Explore topic-wise InterviewSolutions in Current Affairs.

Amount of liability is fixed and it is sure to pay. While provision is an amount appropriated from profit for probable expenses or losses for which the amount cannot be ascertained accurately.

General reserve is created to meet unforeseen requirements.

A general reserve is created from Profit and Loss Appropriation A/c.

A provision is created from the profit and loss account.

Correct option is (a) Profit and Loss A/c

Correct option is (a) General reserve

Correct option is (b) Profit and Loss A/c

Correct option is (b) Profit and Loss appropriation A/c

Correct option is (c) Secret reserve

Correct option is (c) General reserve

Meaning: When a revenue reserve is created out of profit and loss appropriation account for specified purpose is known as Specific reserve or Special reserve. Such reserve is used for the same purpose for which it is created. When the purpose of such a reserve is over, the balance of Specific reserve is to be transferred to the General reserve and used for any other purpose.

Types of specific reserve :

• Investment fluctuation fund,
• Debenture redemption fund,
• Sinking fund,
• Dividend equalization fund and
• Workers accident compensation reserve (fund).

On the basis of time, types of financial analysis are as follows :

• Long term analysis
• Short term analysis

The comparative analysis for one year among different units of different financial statements can be called as vertical analysis.
Vertical analysis is used to compare the performance of different units or departments of one year with the help of different predetermined ratios.

Analysis through comparative statements includes comparative balance sheet and comparative profit-loss statement (income statement).

(a) Comparative Profit-Loss Statement: Comparative profit and loss statement is just like comparative balance sheet. There are total 6 columns. But the content of profit-loss statement and balance sheet are different. The comparison of details of two years of two components of annual accounts profit-loss statement and balance sheet are done. The. growth of business entity can be seen through this analysis.

There are two important components of profit and loss statement:

(1) Total revenue and total expenses. The results of earnings made during the year is available from the profit-loss statement. The increase in revenue /decrease in expenses indicates the increase in revenue. The decrease in revenue and increase in expense indicates the decrease in revenue.

In short, how much total revenue and total expenses have changed (increase/ decrease) in terms of rupees and percentage can be ascertained from comparative profit-loss statement.

(b) Comparative Balance Sheet: Comparative balance sheet has main two components :

• Equity and Liabilities and
• Assets

Balance sheet provides the information about the solvency status of the business enterprise. As compared to previous long term and short term solvency of the business current solvency increased or decreased can be known with the help of comparative balance sheet.

In short, during two periods how much

(i) share capital
(ii) Reserves and surplus
(iii) Non-current liabilities

(iv) Current liabilities as well as(i) non-current assets (ii) current assets are changed in terms of rupee and percentage can be ascertained from comparative balance sheet. The trend of components of comparative balance sheet is fixed, flexible, decreasing or increasing etc. can be known through comparative balance sheet.

Secret reserve can be created as follows :

• By undervaluing closing stock.
• By showing more contingencies than required, e.g., provision for bad debt.
• By showing contingent liability as actual liability.
• By making more provision for depreciation.
• By recording capital expenditure in Profit and Loss Account.
• By showing more expenses than actual.

Financial statements are prepared on the basis of rules and as per Companies Act 2013. Different stages are developed for the analysis of financial statements due to which organised and scientific analysis can be done.

These stages are as under :

1. New structural arrangement of financial statements: Based on the legal provisions, analysis of financial statements are done with the help of comparative statements, ratio analysis, common size statements etc. The information disclosed in financial statements is reclassified and rearranged to undertake use of these tools, eg. to know the trend of net profit of last five years, the net profit rate is used. For this analysis sales and profit of last five years is considered.

2. Comparison: in the second stage of financial analysis, reclassified and rearranged information is compared. Here, the results of the second year with the third year, of the third year with the fourth year etc. can be compared. Analysis and interpretation is done on the basis of comparison.

3. Analysis and Interpretation: Analysis means appropriate examination or evaluation of information, where information is categorised into different components and their relationship is tested. Interpretation gives explanation of this relationship, e.g. In the net profit trend, generally increase in the sales leads to the increase in net profit.

Important objectives of financial analysis are as follows :

1. Efficiency evaluation: Business entity acquires different assets as per the nature of business with the help of this assets production and sales are done and services are provided. The use of these assets should be at maximum level. Maximum use of assets generates more earning. Through financial analysis, the evaluation of the efficient use of assets can be done.

2. Evaluation of earning capacity: Generally, financial statements are prepared for the duration of 12 months. This analysis is made with the help of different accounting ratios and future earning capacity of the entity can also be forecasted. Mostly all stakeholders, gather information of present and future earning through this analysis for their
investment decision.

