CBSE Class 12 Accountancy Part 2 — Exercise Solutions Guide
How to Use This Page
CBSE Class 12 Accountancy Part 2 covers Company Accounts and Financial Analysis — Issue of Shares, Issue of Debentures, Financial Statements, Ratio Analysis, and Cash Flow Statement. These chapters are heavily numerical. Read the NCERT textbook first, solve every illustration, then verify your answers here. Focus on journal entry formats, balance sheet presentations, ratio formulas, and cash flow classifications.
Key Concepts (Quick Recap)
Chapter 1: Accounting for Share Capital
- Authorised Capital — maximum capital a company can raise (stated in the Memorandum)
- Issued Capital — portion of authorised capital offered to the public
- Subscribed Capital — portion of issued capital subscribed by investors
- Called-up Capital — amount demanded by the company from shareholders
- Paid-up Capital — amount actually received from shareholders
- Shares — equity (ownership, voting rights, variable dividend) and preference (fixed dividend, priority)
- Oversubscription — applications exceed shares offered; pro-rata allotment or rejection
- Undersubscription — applications less than shares offered; minimum 90% subscription for minimum subscription
- Premium on Shares — amount received over face value; credited to Securities Premium Reserve
- Discount on Shares — issued below face value (only if authorised; max 10%)
- Calls in Arrears — amount not paid by shareholders on calls made
- Calls in Advance — amount paid by shareholders before calls are made
- Forfeiture — cancelling allotment for non-payment; amount already paid is forfeited
- Re-issue — forfeited shares re-issued at a discount (max discount = amount forfeited)
- Capital Reserve — net gain on re-issue of forfeited shares transferred here
Chapter 2: Issue and Redemption of Debentures
- Debenture — a document acknowledging a debt; fixed interest, no voting rights
- Types — Convertible, Non-convertible, Secured, Unsecured, Registered, Bearer
- Issue at Par/Premium/Discount — same as shares
- Interest on Debentures — paid half-yearly; TDS deducted if interest exceeds ₹5,000
- Debenture Redemption Reserve (DRR) — 50% of debenture amount before redemption (now 10% for listed companies)
- Redemption Methods — Lump sum, Draw of lots, Open market purchase, Conversion
Chapter 3: Financial Statements of a Company
- Balance Sheet — vertical format as per Schedule III of Companies Act, 2013
- Statement of Profit & Loss — income and expenses classified by nature
- Key headings — Equity & Liabilities (Shareholders' Funds, Non-current Liabilities, Current Liabilities), Assets (Non-current Assets, Current Assets)
Chapter 4: Analysis of Financial Statements
- Comparative Statements — year-over-year comparison (absolute change and percentage change)
- Common Size Statements — each item expressed as percentage of a common base (Revenue or Total Assets)
Chapter 5: Ratio Analysis
- Liquidity Ratios — Current Ratio (2:1), Quick Ratio (1:1)
- Solvency Ratios — Debt-Equity Ratio, Proprietary Ratio, Interest Coverage Ratio
- Activity Ratios — Inventory Turnover, Trade Receivables Turnover, Working Capital Turnover
- Profitability Ratios — Gross Profit, Operating, Net Profit, Return on Investment
Chapter 6: Cash Flow Statement
- Operating Activities — core business revenue and expenses
- Investing Activities — purchase/sale of fixed assets and long-term investments
- Financing Activities — issue/repayment of capital, debentures, dividends
- Format — Indirect method (start from net profit, adjust non-cash items) or Direct method
I. Choose the Best Answer (MCQs)
1. The maximum capital a company can raise is called: (a) Issued capital   (b) Subscribed capital   (c) Authorised capital   (d) Paid-up capital
Answer(c) Authorised capital Explanation: Authorised (registered) capital is the maximum amount a company can raise, as stated in its Memorandum of Association.
2. Securities Premium Reserve appears on the balance sheet under: (a) Current Liabilities   (b) Non-current Liabilities   (c) Shareholders' Funds   (d) Contingent Liabilities
Answer(c) Shareholders' Funds Explanation: Securities Premium Reserve is a reserve created out of share premium received. It forms part of shareholders' funds and is shown under "Reserves and Surplus."
