UPSC Commerce & Accountancy 2026 — Paper I

(a) Three linked demands: define the Profit-Volume (P/V) ratio with its formula, explain HOW it is used in profit planning (break-even point, margin of safety, required sales for a target profit, product ranking), and illustrate with a worked numerical example. A purely theoretical answer with no figures cannot score full marks because 'explain with suitable examples' is explicit. (b) A point-by-point distinction, under AS 14 'Accounting for Amalgamations' (and its Ind AS 103 counterpart), between an amalgamation in the nature of merger and one in the nature of purchase. The answer must give the five conditions of AS 14 para 3(e) that define a merger and then contrast the accounting method and its consequences. (c) Two parts: define marginal costing (marginal cost, contribution, the variable-costing treatment of fixed overhead) and then demonstrate its usefulness for specific managerial decisions. The second part carries the greater weight, so the answer must name concrete decision situations and the decision rule applied in each. (d) Identify and discuss the perquisites under section 17(2) of the Income-tax Act, 1961 that are taxable in the hands of EVERY employee, which necessarily requires distinguishing them from those taxable only for 'specified employees' under section 17(2)(iii). The answer must name the statutory clauses and the Rule 3 valuation categories. (e) Set out the major matters an auditor must attend to when auditing a charitable trust - the legal and constitutional documents, the special audit procedures for a not-for-profit entity's receipts and application of income, and the income-tax and FCRA compliance checks that govern the trust's exemption. A generic company-audit checklist will not do.

• P/V ratio = Contribution / Sales x 100
• Contribution = Sales - Variable cost
• BEP (in value) = Fixed cost / P/V ratio
• Margin of Safety = Profit / P/V ratio
• Sales for desired profit = (Fixed cost + Desired profit) / P/V ratio
• P/V ratio is independent of fixed cost
• Cost-Volume-Profit (CVP) analysis / marginal costing framework
• AS 14 Accounting for Amalgamations, para 3(e) and para 3(f)
• Pooling of Interests Method
• Purchase Method
• 90% of the face value of equity shares test
• Consideration discharged wholly in equity shares (except cash for fractional shares)
• Amalgamation Adjustment Reserve (separate line item under Reserves and Surplus)
• Goodwill amortised over a period not exceeding five years; alternatively Capital Reserve
• Ind AS 103 Business Combinations - acquisition method; Appendix C for common-control combinations
• Marginal cost = aggregate variable cost; fixed cost treated as period cost
• Contribution = Sales - Variable cost
• Profit = Contribution - Fixed cost
• Key factor / limiting factor; contribution per unit of key factor
• P/V ratio and break-even point
• Make or buy; special/export order; optimum product mix; shut-down decision; sell or process further
• Differential/incremental costing
• AS 2 / Ind AS 2 Inventories require absorption costing for reporting
• Section 17 of the Income-tax Act, 2025 (section 17(2) of the 1961 Act)
• Rent-free / concessional accommodation (old s. 17(2)(i), (ii))
• Obligation of the employee met by the employer (old s. 17(2)(iv))
• Life insurance premium / annuity paid by the employer (old s. 17(2)(v))
• Specified security or sweat equity shares (ESOP), FMV on date of exercise less amount paid (old s. 17(2)(vi))
• Employer contribution to RPF/NPS/superannuation above Rs 7,50,000 and the annual accretion on it (old s. 17(2)(vii), (viia))
• Other prescribed fringe benefits (old s. 17(2)(viii))
• Specified employee: director, 20% or more voting power, or salary (excluding non-monetary perquisites) above Rs 4,00,000 (Rs 50,000 before FY 2025-26) (old s. 17(2)(iii))
• Valuation under Rule 15 of the Income-tax Rules, 2026 (Rule 3 of the 1962 Rules)
• Trust deed / memorandum and objects clause
• Indian Trusts Act, 1882; State Public Trusts Act; Societies Registration Act, 1860; section 8 of the Companies Act, 2013
• Part B of Chapter XVII (sections 332-355) of the Income-tax Act, 2025 (old sections 11, 12, 12A/12AB, 13); registration under section 332
• 85% application of income; 15% deemed accumulation (section 343; old section 11(1)); further accumulation for specified purposes (old section 11(2))
• Specified modes of investment - Schedule XVI (section 350; old section 11(5))
• Anonymous donations taxed at 30% (section 337; old section 115BBC)
• Books of account and audit report in the prescribed form (sections 347-348; old Rules 17AA/17B, Form 10B/10BB)
• Foreign Contribution (Regulation) Act, 2010 and Form FC-4
• Donation register, counterfoil receipts, hundi collections

