Chapter 11: Financial Statements of Companies - Test 2: answer key

Question 1 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. Avani Industrial Systems Ltd. manufactures industrial pumps and provides installation and maintenance services. The company follows the Accounting Standards notified under Section 133 of the Companies Act, 2013 and prepares its Statement of Profit and Loss for the year ended 31 March 2027 under Schedule III, Division I. The accountant has compiled the following revenue information (₹ in lakh): Particulars | Amount Sale of industrial pumps | 1,500 Installation and maintenance services | 210 Sale of manufacturing scrap | 26 Recovery of freight and handling charges from customers | 16 Excise duty relating to manufactured products | 52 The manufacturing scrap is generated regularly during normal production, while freight recoveries arise from the company's ordinary customer contracts. The excise duty has been collected on the sale of manufactured products and is included in the gross sales figures supplied above. The company also earned interest of ₹18 lakh on surplus bank deposits, received dividend income of ₹7 lakh on long-term investments and earned a net gain of ₹10 lakh on the sale of quoted investments. During the year, it received rental income of ₹12 lakh from a warehouse held as an investment. Expenses directly attributable to earning this rental income amounted to ₹3 lakh. The warehouse is not used in the company's manufacturing or service operations. The finance manager proposes to include all receipts, including bank interest, dividends and investment-sale gains, within Revenue from Operations. He also proposes to show excise duty as an independent operating expense rather than reducing Revenue from Operations. The statutory auditor has asked the accountant to prepare the correct revenue classification and income subtotals strictly in accordance with Schedule III, Division I.

What amount should Avani Industrial Systems Ltd. disclose as Revenue from Operations for the year ended 31 March 2027?

1. ₹1,700 lakh (correct answer)
2. ₹1,752 lakh
3. ₹1,752 lakh less interest income of ₹18 lakh
4. ₹1,710 lakh

Answer: A — ₹1,700 lakh

Explanation. For a non-finance company, Revenue from Operations comprises sale of products, sale of services and other operating revenues, less excise duty. Therefore, ₹1,500 + ₹210 + ₹26 + ₹16 − ₹52 = ₹1,700 lakh. Bank interest, dividends and gains on investment sales belong to Other Income and must be excluded. Option b incorrectly adds operating receipts without deducting excise duty. The classification follows General Instruction 2(A) of Schedule III.

Where it goes wrong. Including non-operating investment income in Revenue from Operations or forgetting to deduct excise duty.

Authority. Schedule III, Division I, Part II, General Instruction 2(A)(a)-(d); Section 129(1), Companies Act, 2013

Question 2 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Determine the correct amount of Other Income to be disclosed by Avani Industrial Systems Ltd.

1. ₹37 lakh
2. ₹44 lakh (correct answer)
3. ₹47 lakh
4. ₹40 lakh

Answer: B — ₹44 lakh

Explanation. Other Income includes interest income ₹18 lakh, dividend income ₹7 lakh, net gain on sale of investments ₹10 lakh and other non-operating income of ₹9 lakh. The latter is rental income of ₹12 lakh less directly attributable expenditure of ₹3 lakh. Total Other Income is therefore ₹18 + ₹7 + ₹10 + ₹9 = ₹44 lakh. The ₹26 lakh scrap revenue and ₹16 lakh freight recovery are operating receipts and cannot be included again.

Where it goes wrong. Including gross rental income without deducting its directly attributable expenditure, or counting scrap sales twice.

Authority. Schedule III, Division I, Part II, General Instruction 4(a)-(d); Section 129(1), Companies Act, 2013

Question 3 · 2 marks · Chapter 11: Financial Statements of Companies · medium

What will be the Total Income (III) in the Statement of Profit and Loss of Avani Industrial Systems Ltd.?

1. ₹1,770 lakh
2. ₹1,726 lakh
3. ₹1,744 lakh (correct answer)
4. ₹1,752 lakh

Answer: C — ₹1,744 lakh

Explanation. Revenue from Operations is ₹1,700 lakh after deducting excise duty. Other Income is ₹44 lakh after deducting expenses directly attributable to rental income. Total Income is calculated as Revenue from Operations plus Other Income, i.e. ₹1,700 + ₹44 = ₹1,744 lakh. Option a happens to display the same numerical amount but is not a separate accounting treatment; the correct answer is the option identifying the prescribed subtotal calculation.

Where it goes wrong. Confusing the subtotal calculation with individual income classifications and relying on an option's numerical value without reading its substance.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, items I to III; Schedule III, Division I, Part II, General Instructions 2(A) and 4

Question 4 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Which of the following treatments of the ₹52 lakh excise duty is correct under Schedule III, Division I?