3. When shares are forfeited, the share capital account is debited with: (a) Issue price   (b) Face value   (c) Called-up amount   (d) Paid-up amount
Answer(c) Called-up amount Explanation: On forfeiture, Share Capital A/c is debited with the called-up amount (the amount the company demanded), not the issue price or face value alone.
4. The minimum subscription that must be received is: (a) 50% of issued capital   (b) 90% of issued capital   (c) 100% of issued capital   (d) 75% of issued capital
Answer(b) 90% of issued capital Explanation: As per SEBI guidelines, minimum subscription is 90% of the issued capital. If not received, the issue fails and all money must be refunded.
5. Debenture holders are: (a) Owners of the company   (b) Creditors of the company   (c) Directors   (d) None of the above
Answer(b) Creditors of the company Explanation: Debenture holders have lent money to the company. They are creditors (lenders), not owners. They receive fixed interest and have no voting rights.
6. Interest on debentures is paid: (a) Annually   (b) Half-yearly   (c) Quarterly   (d) Monthly
Answer(b) Half-yearly Explanation: Interest on debentures is typically paid half-yearly (every six months), though the rate is stated on an annual basis.
7. Cash flow from operating activities under the indirect method starts with: (a) Cash sales   (b) Net profit before tax   (c) Total revenue   (d) Gross profit
Answer(b) Net profit before tax Explanation: Under the indirect method, cash flow from operating activities begins with net profit before tax and adjusts for non-cash items (depreciation, changes in working capital, etc.).
8. A company issues 10,000 shares of ₹10 each at a premium of ₹2. The amount payable is: Application ₹4, Allotment ₹6 (including premium), First & Final Call ₹2. One shareholder holding 100 shares failed to pay the allotment money. The calls in arrears on allotment is: (a) ₹600   (b) ₹400   (c) ₹800   (d) ₹200
Answer(a) ₹600 Explanation: Allotment money per share = ₹6 (including premium). Calls in arrears = 100 shares × ₹6 = ₹600. Note: Premium is part of the allotment amount and is also unpaid.
9. Debenture Redemption Reserve is created by transferring: (a) 25% of debenture amount   (b) 50% of debenture amount (now 10% for listed companies)   (c) 100% of debenture amount   (d) 75% of debenture amount
Answer(b) 50% of debenture amount (now 10% for listed companies) Explanation: Companies must create a DRR of at least 50% of the debenture amount before redemption. However, for listed companies, this has been reduced to 10% by an amendment.
10. In a common size balance sheet, each item is expressed as a percentage of: (a) Revenue from operations   (b) Net profit   (c) Total assets / total equity and liabilities   (d) Share capital
Answer(c) Total assets / total equity and liabilities Explanation: In a common size balance sheet, each item is expressed as a percentage of the total of the balance sheet (total assets or total equity and liabilities, which are equal).
II. Fill in the Blanks
1. The amount of capital that a company can raise is stated in its Memorandum of Association.
2. Shares forfeited can be re-issued at a maximum discount equal to the amount forfeited on those shares.
3. Securities Premium Reserve can be used for issuing fully paid bonus shares.
4. A debenture is a document that acknowledges a debt.
5. Interest on debentures is a charge against profits (not an appropriation).
6. Cash flow from operating activities is the most important indicator of a company's financial health.
7. In a comparative statement, percentage change = (Absolute change / Previous year figure) × 100.
8. The indirect method of cash flow starts from net profit and adjusts for non-cash items.
9. Premium on issue of shares is credited to Securities Premium Reserve account.
10. When forfeited shares are re-issued, the net gain (forfeited amount − discount on re-issue) is transferred to Capital Reserve.
III. True or False
1. A company can issue shares at a discount only if it is authorised by its articles and the issue is made within two months of the company's first commencement of business. False. Correction: As per the Companies Act, shares can now be issued at a discount only by certain types of companies under specific conditions. In practice, the provision for issuing shares at a discount has been largely removed by the Companies Act, 2013.
2. Premium on issue of debentures is credited to Debenture Premium Account. True. The premium received on issue of debentures is credited to a separate "Debenture Premium" account and is written off over the life of the debentures.