(a) A three-part amalgamation problem: (i) compute the purchase consideration payable to X Ltd and to Y Ltd on the stated share-exchange, debenture and preference-share terms after the specified revaluation of Y's plant and debtors; (ii) pass the journal entries in the books of Y Ltd, the transferor (Realisation Account route); and (iii) draw up the opening balance sheet of the new company Z Ltd. All three parts must be attempted. (b) Three demands: define service tax as it existed in India, discuss its features, and then explain the rationale behind changes in GST rates. The answer must connect the two - service tax (Chapter V of the Finance Act, 1994) was subsumed into GST on 1 July 2017 - and must then argue the economic and administrative reasons for rate rationalisation under GST. (c) Two demands: first distinguish special investigation from regular (routine/general) investigation on grounds such as purpose, scope, periodicity, depth of evidence and reporting; second, discuss the key points an investigator must consider before and during a special investigation - terms of reference, independence, nature of evidence, extent of checking, legal implications and the form of the report.

• Purchase consideration X Ltd = Rs 11,00,000 (1,00,000 equity shares of Rs 10 at Rs 11)
• Purchase consideration Y Ltd = Rs 11,95,000 (2,400 preference shares of Rs 100 = Rs 2,40,000 + 95,500 equity shares of Rs 10 = Rs 9,55,000)
• Revalued net assets of Y Ltd available to equity shareholders = Rs 9,55,000
• Plant and machinery of Y written down to Rs 14,40,000; provision of Rs 5,000 on debtors
• Profit & Loss A/c debit balance of Rs 2,80,000 not taken over
• Discount on issue of debentures Rs 40,000
• Balance Sheet of Z Ltd total = Rs 38,25,000
• Securities premium Rs 1,00,000; capital reserve/reserves Rs 8,00,000 on X Ltd's takeover
• AS 14 Accounting for Amalgamations; Schedule III of the Companies Act, 2013
• Realisation Account in the transferor's books
• Chapter V of the Finance Act, 1994; sections 65, 65B, 66B, 66D
• Dr Raja Chelliah Tax Reforms Committee; introduced 1994 at 5% on three services
• Negative list regime from 1 July 2012; Mega Exemption Notification
• Place of Provision of Services Rules, 2012; Point of Taxation Rules, 2011; reverse charge; CENVAT credit
• Final rate 15% (14% + 0.5% Swachh Bharat Cess + 0.5% Krishi Kalyan Cess)
• Constitution (One Hundred and First Amendment) Act, 2016; Article 246A; Article 279A GST Council
• CGST Act, 2017; SGST Acts; IGST Act, 2017; subsumed with effect from 1 July 2017
• Revenue-neutral rate; inverted duty structure; input tax credit accumulation
• Demerit/sin rate on tobacco, pan masala and luxury cars
• 56th GST Council meeting, September 2025 - two principal slabs of 5% and 18% with a 40% demerit rate
• Terms of reference / scope letter / engagement letter
• Statutory investigation under sections 210, 212 (Serious Fraud Investigation Office), 213 and 216 of the Companies Act, 2013
• Non-statutory investigation: acquisition of a business, admission of a partner, lending proposal, insurance claim, suspected fraud
• Conclusive versus persuasive evidence; no materiality concept and no 'true and fair view' opinion
• Extent of checking - complete checking rather than test checking in the suspect area
• Independence and conflict of interest
• Teeming and lading; defalcation of cash and goods; window dressing
• Self-contained report separating facts, assumptions, limitations and opinion
• SA 240 fraud-risk thinking; confidentiality