1. It should be included in Other Expenses as a statutory operating expense.
2. It should be added to Other Income because it is collected from customers.
3. It should be deducted from Total Income after adding Other Income.
4. It should be deducted while arriving at Revenue from Operations and disclosed separately in the revenue note. (correct answer)

Answer: D — It should be deducted while arriving at Revenue from Operations and disclosed separately in the revenue note.

Explanation. General Instruction 2(A) prescribes disclosure of revenue from sale of products, sale of services and other operating revenues, followed by a separate deduction for excise duty. Accordingly, the ₹52 lakh is deducted in arriving at Revenue from Operations and is not presented again as an expense after Total Income. The distinction prevents grossing up operating revenue by an amount collected as excise duty. Option a incorrectly treats the prescribed deduction as an expense classification.

Where it goes wrong. Presenting excise duty as an independent expense instead of deducting it from Revenue from Operations.

Authority. Schedule III, Division I, Part II, General Instruction 2(A), specifically clause (d); Section 129(1), Companies Act, 2013

Question 5 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. Meridian Engineering Ltd. manufactures industrial equipment and also trades in imported electrical components. Its financial year ended on 31 March 2027. The company follows the expense classification by nature prescribed under Schedule III, Division I. The following information has been extracted from its examined under statutory audit inventory and payroll records (₹ in lakh): Raw-material inventory on 1 April 2026 was ₹45 lakh. Purchases of raw materials during the year amounted to ₹295 lakh and the closing raw-material inventory was ₹40 lakh. Purchases of electrical components for resale amounted to ₹105 lakh, net of purchase returns. These components constitute stock-in-trade and are accounted for separately from raw materials. Inventory balances relating to finished goods, work-in-progress and stock-in-trade were as follows: Particulars | 1 April 2026 | 31 March 2027 Finished goods | 56 | 44 Work-in-progress | 24 | 29 Stock-in-trade | 16 | 20 Employee-related expenditure consisted of salaries and wages ₹82 lakh, employer contributions to provident and other funds ₹10 lakh, expense under the Employee Stock Option Scheme ₹6 lakh and staff welfare expenses ₹4 lakh. Interest on borrowings was ₹20 lakh. Other borrowing costs were ₹3 lakh, and an applicable net foreign exchange loss on foreign currency borrowings was ₹2 lakh. Depreciation and amortisation expense for the year was ₹36 lakh. Other operating and administrative expenses, including routine repairs, advertising and office expenses, amounted to ₹42 lakh. The finance manager has proposed netting purchases of stock-in-trade against closing inventory before presentation, excluding ESOP expense from employee benefits expense and placing the foreign exchange loss on borrowings under Other Expenses. The auditor requires computation of the relevant Schedule III expense heads, taking care not to double-adjust stock-in-trade in the purchases and inventory-change lines.

Compute the Cost of Materials Consumed to be disclosed in the Statement of Profit and Loss of Meridian Engineering Ltd.

1. ₹300 lakh (correct answer)
2. ₹340 lakh
3. ₹295 lakh
4. ₹285 lakh

Answer: A — ₹300 lakh

Explanation. Cost of Materials Consumed is calculated as opening raw-material inventory plus purchases less closing raw-material inventory. Thus, ₹45 lakh + ₹295 lakh − ₹40 lakh = ₹300 lakh. Purchases of stock-in-trade amounting to ₹105 lakh are excluded because they relate to goods acquired for resale rather than materials consumed in manufacturing. The closing stock adjustment must be confined to raw materials for this expense head.

Where it goes wrong. Including purchases of trading goods in manufacturing material consumption or forgetting to deduct closing raw materials.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, item IV; Schedule III, Division I, Part II, General Instruction 5(ii)(a)

Question 6 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What amount should be disclosed as Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade?

1. ₹3 lakh as a negative expense
2. ₹3 lakh as a positive expense (correct answer)
3. ₹13 lakh as a positive expense
4. ₹13 lakh as a negative expense

Answer: B — ₹3 lakh as a positive expense

Explanation. Opening inventory aggregates to ₹56 + ₹24 + ₹16 = ₹96 lakh. Closing inventory aggregates to ₹44 + ₹29 + ₹20 = ₹93 lakh. Changes in inventories are opening inventory minus closing inventory, giving ₹96 − ₹93 = ₹3 lakh. Since aggregate inventories have decreased, the difference is a positive expense. The increase in work-in-progress and stock-in-trade partially offsets the reduction in finished goods; the individual movements must be combined before determining the net amount.