3. Solvency evaluation: Solvency evaluation has two types: Short term and long term solvency. The goods and service providers to the business measure the short term solvency and banks and financial institutions measure the long term solvency of business entities for their loan amount.

4. Evaluation of managerial efficiency: The owners and the management are two different entities in the company form of business. Therefore, through financial analysis evaluation of effectiveness and fairness of the decisions of the board of directors can be done. The performance evaluation of the officers can also be done throught this analysis.

5. Planning for budget: Budget means the quantitative planning or statistical planning of future objectives in present. What will be the future sales? How much purchase is required? How much will be the production? How much cash will be required? What will be the revenue expenses? What will be the capital expenses? etc. are estimated. Analysis of financial statements is useful to make the process of budget effective.

6. Comparative Study: Two types of comparisons can be done through financial analysis. In the first comparison, the business entity can compare its currents with the accounts of past. Different aspects of business entity like profitability, liquidity, solvency and efficiency etc. of the current year can be compared with the previous year to know the growth of the above-mentioned aspects.

7. Simplicity to understand accounts: Financial accounts are prepared on the basis of determined rules, principles and terminology. It is possible that all the users of financial accounts may not have full knowledge pertaining to financial accounts. Under these circumstances, financial statements analysis helps to understand the financial accounts. In financial analysis, the presentation of financial accounts is done in various ways. It provides simplicity to the users to understand financial accounts.

A sceret reserve is created by understating the value of the asset or by overstating the liabilities in the books of accounts.

Following are the main limitations of financial statement analysis :

1. Historical data: Financial accounts are prepared on the basis of past transactions, so we can say that financial statement is based on historical information. Based on analysis of financial statement, future of business entity can be forecasted. So, here estimation is possible which is biggest limitation.

2. Absence of qualitative aspect: Factors like honesty, expertise, contribution of workers for development of business and loyalty of management towards business entity etc. are not considered which have relation with efficiency of business. This is again a limitation.

3. Window dressing: Many a time, the information disclosed in financial statement is not found to be correct. Accounts are prepared on the basis of incorrect information rather than correct information. Thus, decisions made by the stakeholders stand incorrect. This is also a limitation.

4. Absence of Qualitative Aspect: During financial statement analysis only quantifiable items are considered. But factors like contribution of workers for development of business and loyalty of management towards business entity, honesty, expertise etc. are ignored.

5. Personal opinion: There are options in accounting for preparing the accounts, i.e. Use of inventory valuation and depreciation method. Thus, there is a possibility of personal opinion. Due of these options, there is a room for subjectivity in preparation of accounts. This also creates hurdle to financial analysis.

6. Based on presentation of financial statements: There is a direct relation between true and fair information and effective and efficient analysis shown in financial statements. Thus if information is incorrect or inadequate true and fair analysis of information can not be done.

(i) Current Assets 

(ii) Fixed Asset

(i) Claims against the Company not acknowledged as debts. 

(ii) Uncalled Liability on partly paid shares. 

(iii) Arrears of Dividend on Cumulative preference shares.

The various types of diagrams are discussed below:

(1) Time-based line (curve) diagram:

• This diagram is used when we have some time related data. For example, price of a given share in last 30 days, number of vehicles passing through a cross road every hour of a day, growth of population from 1951 to 2001, etc.
• The line-diagram represents the relation between the two economic two variables and the slope.
• Line-diagram can be used for showing the demand curve, supply curve, etc.
• The independent variable (usually, time) is measured on ‘X-axis’ and the dependent variable is measured on ‘Y-axis’.

(2) Bar diagram:

A bar diagram is a chart that uses bars to show comparison between catcyories of data. The bars can be either horizontal or vertical.

Purpose:

• A bar diagram shows distribution of the value of a variable in various sections. For example, literacy rate in a country in various years or literacy rate among females and males in a particular year.
• A vertical or horizontal bar is drawn for each value of the variable.
  A separate bar is drawn for each section and the height/length of the bar indicates the value for that section.
• Thus, by comparing the height/length of the bars a comparison can be made of the values of each section.

Bar diagrams are generally of three types:

(A) Simple bar diagram
(B) Clustered bar diagram
(C) Divided bar diagram.

(A) Simple bar diagram:

• A simple bar diagram is a bar diagram which represents values of only one variable over a base.
• Through simple bar diagram, one can represent data of sale in various regions, months or years, etc.
• The difference in the length of bars gives a visual effect of the difference in the value of the variable under study.

(B) Clustered bar diagram:

In this type of a diagram, values of a common variable and over a common base are displayed for more than one section of related parameters. Hence we get a cluster of bars for the same variable over various values/sections at the base.