(a) Compute Mr A's income from house property for Assessment Year 2025-26 for a let-out residential house, AND his 'any other income', from a composite rent situation. The candidate must split composite rent between the building and the amenities, compute Gross Annual Value with the standard-rent cap, deduct only the owner's share of municipal taxes, apply the section 24 deductions, bring the recovered unrealised rent to tax under section 25A, and tax the net amenity charges under 'Income from Other Sources'. (b) Prepare the three Process Accounts (A, B and C) and the Godown Account for a manufacturer whose output passes through three processes with a 5% weight loss and a 20% scrap in each process, where scrap from A and B realises Rs 20 per ton and from C Rs 5 per ton, part of each process output goes to the godown and the balance to the next process, transfers carry no profit, and godown stock is sold at cost plus 25%. (c) Two demands of equal weight: the REASONS why a company buys back its own shares (financial, signalling, capital-structure and strategic motives) and the PROCESS of buy-back, which must be answered with the statutory machinery of sections 68, 69 and 70 of the Companies Act, 2013, Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014, and the SEBI (Buy-Back of Securities) Regulations, 2018 for listed companies.

• Expected Rent Rs 1,40,000 (standard rent cap)
• Gross Annual Value Rs 1,92,000
• Municipal taxes deductible Rs 8,500 (owner's 50% of Rs 17,000)
• Net Annual Value Rs 1,83,500
• Section 24(a) standard deduction 30% = Rs 55,050
• Section 24(b) interest Rs 50,000
• Section 25A - unrealised rent recovered Rs 24,000 less 30% = Rs 16,800
• Income from house property Rs 95,250
• Income from other sources Rs 33,200 (Rs 55,200 - Rs 22,000)
• Sections 22, 23(1), 24 and 25A of the Income-tax Act, 1961 (sections 20-23 of the Income-tax Act, 2025); composite rent
• Process A: net cost Rs 32,000 for 1,500 tons; Rs 21.33 per ton
• Process B: net cost Rs 51,200 for 1,500 tons; Rs 34.13 per ton
• Process C: net cost Rs 59,360 for 1,200 tons; Rs 49.47 per ton
• Scrap credits: Rs 8,000 in A, Rs 8,000 in B, Rs 1,600 in C
• Total godown cost Rs 82,400 for 2,100 tons
• Godown sales Rs 1,03,000 at cost plus 25%
• Godown profit Rs 20,600
• Normal loss carries no cost; scrap credited at realisable value
• Sections 68, 69 and 70 of the Companies Act, 2013
• Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014
• SEBI (Buy-Back of Securities) Regulations, 2018
• Sources: free reserves, securities premium account, proceeds of a fresh issue
• 25% ceiling on paid-up capital and free reserves; 25% of paid-up equity capital in a financial year; 10% board-resolution route
• Post-buy-back debt-equity ratio not exceeding 2:1
• Declaration of solvency in Form SH-9; letter of offer Form SH-8; return of buy-back Form SH-11; certificate Form SH-15
• Capital Redemption Reserve under section 69
• Extinguishment and physical destruction within seven days; one-year cooling-off period
• Tender offer, open market/book-building, odd-lot and ESOP routes
• Earnings per share and return on equity; signalling undervaluation

(a) Prepare a Cash Flow Statement by the INDIRECT method (AS 3 / Ind AS 7) from two comparative balance sheets, given that Rs 52,000 was paid as dividend during the year. Because no profit figure is given, the net profit must first be derived from the movement in shareholders' funds, and the three activity classifications - operating, investing and financing - must each be shown and must reconcile to the Rs 800 fall in cash. (b) Define responsibility accounting and then explain HOW it improves organisational effectiveness. The second half requires a causal argument - through responsibility centres, the controllability principle, performance reports, management by exception, goal congruence and motivation - not merely a list of advantages. (c) Analyse the material variances of Global Ltd for April 2026. 'Analyse' means compute and reconcile the full set: material cost variance, material price variance, material usage (quantity) variance and its split into mix and yield (sub-usage) variances, for each material and in total. Actual consumption has to be derived from opening stock plus purchases less closing stock, and the standard quantity from the 15% standard process loss.