3. Debenture interest is an appropriation of profit. False. Correction: Debenture interest is a charge against profit — it must be paid whether the company makes a profit or not. It is NOT an appropriation (which applies to dividends on shares).
4. Cash flow from financing activities includes interest paid on debentures. True. Under AS-3 (Revised), interest paid on debentures and loans is classified as a financing activity (though some older practices classified it under operating activities).
5. Forfeited shares can be re-issued at par, at a premium, or at a discount. True. Forfeited shares can be re-issued at any price, but the discount on re-issue cannot exceed the amount forfeited on those shares.
6. Comparative statements show only absolute figures without comparison. False. Correction: Comparative statements show figures for two or more years side by side, along with the absolute change and percentage change — enabling comparison.
7. The Cash Flow Statement is mandatory for all companies under AS-3. True. AS-3 (Revised) makes the Cash Flow Statement mandatory for all enterprises whose financial statements comply with Accounting Standards.
IV. Match the Following
1.
| Column A | Column B |
|---|
| Authorised Capital | Maximum capital in Memorandum |
| Issued Capital | Portion of authorised capital offered |
| Subscribed Capital | Shares subscribed by the public |
| Called-up Capital | Amount demanded from shareholders |
| Paid-up Capital | Amount actually received from shareholders |
2.
| Column A | Column B |
|---|
| Shareholders | Owners of the company |
| Debenture holders | Creditors of the company |
| Securities Premium | Reserve under Shareholders' Funds |
| DRR | Debenture Redemption Reserve |
| Calls in Arrears | Amount not paid by shareholders on calls |
3.
| Column A | Column B |
|---|
| Operating Activity | Cash from core business |
| Investing Activity | Purchase/sale of fixed assets |
| Financing Activity | Issue of shares, repayment of loans |
| Indirect Method | Start from net profit, adjust non-cash items |
| Direct Method | Start from cash receipts from customers |
V. Answer Briefly
1. Distinguish between shares and debentures.
Answer
| Basis | Shares | Debentures | |---|---|---| | Nature | Ownership (equity) | Debt (loan) | | Return | Dividend (variable, not guaranteed) | Interest (fixed, guaranteed) | | Voting rights | Yes (equity shareholders) | No | | Priority on liquidation | After debenture holders | Before shareholders | | Charge on assets | No | Yes (for secured debentures) | | Conversion | Cannot be converted to debentures | Convertible debentures can be converted to shares | | Risk | Higher (returns depend on profits) | Lower (fixed return) | | Accounting treatment | Share capital under Shareholders' Funds | Long-term borrowings under Non-current Liabilities |
2. What is oversubscription? How is it dealt with?
Answer
Oversubscription occurs when the number of shares applied for exceeds the number of shares offered by the company. It is dealt with in three ways: 1. Reject some applications entirely — Some applicants get no shares at all; their application money is refunded. 2. Pro-rata allotment — Shares are allotted proportionately to all applicants. For example, if 15,000 shares are applied for but only 10,000 are offered, each applicant gets 10,000/15,000 = 2/3 of the shares applied for. 3. Combination of both — Some applications are rejected, and the remaining applicants receive pro-rata allotment. Important: Excess application money received from applicants who are allotted shares can be adjusted towards allotment and calls, rather than refunding and collecting again.
3. What is the difference between calls in arrears and calls in advance?
Answer
| Basis | Calls in Arrears | Calls in Advance | |---|---|---| | Meaning | Amount not paid by shareholders on calls made | Amount paid by shareholders before calls are made | | Interest | Company charges interest @ rate specified in articles (max 10% p.a.) | Company pays interest @ rate specified in articles (max 12% p.a.) | | Balance Sheet | Deducted from called-up capital (shown as note) | Shown under Current Liabilities as "Calls in Advance" | | Accounting | Debited to Calls in Arrears A/c | Credited to Calls in Advance A/c |
4. State the purposes for which Securities Premium Reserve can be used.
Answer
As per Section 52 of the Companies Act, 2013, Securities Premium can be used for: 1. Issuing fully paid bonus shares to existing shareholders 2. Writing off preliminary expenses 3. Writing off expenses of or commission/discount on issue of shares or debentures 4. Providing for premium payable on redemption of debentures or preference shares 5. Buy-back of shares