Use in economics:

• Suppose a mobile store owner has two branches. If he wish to compare sales of each branch for a given period of time then he can use clustered bar diagram.
• Other example could be variable ‘year’ as the base and comparing literacy of two sections namely males and females. This will be a two clustered bar diagram and each pair of bar will show literacy rate of male as well as female.
• To separate the bars properly, the clustered bars are given either different colours or designs. Each value point is then represented on the bar.

(C) Divided bar diagram:

• Divided bar diagram is a bar diagram wherein each bar is divided into several segments to represent a set of quantities according to the different proportions of the total amount.
• In this diagram, every single value of the variable has sub divisions. Hence we get divisions in all the bars which represent a common variable and common base values.
• Each division of the bar is colored differently to distinguish between the divisions. Values are put on each division so that it is easily understood.

(3) Pie-diagram:

• A pie diagram (or a circle chart) is a circular statistical diagram which is divided into slices to illustrate numerical proportion.
• Division of a circle in degrees represents a pie diagram.
• If an entire circle is considered as universal set of an entire data and the different sections of this data are represented by dividing the circle in degrees proportional to the data then a pie diagram is obtained.
• Note that we can draw pie diagram for the similar type of data for which a bar diagrams can be drawn.
• The complete circle represents 360°. Hence, the entire data represents 360° and sections/divisions of the data are represented by dividing the circle in degrees proportional to each data section.

Formula for obtaining proportional degree for a section of data:
Degree =  Component value /Total value  × 360

Importance of diagrams and graphs in context of presenting information:

• Economic provides an explanation and analysis of various economic events occurring in the real world.
• For studying these events a lot of data is collected. It is then analysed and represented in simpler forms.
• Pictorial representation is a very effective and easy way to represent data analysis.
• Diagrams and graphs are two ways of representing the information pictorially.
• A layman may call diagram and graph as one but Statistics classifies diagrams and graphs as different types of pictures. Both of these are used for distinct purpose. Similarly, even in economics these two are used to fulfill different purposes.
• When we talk about general public or say layman we need to show them such representations which they can understand. Diagrams fulfill this purpose.
• Data understanding and analysis is out of reach and interest of general public. When such information is provided in an easy manner through diagrams then people tend to take interest in them.

Although one needs to make use of scale and measurement to draw a diagram, one does not need to have a thorough knowledge of statistics to draw it. Since drawing the diagram is easy it obviously means that it is easy to understand as well for layman.

• On the other hand graphs are not meant for general public. A graph is drawn for statistical information which is not self-explanatory.
• Layman can neither create not represent graphs without thorough knowledge of statistics. Hence, graphs are mostly used by researchers and in higher education.
• Moreover, graphs are not used or published for general public. They are created by researchers for their data analysis and understanding purposes only.

Correct option is (b) Bar diagram and pie diagram

Diagram:

A pictorial representation of observed data is called a diagram.

Diagram is self-explanatory in nature and can be easily created and understood by anyone.

Although one needs to make use of scale and measurement to draw a diagram, one does not need to have a thorough knowledge of statistics to draw it.

A diagram is drawn for data having discrete(discontinuous) frequency distribution. For example, the data could be

1 No. of children born in a month,

2 Price in rupees,

3 No. of road accidents, etc.

• Time series Graphs
• Graphs of Continuous Frequency Distribution:
  • Histogram
  • Frequency Polygon
  • Frequency Curve
  • Cumulative Frequency Curve
• Logarithmic Graphs:
  Time Series Graphs: The graphs drawn by taking time period as base are called time series graphs. This type of graphs are used to find the trend of changes in economic activities.

Diagram is a representation of the relationship between variables in a picture.

Aspects to be considered while drawing a bar diagram:

1. The width of the bars does not represent any data. Hence, one should draw all the bars of equal width.
2. The length of the respective bars should be proportional to the value of the variable which they represent.
3. The distance between all bars should be equal. This distance should be also maintained between the first bar and the origin.
4. All bars rest on the same line called the ‘base’ which usually coincides with the ‘X-axis’. In today’s times with the help of computer technology, horizontal bars are also drawn instead of vertical bars.
5. All vertical bars should be arranged from left to right in order of the data series. Therefore, the bar representing the first data in the series is drawn first near the point of origin.

A diagram which is drawn by representing sub-divisions of an entire data by proplonate degrees ¡n a circle, is called a pie diagram.

Profit share of partner will be credited to partners current account when fixed capital account method is adopted.

When a data set is distributed among various sections and for each section a bar is drawn on a common base, such that the height of the bar is proportional to the value of the variable for the respective section then such a diagram is called a bar diagram.

