Chapter financial-statements-i: Financial Statements - I Application Questions | accountancy Class 11 CBSE

Chapter financial-statements-i: Financial Statements - I Application Questions | accountancy Class 11 CBSE | ByteNotes.in

Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 1

Applied Concept

A firm paid Rs.2,00,000 for heavy advertising in the launch year of a new product. The management expects the advertising to benefit the business for four years. How should this expenditure be classified and treated in the financial statements? Justify your answer with reference to the concepts discussed in this chapter.

This expenditure is classified as deferred revenue expenditure because, although advertising is normally a revenue expenditure, its benefit is expected to extend over four accounting periods rather than just the current year.
Like capital expenditure, deferred revenue expenditure is written off gradually over its period of benefit; therefore, Rs.50,000 (Rs.2,00,000 ÷ 4) should be charged to the profit and loss account each year as an expense, and the remaining unamortised balance should be shown in the balance sheet as a fictitious asset.
If the entire Rs.2,00,000 were charged to the profit and loss account in the first year, profit would be significantly understated in year one and overstated in subsequent years, violating the matching principle and distorting the true and fair view of the business performance.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 2

Applied Concept

M/s Sunrise Traders recorded repairs to machinery worth Rs.15,000 as an addition to machinery (capital expenditure) in its books. What is the error, what is its impact on the financial statements, and how should it have been correctly treated?

The error is misclassification: repairs to machinery are revenue expenditure (they maintain, not enhance, earning capacity) but have been wrongly capitalised. This means Rs.15,000 has been added to the machinery account instead of being debited to the repairs account and charged to the profit and loss account.
Impact: Expenses are understated by Rs.15,000, so net profit is overstated by Rs.15,000. At the same time, the value of machinery (and total assets) in the balance sheet is overstated by Rs.15,000. The financial statements do not present a true and fair view.
Correct treatment: Rs.15,000 should be debited to Repairs Account and credited to Machinery Account to reverse the error; the Repairs Account balance should then be transferred to the debit side of the profit and loss account as an indirect expense for the year.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 3

Applied Concept

With reference to the concept of stakeholders, explain how a bank and a prospective investor would use the same set of financial statements differently when evaluating M/s XYZ Enterprises.

The bank uses the balance sheet to assess the composition of assets — particularly the proportion held in liquid form (cash, debtors) — to determine if the business can service its loan interest and repay principal on time. It views profit mainly as an assurance of repayment ability rather than as evidence of wealth creation.
The prospective investor uses the profit and loss account to study historical profit trends and growth patterns as indicators of likely future returns, and examines the balance sheet to assess asset quality, capital structure, and overall financial health before committing investment funds.
Although both stakeholders read the same financial statements, their analytical focus differs entirely: the bank prioritises safety and liquidity (downside risk), while the prospective investor prioritises profitability and growth potential (upside opportunity).

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Application Question

Hard difficulty • Concept in a practical situation

Hard

Question 4

Applied Concept

A business received Rs.5,00,000 as a bank loan and Rs.3,00,000 from cash sales. The accountant classified both as revenue receipts and credited them to the profit and loss account. Identify the error and explain its consequences.

The bank loan of Rs.5,00,000 is a capital receipt (it creates an obligation to repay), not a revenue receipt. The cash sales of Rs.3,00,000 are correctly classified as revenue receipts. The error is treating the loan as revenue income.
Consequence: Revenue (and therefore profit) is overstated by Rs.5,00,000 because a loan — which is a liability and must be repaid — has been treated as income. The balance sheet also fails to record the loan as a liability, understating total liabilities and distorting the financial position.
Correct treatment: The bank loan should be credited to the Loan Account (a liability in the balance sheet) and Rs.5,00,000 should be removed from the profit and loss account. Only the cash sales of Rs.3,00,000 should remain as revenue income.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 5

Applied Concept

M/s Priya Traders has the following data: Opening Stock Rs.20,000; Purchases Rs.80,000; Purchases Returns Rs.5,000; Direct Expenses Rs.10,000; Closing Stock Rs.15,000; Sales Rs.1,20,000; Sales Returns Rs.8,000. Calculate the gross profit and cost of goods sold.

