own circumstances.

  6. #6
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    Chapter – 3 Unit – 3 Valuation of Goodwill

    Question: 1

    Define goodwill & distinguish between purchased & interested G/W.

    Answer: 1

    In the words of Lord Macnaughton (In IRC Vs Muller 1991) – “Goodwill is a thing very easy of disoule, very difficult to define. In the benefit and advantage of the good name, reputation & connection of a business. In the attractive force which bring in customers. Its one thing which distinguishes an old established business from a new business at its first start.”

    • It can arise to two ways. It could be either generate internally or he inherent to the business known as inherent goodwill.
    • It may also be acquired while purchasing any concern in the excess of fair value of the purchase consideration over the fair value of the separable net assets acquired.

    Question: 2

    Describe briefly the contributing factor of goodwill.

    Answer: 2

    Inherent & Purchased Goodwill
    Purchased goodwill only
    (a) Superior Management Team Market dominance
    (b) O/s Sales manage or organisation Economic of seals, (Production, Advantage etc.)
    (c) Weakness in the management of competitor Cost solving
    (d) Effective advertisement Cost of financing
    (e) Secret or patented manufacturing Fiscal advantages
    (f) Good labour relations Strong liquid resources
    (g) O/S credit rating Preliminary expense savings
    (h) Good public image Ability to guarantee suppliers
    (i) Favourable tax conditions Ability to guarantee market
    (j) Discovery of talent or resources Cost of acquisition
    (k) Excellent reputation for quality and reliability of products Opinion of acquirer’s directors as to future policy of acquires.

    Question: 3

    Discuss various methods of goodwill valuation.

    Answer: 3

    Basically there are two accounting methods for goodwill valuation namely capitalisation method of super profit method. A third method called annuity method is a refine mat of the super profit method of goodwill valuation.

    (a) Capitalisation method:- Future maintainable profit is capitalised applying normal rate of return to arrive at the normal capital employed goodwill is excess of normal capital employed over the actual capital employed.

    Goodwill = Normal capital employed – Actual closing capital employed
    Normal Capital Employed => FMP/Normal rate of return.

    (b) Super profit Method:- Excess of FMP over normally expected profit is called super profit. Here G/W is taken as the aggregate super profit of the future years for which super profit is expected to be maintained.

    G/W = Super Profit x No. of years
    Where Super Profit = FMP – (Actual Capital Employed x Normal Rate of Return).

    (c) Annuity Method: - Since Super Profit is expected to arise as different future time periods it would be apt to discount using appropriate discount factor future values of super profits and arrive at the present value.

    Goodwill => Super Profit x No. of years
    No. of years is to be calculated wrt appropriate discount rate and no. of years correspondingly.

    Question: 4

    How do you find out capital employed for goodwill valuation? Would you prefer ‘Long term Fund’ to ‘shareholders fund’ approach?

    Answer: 4

    For goodwill valuation capital employed is calculated using: -

    CE => Net Worth – Non trading assets. Here generally shareholders Fund approach is preferred because the lenerage advantage has been taken into considerations where in use of lower amount of owned fund results in higher return due to usage of borrowed funds advantageously.

  7. #7
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    Chapter – 3, Unit – 4 Valuation of Shares

    Question: 1

    What factors have to be considered for valuation of shares under Net Assets Basis?

    Answer: 1

    (a) Value of tangible fixed asset should be taken at current cost.
    (b) Value of intangible should also be taken at their current cost.
    (c) Investments like shares & securities regularly traded to market price should be taken as current value of investments & wrt others book value after making adjustments for known losses/gains should be taken.
    (d) Inventories consisting of FG @ Market price & others at cost following a conservative approach.
    (e) Sundry Debtors must be taken at Net realiable value after making proper allowance for bad & doubtful debts.
    (f) Development expenses and miscellaneous expenditure & loss are not considered.

    Question: 2

    What other special factors are to be considered while doing valuation of equity shares?