Where it goes wrong. Considering only the increase in work-in-progress or stock-in-trade instead of aggregating all three inventory categories.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, item IV, Changes in Inventories; Section 129(1), Companies Act, 2013

Question 7 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Determine the total Employee Benefits Expense of Meridian Engineering Ltd. for the year ended 31 March 2027.

1. ₹86 lakh
2. ₹92 lakh
3. ₹98 lakh
4. ₹102 lakh (correct answer)

Answer: D — ₹102 lakh

Explanation. Employee Benefits Expense includes salaries and wages ₹82 lakh, employer contributions to provident and other funds ₹10 lakh, ESOP expense ₹6 lakh and staff welfare expenses ₹4 lakh. Total expense is ₹82 + ₹10 + ₹6 + ₹4 = ₹102 lakh. Schedule III specifically requires these employee-benefit components to be separately disclosed in the notes. Excluding ESOP expense or staff welfare would understate total employee benefits.

Where it goes wrong. Excluding non-cash ESOP expense or employer contributions while calculating employee benefits.

Authority. Schedule III, Division I, Part II, General Instruction 5(i)(a); AS 15, paragraphs 10-11, Employee Benefits

Question 8 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What amount should be presented as Finance Costs by Meridian Engineering Ltd.?

1. ₹20 lakh
2. ₹23 lakh
3. ₹25 lakh (correct answer)
4. ₹26 lakh

Answer: C — ₹25 lakh

Explanation. Finance Costs comprise interest expense ₹20 lakh, other borrowing costs ₹3 lakh and the applicable net foreign exchange loss on foreign currency borrowings of ₹2 lakh. Therefore, total Finance Costs are ₹25 lakh. The applicable foreign exchange loss forms part of finance costs, rather than being automatically included in Other Expenses. The separate inventory, employee and depreciation expenses are not included in this computation.

Where it goes wrong. Omitting other borrowing costs or excluding the applicable foreign exchange loss relating to borrowings.

Authority. Schedule III, Division I, Part II, General Instruction 3(a)-(c); Section 129(1), Companies Act, 2013

Question 9 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. Vardhan Chemicals Ltd. manufactures speciality industrial chemicals and operates several processing facilities in India. Its financial statements for the year ended 31 March 2027 are prepared under Schedule III, Division I and the notified Accounting Standards. The following summarised financial information is available (₹ in lakh): Particulars | Amount Sale of chemical products | 1,180 Sale of laboratory testing services | 90 Other operating revenues | 20 Excise duty | 30 Other income | 25 Total expenses before separately presented exceptional and extraordinary items | 865 The other income comprises interest on bank deposits ₹12 lakh, dividend income ₹4 lakh, net gain on sale of investments ₹6 lakh and other non-operating income ₹3 lakh, net of directly attributable expenses. The total expenses of ₹865 lakh comprise all expenses classified by nature, including cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits, finance costs, depreciation and other expenses. During the year, management incurred restructuring expenditure of ₹35 lakh to reorganise the company's continuing manufacturing operations. Although the expenditure is unusually large and material to the year's performance, it arises from the company's ordinary business operations and is not a transaction clearly distinct from those operations. Separately, an earthquake damaged one of the company's storage facilities, resulting in an estimated and reliably measured loss of ₹45 lakh. Such an event is clearly distinct from the ordinary activities of the company. The tax computation for the year resulted in current tax of ₹96 lakh and a deferred tax credit of ₹12 lakh. There are no discontinued operations or other tax adjustments. The accountant has proposed combining the restructuring expenditure and earthquake loss under Other Expenses and calculating tax expense using current tax alone. The audit committee requires the correct presentation of exceptional items, extraordinary items, profit before tax and tax expense under Division I.

How should the restructuring expenditure of ₹35 lakh and earthquake loss of ₹45 lakh be presented under Schedule III, Division I?

1. Both should be presented under Other Expenses because neither relates to revenue generation.
2. Restructuring expenditure should be separately disclosed as an exceptional item, while earthquake loss should be separately disclosed as an extraordinary item. (correct answer)
3. Restructuring expenditure should be extraordinary, while earthquake loss should be exceptional.
4. Both should be presented as extraordinary items because their amounts are material.

Answer: B — Restructuring expenditure should be separately disclosed as an exceptional item, while earthquake loss should be separately disclosed as an extraordinary item.

Explanation. The restructuring expenditure arises from the company's continuing ordinary operations, but its size and nature make separate disclosure relevant under AS 5 paragraph 12. It is therefore an exceptional item. The earthquake loss arises from an event clearly distinct from ordinary business activities and qualifies as an extraordinary item under AS 5 paragraph 4. Schedule III provides separate lines for both. Materiality alone does not transform an ordinary-activity item into an extraordinary item.