Net Purchases = Rs.80,000 – Rs.5,000 = Rs.75,000. Net Sales = Rs.1,20,000 – Rs.8,000 = Rs.1,12,000. Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock = Rs.20,000 + Rs.75,000 + Rs.10,000 – Rs.15,000 = Rs.90,000.
Gross Profit = Net Sales – Cost of Goods Sold = Rs.1,12,000 – Rs.90,000 = Rs.22,000. This figure represents the surplus earned from the basic trading operations of buying and selling goods after accounting for all direct costs.
The closing stock of Rs.15,000 reduces the cost of goods sold because it represents goods that have been purchased but not yet sold; they will be part of next year's cost of goods sold when sold in the subsequent accounting period.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 6

Applied Concept

Operating profit earned by a firm was Rs.17,00,000. Non-operating incomes were Rs.1,50,000 (dividend on investment) and non-operating expenses were Rs.3,75,000 (interest on loan). Calculate the net profit.

The formula to relate operating profit to net profit is: Operating Profit = Net Profit + Non-Operating Expenses – Non-Operating Incomes. Rearranging: Net Profit = Operating Profit – Non-Operating Expenses + Non-Operating Incomes.
Net Profit = Rs.17,00,000 – Rs.3,75,000 + Rs.1,50,000 = Rs.14,75,000. The net profit is lower than operating profit because the non-operating expense (interest) exceeds the non-operating income (dividend).
This calculation demonstrates that operating profit measures pure business performance, while net profit reflects the impact of the firm's financial decisions (borrowing) and investment activities (dividend income) on the final outcome.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 7

Applied Concept

A business purchased a second-hand machine for Rs.50,000 and spent Rs.8,000 on its installation and Rs.3,000 on minor repairs. Determine which amounts are capital expenditure and which are revenue expenditure. Justify your classification.

The purchase price of Rs.50,000 is capital expenditure because it is the cost of acquiring a fixed asset (machine) that will provide benefits for more than one accounting period and increases the productive capacity of the business.
The installation cost of Rs.8,000 is also capital expenditure because it is a cost directly necessary to bring the asset to its working condition; it is treated as part of the cost of the machine and is therefore capitalised.
The repair cost of Rs.3,000 is revenue expenditure because repairs merely restore the machine to its existing working condition (maintaining, not improving, the asset); their benefit is limited to the current period and they should be charged to the profit and loss account.

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Application Question

Easy difficulty • Concept in a practical situation

Easy

Question 8

Applied Concept

With reference to the balance sheet, explain how drawings made by the proprietor during the year affect the capital account. If opening capital is Rs.2,00,000, net profit Rs.40,000, and drawings Rs.25,000, calculate the closing capital.

Drawings represent the proprietor's personal withdrawals of cash or goods from the business. They reduce the capital balance because the proprietor is taking out funds that had been invested in the business, thereby reducing the owner's equity.
In the balance sheet, drawings are shown as a deduction from capital rather than as a separate liability: Closing Capital = Opening Capital + Net Profit – Drawings (adjusted for interest on capital and interest on drawings if applicable).
Closing Capital = Rs.2,00,000 + Rs.40,000 – Rs.25,000 = Rs.2,15,000. This balance is shown on the liabilities side of the balance sheet, reflecting the owner's residual interest in the business after profit addition and withdrawal.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 9

Applied Concept

A firm's balance sheet shows: Cash Rs.5,000; Debtors Rs.20,000; Stock Rs.15,000; Machinery Rs.60,000; Building Rs.1,00,000; Creditors Rs.18,000; Bills Payable Rs.7,000; Bank Overdraft Rs.10,000; Capital Rs.1,65,000. Rearrange these in order of liquidity for both assets and liabilities.

