1.

(a) What do you understand by the concept of conservatism ? Why is it also called the concept of
prudence? Why is it not applied as strongly today as it used to be in the Past ?

Ans. "conservatism in the balance sheet is of dubious value if attained at the

expense of conservatism in the income statement, which is far more
significant."
A branch of accounting that requires a high degree of verification before making a legal claim to any
profit. Accounting conservatism will recognize all probable losses as they are discovered and most
expenditures as they are incurred. Revenue will be deferred until it is verified. Having strict revenuerecognition criteria is one of the most common forms of accounting conservatism.

(b) What is a Balance Sheet ? How does a Funds Flow Statement differ from a Balance Sheet ?
Enumerate the items which are usually shown in a Balance Sheet and a Funds Flow
Statement.

DEFINITION OF 'BALANCE SHEET'

A financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time. These three balance sheet
segments give investors an idea as to what the company owns and owes, as well
as the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity

Difference Between Balance Sheet And Funds Flow

Statement
The main differences between balance sheet and fund flow statement are as below:

1. Meaning
Balance Sheet: Balance sheet is a statement of assets, liabilities and capital.
Funds Flow Statement: Funds flow statement is a statement if changes in assets, liabilities and
capital accounts.

2. Objective
Balance Sheet: Balance sheet is prepared to ascertain the financial position of a firm.
Funds Flow Statement: It is prepared to ascertain the sources and application of funds.

3. Preparation
Balance Sheet: It is prepared with the help of trial balance.
Funds Flow Statement: It is prepared with the help of balance sheets of two subsequent dates.

4. Information
Balance Sheet: It provides static view of financial affairs.
Funds Flow Statement: It provides the changes in assets, liabilities and capital accounts.