Important Theory and Question Practice for Last Minute Preparation for CBSE 12th Accountancy

Class 12 Accounts Important Theory + Question Practice is given for CBSE 12th Accounts board exam (24 February, 2026). Class 12 Accountancy is a subject where strong theory understanding and consistent question practice together lead to high scores.

To score 90+ marks in the Class 12 Accounts Board Exam 2026, students must combine important theory revision with structured question practice. Here are the most scoring theoretical concepts along with the types of practical questions frequently asked in board exams. 

Revision through Multiple Choice Questions

Rules in the Absence of a Partnership Deed

When a partnership deed is absent or silent, the Indian Partnership Act, 1932, dictates specific rules:

A key distinction: Allowed means the firm gives interest (e.g., Interest on Capital); Charged means the firm takes interest (e.g., Interest on Drawings).

Fixed vs. Fluctuating Capital Methods

Questions involving items like "Drawings against capital" imply the Fixed Capital Method. Under this method, a Partner's Capital Account records capital-related transactions, while a Partner's Current Account handles operational appropriations.

• Drawings against Capital: Debited to Partner's Capital Account.

• Partner's Salary: Credited to Partner's Current Account.

• Fresh Capital Introduced: Credited to Partner's Capital Account.

• Interest on Drawings: Debited to Partner's Current Account.

Calculating Interest on Quarterly Drawings

For withdrawals of ₹6,000 regularly at the end of every quarter with 8% p.a. interest:

1. Total Drawings: ₹6,000 × 4 = ₹24,000

2. Average Period: (Months left after 1st drawing + Months left after last drawing) / 2 = (9 months + 0 months) / 2 = 4.5 months.

3. Interest on Drawings: ₹24,000 × (8/100) × (4.5 / 12) = ₹720.
   (Memory Tip: To avoid decimals, 4.5/12 can be expressed as (9/2) * (1/12) for easier calculation.)

Manager's Commission vs. Partner's Salary

Manager's Commission is a charge against profit, calculated before appropriations. Partner's Salary is an appropriation of profit.

If profit is ₹75,000 after charging partner's salary (₹7,500/month) and manager's commission is 10% on net profit after charging such commission:

1. Partner's Annual Salary: ₹7,500 × 12 = ₹90,000.

2. Net Profit before Appropriations: ₹75,000 (Given Profit) + ₹90,000 (Salary) = ₹1,65,000.

3. Manager's Commission (After Charging): Profit × (Rate / (100 + Rate)) = ₹1,65,000 × (10 / 110) = ₹15,000.

Past Adjustments: Using the Profit & Loss Adjustment Account

To rectify omitted Interest on Capital (IOC) and partner's salary using a Profit & Loss Adjustment Account:

Problem: IOC (Cheese ₹3,000, Slice ₹6,000) and Cheese's Salary (₹5,000) omitted. Profit distributed equally.

Journal Entries via P&L Adjustment Account:

1. To record omitted Interest on Capital:

• Profit & Loss Adjustment A/c Dr. 9,000

• To Cheese's Capital A/c 3,000

• To Slice's Capital A/c 6,000

2. To record omitted Salary:

• Profit & Loss Adjustment A/c Dr. 5,000

• To Cheese's Capital A/c 5,000

3. To distribute the adjustment loss: (Total debit to P&L Adjustment is ₹14,000, distributed equally).

• Cheese's Capital A/c Dr. 7,000

• Slice's Capital A/c Dr. 7,000

• To Profit & Loss Adjustment A/c 14,000

Solving Missing Figure Problems: P&L Appropriation Account

To complete a partially filled P&L Appropriation Account:

Problem Context: Profit for the year before providing for rent ₹2,00,000. Rent to partner ₹2,500/month. Anne's commission 2% on net profit.

Solution Steps:

1. Differentiate Charge vs. Appropriation: Rent to a partner is a charge against profit, deducted before P&L Appropriation.