Assets in order of liquidity (most liquid first): Cash Rs.5,000; Debtors Rs.20,000; Stock Rs.15,000; Machinery Rs.60,000; Building Rs.1,00,000. Total Assets = Rs.2,00,000.
Liabilities in order of liquidity (most payable first): Bank Overdraft Rs.10,000; Bills Payable Rs.7,000; Creditors Rs.18,000; Capital Rs.1,65,000. Total Liabilities = Rs.2,00,000.
In order of liquidity, the most easily convertible assets appear first (cash is immediately available), while on the liabilities side, obligations that fall due soonest appear first (bank overdraft is typically repayable on demand). The arrangement reveals the short-term solvency position at a glance.

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Application Question

Medium difficulty • Concept in a practical situation

Medium

Question 10

Applied Concept

Using the concept of grouping, rearrange the following balance sheet items under appropriate headings: Cash in hand, Goodwill, Machinery, Debtors, Capital, Long-term Loan, Creditors, Bills Payable, Land, Patents.

Fixed/Non-Current Assets: Goodwill (intangible), Patents (intangible), Land (tangible fixed asset), Machinery (tangible fixed asset). These are long-term assets held for productive use and not for resale.
Current Assets: Debtors (convertible to cash within a year), Cash in hand (immediately liquid). These are short-term assets that circulate in the normal operating cycle of the business.
Liabilities and Capital: Long-term Loan (Non-Current Liability — payable after one year); Creditors and Bills Payable (Current Liabilities — payable within one year); Capital (Owner's Equity). Grouping in this manner makes the balance sheet structured, readable, and analytically meaningful.

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Chapter financial-statements-i: Financial Statements - I | Application Questions

M/s Sunrise Traders recorded repairs to machinery worth Rs.15,000 as an addition to machinery (capital expenditure) in its books. What is the error, what is its impact on the financial statements, and how should it have been correctly treated?

With reference to the concept of stakeholders, explain how a bank and a prospective investor would use the same set of financial statements differently when evaluating M/s XYZ Enterprises.

A business received Rs.5,00,000 as a bank loan and Rs.3,00,000 from cash sales. The accountant classified both as revenue receipts and credited them to the profit and loss account. Identify the error and explain its consequences.

M/s Priya Traders has the following data: Opening Stock Rs.20,000; Purchases Rs.80,000; Purchases Returns Rs.5,000; Direct Expenses Rs.10,000; Closing Stock Rs.15,000; Sales Rs.1,20,000; Sales Returns Rs.8,000. Calculate the gross profit and cost of goods sold.

Operating profit earned by a firm was Rs.17,00,000. Non-operating incomes were Rs.1,50,000 (dividend on investment) and non-operating expenses were Rs.3,75,000 (interest on loan). Calculate the net profit.

A business purchased a second-hand machine for Rs.50,000 and spent Rs.8,000 on its installation and Rs.3,000 on minor repairs. Determine which amounts are capital expenditure and which are revenue expenditure. Justify your classification.

With reference to the balance sheet, explain how drawings made by the proprietor during the year affect the capital account. If opening capital is Rs.2,00,000, net profit Rs.40,000, and drawings Rs.25,000, calculate the closing capital.

A firm's balance sheet shows: Cash Rs.5,000; Debtors Rs.20,000; Stock Rs.15,000; Machinery Rs.60,000; Building Rs.1,00,000; Creditors Rs.18,000; Bills Payable Rs.7,000; Bank Overdraft Rs.10,000; Capital Rs.1,65,000. Rearrange these in order of liquidity for both assets and liabilities.

Using the concept of grouping, rearrange the following balance sheet items under appropriate headings: Cash in hand, Goodwill, Machinery, Debtors, Capital, Long-term Loan, Creditors, Bills Payable, Land, Patents.

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