Use of technology in the study of economics: The various types of digital tools frequently used in the study of economics are:
Computer technology:

• Computers and economics now go hand in hand.
• Computers are used to solve several purposes of economics. Some of them are discussed below.

1. In making presentations:

• Complicated economic information/data and difficult economic theories can be easily represented by making their PowerPoint presentations.
• For example, if one has to explain the budget briefly then he can simply make a 3 to 4 slides in Microsoft Power point, highlight the main topics, show important figures and charts and explain the entire budget.

2. Excel worksheets:

• Economics deals with lots of data. Researchers come across data having thousands of observations on a daily basis. It is almost impossible to handle so much data manually.
• Microsoft Excel is a powerful tool for handling large data related to several economic parameters and then and performing analysis on it.
• For example, if we survey on number of items produced by small scale industries in India, we would get thousands of observations.
• We can feed this data in excel and get various figures such as total production, average production, number of units in a given region, total exports, etc. within seconds.
• Excel also has numerous types of graphs and diagrams which can be created within a click.

3. Diagrams and graphs:

• There are several programmes in a computer which help us to draw diagrams and graphs used frequently in economics.
• Microsoft Word also offers drawing tools which can be used to draw simple free hand figures like a downward sloping or upward sloping demand or supply curve.
• It can also be used to draft a report, paste diagrams and graphs from Excel and publish the report.

4. Storage tools:

Economic study makes use of large amount of study and reference material. So, it is very important to have enough space where the material can be preserved for a long time.

• Having so much reference and data in the form of books is very cumbersome to carry, study and manage. Moreover, the material may be lost, get damaged by pest, moisture or other reasons.
• All such material can be conveniently stored, retrieved and transported easily if we use electronic media.
  The data and material can be stored computers, portable hard drives, pen drive, compact disc, etc.
  Nowadays the data can also be easily stored in digital format with the help of e-mail, drop-box, Google drive, Digi-locker, etc. we can access this material and read it in any part of the world.
• These media make it quite easy to transfer data, save it securely, preserve it for long time that too at multiple locations.
• Thus, study material can be preserved with the help of computer technology.

5. Other tools:

• Microsoft Excel cannot handle very large amount of data. For this purpose there are various statistical software available which are highly advanced, sophisticated and can handle any size of data.
• SPSS, SHAZAM, E-views, SAS, etc. are few of the such statistical software. -» These software can process data for lakhs of observations that too within seconds or minutes.
  Since these statistical software are very costly, they are mostly bought by research institutes or government organizations.
• There are also certain statistical software like Gretl, PSPP, R, etc. which are available free of cost on the internet but does almost same tasks of analysis as done by the costly software.
• Now-a-days many of these functions of a computer are also available on smart phones and tablets.

Partner's Capital

Explanation: Partner’s Capital is the amount which is brought in by the partners into the business for smooth functioning of their firm.

1. Computer Technology:

• Complicated economic data and difficult theories of economics can be made easy by expressing in a power point presentation.
• A large amount of statistical data of economics can be entered in an excel sheet and processing this sheet for any formula at only one click. For – example sum total, averages, dispersion, correlation, etc. Also we can obtain various figures for the data in an excel sheet.
• There are several programmes in a computer which help us to draw diagrams and graphs in economics.
• Computer preserves plenty of study material in economics and transfers it in a hard disk or pen drive, in e-mail, drop-box, google drive, digi-locker, etc. and we can access this material and read it in any part of the world.
• Using statistical programmes like SPSS, SHAZAM, SAS, E-views, etc. almost all types of data can be processed in minutes by entering the right formulae.

Cautions in using Computer Technology:

• It is an aid in studying but not a study material by itself.
• It helps to make the study easier and faster but it does not replace the process of studying.
• If we do not use the right commands in a computer we may end up losing our material.
• If we do not know the correct formulae and commands, we may also end up getting incorrect graphs and data processing.

2. Internet Technology: Internet is a facility created by digital technology. The use of internet in economics can be described as follows:

• As tutorials: Through powerpoint presentations we can read guiding study materials in economics on the open access link.
• As active learning: Some videos of lectures by experts are put on open access sites which students can listen on the net like we do in our classroom.
• As reading material: Numerous books are available online free of cost on net for reading. Also good research articles, copies of journals, etc. are also available for students to read on net. Such materials are known as e-books, e-journals, etc.
• As information: Information on universities offering degrees in economics and other details on the subject economics we can get on internet.
• As data: Data on banking on website of RBI, data on exports and imports on website of Ministry of Commerce and Industries, data on budget on website of Ministry of Finance, etc. Data collected by CSO. NSSO, WHO, UNO, CMIE, ILO, IMF, etc. are put on websites.
• As miscellaneous: By using search engine on internet many other information like quotes by economists, names of reference books etc.