2. Calculate Net Profit: ₹2,00,000 (Profit before rent) - (₹2,500 × 12) = ₹1,70,000.

3. Calculate Commission: Anne's Commission: ₹1,70,000 × 2% = ₹3,400.

4. Calculate Divisible Profit: ₹1,70,000 - IOC - Salary - Commission = Divisible Profit.

Advanced Goodwill Calculation with Profit Adjustments

Calculating goodwill based on average adjusted profit requires incorporating complex adjustments:

1. Abnormal Loss/Gain: Add back abnormal losses; subtract abnormal gains to normalize profit.

2. Valuation of Stock:

• Overvaluation of Closing Stock: Subtract from current year's profit.

• Impact on Next Year: This overvaluation becomes overvalued opening stock for the next year, which artificially reduces profit. So, add back to the next year's profit.

3. Error in Capital vs. Revenue Expenditure: If a revenue expense (e.g., repair) is wrongly capitalized:

• Year of Error: Subtract the actual expense. Add back the incorrect depreciation charged.

• Subsequent Year: Add back incorrect depreciation (calculated on Diminishing Balance Method for subsequent years).

4. Handling of Loss Figures: When adjusting a year with a loss, be careful with signs. For example, (-₹40,000) - ₹20,000 (abnormal gain) results in -₹60,000.

Final Calculation Steps:

1. Calculate adjusted profit for each year.

2. Sum adjusted profits.

3. Calculate Average Adjusted Profit.

4. Calculate Goodwill (Average Adjusted Profit × Years' Purchase).

Comprehensive Problem 1: Change in Profit-Sharing Ratio

This problem integrates Revaluation, Reserves, and Goodwill.

Partners: Raju, Kaju, Vaju. Old PSR: 5:3:2. New PSR: 2:2:1.

1. Gaining and Sacrificing Ratio: Old Share - New Share.

• Raju: (5/10) - (2/5) = 1/10 (Sacrifice)

• Kaju: (3/10) - (2/5) = -1/10 (Gain)

• Vaju: No Change.

• Conclusion: Kaju gains, Raju sacrifices.

2. Balance Sheet Items and Adjustments:

• Debit Balance of P&L A/c (Loss): Debited to partners' capital in old PSR.

• General Reserve (Profit): Credited to partners' capital in old PSR.

• Goodwill of the Firm (Valued): Adjustment through capital accounts (Gainer to Sacrificer) based on gaining/sacrificing ratio.

• Investment Fluctuation Fund (IFF) & Revaluation: If investment gains, IFF is fully distributed in old PSR. If a claim exists, only the surplus is distributed.

• Workmen Compensation Reserve (WCR) & Claim: If Claim > WCR, the excess is a loss debited to Revaluation Account. The WCR is used to cover the claim.

• Other Revaluation Items: Stock depreciation, unrecorded liabilities are losses (debit Revaluation). Unrecorded assets are gains (credit Revaluation).

3. Final Revaluation Profit/Loss: The net balance of the Revaluation Account is transferred to partners' capital accounts in the old PSR.

MCQ Analysis: Determining Loss on Workmen Compensation

If WCR Balance is ₹65,000, and B's share of loss on WCR claim (old PSR 4:3:2) is ₹5,000, to find the Total Loss on Workmen Compensation:

1. Total Revaluation Loss: If B's share (3/9) is ₹5,000, then the total loss debited to Revaluation is ₹5,000 × (9/3) = ₹15,000.

2. Total Claim: This total revaluation loss of ₹15,000 represents the amount by which the claim exceeded the WCR. So, Total Claim = WCR Balance + Total Revaluation Loss = ₹65,000 + ₹15,000 = ₹80,000.

3. The "Total Loss on Workmen Compensation" refers to the total claim amount from the firm's perspective.

Goodwill Calculation: Capitalization of Super Profit Method

To calculate goodwill using Capitalization of Super Profit:

Data: Average Profit ₹2,40,000; NRR 12%; Partner Capitals; General Reserve; P&L Debit Balance ₹1,00,000.

1. Calculate Capital Employed: Partners' Capital + Reserves - P&L (Debit Balance) = ₹5,50,000 + ₹6,50,000 + ₹3,00,000 - ₹1,00,000 = ₹14,00,000.

