PREVIOUS YEAR SOLVED PAPERS MCQ - January 2017

Consolidated financial statements of a group of companies are prepared on the basis of single economic entity concept.
Definition : Single Economic Entity Concept suggests that companies associated with each other through the virtue of common control operate as a single economic unit and therefore the consolidated financial statements of a group of companies should reflect the essence of such arrangement.
Explanation : Consolidated financial statements of a group of companies must be prepared as if the entire group constitutes a single entity in order to avoid the misrepresentation of the scale of group’s activities.
It is therefore necessary to eliminate the effects of any inter-company transactions and balances during the consolidation of group accounts such as the following:
∎ Inter-company sales and purchases
∎ Inter-company payables and receivables
∎ Inter-company payments such as dividends, royalties and head office charges
∎ Inter-company transactions must be eliminated as if the transactions had not occurred in the first place. Examples of adjustments that may be required to eliminate the effects of inter-company transactions include:
∎ Elimination of unrealized profit or loss on the sale of assets member companies of a group
∎ Elimination of excess or deficit depreciation expense in respect of a fixed asset purchased from a member company at a price that was higher or lower than the net book value of the asset in the books of the seller.

Standard Cost for Direct Labour : The labour engaged in the manufacture of a product is known as direct labour. The wages paid to such workers can be known as direct wages. If the wages paid to workers cannot be directly assigned to a particular product, these will be known as indirect wages. The time required for producing a product should be ascertained and labour should be properly graded. Different grades of workers will be paid different rates of wages. The setting of standards for direct labour cost will involve: (1) Standard labour time and (2) Labour rate standard.
Standard labour time indicates the time taken by different categories of workers for performing a particular job. The method for determining direct labour cost will be different for different jobs but general principles can be followed for arriving at this cost.
The labour rate standard refers to the expected wage rates to be paid for different categories of workers past wage rates and demand supply principle may not be safe guide for determining standard labour rates. The anticipation of expected changes in labour rates will be an essential factor. In case there is an agreement with workers for payment of wage rates in the coming period then these rates should be used.
If a premium or bonus scheme is in operation then anticipated extra payment should also be included. Where piece rate system is used then standard cost will be fixed per piece. The object of fixing standard labour time and labour rate is to derive maximum efficiency in the use of labour.