Where it goes wrong. Confusing an unusually large expense arising from ordinary activities with an extraordinary item.

Authority. AS 5, paragraph 4, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies; AS 5, paragraph 12; Schedule III, Division I, Part II, Statement of Profit and Loss, items VI and VIII

Question 10 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Calculate Profit before Extraordinary Items and Tax (Item VII) in the Statement of Profit and Loss of Vardhan Chemicals Ltd.

1. ₹420 lakh
2. ₹350 lakh
3. ₹340 lakh
4. ₹385 lakh (correct answer)

Answer: D — ₹385 lakh

Explanation. Revenue from Operations is ₹1,180 + ₹90 + ₹20 − ₹30 = ₹1,260 lakh. Adding Other Income of ₹25 lakh gives Total Income of ₹1,285 lakh. Deducting expenses of ₹865 lakh produces profit before exceptional and extraordinary items and tax of ₹420 lakh. The restructuring expenditure of ₹35 lakh is then separately deducted as an exceptional item. Profit before extraordinary items and tax is ₹420 − ₹35 = ₹385 lakh.

Where it goes wrong. Deducting the earthquake loss before calculating Profit before Extraordinary Items and Tax.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, items III-VII; AS 5, paragraph 12

Question 11 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What is the Profit before Tax of Vardhan Chemicals Ltd. after accounting for the exceptional and extraordinary items?

1. ₹340 lakh (correct answer)
2. ₹385 lakh
3. ₹420 lakh
4. ₹295 lakh

Answer: A — ₹340 lakh

Explanation. Profit before exceptional and extraordinary items and tax is ₹420 lakh. After deducting the exceptional restructuring expenditure of ₹35 lakh, profit before extraordinary items and tax becomes ₹385 lakh. The extraordinary earthquake loss of ₹45 lakh is then deducted, resulting in Profit before Tax of ₹385 − ₹45 = ₹340 lakh. Tax expense is considered only after arriving at this subtotal and must not be deducted at the earlier stages.

Where it goes wrong. Deducting tax expense before arriving at Profit before Tax or deducting the exceptional item twice.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, items V-IX; AS 5, paragraphs 4 and 12

Question 12 · 2 marks · Chapter 11: Financial Statements of Companies · hard

What will be the tax expense and Profit for the Period of Vardhan Chemicals Ltd., assuming no discontinued operations?

1. Tax expense ₹96 lakh; Profit ₹244 lakh
2. Tax expense ₹108 lakh; Profit ₹232 lakh
3. Tax expense ₹84 lakh; Profit ₹256 lakh (correct answer)
4. Tax expense ₹96 lakh; Profit ₹256 lakh

Answer: C — Tax expense ₹84 lakh; Profit ₹256 lakh

Explanation. Profit before Tax is ₹340 lakh. Tax expense comprises current tax of ₹96 lakh less the deferred tax credit of ₹12 lakh, producing total tax expense of ₹84 lakh. Profit for the period is therefore ₹340 − ₹84 = ₹256 lakh. Schedule III presents current tax and deferred tax separately within Tax Expense. AS 22 requires current and deferred tax to be included in the determination of the period's net profit or loss. Ignoring the deferred tax credit would understate profit.

Where it goes wrong. Treating a deferred tax credit as an additional expense instead of reducing total tax expense.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, items IX-XV; AS 22, paragraph 9, Accounting for Taxes on Income; Section 129(1), Companies Act, 2013

Question 13 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A manufacturing company reports product sales of ₹980 lakh, inclusive of sales returns of ₹25 lakh already recorded in its books. Sale of services is ₹140 lakh, other operating revenues are ₹18 lakh and excise duty is ₹22 lakh. Calculate Revenue from Operations.

A manufacturing company reports product sales of ₹980 lakh, inclusive of sales returns of ₹25 lakh already recorded in its books. Sale of services is ₹140 lakh, other operating revenues are ₹18 lakh and excise duty is ₹22 lakh. Calculate Revenue from Operations.

1. ₹1,113 lakh
2. ₹1,116 lakh
3. ₹1,135 lakh
4. ₹1,091 lakh (correct answer)

Answer: D — ₹1,091 lakh

Explanation. Net sale of products is ₹980 − ₹25 = ₹955 lakh because sales returns have already been identified within gross product sales. Adding sale of services of ₹140 lakh and other operating revenues of ₹18 lakh gives ₹1,113 lakh. Deducting excise duty of ₹22 lakh results in Revenue from Operations of ₹1,091 lakh. Option a neglects the excise deduction, while option b fails to deduct sales returns.

Where it goes wrong. Forgetting that sales returns reduce product revenue and excise duty is separately deducted.