5. What is a Cash Flow Statement? What are its objectives?
Answer
A Cash Flow Statement is a financial statement that shows the inflows (receipts) and outflows (payments) of cash and cash equivalents during a particular period. It classifies cash flows into three activities: 1. Operating Activities — cash from core business operations 2. Investing Activities — cash from purchase/sale of fixed assets and long-term investments 3. Financing Activities — cash from issue/repayment of capital, debentures, and dividends Objectives: 1. Assess the ability to generate future cash flows 2. Evaluate liquidity and solvency 3. Compare cash from operating, investing, and financing activities 4. Assess the quality of net profit (whether profit is supported by cash) 5. Help in planning and decision-making
6. How are comparative and common size statements different?
Answer
| Basis | Comparative Statement | Common Size Statement | |---|---|---| | Purpose | Shows year-over-year changes | Shows each item as % of a base | | Base | Previous year figures | Common base (Revenue or Total Assets) | | Columns | Two years + Absolute Change + % Change | Two years + % of base for each | | Use | Trend analysis across time | Cross-sectional analysis | | Example | "Sales increased 15% from ₹10L to ₹11.5L" | "Cost of goods sold is 60% of revenue" |
VI. Answer in Detail
1. ABC Ltd. issued 50,000 shares of ₹10 each at a premium of ₹2 per share, payable as: Application ₹4, Allotment ₹5 (including premium), First Call ₹2, Final Call ₹1. Applications were received for 60,000 shares. The directors made allotment on pro-rata basis and excess application money was adjusted towards allotment. One shareholder holding 500 shares failed to pay the first call. Pass the necessary journal entries.
Answer
Step 1: Application Money Received Applications received for 60,000 shares × ₹4 = ₹2,40,000 Applications due for 50,000 shares × ₹4 = ₹2,00,000 Excess application money = ₹40,000 Bank A/c Dr. 2,40,000 — To Share Application A/c 2,40,000 (Being application money received for 60,000 shares) Step 2: Adjustment of Application Money Share Application A/c Dr. 2,40,000 — To Share Capital A/c 2,00,000 (50,000 × ₹4) — To Share Allotment A/c 40,000 (excess adjusted) (Being application money transferred to share capital and excess adjusted towards allotment) Step 3: Allotment Money Due Allotment money due = 50,000 × ₹5 = ₹2,50,000 Less: Already adjusted from application = ₹40,000 Allotment money now due = ₹2,10,000 Share Allotment A/c Dr. 2,50,000 — To Share Capital A/c 2,00,000 (50,000 × ₹4) — To Securities Premium Reserve A/c 1,00,000 (50,000 × ₹2) (Being allotment money made due) Step 4: Allotment Money Received Bank A/c Dr. 2,10,000 — To Share Allotment A/c 2,10,000 (Being allotment money received after adjusting excess application money) Step 5: First Call Money Due First call money = 50,000 × ₹2 = ₹1,00,000 Calls in arrears = 500 × ₹2 = ₹1,000 Share First Call A/c Dr. 1,00,000 — To Share Capital A/c 1,00,000 (Being first call money made due) Step 6: First Call Money Received Bank A/c Dr. 99,000 Calls in Arrears A/c Dr. 1,000 — To Share First Call A/c 1,00,000 (Being first call money received except on 500 shares) Step 7: Final Call Money Due and Received Final call money = 50,000 × ₹1 = ₹50,000 Share Final Call A/c Dr. 50,000 — To Share Capital A/c 50,000 (Being final call made due) Bank A/c Dr. 50,000 — To Share Final Call A/c 50,000 (Being final call money received)
2. XYZ Ltd. issued 10,000, 9% Debentures of ₹100 each at a premium of 5%, redeemable at a premium of 10% after 5 years. Pass the journal entries for issue and write off the premium. Also show the treatment of loss on issue of debentures.