• Net profit Rs 54,000 (balancing figure from shareholders' funds plus dividend)
• Depreciation added back Rs 18,000
• Operating profit before working capital changes Rs 72,000
• Net cash from operating activities Rs 81,200
• Purchase of machinery Rs 30,000; building Rs 10,000; land Rs 20,000
• Net cash used in investing activities Rs (60,000)
• Loan from subsidiary Rs 40,000; bank loan repaid Rs 10,000; dividend paid Rs 52,000
• Net cash used in financing activities Rs (22,000)
• Net decrease in cash Rs 800; opening Rs 8,000, closing Rs 7,200
• AS 3 / Ind AS 7 Statement of Cash Flows - indirect method
• Responsibility centre; cost centre, revenue centre, profit centre, investment centre
• Controllability principle - controllable versus uncontrollable costs
• Responsibility reporting; management by exception
• Budgetary control and variance analysis
• Return on Investment (ROI), Residual Income (RI), Economic Value Added (EVA)
• Transfer pricing
• Goal congruence; decentralisation; participative budgeting
• Sub-optimisation and dysfunctional behaviour; budget slack
• Balanced scorecard as a supplement
• Standard input for 3,400 kg output = 4,000 kg (grossing up for 15% loss)
• Standard cost Rs 27,200; standard cost per kg of output Rs 8
• Actual consumption A 1,660 kg, B 2,380 kg, total 4,040 kg
• Actual prices A Rs 4.25 per kg, B Rs 2.50 per kg; actual cost Rs 13,005
• Material Cost Variance Rs 14,195 (F)
• Material Price Variance Rs 14,555 (F)
• Material Usage Variance Rs 360 (A)
• Material Mix Variance Rs 88 (A)
• Material Yield / Sub-usage Variance Rs 272 (A)
• Reconciliation: MPV + MUV = MCV; MMV + MYV = MUV

(a) Explain the Capital Asset Pricing Model as a method of estimating the cost of equity - the equation, the meaning of each input and how beta is obtained - and then evaluate the approach by discussing its merits and its demerits. Both halves must be present. (b) Discuss Myron Gordon's dividend capitalisation model as a theory of dividend RELEVANCE: state its assumptions, give the valuation formula, derive the optimum payout for growth, normal and declining firms, explain the bird-in-the-hand argument that underlies it, and criticise it. (c) Define the funds flow statement - specifying what 'funds' means (working capital) and the three documents that make it up - and then discuss its uses to management. The second half carries at least half the marks, so specific managerial uses must be named, not merely asserted. (d) Discuss the REASONS for the emergence of innovative debt instruments. The directive is causal, so the answer must explain the issuer-side, investor-side, regulatory and market forces that produced financial innovation in debt, illustrating each reason with the specific instrument it gave rise to. A bare catalogue of instruments without reasons does not answer the question. (e) Discuss the role of credit rating agencies in India - what a credit rating is and is not, the functions rating agencies perform for investors, issuers, intermediaries and regulators, the mandatory rating requirements in Indian law, the principal agencies operating here and the regulatory framework, and a balanced critique of their performance.

