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

Kaveri Traders Ltd. received an advance of ₹5,00,000 from a customer for goods to be delivered next year. At the year-end the goods are undelivered and the advance is not refundable unless Kaveri fails to deliver. Applying the Framework's definitions, how should the advance be classified at the year-end?

The advance is a liability. Kaveri has a present obligation arising from a past event, receipt of the advance, and settling it by delivering goods will require an outflow of resources embodying economic benefits. It is not income until the goods are delivered.

  1. AIncome, because cash has been received
  2. BEquity, because it increases the owner's funds
  3. CA liability, because it is a present obligation arising from a past event whose settlement is expected to result in an outflow of resourcesCorrect
  4. DAn asset only, with no corresponding obligation

Explanation

Kaveri has received cash and now has a present obligation to deliver goods, so settlement will involve an outflow of resources. This fits the definition of a liability. Treating it as income would anticipate revenue not yet earned, since the goods are undelivered.

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