Answer
Step 1: Issue of Debentures Issue price = ₹100 + ₹5 (premium) = ₹105 per debenture Redemption price = ₹100 + ₹10 (premium) = ₹110 per debenture Bank A/c Dr. 1,05,00,000 (10,000 × ₹105) — To 9% Debentures A/c 1,00,00,000 (10,000 × ₹100) — To Premium on Issue of Debentures A/c 5,00,000 (10,000 × ₹5) (Being 10,000 debentures issued at 5% premium) Step 2: Loss on Issue of Debentures Since debentures are redeemable at a premium of 10%, the company will have to pay ₹10 per debenture extra at redemption. This is a loss that must be provided for at the time of issue: Loss on Issue of Debentures A/c Dr. 10,00,000 (10,000 × ₹10) — To Premium on Redemption of Debentures A/c 10,00,000 (Being loss on issue of debentures due to premium on redemption provided for) Step 3: Writing Off Premium and Loss Premium on Issue of Debentures (₹5,00,000) and Loss on Issue (₹10,00,000) are written off over the 5-year life of debentures: Annual write-off = (5,00,000 + 10,00,000) / 5 = ₹3,00,000 per year Every year for 5 years: Statement of Profit & Loss Dr. 3,00,000 — To Premium on Issue of Debentures A/c 1,00,000 — To Loss on Issue of Debentures A/c 2,00,000 (Being premium on issue and loss on issue written off over 5 years)
3. From the following Balance Sheet of PQR Ltd. as at 31st March 2025, prepare a Common Size Balance Sheet.
Answer
Balance Sheet of PQR Ltd.
| Particulars | 31.3.2025 (₹) | 31.3.2024 (₹) |
|---|
| Equity and Liabilities | | |
| Shareholders' Funds: | | |
| Share Capital | 5,00,000 | 4,00,000 |
| Reserves & Surplus | 2,00,000 | 1,50,000 |
| Non-current Liabilities: | | |
| Long-term Borrowings | 3,00,000 | 3,50,000 |
| Current Liabilities: | | |
| Trade Payables | 1,00,000 | 1,00,000 |
| Short-term Provisions | 50,000 | 50,000 |
| Total | 11,50,000 | 10,50,000 |
| Assets | | |
| Non-current Assets: | | |
| Fixed Assets | 7,00,000 | 6,50,000 |
| Current Assets: | | |
| Inventories | 2,00,000 | 1,80,000 |
| Trade Receivables | 1,50,000 | 1,20,000 |
| Cash & Cash Equivalents | 1,00,000 | 1,00,000 |
| Total | 11,50,000 | 10,50,000 |
Common Size Balance Sheet (Each item expressed as % of Total) | Particulars | 31.3.2025 (₹) | % | 31.3.2024 (₹) | % | |---|---|---|---|---| | Equity and Liabilities | | | | | | Share Capital | 5,00,000 | 43.48% | 4,00,000 | 38.10% | | Reserves & Surplus | 2,00,000 | 17.39% | 1,50,000 | 14.29% | | Long-term Borrowings | 3,00,000 | 26.09% | 3,50,000 | 33.33% | | Trade Payables | 1,00,000 | 8.70% | 1,00,000 | 9.52% | | Short-term Provisions | 50,000 | 4.35% | 50,000 | 4.76% | | Total | 11,50,000 | 100% | 10,50,000 | 100% | | Assets | | | | | | Fixed Assets | 7,00,000 | 60.87% | 6,50,000 | 61.90% | | Inventories | 2,00,000 | 17.39% | 1,80,000 | 17.14% | | Trade Receivables | 1,50,000 | 13.04% | 1,20,000 | 11.43% | | Cash & Cash Equivalents | 1,00,000 | 8.70% | 1,00,000 | 9.52% | | Total | 11,50,000 | 100% | 10,50,000 | 100% | Key Observations: - Shareholders' funds increased from 52.38% to 60.87% of total — improved financial stability - Long-term borrowings decreased from 33.33% to 26.09% — reduced debt dependence - Fixed assets remain the dominant asset (around 61%) - Trade receivables increased from 11.43% to 13.04% — may indicate slower collection