Cautions in using Internet:

• A lot of substandard material, irrelevant information, misleading information, ideas of another are found on internet. So we must avoid using such data.
• Only authentic websites must be refferred to otherswise we may end up getting misled.
• Data CDs (Compact Discs): Some authentic agencies like laboratories, research centres, government agencies, etc. collect and publish the data on macroeconomic indicators and put huge data in compact discs. Such CDs are sold to and used by educational institutions, research institutes etc. for their studies. Agency namely CMIE (Centre for Monitoring Indian Economy) also creates data software, which are very useful to research institutions and corporations, etc.

Cautions in using CDs:

• The data CDs contain a huge data. So it becomes complicated to use.
• A CD consists of several data sheets. So one must have knowledge for searching the relevant data sheet.

A data CD is a CD which consists of collection and publication of information and data pertaining to macroeconomic indicators. This data content in compact disc is sold to researchers and educational institutions.

Correct option is (c) Laboratories, research centres, government etc.

Use of technology in the study of economics:

The various types of digital tools frequently used in the study of economics are:

Computer technology:

• Computers and economics now go hand in hand.
• Computers are used to solve several purposes of economics. Some of them are discussed below.

1. In making presentations:

• Complicated economic information/data and difficult economic theories can be easily represented by making their Powerpoint presentations.
• For example, if one has to explain the budget briefly then he can simply make a 3 to 4 slides in Microsoft Powerpoint, highlight the main topics, show important figures and charts and explain the entire budget.

2. Excel worksheets:

• Economics deals with lots of data. Researchers come across data having thousands of observations on a daily basis. It is almost impossible to handle so much data manually.
• Microsoft Excel is a powerful tool for handling large data related to several economic parameters and then and performing analysis on it.
• For example, ¡f we survey on a number of items produced by small scale
  industries in India, we would get thousands of observations.
• We can feed this data in excel and get various figures such as total production, average production, number of units in a given region, total exports, etc. within seconds.
• Excel also has numerous types of graphs and diagrams which can be created within a click.

Diagrams and graphs:

There are several programs in a computer which help us to draw diagrams and graphs used frequently in economics.

New profit-loss ratio = 2 : 6 : 3 profit received by Akash, Vikas and Suhas are respectively ₹ 10,000, ₹ 30,000 and ₹ 15,000

Partnership

Explanation: A Partnership is an association of two or more persons who have agreed to carry on a lawful business and share profits or losses in the agreed ratio.

A nominal partner is a partner who is paid a certain amount of fee for lending his name to the firm, which is important for building recognition of the firm. He’s also called a limited partner, as he neither invests in the business nor actively participates in its affairs.

Partner by Estoppel or Holding out

Explanation: A partner who is actually not a partner of the firm but represents to the outside world that he is a partner in the firm is regarded as a partner by estoppel or holding out. Also, such persons are liable to outsiders as partners because on the faith of their representation, outsiders have granted credit to the firm.

Sleeping partner

Explanation: A partner who contributes only capital for the business and does not take any active part in the day to day functioning of the business is regarded as a sleeping partner.

Partner in profits only

Explanation: A partner who has the right to share the profits of the partnership firm without being liable to bear losses is regarded as a partner in profits only. Such a partner also does not take part in the management of the business.

Minor partner

Explanation: A partner below the age of 18 years is known as a minor partner. He can be admitted to the benefits of the partnership firm only with the consent of all the partners.

A partnership deed defines the relationship among the partners. So, it acts as evidence in case of disputes among the partners of a firm. Therefore, it is advised to prepare a partnership deed.

News profit-loss ratio = 2 : 5 : 1. Profit received by Devang,

Jignesh and Brijesh are respectively ₹ 15,000, ₹ 37,500 and ₹ 7,500

profit amount for Shyam 30,000

Drawings

Explanation: Drawings refer to the amounts which are withdrawn (in cash or in kind) by the partners from the business for their personal use. It is recorded in the Current Account in case of Fixed Capital Method and in the Capital Account in case Fluctuating Capital Method is used.

Dissolution of the firm

Explanation: Closure of partnership is termed as dissolution of the firm. A firm is closed with the consent of all the partners which terminates the firm’s business.

When capital accounts of the partners are maintained under fixed capital method, then the capital of the partners remains unchanged or unaltered. It alters only in case of permanent change in capital (i.e. additional capital introduced or withdrawal of capital). In this method, two accounts, namely, Capital Account and Current Account are prepared.