2. Calculate Normal Profit: Capital Employed × NRR = ₹14,00,000 × 12% = ₹1,68,000.

3. Calculate Super Profit: Average Profit - Normal Profit = ₹2,40,000 - ₹1,68,000 = ₹72,000.

4. Calculate Goodwill: Super Profit × (100 / NRR) = ₹72,000 × (100 / 12) = ₹6,00,000.

Comprehensive Problem 2: Admission of a Partner (Journal Entries)

For admission, prepare for journal entries.

New partner Suman admitted for 1/5th share, brings capital and goodwill. Firm's goodwill ₹1,00,000. Old partners' (Raman, Aman) sacrificing ratio 3:1.

Key Journal Entries:

1. Capital and Goodwill Premium:

• Suman's goodwill share: ₹1,00,000 × (1/5) = ₹20,000.

• Bank A/c Dr.

• To Suman's Capital A/c

• To Premium for Goodwill A/c (Use Bank Account if bank balance is in B/S).

2. Distribution of Goodwill Premium:

• Premium for Goodwill A/c Dr.

• To Raman's Capital A/c (₹15,000)

• To Aman's Capital A/c (₹5,000)

3. Workmen Compensation Claim (Claim > Reserve): WCR ₹55,000, Claim ₹60,000.

• Excess claim ₹5,000 debited to Revaluation.

• WCR A/c Dr. ₹55,000

• Revaluation A/c Dr. ₹5,000

• To Workmen Compensation Claim A/c ₹60,000

4. Bad Debts and Provision for Doubtful Debts: Debtors ₹95,000; Existing Prov. ₹7,000; Bad Debts ₹5,000; New Prov. 5%.

• Debtors after write-off: ₹95,000 - ₹5,000 = ₹90,000.

• New Provision: ₹90,000 × 5% = ₹4,500.

• Total Provision needed (Bad Debts + New Prov.): ₹5,000 + ₹4,500 = ₹9,500.

• Shortfall (loss to Revaluation): ₹9,500 - ₹7,000 (Existing) = ₹2,500.

• Revaluation A/c Dr. ₹2,500

• To Provision for Doubtful Debts A/c ₹2,500

5. Final Revaluation Loss Entry: Net loss/profit from Revaluation is transferred to old partners' capital accounts in their old profit-sharing ratio.

Comprehensive Problem 3: Retirement of a Partner

Partner A retires. PSR 2:3:2 (from capital proportions).

Key Distinction: Employees' Provident Fund is a liability, not distributed. Workmen Compensation Reserve is a reserve.

Preparation of Revaluation Account

1. Land and Building "Under-valued by 15%": Book Value (₹3,91,000) is 85% of True Value.

• True Value = ₹3,91,000 / 0.85 = ₹4,60,000.

• Gain: ₹4,60,000 - ₹3,91,000 = ₹69,000 (Credit Revaluation).

2. Machinery "Depreciated to ₹3,90,000": Book Value ₹6,00,000.

• Loss: ₹6,00,000 - ₹3,90,000 = ₹2,10,000 (Debit Revaluation).

3. Bad Debts of ₹35,000: Existing Provision ₹20,000.

• Additional Loss: ₹35,000 - ₹20,000 = ₹15,000 (Debit Revaluation).

4. Unrecorded Liabilities/Assets: Unrecorded Liability ₹30,000 (Debit Revaluation); Unrecorded Asset ₹40,000 (Credit Revaluation).

5. Accrued Income/Outstanding Expense: Accrued Income ₹6,500 (Credit Revaluation); Outstanding Expense ₹500 (Debit Revaluation).

6. Workmen Compensation Claim (Claim < Reserve): WCR ₹30,000, Claim ₹15,000.

• Surplus of ₹15,000 (₹30,000 - ₹15,000) is distributed to all partners in their old PSR. This does not affect Revaluation.

7. Revaluation Loss: Assume total calculated Revaluation Loss is ₹1,40,000 (A: ₹40,000, P: ₹60,000, T: ₹40,000 in 2:3:2 ratio).

Partners' Capital Accounts

1. Initial Postings: Opening Balances, WCR Distribution (surplus ₹14,000), and Revaluation Loss (debit).

2. Goodwill Treatment: Firm's Goodwill ₹2,80,000. A's share (2/7) = ₹80,000.

• Gaining Ratio (P:T): New Ratio (P:T) = 3:4. Old (A:P:T) = 2:3:2.

