Answer 1(a):

Concept of Conservatism implies using conservatism while preparing financial statements

i.e. income should not be accounted for unless it has actually been earned but expenses,
even if ust anticipated should be provided for. According to this concept, revenues should
be recogni!ed only when they are reali!ed, while expenses should be recogni!ed as soon as
they are reasonably possible. "or instance, suppose a firm sells 1##units of a product on
credit for $s.1#, ###. %ntil the payment is received, it will not be recorded in the accounting
boo&s. 'owever, if the firm receives information that the customer has lost his assets and is
li&ely to default the payment, the possible loss is immediately provided for in the firm(s
boo&s. )he rule is to recogni!e revenue when it is reasonably certain and recogni!e
expenses as soon as they are reasonably possible. )he reasons for accounting in this
manner are so that financial statements do not overstate the company(s financial position
It is also called the concept of prudence as it essentially involves exercising prudence in
recording income and expenses*losses in the financial statements so that anticipated
income are not recorded whereas li&ely losses are provided for.
'owever, this concept is not applied as strongly today as it used to be in the past for the
reason that the modern world saw a considerable increase in corporate frauds e.g. +nron
case in %,A and ,atyam in -ndia.Also, there is a decline in assuming corporate social
responsibilities due to superfluous issues of gaining publicity and brand building. )hese two
maor issues call for increased transparency in financial statements and hence, the decline
in use of age old concept of conservatism.
Answer 1(b):
A .alance ,heet is a type of financial statement of an entity, indicating the financial position
at a given point of time. -t is the statement of Assets and /iabilities as on a particular date.
)he various items of a .alance ,heet can be grouped under two heads, vi!: assets and
liabilities.
"unds "low statement determines the sources of cash flowing into the firm and the
application of that cash by the firm. )he various items of a "unds "low ,tatement can be
grouped under two heads, vi!: inflow of funds (sources) or outflow of funds (applications).
0hile the .alance ,heet shows only the monetary value of each source and application of
funds at the end of the year, funds flow statement depicts the extent of changes in each
source and application of funds during the year.
-f we ta&e the .alance ,heet for two consecutive years and wor& out the change for each
item, we are able to arrive at the "unds "low ,tatement items.
)he various items usually shown in a .alance ,heet are:
Assets side:
(1) "ixed assets
#
1 1ross bloc&
2 /ess depreciation
3 4et bloc&
5 Capital wor&6in6progress
(2) -nvestments
(3) Current assets, loans, and advances:
(a)-nventories
(b) ,undry debtors
(c) Cash and ban& balances
(d) 7ther current assets
(e)/oans and advances
(5) 8eferred $evenue +xpenditure:
(a) 9iscellaneous expenditure to the extent not written off or adusted
(b) :rofit and /oss account
Liabilities side:
(1) ,hareholder;s funds
(a)Capital
(b) $eserves and ,urplus
(2) /oan funds
(a),ecured loans
(b)%nsecured /oans
Current Liabilities and Provisions
(a) /iabilities
,undry Creditors
7utstanding expenses
:rovision for tax
,imilarly, items in a "unds "low ,tatement are:
-nflow of funds:
A decrease in assets
An increase in liabilities
An increase in shareholder(s
funds 7utflow of funds:
An increase in assets
A decrease in liabilities
A decrease in shareholder(s funds