Financial Statements of a Company - Class 12 Accountancy - Chapter 7 - Notes, NCERT Solutions & Extra Questions
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Extra Questions - Financial Statements of a Company | NCERT | Accountancy | Class 12
Briefly explain the position of a promoter of a company.
Promoters of a company hold a critical and distinct role, characterized mainly by their fiduciary position. They are neither considered as agents nor trustees of the company for several reasons:
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Agents: Promoters cannot be agents since the company has not yet been incorporated; thus, there is no principal (the company) to appoint them.
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Trustees: They also cannot be trustees because the assets or wealth they contribute or manage in initiating the business are not legally owned in the name of the company at this stage.
As a result of these limitations, promoters are personally liable for all contracts they enter into on behalf of the company prior to its incorporation. This responsibility underscores the significant fiduciary role they play during the foundational phase of the company.
In a Systematic Investment Plan, investments are made only on a yearly basis.
A) True
B) False
Solution
The correct option is B) False.
Systematic Investment Plan, commonly abbreviated as SIP, allows investors to contribute small amounts at regular intervals instead of investing a large sum in one go. The intervals for investment in a SIP can be monthly or quarterly, not just annually. Thus, the statement that investments in SIPs are made only on a yearly basis is false.
Distinguish between a balance sheet and a trial balance.
Solution: Differences Between Balance Sheet and Trial Balance
The balance sheet and trial balance are both essential financial statements but serve different purposes and contain different information. Here are the key differences laid out in a table format:
Basis | Trial Balance | Balance Sheet |
---|---|---|
Objective | Prepared to check the arithmetical accuracy of the books of accounts. | Shows the financial position of a company at a specific point in time. |
Contents | Includes all ledger accounts. | Contains assets, liabilities, and equity accounts. |
Columns | Two headings: Debit and Credit. | Typically structured into two sections: Assets and Liabilities & Equity. |
Presence of Closing Stock | Closing stock usually does not appear. | Closing stock is included under the assets section. |
Periodicity | Prepared monthly or whenever required. | Generally prepared at the end of a fiscal year but can be more frequent. |
Account Inclusion | All accounts must be mentioned. | Only includes accounts that represent financial status as of the balance sheet date. |
Necessity | Its preparation is not mandatory, though it is desirable. | It is essential for financial reporting and compliance with accounting standards. |
These distinctions highlight the specific functions and significance of each document in financial accounting and reporting.
"What is the importance of comparative statements? Illustrate your answer with particular reference to a comparative income statement."
The importance of comparative statements can be seen in several key aspects:
(i) Simplifying Presentation: Comparative statements display financial data in a straightforward manner by placing year-on-year data of similar items side by side. This not only clarifies the presentation but also facilitates easy comparisons both within the company and with others, making the results more straightforward and conclusive.
(ii) Assisting in Conclusions: The format of comparative statements is highly effective as it enables quick and unambiguous conclusions. Analysts can easily interpret financial changes and trends without confusion due to the clear presentation of data.
(iii) Facilitating Forecasting and Planning: Management can use comparative statements to analyze trends over the years, which aids in forecasting future conditions. This analysis is crucial for drafting strategic plans and policy measures, ensuring that the company is prepared for future financial landscapes.
(iv) Detecting Problems and Implementing Controls: Comparative analysis helps management by identifying potential issues early on. By comparing financial data across different periods, managers can spot discrepancies and areas needing improvement. This allows for the implementation of budgetary controls and corrective measures to ensure that the company’s operations align with set targets and plans.
These benefits are especially evident when considering a comparative income statement, which provides insights into the company's revenue, expenses, and net income over multiple periods. This comparison greatly aids in understanding financial progress or regress, and in making informed decisions about operational, investment, and financial strategies.
"When is a company said to be born?"
A company is legally born on the date specified on the Certificate of Incorporation. This date marks the beginning of the company’s existence as a legal entity with perpetual succession. From this date, the company has the legal capacity to enter into valid contracts. The Certificate of Incorporation acts as conclusive evidence confirming the proper incorporation of the company.
