Skip to content

CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Anand Pharma Ltd. received an advance of Rs 8,00,000 from a customer for goods to be delivered next year. Under the Framework definitions, how should the advance be viewed at the balance sheet date?

The advance is a liability. The company has a present obligation from a past event, the receipt of money, and settling it by delivering goods or refunding will cause an outflow of resources. It is not income until earned.

  1. AAs income of the current year because cash is received
  2. BAs a liability because there is a present obligation to deliver goods or refund, with outflow of resources expectedCorrect
  3. CAs equity because it increases net assets
  4. DAs an asset because the customer is a future source of benefits

Explanation

A liability is a present obligation arising from past events, whose settlement is expected to result in an outflow of resources. The advance obliges the company to deliver goods or refund. Income is recognised only when earned, so treating it as income is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Framework for Preparation and Presentation of Financial Statements shows your real accuracy, how long you take and where you lose marks.

Practise Framework for Preparation and Presentation of Financial StatementsFree diagnostic mock

More Framework for Preparation and Presentation of Financial Statements questions