• P's Gain: (3/7) - (3/7) = 0. T's Gain: (4/7) - (2/7) = 2/7.

• T alone compensates A for goodwill.

• Journal Entry: T's Capital A/c Dr. ₹80,000 To A's Capital A/c ₹80,000. (Contra posting in capital accounts).

3. Capital Adjustment and Closing Balances:

• Total Capital of New Firm = Total Capital before retirement (₹14,00,000).

• New Capital for P and T (in 3:4 ratio): P ₹6,00,000, T ₹8,00,000 (These are To Balance c/d).

4. Final Settlement and Balancing:

• Retiring Partner (A): Cash payment of ₹1,00,000. Remaining balance (Balancing Figure) transferred to A's Loan A/c (e.g., ₹3,44,000).

• Continuing Partners (P & T): Deficit or surplus adjusted via Bank Account. (e.g., P brings in ₹54,000; T brings in ₹5,16,000).

• (Memory Tip: If retirement problem is silent on payment, transfer entire amount to Loan A/c. For capital adjustments, assume adjustment through Bank A/c if not specified.)

Final Balance Sheet (After Retirement)

Working Note: Cash at Bank

Opening Balance + Cash in by P + Cash in by T - Cash out to A = Closing Balance.

Death of a Partner: Case Study 1

Deceased partner A (PSR 3:2:1) dies after 9 months.

A's Capital Account:

Working Notes:

1. Goodwill: Firm's Goodwill = Average Profit (last 3 yrs) × 2 Yrs' Purchase = ₹8,000 × 2 = ₹16,000.

• A's Share = ₹16,000 × (3/6) = ₹8,000 (Contributed by B and C in their gaining ratio 2:1).

2. Profit up to Date of Death (P&L Suspense): Based on previous year's profit (₹9,000).

• A's Share = [₹9,000 × (9/12)] × (3/6) = ₹3,375.

3. Interest on Capital (IOC): A's Capital ₹45,000 × 6% × (9/12) = ₹2,025.

Death of a Partner: Tricky Journal Entry Problem

Partner B dies after 4 months. B's Capital ₹4,00,000.

Goodwill: 1.5 years' purchase of last year's profit (₹80,000) = ₹1,20,000. B's Share (2/5) = ₹48,000.

(A contributes ₹32,000, C contributes ₹16,000 in 2:1 gaining ratio).

Profit up to Date of Death (P&L Suspense):

1. Previous Year's Profit Rate: (Profit ₹80,000 / Sales ₹4,00,000) × 100 = 20%.

2. New Profit Rate: 20% + 4% = 24%.

3. Estimated Full Year Sales: ₹4,00,000 × 1.25 = ₹5,00,000.

4. Estimated Full Year Profit: ₹5,00,000 × 24% = ₹1,20,000.

5. B's Share: ₹1,20,000 × (4/12) × (2/5) = ₹16,000.

Journal Entries:

1. For Goodwill Adjustment:
   A's Capital A/c Dr. 32,000 C's Capital A/c Dr. 16,000 To B's Capital A/c 48,000

2. For Profit up to Date of Death:
   Profit & Loss Suspense A/c Dr. 16,000 To B's Capital A/c 16,000

3. For Transferring Final Amount to Executor's Account: (B's Final Balance: ₹4,00,000 + ₹48,000 + ₹16,000 = ₹4,64,000).
   B's Capital A/c Dr. 4,64,000 To B's Executor's A/c 4,64,000

Dissolution of a Partnership Firm

Application of Proceeds under Section 48

This section outlines the mandatory order for settling liabilities from asset realisation during dissolution.

Order of Payment:

1. Outside Liabilities: First priority (includes loans from partners' relatives).

2. Partners' Loans: Loans by partners to the firm.

3. Partners' Capital: Balances in capital accounts.

4. Distribution of Surplus: Remaining amount distributed in Profit Sharing Ratio (PSR).

Problem Application:

Cash ₹6,00,000. Outside Liabilities (Creditors ₹1,00,000 + Ruby's Loan ₹50,000 = ₹1,50,000). Hemant's Loan ₹80,000. Capital (Hemant ₹1,60,000, Pankaj ₹1,40,000 = ₹3,00,000). PSR 3:2.