    Answer: 2

    (a) Importance of the size of the block of shares – wrt control.
    (b) Restricted transferability as contained in the Articles of Association except in certain cases.
    (c) Dividends and valuation also pay an important role is companies paying high dividends @ a stready rates with high share prices enjoy the confidence of the public and vice versa as prices are lived to the rise factor primarily.
    (d) Bonus & rights issue: - When such issue are announced shares values go up generally.

    Question: 3

    What are the factors to be considered for valuation of preference shares?

    Answer: 3

    The following factors are generally considered.

    (a) Risk free rate & small risk premium ie Marked expectation rate
    (b) Ability of the company to pay dividend on a regular basis.
    (c) Ability of the company to redeem preference share capital.

  8. #8
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    Chapter – 4, Unit – 1 Holding Company Accounts legal Requirements in India

    Question: 1

    Briefly discuss the requirements of see 212 of the Companies Act wrt disclosure of information regarding investment in subsidiaries.

    Answer: 1

    The holding company as v/s 212 is required to attach to its balance sheet the following documents in respect of each of its subsidiaries.

    (i) A copy of the Balance Sheet of the company
    (ii) A copy of its profit & loss account
    (iii) A copy of the report of its Board of directors.
    (iv) A copy of the report of its auditors.
    (v) A statement of the holding Co.’s interest in the subsidiary as specified in section 212(3).
    (vi) Statement referred to in Sec. 212(5).
    (vii) The report if any referred to in Section 212(6).
    (viii) If for any reason the Board of directors in unable to obtain information on any of the matters required, a report in writing to that effect should be attached along with the Balance sheet.

  9. #9
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    Chapter – 4, Unit – 2 Accounting for Investments

    Question: 1

    What are the methods for Accounting of Investment of explain them Briefly?

    Answer: 1

    When consolidated as well as separate financial statements are prepared then basically there are two methods namely the equity method and the cost method.

    (a) Equity Method :-

    (i) The investment is initially recorded at cost.

    (ii) The carrying amount is increased/decreased to recognise the investors share of the profits or losses of the investee after the date of acquisition.

    (iii) Distribution received from the investee reduce the carrying amount of the investment.

    (iv) Adjustments to the carrying amount may also be necessary for alterations in the investor’s proportionate interest in the investee arising from changes in the investee’s equity that have not been included in the income statement.

    (b) Cost Method :-

    (i) Investments in the shares of subsidiary are shown at cost.

    (ii) Holding Company recognises income from investments in subsidiary only if the distribution from the accumulated net profit of the investee represents income earned subsequent to the date of acquisation to it.

    (iii) Distributions received in excess of such profits are considered as recovery of investment & recorded as reduction in cost of investment.

  10. #10
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    Chapter – 4, Unit – 3 Consolidated Financial Statements

    Question: 1

    What are the main advantages of consideration?

    Answer: 1

    The following as the advantages: -

    (i) The users of accounts earn get an overall picture of the holding company its subsidiaries.
    (ii) Intrinsic share value of the holding Co. can be calculated directly.
    (iii) Consolidated Financial Statements provide information for identifying revenue profit for determining return on investment.
    (iv) CFS shows the Minority interest of outside shareholders include can be used as the statutory point of bargaining at the time of acquisitions of a subsidiary.
    (v) The overall financial health of the Holding Co. can be judged using consolidated financial statements.

    Question: 2

    What are the procedures to the undertaken for consolidation?

    Answer: 2

    The following are the consolidation procedures: -

    (i) The financial statements of the parent & its subsidiaries are combined on a line by line basis by adding together like items of assets, liabilities etc.

    (ii) Carrying amount of the parent’s investment in each subsidiary & the parent position of equity of each subsidiary are eliminated.

    (iii) Inter group transactions, included sales, dividend expenses are eliminated in full.

    (iv) Unrealised losses resulting from intragroup transactions that are deducted in arriving at the carrying amount are also eliminated unless cost cant be recovered.

    (v) Similar to above unrealised profits included in the carrying amount of assets, such as investing & fixed assets are eliminated in full.

    (vi) Minority Interest in the net income of consolidated subsidiaries are identified and adjusted against the income of the group to arrive at the net income attributable to the owners of the parent.

    (vii) Minority interest in the Net Assets are identified separately from liabilities & the parent shareholders’ equity.

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