Authority. Schedule III, Division I, Part II, General Instruction 2(A)(a)-(d); Section 129(1), Companies Act, 2013

Question 14 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A non-banking finance company has earned interest on loans advanced of ₹64 lakh and processing and financial service fees of ₹18 lakh. It has also received dividends of ₹5 lakh and earned a net gain of ₹8 lakh on sale of long-term investments. What is its Revenue from Operations under Schedule III, Division I?

A non-banking finance company has earned interest on loans advanced of ₹64 lakh and processing and financial service fees of ₹18 lakh. It has also received dividends of ₹5 lakh and earned a net gain of ₹8 lakh on sale of long-term investments. What is its Revenue from Operations under Schedule III, Division I?

1. ₹82 lakh (correct answer)
2. ₹95 lakh
3. ₹87 lakh
4. ₹69 lakh

Answer: A — ₹82 lakh

Explanation. For a finance company, Revenue from Operations includes interest income and income from other financial services. Accordingly, Revenue from Operations is ₹64 + ₹18 = ₹82 lakh. Dividend income of ₹5 lakh and net gain on sale of investments of ₹8 lakh are not added to this operating-revenue subtotal and are classified under the relevant Other Income heads. Applying the non-finance-company presentation of interest income would result in an incorrect classification.

Where it goes wrong. Applying the non-finance-company revenue classification to a finance company.

Authority. Schedule III, Division I, Part II, General Instruction 2(B)(a)-(b); Schedule III, Division I, Part II, General Instruction 4(b)-(d); Section 129(1), Companies Act, 2013

Question 15 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. The following inventory balances are available for a company for the year ended 31 March 2027 (₹ in lakh): Finished goods: Opening 45; Closing 50. Work-in-progress: Opening 20; Closing 13. Stock-in-trade: Opening 25; Closing 30. What amount should be presented as Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade?

The following inventory balances are available for a company for the year ended 31 March 2027 (₹ in lakh): Finished goods: Opening 45; Closing 50. Work-in-progress: Opening 20; Closing 13. Stock-in-trade: Opening 25; Closing 30. What amount should be presented as Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade?

1. ₹3 lakh positive expense
2. ₹12 lakh negative expense
3. ₹3 lakh negative expense (correct answer)
4. ₹12 lakh positive expense

Answer: C — ₹3 lakh negative expense

Explanation. Total opening inventory is ₹45 + ₹20 + ₹25 = ₹90 lakh. Total closing inventory is ₹50 + ₹13 + ₹30 = ₹93 lakh. The change in inventories is opening stock less closing stock, i.e. ₹90 − ₹93 = negative ₹3 lakh. The increase in closing inventory reduces the expense recognised in the Statement of Profit and Loss. It is therefore presented as a negative expense, rather than as a positive charge.

Where it goes wrong. Reversing the sign of the inventory adjustment or considering only finished goods.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, item IV, Changes in Inventories

Question 16 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A trading company purchased stock-in-trade worth ₹180 lakh during the year. Purchase returns amounted to ₹8 lakh, while trade discounts of ₹5 lakh were already deducted in the supplier invoices. Opening and closing stock-in-trade were ₹30 lakh and ₹44 lakh respectively. What amount should be presented under Purchases of Stock-in-Trade?

A trading company purchased stock-in-trade worth ₹180 lakh during the year. Purchase returns amounted to ₹8 lakh, while trade discounts of ₹5 lakh were already deducted in the supplier invoices. Opening and closing stock-in-trade were ₹30 lakh and ₹44 lakh respectively. What amount should be presented under Purchases of Stock-in-Trade?

1. ₹167 lakh
2. ₹172 lakh (correct answer)
3. ₹128 lakh
4. ₹180 lakh

Answer: B — ₹172 lakh

Explanation. Purchases of Stock-in-Trade are ₹180 lakh less purchase returns of ₹8 lakh, resulting in ₹172 lakh. Trade discounts of ₹5 lakh have already been deducted in supplier invoices and must not be deducted again. The difference between opening stock of ₹30 lakh and closing stock of ₹44 lakh is presented separately under Changes in Inventories. Therefore, closing stock must not be deducted again while calculating purchases of stock-in-trade.

Where it goes wrong. Reducing purchases by closing inventory despite the separate inventory-change line, or deducting trade discounts twice.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, item IV; Schedule III, Division I, Part II, General Instruction 5(ii)(a)-(b)

Question 17 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. The following employee-related expenses are available from the books of a company for the year ended 31 March 2027 (₹ in lakh): Salaries and wages: ₹48 Employer contribution to provident fund: ₹5 Provision for gratuity recognised during the year: ₹4 ESOP expense: ₹3 Staff welfare expenditure: ₹2 What amount should be disclosed as Employee Benefits Expense?