How much was the total sale of the company? Statements: I: The company sold 8000 units of product A, each costing Rs. 25. II: This company has no other product line.
(A) If the data in statement I alone is sufficient to answer the question, while the data in statement II alone is not sufficient to answer the question. (B) If the data in statement II alone is sufficient to answer the question, while the data in statement I alone is not sufficient to answer the question. (C) If the data given in both statements I and II together are not sufficient to answer the question. (D) If the data in both statements I and II together are necessary to answer the question.
The correct response here is Option D.
To determine the total sales, it's crucial to consider both statements:
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Statement I provides the quantity and price of Product A sold: $$8000 \times 25 = Rs. 2,00,000.$$ This calculates the total sales from Product A.
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Statement II clarifies that Product A is the only product the company sells.
Combining statements I and II confirms that the total sales of the company are the sales from Product A, which is Rs. 2,00,000. Hence, both statements together are necessary to answer the question fully.
Consider the following statements about General anti avoidance rules (GAAR). Identify the wrong statement.
a) Parthasarathi Shome committee was set up in 2012 to look into the matters of GAAR
b) GAAR tries to avoid the misuse of DTAA (double taxation avoidance agreement)
c) Under GAAR income tax department will have very limited powers.
d) None of these
The correct option is C.
Explanation:
General Anti-Avoidance Rules (GAAR) aim to tackle transactions or business arrangements primarily made to avoid tax, focusing on curbing aggressive tax planning.
Implications of GAAR:
GAAR accords significant authority to the Income Tax Department. Contrary to the statement in option C, under GAAR, the tax authorities have extensive powers to deny tax benefits if a transaction is undertaken solely for tax avoidance. Here’s a more detailed breakdown:
Authority to Deny Tax Benefits: If, for instance, a company is established in Mauritius primarily to claim exemptions from capital gains tax, the tax authorities can deny such benefits, per the provisions under the India-Mauritius tax treaty.
Impermissible Avoidance Arrangement (IAA): The Income Tax Commissioner can label an arrangement as an IAA if it meets the following criteria:
The arrangement, in whole or in part, was designed to obtain tax benefits.
The arrangement creates rights and obligations not typically formed in arm's length transactions.
It results in direct or indirect misuse or abuse of the tax provisions.
It lacks commercial substance or is not bona fide.
Powers Granted by GAAR:
Re-characterization of Transactions: GAAR gives tax authorities the ability to:
Disregard or re-characterize any part of the arrangement.
Disregard any accommodating party involved.
Treat transactions as if they had not been entered into.
Reallocate income or expenditure.
Disregard any corporate structure.
Re-characterize debt as equity or vice versa.
Immediate Implementation: This means that any transaction deemed to save taxes can be regarded as an IAA, allowing tax authorities to treat it differently for tax purposes.
Parthasarathi Shome Committee:
The committee, established in 2012 by the Prime Minister of India, was tasked with formulating the final guidelines on GAAR. Its goal was to ensure tax clarity and address concerns of foreign investors. The committee suggested not just focusing on Foreign Institutional Investors (FIIs) but also considering all non-resident taxpayers.
One of its recommendations was to delay the controversial tax provision by three years, until 2016-17, and to abolish the capital gains tax on securities transfers.
In summary, option C is incorrect because under GAAR, the Income Tax Department actually possesses extensive powers to scrutinize and re-characterize tax avoidance arrangements.
Study the graph carefully to answer the questions that follow.
Which of the following statements is true with respect to the above graph?
Company M made the highest profit in the year 2009
Company L made least profit in the year 2005
The respective ratio between the profits earned by company L and M in the year 2006 was 6:5
Company L made the highest profit in the year 2008
All are true
The correct option is A: Company M made the highest profit in the year 2009.
From careful examination of the graph, it is evident that Company M achieved its peak profit in the year 2009.
Thus, Company M indeed made the highest profit in that particular year.