1. Pay Outside Liabilities: ₹1,50,000. Remaining Cash: ₹4,50,000.

2. Pay Partner's Loan: ₹80,000. Remaining Cash: ₹3,70,000.

3. Pay Partners' Capital: ₹3,00,000. Remaining Cash: ₹70,000.

4. Distribute Surplus: ₹70,000 in 3:2 PSR. Hemant ₹42,000, Pankaj ₹28,000.

Journal Entries for Dissolution

In dissolution, all asset sales and liability payments route through the Realisation Account.

1. Sale of Unrecorded Asset (Typewriter for ₹4,000):
   Bank A/c Dr. 4,000 To Realisation A/c 4,000

2. Repayment of Partner's Loan (Harshit's Loan ₹30,000):
   Harshit's Loan A/c Dr. 30,000 To Bank A/c 30,000

3. Remuneration and Expenses for Dissolution (NDA to receive ₹42,000, firm paid actual expenses ₹51,000): Firm pays expenses on NDA's behalf.
   NDA's Capital A/c Dr. 51,000 To Bank A/c 51,000

4. Settlement of Creditor with Asset (Creditor ₹23,000 took investments ₹12,000, rest paid in cash): No entry for asset takeover. Only for cash payment.

• Cash paid: ₹23,000 - ₹12,000 = ₹11,000.
  Realisation A/c Dr. 11,000 To Bank A/c 11,000

5. Partner Takes Responsibility for a Liability (Harshit agreed to pay wife's loan ₹45,000):
   Realisation A/c Dr. 45,000 To Harshit's Capital A/c 45,000

6. Asset Taken Over by Partner (Machine taken by NDA at 50% of ₹6,00,000):

• Note: If an asset is taken by a creditor in full settlement, no entry is made.
  NDA's Capital A/c Dr. 3,00,000 To Realisation A/c 3,00,000

7. Distribution of Accumulated Loss (P&L A/c Dr. Balance ₹20,000): Distributed in PSR (5:3:2).
   Sanatan's Capital A/c Dr. 10,000 Harshit's Capital A/c Dr. 6,000 NDA's Capital A/c Dr. 4,000 To Profit & Loss A/c 20,000

Company Accounts: Share Capital

Section 52: Utilisation of Securities Premium

Securities Premium can be utilized for five specific purposes:

1. Issuing fully paid bonus shares.

2. Writing off preliminary expenses.

3. Writing off discount/commission on issue of shares/debentures.

4. Providing for premium payable on redemption of debentures or preference shares.

5. Buy-back of own shares.
   (Memory Tip: Securities Premium can be used for fully paid bonus SHARES, but NOT for fully paid bonus DEBENTURES.)

Balance Sheet Presentation of Share Capital

Scenario: Authorised Capital 1 Cr. shares @ ₹10. Issued Capital 10 L shares @ ₹10. Fully subscribed. ₹3/share on 1,000 shares not received (Calls-in-Arrears).

Notes to Accounts (Note 1: Share Capital)

• Authorised Capital
  1,00,00,000 Equity Shares of ₹10 each 10,00,00,000

• Issued Capital
  10,00,000 Equity Shares of ₹10 each 1,00,00,000

• Subscribed Capital

• Subscribed and Fully Paid
  9,99,000 Equity Shares of ₹10 each 99,90,000

• Subscribed but Not Fully Paid
  1,000 Equity Shares of ₹10 each 10,000
  Less: Calls-in-Arrears (1,000 shares @ ₹3) (3,000) 7,000

• Total for Balance Sheet 99,97,000

Balance Sheet (Extract)

Share Forfeiture Account (Ledger)

Forfeited 5,000 shares of ₹10 each, ₹5 received. 2,500 reissued at ₹9 (fully paid-up).

Share Forfeiture Account

Journal Entries for Forfeiture and Partial Reissue

Case 1: Reissue at a Discount

• Forfeited 10,000 shares @ ₹10, ₹8 called up, non-payment of allotment (₹3) and first call (₹3). Reissued 2,000 shares @ ₹7 (₹8 paid up).