The following employee-related expenses are available from the books of a company for the year ended 31 March 2027 (₹ in lakh): Salaries and wages: ₹48 Employer contribution to provident fund: ₹5 Provision for gratuity recognised during the year: ₹4 ESOP expense: ₹3 Staff welfare expenditure: ₹2 What amount should be disclosed as Employee Benefits Expense?

1. ₹57 lakh
2. ₹59 lakh
3. ₹60 lakh
4. ₹62 lakh (correct answer)

Answer: D — ₹62 lakh

Explanation. Employee Benefits Expense includes salaries and wages ₹48 lakh, employer provident fund contribution ₹5 lakh, gratuity expense ₹4 lakh, ESOP expense ₹3 lakh and staff welfare expenditure ₹2 lakh. The total is ₹48 + ₹5 + ₹4 + ₹3 + ₹2 = ₹62 lakh. Schedule III requires disclosure of salaries and wages, contributions to funds, ESOP/ESPP expenditure and staff welfare separately in the notes. ESOP expense cannot be excluded merely because it is non-cash.

Where it goes wrong. Omitting ESOP expense or gratuity provision from total employee benefits.

Authority. Schedule III, Division I, Part II, General Instruction 5(i)(a); AS 15, paragraphs 10-11 and 46, Employee Benefits

Question 18 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A manufacturing company's financial records disclose the following expenses relating to financing arrangements (₹ in lakh): Interest expense on borrowings: ₹16 Loan processing and other borrowing costs: ₹2 Applicable net foreign exchange loss on foreign currency borrowings: ₹3 What amount should be shown under Finance Costs?

A manufacturing company's financial records disclose the following expenses relating to financing arrangements (₹ in lakh): Interest expense on borrowings: ₹16 Loan processing and other borrowing costs: ₹2 Applicable net foreign exchange loss on foreign currency borrowings: ₹3 What amount should be shown under Finance Costs?

1. ₹16 lakh
2. ₹18 lakh
3. ₹21 lakh (correct answer)
4. ₹22 lakh

Answer: C — ₹21 lakh

Explanation. Schedule III identifies three components of Finance Costs: interest expense, other borrowing costs and applicable net foreign exchange gain or loss on foreign currency transactions and translation. Accordingly, the total is ₹16 + ₹2 + ₹3 = ₹21 lakh. Excluding borrowing costs would understate the amount by ₹2 lakh, while excluding the applicable foreign exchange loss would understate it by ₹3 lakh. These components must be aggregated under the prescribed Finance Costs heading.

Where it goes wrong. Including only contractual interest and omitting other borrowing costs or applicable foreign exchange losses.

Authority. Schedule III, Division I, Part II, General Instruction 3(a)-(c); Section 129(1), Companies Act, 2013

Question 19 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A company incurred depreciation of ₹28 lakh on property, plant and equipment and amortisation of ₹7 lakh on computer software during the year ended 31 March 2027. The company also paid ₹4 lakh towards routine repairs of the same equipment. What amount should be presented under Depreciation and Amortisation Expense?

A company incurred depreciation of ₹28 lakh on property, plant and equipment and amortisation of ₹7 lakh on computer software during the year ended 31 March 2027. The company also paid ₹4 lakh towards routine repairs of the same equipment. What amount should be presented under Depreciation and Amortisation Expense?

1. ₹35 lakh (correct answer)
2. ₹39 lakh
3. ₹28 lakh
4. ₹32 lakh

Answer: A — ₹35 lakh

Explanation. The prescribed expense head combines depreciation and amortisation. Depreciation on PPE is ₹28 lakh and amortisation of software is ₹7 lakh, giving total depreciation and amortisation expense of ₹35 lakh. Routine repairs of ₹4 lakh are a separate operating expense and are not included in depreciation or amortisation. They are classified within Other Expenses. The correct classification therefore preserves the distinction between systematic allocation of asset cost and maintenance expenditure.

Where it goes wrong. Adding routine repair expenditure to depreciation and amortisation expense.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, item IV; Schedule III, Division I, Part II, General Instruction 5(i)(b); AS 10, Property, Plant and Equipment

Question 20 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A non-finance company receives the following income during the year (₹ in lakh): Interest on bank deposits: ₹14 Dividend income: ₹6 Net gain on sale of investments: ₹9 Rent received from an investment property: ₹12 Expenses directly attributable to rental income: ₹3 Sale of manufacturing scrap generated in normal production: ₹4 What is the correct amount of Other Income?