• Ke = Rf + beta (Rm - Rf)
• Beta = Cov(Rj, Rm) / Var(Rm); characteristic line
• Systematic (non-diversifiable) versus unsystematic (diversifiable) risk
• Security Market Line; market risk premium
• Sharpe, Lintner and Mossin as the model's authors; Markowitz portfolio theory as its base
• Roll's critique - unobservability of the true market portfolio
• Fama-French three-factor model; Carhart four-factor model
• Applicability to non-dividend-paying firms where the dividend growth model fails
• P = E(1 - b) / (Ke - br); P = D1 / (Ke - g)
• g = br, the growth rate as retention ratio times return on investment
• Condition Ke > br
• Growth firm r > Ke: zero payout optimal; Normal firm r = Ke: payout irrelevant; Declining firm r < Ke: 100% payout optimal
• Bird-in-the-hand argument; risk aversion and increasing uncertainty of distant dividends
• Myron Gordon; dividend relevance; contrast with Modigliani and Miller's irrelevance hypothesis
• Relation to Walter's model as the other relevance theory
• Funds = net working capital (current assets less current liabilities)
• Schedule of Changes in Working Capital
• Funds From Operations; add back depreciation, goodwill written off, loss on sale of fixed assets, transfer to reserve
• Statement of Sources and Applications of Funds
• Sources: funds from operations, issue of shares/debentures, long-term loans, sale of fixed assets
• Applications: purchase of fixed assets, redemption of debentures/preference shares, repayment of loans, dividend and tax paid
• Flow arises only between a current and a non-current account
• AS 3 / Ind AS 7 and section 2(40) of the Companies Act, 2013 require a Cash Flow Statement, not a funds flow statement
• Deep discount bonds (IDBI, 1992); zero coupon bonds
• Secured Premium Notes (TISCO, 1992)
• Floating rate notes/bonds; inflation-indexed bonds
• Fully, partly and optionally convertible debentures; debentures with detachable warrants
• Callable and puttable bonds
• Abolition of the Controller of Capital Issues, 1992; free pricing under SEBI; interest rate deregulation by the RBI
• Securitisation - mortgage-backed and asset-backed securities, pass-through certificates; SARFAESI Act, 2002
• Basel norms; perpetual Additional Tier 1 bonds and Tier 2 subordinated debt
• Masala bonds; foreign currency convertible bonds; external commercial borrowings; green bonds
• R.H. Patil Committee (2005) and H.R. Khan Committee (2016) on the corporate bond market
• Section 54EC capital gains bonds; tax-free infrastructure bonds
• Credit rating agencies and dematerialisation as enablers
• A rating is an opinion on a specific instrument, not a recommendation to buy or sell and not a guarantee
• CRISIL (1987), ICRA (1991), CARE (1993), India Ratings and Research, Brickwork Ratings, Acuite Ratings, Infomerics
• SEBI (Credit Rating Agencies) Regulations, 1999
• Rating symbols AAA to D; investment grade versus speculative grade; outlook and rating watch
• Mandatory rating of public/listed debt issues, commercial paper, certificates of deposit and NBFC public deposits
• Bank loan ratings and Basel standardised approach risk weights
• Issuer-pays conflict of interest; rating shopping
• IL&FS default of 2018; DHFL; Amtek Auto
• Issuer Not Cooperating (INC) tagging; probability of default benchmarks

(a) Two substantial demands: trace the EVOLUTION of the Reserve Bank of India's monetary policy across its distinct phases - the planned/administered era, the monetary-targeting phase after the Chakravarty Committee, the multiple-indicator approach after 1998, and flexible inflation targeting with the Monetary Policy Committee since 2016 - and then explain the quantitative and qualitative instruments available to the RBI today. (b) A Modigliani-Miller arbitrage problem. The candidate must value both firms, show that the levered company X is overvalued relative to the unlevered company Y in the same risk class, and then demonstrate the arbitrage step by step - sell the holding in X, borrow personally in the same proportion as X's debt to replicate the leverage, invest the whole amount in Y - proving that the investor's income rises without any increase in risk, and explain how this restores equilibrium. (c) Two separate demands of roughly equal weight: (a) describe the COSTS a firm incurs in carrying receivables - capital/opportunity cost, administrative cost, collection cost, delinquency cost and default/bad-debt cost, plus the cost of cash discount; and (b) explain the FACTORS that determine how large the receivables balance will be. Both lists must be explained, not merely named.

• Evolution: administered regime and monetary targeting to multiple indicators, LAF, and flexible inflation targeting with MPC (2016, 4% ± 2%)
• Quantitative tools: repo, reverse repo, SDF, MSF, CRR, SLR, OMO, bank rate, MSS
• Qualitative tools: margins, moral suasion, credit rationing, selective controls
• Recent developments: SDF corridor 2022, COVID response, 2025 easing and CRR cut
• V_X = 2,60,000 + 1,00,000 = 3,60,000 and V_Y = 3,00,000, so X is overvalued
• Current income: 10% of (40,000 - 10,000) = 3,000 on shares worth 26,000
• Sell 20,000 X shares, borrow 10,000, buy 36,000 Y shares (12%)
• New income 4,800 - 1,000 = 3,800; gain of 800 and the arbitrage conclusion V_X = V_Y
• Costs: carrying or capital, administrative, collection, delinquency, default
• Trade-off of cost against the benefit of additional sales
• Factors: sales level, credit policy (standards, period, discount, collection), competition, industry practice
• Other factors: seasonality, economic conditions, cost of capital and liquidity, customers