1. Forfeiture:
   Share Capital A/c (10,000 x ₹8) Dr. 80,000 To Share Forfeiture A/c (10,000 x ₹2) 20,000 To Share Allotment A/c (10,000 x ₹3) 30,000 To Share First Call A/c (10,000 x ₹3) 30,000

2. Reissue:
   Bank A/c (2,000 x ₹7) Dr. 14,000 Share Forfeiture A/c (2,000 x ₹1) Dr. 2,000 To Share Capital A/c (2,000 x ₹8) 16,000

3. Capital Reserve: (₹4,000 forfeited on 2,000 shares - ₹2,000 discount)
   Share Forfeiture A/c Dr. 2,000 To Capital Reserve A/c 2,000

Case 2: Forfeiture with Premium & Reissue at Premium

• Forfeited 2,000 shares @ ₹10, issued at 10% premium. Only application (₹3) received. Reissued 500 shares @ ₹11 (fully paid up).

1. Forfeiture: (Premium due on allotment, not paid)
   Share Capital A/c (2,000 x ₹10) Dr. 20,000 Securities Premium A/c (2,000 x ₹1) Dr. 2,000 To Share Forfeiture A/c (2,000 x ₹3) 6,000 To Calls-in-Arrears A/c (Bal. fig.) 16,000

2. Reissue:
   Bank A/c (500 x ₹11) Dr. 5,500 To Share Capital A/c (500 x ₹10) 5,000 To Securities Premium A/c (500 x ₹1) 500

3. Capital Reserve: (₹1,500 forfeited on 500 shares - ₹0 discount)
   Share Forfeiture A/c Dr. 1,500 To Capital Reserve A/c 1,500

Company Accounts: Debentures

Issue at Discount, Redeemable at Premium & Writing Off Loss

Scenario: 10,000, 9% Debentures @ ₹100 issued at 5% discount, redeemable at 10% premium. Securities Premium ₹80,000 available.

1. Receipt of Application Money: (10,000 debentures @ ₹95)
   Bank A/c Dr. 9,50,000 To 9% Debenture Application & Allotment A/c 9,50,000

2. Allotment of Debentures:

• Total Loss: Discount (₹50,000) + Premium on Redemption (₹1,00,000) = ₹1,50,000.
  9% Debenture Application & Allotment A/c Dr. 9,50,000 Loss on Issue of Debentures A/c Dr. 1,50,000 To 9% Debentures A/c 10,00,000 To Premium on Redemption of Debentures A/c 1,00,000

3. Writing Off the Loss: (First against Securities Premium, then P&L)
   Securities Premium A/c Dr. 80,000 Statement of Profit and Loss Dr. 70,000 To Loss on Issue of Debentures A/c 1,50,000

Issue at a Premium, Redeemable at a Premium

Scenario: 800 9% Debentures @ ₹100 issued at ₹20 premium, redeemable at ₹10 premium.

1. Receipt of Application Money: (800 debentures @ ₹120)
   Bank A/c Dr. 96,000 To 9% Debenture Application & Allotment A/c 96,000

2. Allotment of Debentures:

• Loss on Issue = Premium on Redemption: 800 debentures × ₹10 = ₹8,000.
  9% Debenture Application & Allotment A/c Dr. 96,000 Loss on Issue of Debenture A/c Dr. 8,000 To 9% Debentures A/c 80,000 To Securities Premium Reserve A/c 16,000 To Premium on Redemption of Debentures A/c 8,000

3. Writing off the Loss: (Against Securities Premium, if available)
   Securities Premium Reserve A/c Dr. 8,000 To Loss on Issue of Debenture A/c 8,000

Issue of Debentures as Collateral Security

Collateral security is additional security for a loan. Debentures issued as collateral do not create an immediate liability for interest. Their accounting presentation has two methods:

Combined Concepts in Debenture Issue

Scenario: Loan from SBI (₹1,60,000) with 2,000 12% Debentures as collateral. Purchased machinery (₹4,60,000) from Beta Ltd., paid by issuing 9% Debentures @ ₹100 at 15% premium, redeemable at par.