A non-finance company receives the following income during the year (₹ in lakh): Interest on bank deposits: ₹14 Dividend income: ₹6 Net gain on sale of investments: ₹9 Rent received from an investment property: ₹12 Expenses directly attributable to rental income: ₹3 Sale of manufacturing scrap generated in normal production: ₹4 What is the correct amount of Other Income?

1. ₹45 lakh
2. ₹38 lakh (correct answer)
3. ₹41 lakh
4. ₹35 lakh

Answer: B — ₹38 lakh

Explanation. Other Income comprises interest of ₹14 lakh, dividend of ₹6 lakh, net gain on sale of investments of ₹9 lakh and net other non-operating income of ₹9 lakh (₹12 lakh rent less ₹3 lakh directly attributable expense). Total Other Income is ₹38 lakh. The ₹4 lakh scrap sale generated from normal manufacturing operations is an operating receipt and must not be added to Other Income. Option a incorrectly includes that scrap revenue.

Where it goes wrong. Classifying routine manufacturing scrap revenue as non-operating income and ignoring directly attributable expenses.

Authority. Schedule III, Division I, Part II, General Instructions 2(A)(c) and 4(a)-(d)

Question 21 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A company suffers two material losses during the year. First, a settlement of ₹32 lakh is made in respect of a major warranty dispute arising from its normal sales activities. Second, a loss of ₹48 lakh arises because a severe earthquake destroys a remote warehouse. The warranty settlement is unusually large and materially affects the year's results, while earthquake damage is clearly distinct from the company's ordinary business activities. Which classification is appropriate?

A company suffers two material losses during the year. First, a settlement of ₹32 lakh is made in respect of a major warranty dispute arising from its normal sales activities. Second, a loss of ₹48 lakh arises because a severe earthquake destroys a remote warehouse. The warranty settlement is unusually large and materially affects the year's results, while earthquake damage is clearly distinct from the company's ordinary business activities. Which classification is appropriate?

1. Both losses are extraordinary because their monetary amounts are material.
2. Both losses are exceptional because they were not anticipated in the budget.
3. Warranty settlement is an ordinary expense without separate disclosure, while earthquake damage is an exceptional item.
4. Warranty settlement is an exceptional item, while earthquake damage is an extraordinary item. (correct answer)

Answer: D — Warranty settlement is an exceptional item, while earthquake damage is an extraordinary item.

Explanation. The warranty settlement arises from normal sales activities, so it belongs to ordinary activities. However, its unusual size and material impact justify separate disclosure as an exceptional item under AS 5 paragraph 12. The earthquake loss arises from an event clearly distinct from ordinary activities and qualifies as extraordinary under paragraph 4. The distinction depends on the nature of the event, not merely the monetary amount or whether management anticipated the expense.

Where it goes wrong. Classifying items solely by their financial magnitude or whether management expected them to occur.

Authority. AS 5, paragraph 4; AS 5, paragraph 12; Schedule III, Division I, Part II, Statement of Profit and Loss, items VI and VIII

Question 22 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A company reports Profit before Exceptional and Extraordinary Items and Tax of ₹240 lakh. During the year, an exceptional loss of ₹18 lakh and an extraordinary loss of ₹7 lakh are separately identified. What is Profit before Tax?

A company reports Profit before Exceptional and Extraordinary Items and Tax of ₹240 lakh. During the year, an exceptional loss of ₹18 lakh and an extraordinary loss of ₹7 lakh are separately identified. What is Profit before Tax?

1. ₹215 lakh (correct answer)
2. ₹222 lakh
3. ₹229 lakh
4. ₹233 lakh

Answer: A — ₹215 lakh

Explanation. Profit before exceptional and extraordinary items and tax is ₹240 lakh. Deducting the exceptional loss of ₹18 lakh gives profit before extraordinary items and tax of ₹222 lakh. Deducting the extraordinary loss of ₹7 lakh gives Profit before Tax of ₹215 lakh. Schedule III presents these two items separately before the Profit before Tax subtotal. Deducting only one loss or treating the exceptional loss as an ordinary operating expense already included in the initial subtotal would produce an incorrect result.

Where it goes wrong. Deducting only one separately presented item or deducting either loss twice.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, items V-IX; AS 5, paragraphs 4 and 12

Question 23 · 2 marks · Chapter 11: Financial Statements of Companies · medium

Scenario. A company has Profit before Tax of ₹160 lakh for the year ended 31 March 2027. Its current tax liability for the year is ₹58 lakh and it has recognised a deferred tax credit of ₹9 lakh. There are no discontinued operations. Calculate Profit for the Period.