(a) Reconstruct a complete balance sheet from six ratios and the two given equity figures. The candidate must work in the correct sequence - net worth, total debt, total assets, sales, cost of goods sold, inventory, receivables, cash from the acid-test ratio, and equipment as the balancing figure - and present the finished balance sheet with both sides equal. (b) Compute the Net Present Value of a Rs 400 lakh equipment proposal over five years and advise management. The candidate must convert the given earnings before depreciation and tax into after-tax CASH FLOWS by deducting straight-line depreciation, applying the 40% tax and adding depreciation back, discount at the given 14% factors, and state a clear accept/reject recommendation. (c) Two demands: describe the PROCESS by which venture capitalists finance a business in India, stage by stage from deal origination to exit, and then discuss the TYPES of investment instrument they use. Both halves must be answered, with the Indian regulatory framework identified.

• Net worth 22,50,000; debt 11,25,000; total assets 33,75,000
• Sales 67,50,000; COGS 54,00,000; receivables 5,62,500; inventory 18,00,000
• Cash 3,37,500 from acid-test 0.8 on current liabilities of 11,25,000
• Equipment 6,75,000 and a tallied balance sheet
• Depreciation 80 lakh a year; tax 40%
• CFAT: 143, 146, 146, 149, 137 lakh
• PV at 14% totalling about 495.55 lakh
• NPV about 95.55 lakh; accept the project on a positive NPV
• Process: origination, screening, due diligence, structuring, post-investment support, exit
• Regulatory setting: Category I AIF under SEBI (AIF) Regulations 2012
• Instruments: equity, CCPS, convertible debentures or notes, warrants, venture debt, mezzanine
• Exit routes: IPO, trade sale, buyback, secondary sale

(a) Two demands: (a) evaluate the proposition that investing through mutual funds is better than direct investment in securities - which requires arguing the case with specific advantages AND acknowledging the counter-arguments, since 'explain the statement' invites reasoned support rather than blind assertion; and (b) discuss the types of mutual funds prevalent in India, which should follow SEBI's categorisation by structure, asset class and objective. (b) Apply Walter's formula to compute the market price of a share for NINE combinations - three payout ratios (50%, 60% and 100%) under each of three rates of return on retained earnings (15%, 12% and 5%) - with EPS Rs 9 and a capitalisation rate of 12%, and then interpret the results in terms of Walter's growth, normal and declining firm classification. (c) Two demands: classify and describe the TYPES of merger - horizontal, vertical, conglomerate, concentric/congeneric and reverse - with an example of each, and then explain the FINANCIAL objectives that mergers are meant to achieve, which means synergy, tax benefits, cost of capital, debt capacity, surplus cash deployment and EPS effects, not the generic strategic reasons alone.

• Advantages: professional management, diversification, liquidity, affordability and SIP, transparency and SEBI regulation
• Limitations: expense ratio, exit load, market risk, no control
• Types by structure: open-ended, closed-ended, interval
• Types by objective: equity, debt, hybrid, solution-oriented, index or ETF, fund of funds, ELSS
• Formula P = [D + (r/k)(E - D)]/k with E = 9 and k = 12%
• At 50%: 84.38, 75.00, 53.13
• At 60%: 82.50, 75.00, 57.50; at 100%: 75.00 in all cases
• Conclusion: growth firm optimum payout 0%, normal firm indifferent, declining firm 100%
• Types: horizontal, vertical (forward and backward), conglomerate, congeneric, with an example
• Legal forms: absorption, consolidation, reverse merger; Companies Act 2013 ss. 230-232 and NCLT
• Objectives: synergy, economies of scale, financial synergy, EPS growth, tax benefits, diversification
• Value creation only if synergy exceeds premium