Journal Entries:

1. For the Loan:
   Bank A/c Dr. 1,60,000 To Bank Loan A/c 1,60,000

2. For Collateral Security:
   Debenture Suspense A/c Dr. 2,00,000 To 12% Debentures A/c 2,00,000

3. For Purchase of Machinery:
   Machinery A/c Dr. 4,60,000 To Beta Ltd. (Vendor) A/c 4,60,000

4. For Payment to Vendor: (Debentures to issue = ₹4,60,000 / ₹115 issue price = 4,000 debentures)
   Beta Ltd. A/c Dr. 4,60,000 To 9% Debentures A/c 4,00,000 To Securities Premium Reserve A/c 60,000
   (If redeemable at premium, also include Loss on Issue of Debenture A/c Dr. and To Premium on Redemption of Debenture A/c.)

Analysis of Financial Statements

MCQ: Identifying Tools of Financial Analysis

The Cash Flow Statement is a tool of financial analysis. It's crucial to distinguish between financial statements themselves and the tools used to analyze them.

Ratio Analysis

Calculating Assets & Liabilities from Ratios

Given: Current Ratio (CR) = 3.5:1, Quick Ratio (QR) = 2:1. Excess of Current Assets over Quick Assets (Inventory + Prepaid Expenses) = ₹24,000.

1. Assume Current Liabilities (CL) = x.

2. Current Assets (CA) = 3.5x (from CR = CA/CL).

3. Quick Assets (QA) = 2x (from QR = QA/CL).

4. CA - QA = ₹24,000 => 3.5x - 2x = ₹24,000 => 1.5x = ₹24,000 => x = ₹16,000.

5. Current Liabilities (CL) = ₹16,000.

6. Current Assets (CA) = 3.5 × ₹16,000 = ₹56,000.

7. Quick Assets (QA) = 2 × ₹16,000 = ₹32,000.

Effect of Transactions on Current Ratio

Base Scenario: Current Ratio is 2:1 (e.g., CA ₹2,00,000, CL ₹1,00,000).

(Memory Tip: If CR > 1:1, subtracting the same amount from CA & CL improves the ratio. Adding the same amount reduces it.)

Cash Flow Statement (CFS)

Classification of Activities: Financing vs. Non-Financing Company

The classification of interest and dividends differs for financing and non-financing companies.

Key Definitions and Concepts

1. Cash and Cash Equivalents: Short-term investments with a maturity period of three months or less from purchase date.

2. Provision for Tax: If no adjustment, previous year's provision is Tax Paid (Financing), current year's is Tax Made (Operating).

3. Proposed Dividend: Current year's is ignored. Previous year's is considered paid (outflow under Financing Activities). If Unclaimed Dividend exists, Amount Paid = Proposed Dividend - Unclaimed Dividend.

Advanced Problem: Asset Sale with Accumulated Depreciation

This problem type is critical, especially when an Accumulated Depreciation Account is maintained.

Key Concepts:

• Cost: Original purchase price.

• Book Value (WDV): Cost - Accumulated Depreciation.

Step-by-Step Process:

Scenario: Machine Cost ₹1,60,000, sold at Loss ₹20,000. Depreciation during year ₹40,000.

1. Prepare Accumulated Depreciation Account:

• Debit side: To Plant & Machinery A/c (Depreciation on asset sold - Balancing Figure).

• Credit side: By Balance b/d (Opening); By P&L A/c (Depreciation for current year).

• (Example: If opening was ₹100,000, closing ₹120,000, current year dep. ₹40,000, then depreciation on asset sold = ₹20,000 (100k + 40k - X = 120k, X = 20k)).

2. Calculate Sale Proceeds:

• Cost of asset sold - Accumulated Depreciation on that asset = Book Value.

• Book Value - Loss on Sale = Sale Proceeds (inflow in Investing Activity).

• Example: ₹1,60,000 (Cost) - ₹90,000 (Accum. Dep.) = ₹70,000 (Book Value).

• ₹70,000 (Book Value) - ₹20,000 (Loss) = ₹50,000 (Sale Proceeds).

3. Prepare Plant & Machinery Account (at Cost):

• Debit side: To Balance b/d (Opening); To Bank A/c (Purchases - Balancing Figure).

• Credit side: By Accumulated Depreciation A/c (on asset sold); By Balance c/d (Closing).

• The balancing figure for Purchases is an outflow under Investing Activities.