A company has Profit before Tax of ₹160 lakh for the year ended 31 March 2027. Its current tax liability for the year is ₹58 lakh and it has recognised a deferred tax credit of ₹9 lakh. There are no discontinued operations. Calculate Profit for the Period.

1. ₹102 lakh
2. ₹118 lakh
3. ₹111 lakh (correct answer)
4. ₹109 lakh

Answer: C — ₹111 lakh

Explanation. Total tax expense is current tax of ₹58 lakh less the deferred tax credit of ₹9 lakh, producing ₹49 lakh. Profit for the period is consequently ₹160 − ₹49 = ₹111 lakh. AS 22 requires current and deferred tax to be included in determining net profit or loss for the period. Schedule III presents both components within Tax Expense. Treating the deferred tax credit as an additional expense would incorrectly reduce profit.

Where it goes wrong. Adding deferred tax credit to current tax instead of deducting it from total tax expense.

Authority. AS 22, paragraph 9, Accounting for Taxes on Income; Schedule III, Division I, Part II, Statement of Profit and Loss, items IX-XV

Question 24 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. The following expense information is available for a manufacturing company for the year ended 31 March 2027 (₹ in lakh): Cost of materials consumed: ₹210 Purchases of stock-in-trade: ₹75 Changes in inventories: (₹8) Employee benefits expense: ₹92 Finance costs: ₹18 Depreciation and amortisation expense: ₹26 Other expenses: ₹44 Determine the Total Expenses under Schedule III, Division I.

The following expense information is available for a manufacturing company for the year ended 31 March 2027 (₹ in lakh): Cost of materials consumed: ₹210 Purchases of stock-in-trade: ₹75 Changes in inventories: (₹8) Employee benefits expense: ₹92 Finance costs: ₹18 Depreciation and amortisation expense: ₹26 Other expenses: ₹44 Determine the Total Expenses under Schedule III, Division I.

1. ₹465 lakh
2. ₹457 lakh (correct answer)
3. ₹473 lakh
4. ₹449 lakh

Answer: B — ₹457 lakh

Explanation. Total Expenses are obtained by aggregating each of the prescribed expense heads. The calculation is ₹210 + ₹75 − ₹8 + ₹92 + ₹18 + ₹26 + ₹44 = ₹457 lakh. Changes in inventories are negative ₹8 lakh, representing an increase in inventory, and must reduce the total expense. Adding this figure as a positive expense would produce ₹473 lakh, overstating total expenses by ₹16 lakh compared with the correct amount.

Where it goes wrong. Ignoring the negative sign on changes in inventories and adding an inventory increase to expenses.

Authority. Schedule III, Division I, Part II, Statement of Profit and Loss, item IV; Schedule III, Division I, Part II, General Instructions 3 and 5

Question 25 · 2 marks · Chapter 11: Financial Statements of Companies · hard

Scenario. A company has Revenue from Operations of ₹2.40 crore for the year ended 31 March 2027. The following individual expenditure items are recorded (₹ in lakh): Repairs and maintenance: ₹2.30 Legal expenses relating to routine operations: ₹2.50 Office administration expenses: ₹1.80 Staff welfare expenses: ₹0.95 Which expenditure item necessarily crosses the threshold for separate additional disclosure under Schedule III, Division I, General Instruction 5?

A company has Revenue from Operations of ₹2.40 crore for the year ended 31 March 2027. The following individual expenditure items are recorded (₹ in lakh): Repairs and maintenance: ₹2.30 Legal expenses relating to routine operations: ₹2.50 Office administration expenses: ₹1.80 Staff welfare expenses: ₹0.95 Which expenditure item necessarily crosses the threshold for separate additional disclosure under Schedule III, Division I, General Instruction 5?

1. Repairs and maintenance of ₹2.30 lakh only
2. Office administration expenses of ₹1.80 lakh only
3. Legal expenses of ₹2.50 lakh only (correct answer)
4. Staff welfare expenses of ₹0.95 lakh only

Answer: C — Legal expenses of ₹2.50 lakh only

Explanation. General Instruction 5(i)(c) requires separate additional disclosure of an income or expenditure item exceeding 1% of Revenue from Operations or ₹1,00,000, whichever is higher. One per cent of ₹2.40 crore is ₹2.40 lakh, which is higher than ₹1 lakh. The legal expense of ₹2.50 lakh exceeds this threshold. Repairs of ₹2.30 lakh, administration expenses of ₹1.80 lakh and staff welfare of ₹0.95 lakh do not exceed it.

Where it goes wrong. Using ₹1 lakh as the universal threshold instead of comparing it with 1% of Revenue from Operations and selecting the higher amount.

Authority. Schedule III, Division I, Part II, General Instruction 5(i)(c); Section 129(1), Companies Act, 2013