ch-13

Question 1

Define provision

Answer 1

Provision is an amount set aside by changing it to profit to meet a known liability, amount of which is not determined and is accounted by making best estimate

Question 2

Define reserve

Answer 2

It is an amount set aside out of profit to meet an unknown contingency /to strengthen the financial position

Question 3

Define revenue reserve

Answer 3

It is the amount of reserve set aside out of revenue profit

Question 4

Define capital reserve

Answer 4

It is the amount of capital profit transferred to capital reserve

Question 5

Define general reserve

Answer 5

It is the amount set aside out of profit not for any specific purpose

Question 6

Define specific reserve

Answer 6

It is the amount set aside out of profit for a specific purpose

Question 7

Define reserve fund

Answer 7

Amount of reserve invested outside the business

Question 8

What are the objectives of provisions

Answer 8

To account all expenses and losses

Question 9

What are the features of provision

Answer 9

1. Amount set aside out of income/profits
2. The purpose of which provision is created:
   a. Anticipated loss
   b. Known depletion in the value of an asset
   c. Liability
3. Depletion in the value of an asset is not ascertained
4. Charged to profit and loss account

Question 10

What is the importance of provision

Answer 10

1. It is made to retain future operating performance undisturbed by losses arising out of transactions of prior periods
2. Provision is made following the prudence concept of accounting
3. Any loss/depletion in the value of an asset may not have been provided against income/profit would effectively erode the capital of business intact

Question 11

What are the types of reserve

Answer 11

1. Revenue reserves
   a. General reserve
   b. Specific reserve
2. Capital reserves

Question 12

What do provisions represent

Answer 12

1. Maintenance of capital
2. Adjustment of capital as is lost
3. A shield where loss arising out of past transactions does not effect result of future operations

Question 13

Define secret reserve, what is the other name for it?

Answer 13

It is a reserve, the existence and /or the amount of which is not disclosed in the balance sheet.It is also called hidden reserve

Question 14

What are the advantages of secret reserve

Answer 14

1. Increases the working capital
2. Enables the directors to tide over unfavourable time
3. Heavy losses of an exceptional nature can be met without disclosing the fact in the published statements and without disturbing the normal business profit

Question 15

What are the disadvantages of secret reserve

Answer 15

1. Balance sheet will not disclose true and fair position of the affairs of the business
2. Value of shares goes down in the market
3. Shareholders do not get their due share of profit from the business