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Society, Management and Accounting

Predicted Questions with Model Answers

GAAP, Accounting Concepts & Accounting Standards

Paper I · Unit 3 Section 12 of 14 0 PYQs 23 min
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Predicted Questions with Model Answers

Q1 (5 marks) — What is GAAP? What are its main components?

Model Answer:
GAAP is the standard framework for financial accounting. Three components: (1) Concepts — going concern, accrual, business entity; (2) Conventions — prudence, consistency, materiality; (3) Standards — AS 1–32 for non-listed; Ind AS for listed firms (IFRS-converged, from April 2016). India's GAAP is governed by ICAI (est. 1949 under Chartered Accountants Act). (46 words)

Q2 (5 marks) — Explain the accrual concept with an example.

Model Answer:
The accrual concept recognises revenue when earned and expenses when incurred — not on a cash basis. Example: consulting services rendered in March 2024 but paid in April appear as March revenue. March salaries paid in April are March expenses. This matching of income and costs within the same period gives accurate, period-specific profit measurement. (52 words)

Q3 (5 marks) — What is the prudence concept? How does it apply to inventory valuation?

Model Answer:
The prudence concept: anticipate no profits; provide for all probable losses. Inventory: Ind AS 2 mandates LCNRV (Lower of Cost or Net Realisable Value). If inventory costing ₹10 lakh sells for only ₹7 lakh, write it down and record a ₹3 lakh loss immediately. This prevents asset overstatement and protects creditors from inflated financial statements. (51 words)

Q4 (5 marks) — What is the going concern concept? What happens when it is violated?

Model Answer:
The going concern concept assumes a business continues for at least 12 months — justifying historical cost for assets and depreciation over useful life. When doubtful — heavy losses, debt default — assets are restated at net realisable value and auditors issue a going concern qualification. Jet Airways received this before collapsing in April 2019. (50 words)

Q5 (5 marks) — What is the difference between Ind AS and IFRS?

Model Answer:
IFRS is issued by IASB (London, 2001) and adopted by 144 countries. Ind AS — India's IFRS-converged standard — is mandatory for listed companies since April 2016. Key differences: Ind AS includes carve-outs (e.g., cost model for investment properties); reflects India's Companies Act 2013. Both are principles-based; US GAAP is rules-based (prescriptive). (48 words)

Q6 (5 marks) — Explain the difference between capital and revenue expenditure.

Model Answer:
Capital expenditure creates assets with >1 year benefit — capitalised on the Balance Sheet and depreciated. Example: ₹50 lakh machinery. Revenue expenditure benefits the current period — expensed in P&L. Example: ₹50,000 machinery repair. Misclassification distorts profit: capitalising revenue expenditure overstates profit; expensing capital expenditure understates it. Both violate GAAP and mislead stakeholders. (51 words)