4. From the following information, calculate Cash Flow from Operating Activities using the Indirect Method.
Answer
| Particulars | ₹ |
|---|
| Net Profit before Tax | 2,00,000 |
| Depreciation on Fixed Assets | 30,000 |
| Loss on Sale of Machinery | 10,000 |
| Goodwill Written Off | 15,000 |
| Increase in Trade Receivables | 20,000 |
| Decrease in Inventories | 25,000 |
| Increase in Trade Payables | 15,000 |
| Decrease in Prepaid Expenses | 5,000 |
| Interest Paid | 20,000 |
| Tax Paid | 40,000 |
Cash Flow from Operating Activities (Indirect Method) | Particulars | ₹ | ₹ | |---|---|---| | Net Profit before Tax | | 2,00,000 | | Adjustments for non-cash and non-operating items: | | | | + Depreciation on Fixed Assets | 30,000 | | | + Loss on Sale of Machinery | 10,000 | | | + Goodwill Written Off | 15,000 | | | | | 55,000 | | Operating Profit before Working Capital Changes | | 2,55,000 | | | | | | Adjustments for Working Capital Changes: | | | | + Decrease in Inventories | 25,000 | | | + Decrease in Prepaid Expenses | 5,000 | | | + Increase in Trade Payables | 15,000 | | | − Increase in Trade Receivables | (20,000) | | | | | 25,000 | | Cash Generated from Operations | | 2,80,000 | | | | | | − Interest Paid | | (20,000) | | − Tax Paid | | (40,000) | | Net Cash Flow from Operating Activities | | 2,20,000 | Key Points: - Depreciation, loss on sale, and goodwill written off are added back as they are non-cash expenses - Increase in trade receivables is subtracted (cash not yet received) - Decrease in inventories is added (less cash tied up in stock) - Increase in trade payables is added (cash not yet paid out) - Interest and tax paid are actual cash outflows deducted at the end
5. A company forfeited 1,000 shares of ₹10 each (issued at par) for non-payment of allotment ₹4 and first call ₹3. The final call of ₹2 has not yet been called. These shares were re-issued at ₹8 per share as fully paid. Pass the necessary journal entries.
Answer
Step 1: Forfeiture of Shares Called-up amount = Application + Allotment + First Call = (assumed ₹1 + ₹4 + ₹3) = ₹8 Amount paid by shareholder = Application money only = ₹1 (assuming ₹1 was paid on application) Actually, let's recalculate: - Face value = ₹10 - Allotment unpaid = ₹4 - First call unpaid = ₹3 - Final call not called = ₹2 - Called-up = ₹8 (₹1 application + ₹4 allotment + ₹3 first call) - Paid-up = ₹1 (only application paid) Share Capital A/c Dr. 8,000 (1,000 × ₹8 called-up) — To Share Allotment A/c 4,000 (1,000 × ₹4) — To Share First Call A/c 3,000 (1,000 × ₹3) — To Shares Forfeited A/c 1,000 (1,000 × ₹1 = amount already paid) (Being 1,000 shares forfeited for non-payment of allotment and first call) Step 2: Re-issue of Forfeited Shares Re-issue price = ₹8 per share (fully paid) Discount on re-issue = Face value − Re-issue price = ₹10 − ₹8 = ₹2 per share Total discount = 1,000 × ₹2 = ₹2,000 Bank A/c Dr. 8,000 (1,000 × ₹8) Shares Forfeited A/c Dr. 2,000 (discount on re-issue) — To Share Capital A/c 10,000 (1,000 × ₹10) (Being 1,000 forfeited shares re-issued at ₹8 per share as fully paid) Step 3: Transfer to Capital Reserve Amount forfeited on re-issued shares = ₹1,000 Less: Discount on re-issue = ₹2,000 Net gain = ₹1,000 − ₹2,000 = −₹1,000 (Net loss) Since the discount exceeds the amount forfeited, there is no transfer to Capital Reserve. The loss is absorbed in the Shares Forfeited Account. (If the amount forfeited exceeds the discount, the net gain is transferred:) Shares Forfeited A/c Dr. — To Capital Reserve A/c (Being net gain on re-issue of forfeited shares transferred to Capital Reserve)
6. From the following information of LMN Ltd., calculate: (a) Current Ratio, (b) Quick Ratio, (c) Debt-Equity Ratio, (d) Gross Profit Ratio, (e) Net Profit Ratio.
