Accountancy Notes

What are the Contingent Liabilities

Contingent liability is a potential obligation which may in the future develop into actual liability or may dissolve without necessitating any outlay. The crucial characteristics of contingent liability is uncertainty i.e, whether it will or will not develop into a real liability. Thus a contingent liability is that which may or may not arise after the preparation of balance sheet.

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Importance of An Accurate Valuation of Inventories

The auditor examines the particular thing to assume himself of its existence. Physical examination requires identification of the item. One must be convinced that he has examined the specific theory which he is supposed to be verification of genuineness and quality.

The applicability of its techniques is restricted to those assets which are either material or some tangible evidence of existence such as count, inventories, fixed property, etc and stock-in-trade should be valued by expert values. As the amounts of debtors and creditors can not be correctly ascertained, the purchaser should be recommended not only to take them over, but merely to collect and pay them on behalf of the vendor and account for the net proceeds, therefrom to him.

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Explain Prepayment

Prepayment also known as prepared expenses are those expenses which are incurred or paid during the year under audit but relate to the period subsequent to the current year. These represents payments made in advance, for services or rights to be received over some future period of time. Such prepayment may be in respect in telephone charges, rent, rates insurances, subscriptions, advertisement, etc.

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Divisible Profits

Profit may be defined as follows:

1. Generally speaking the profit of the business during a given period is the excess over the expenditure for the period.

2. It is the excess of Assets over the liabilities and the capital between the two periods.

Profit is the different to the net assets of the business an existing on the end of the year and on the commencement of the year after making necessary adjustments for internal or introduction of capital. The surplus of income earned during a particular period after providing for all actual and outstanding expenses, incurred in the earning of such income is the measures of profit.

Divisible Profit is that part of the net profit of the business which has actually been released and bonafide exists after the revaluation of all assets and liabilities and can legally be distributed to the share holders as dividend. The amount of divisible profit is ascertained in accordance with the provisions of the memorandum of Association and the articles of Association. Distribution of profits which would affect the interest of third parties of which would amount to the return of capital to the share holders, would be illegal. In all cases capital of the business is to be maintained intact.

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Describe the rights and Duties of an Auditor in brief

Rights and duties go together. Whatever is demanded by someone as ‘Rights’ is considered justified on the basis of ‘Duties’ he performs. Similar is the case with Auditor.

The duties he perform make him eligible for certain rights. Following is the description of the said ‘Rights’ and ‘Duties’:

Rights of an Auditor:

1. Right of Access to the Books: Every auditor as a right of access to the books, accounts and vouchers of the company and has the power to obtain from the Directors and other executives of the company.

2. Rights to Demand information: Auditor has been give the rights to demand any information from the officers of the company.

3. Rights to Attend General Meetings: He is entitled to receive notice of an attend to any general meeting of the Company on which any accounts which has examined of respond upon by him to be laid before the shareholders.

Duties of an Auditor:

1. An auditor is required to certify the stating reports of a Public Limited Company. He also the receipts and payments made by the Company.

2. The auditor will report on the prospectus issued by an existing company regarding the profits and losses and assets and liabilities of the Company and rates of dividends paid by the Company.

3. In case of members’ voluntarily winding up, auditor is required to certify the ‘Directors declaration’ about the solvency of the Company.

4. It is the duty of an Auditor to help Inspectors to his best, while they are investigating the affairs of the company.

5. An auditor shall also be required to give all to the Government all reasonable assistance in connecting with the prosecution of Directors or the officers of the company.

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What is the relationship among an annuity, a perpetuity, and a growing cash stream?

All three are patterns of future cash flows for which simplifying time value formulas have been derived. An annuity is a sequence of equal cash flows for a finite period of time that are equal in three dimensions: amount, direction, and spacing. A perpetuity is a “perpetual annuity,” an annuity that continues forever; it is still made up of equal (amount, direction, and spacing) cash flows. A growing cash stream is a perpetuity in which the cash flows are still equal in direction and spacing but no longer equal in amount; instead each cash flow differs from the previous cash flow by a constant ratio, the rate of growth.

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What is the relationship between a future value and a present value?

A future value equals a present value plus the interest that can be earned by having ownership of the money; it is the amount that the present value will grow to over some stated period of time. Conversely, a present value equals the future value minus the interest that comes from ownership of the money; it is today’s value of a future amount to be received at some specified time in the future.

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Would an increase in interest rates increase the amount of money you saved?

Some economists argue that people increase their savings when interest rates rise since they can earn more money. Suppose you were putting money away with the goal of raising $50,000 in five years. Would an increase in interest rates increase the amount of money you saved?

No. With a higher interest rate you could save less and still reach your goal of $50,000 in five years. More of the $50,000 could now come from your interest, hence less would have to come from your savings. In this case, where the future value is given, an increase in interest rates always lowers the principal required to reach that goal. The economists are discussing another scenario in which the future value is not specified. The evidence is that they are correct in that case, since higher interest rates make the future worth of one’s savings grow to a greater amount.

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A well-known advertisement by American Express urged travelers returning home to keep their travelers checks rather than cash them in.

A well-known advertisement by American Express urged travelers returning home to keep their travelers checks rather than cash them in. The reason given was to have cash in an emergency, but could American Express have had any other reason for encouraging this behavior?

They certainly could. At any time, American Express is holding over $1 billion from clients who have purchased travelers checks but have not yet used them. American Express invests this money and earns a sizable income on it. As long as their clients keep travelers checks outstanding, it is American Express and not the clients that earn interest on this money.

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Why do airlines often insist that you pay for your ticket on the date you book your flight rather than the date you actually fly?

One reason is time value of money¾the earlier the airlines receive the cash, the more valuable it is to them. A second reason is that airlines follow a practice they call “yield management” in which they try to charge the highest price for every ticket they sell. By insisting that some customers pay at the time of booking, they can charge more for tickets that do not require immediate payment.

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