Answer
| Particulars | ₹ |
|---|
| Revenue from Operations | 10,00,000 |
| Cost of Revenue from Operations | 6,00,000 |
| Operating Expenses | 1,50,000 |
| Non-operating Income | 20,000 |
| Current Assets | 4,00,000 |
| Inventory | 1,20,000 |
| Prepaid Expenses | 30,000 |
| Current Liabilities | 2,00,000 |
| Long-term Debts | 3,00,000 |
| Shareholders' Funds | 5,00,000 |
(a) Current Ratio Current Ratio = Current Assets ÷ Current Liabilities = 4,00,000 ÷ 2,00,000 = 2:1 (b) Quick Ratio Liquid Assets = Current Assets − Inventory − Prepaid Expenses = 4,00,000 − 1,20,000 − 30,000 = ₹2,50,000 Quick Ratio = Liquid Assets ÷ Current Liabilities = 2,50,000 ÷ 2,00,000 = 1.25:1 (c) Debt-Equity Ratio Debt-Equity Ratio = Long-term Debts ÷ Shareholders' Funds = 3,00,000 ÷ 5,00,000 = 0.6:1 Interpretation: For every ₹1 of shareholders' funds, there is ₹0.60 of long-term debt — conservative financing. (d) Gross Profit Ratio Gross Profit = Revenue from Operations − Cost of Revenue from Operations = 10,00,000 − 6,00,000 = ₹4,00,000 Gross Profit Ratio = (Gross Profit ÷ Revenue from Operations) × 100 = (4,00,000 ÷ 10,00,000) × 100 = 40% (e) Net Profit Ratio Net Profit = Gross Profit − Operating Expenses + Non-operating Income = 4,00,000 − 1,50,000 + 20,000 = ₹2,70,000 Net Profit Ratio = (Net Profit ÷ Revenue from Operations) × 100 = (2,70,000 ÷ 10,00,000) × 100 = 27%
Common Mistakes to Avoid
1. Confusing called-up capital with paid-up capital — Called-up is what the company demanded; paid-up is what shareholders actually paid. On forfeiture, debit Share Capital A/c with the called-up amount, not the paid-up amount.
2. Forgetting to adjust excess application money towards allotment — In oversubscription problems, excess application money received from allotted applicants must be adjusted towards allotment. Do not refund and re-collect.
3. Treating debenture interest as an appropriation — Debenture interest is a CHARGE against profits, not an appropriation. It must be paid whether the company earns profit or not. It appears in the Statement of Profit & Loss under "Finance Costs."
4. Not providing for premium on redemption of debentures — If debentures are redeemable at a premium, the loss on issue must be accounted for at the time of issue itself, not at redemption. Create a "Loss on Issue of Debentures" account and a "Premium on Redemption of Debentures" account.
5. Misclassifying cash flows — Interest paid on debentures is a financing activity (not operating), dividends received from investments are investing activities, and dividends paid are financing activities. Under AS-3, interest and dividends received are classified based on the nature of the underlying activity.
6. Omitting non-cash items in indirect method — When computing cash flow from operations, always add back depreciation, amortisation, loss on sale of assets, and subtract gains on sale of assets. These are non-cash items that affected net profit but did not involve cash.
Exam Checklist
- [ ] I can pass journal entries for share issue (application, allotment, calls, oversubscription, forfeiture, re-issue)
- [ ] I can distinguish between authorised, issued, subscribed, called-up, and paid-up capital
- [ ] I can account for premium and discount on issue of shares and debentures
- [ ] I can handle forfeited shares — forfeiture, re-issue, and transfer to Capital Reserve
- [ ] I can pass journal entries for debenture issue, interest, and redemption
- [ ] I can prepare Common Size and Comparative financial statements
- [ ] I can compute all major ratios (current, quick, debt-equity, proprietary, gross profit, net profit, inventory turnover)
- [ ] I can prepare a Cash Flow Statement using the Indirect Method with proper classification of operating, investing, and financing activities
- [ ] I remember to add back non-cash items (depreciation, loss on sale) and adjust working capital changes in cash flow
- [ ] I can present the Balance Sheet in the vertical format as per Schedule III of the Companies Act
