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Question Paper

Accounting for Decision Making – I (MB2D1): October 2008


 Answer all 70 questions.
 Marks are indicated against each question.
Total Marks : 100
1. Which of the following transactions results in an increase in the owners’ equity? <Answer
>
(a) Sale of fixed assets at book value
(b) Earning revenue income
(c) Borrowing additional loans
(d) Sale of investments at book value
(e) Purchase of fixed assets. (1mark)
2. Which of the following accounting concepts is applicable to determine the profits or losses <Answer
>
accrued?

(a) Money measurement concept


(b) Materiality concept
(c) Business entity concept
(d) Conservatism concept
(e)
Matching concept.
(1mark)
3. Duality concept states that <Answer
>
(a) The total assets is equal to the sum of owners’ equity and outside liabilities
(b) The outside liabilities is equal to the sum of owners’ equity and the total assets
(c) The owners’ equity is equal to the sum of total assets and outside liabilities
(d) The total assets is equal to the sum of current assets and owners’ equity
(e) The owners’ equity is equal to the sum of total current assets and total current liabilities. (1mark)
4. Assets are to be recorded in the books of accounts at the price paid to acquire them. This <Answer
>
statement is in recognition of
(a) Cost concept
(b) Going concern concept
(c) Conservatism concept
(d) Business entity concept
(e) Consistency concept. (1mark)
5. Depreciation is allocated over the effective life of an asset according to <Answer
>
(a) Conservatism concept
(b) Going concern concept
(c) Matching concept
(d) Time period concept
(e) Business entity concept. (1mark)
6. Contingent liabilities appearing as notes to balance sheet reiterate <Answer
>
(a) Conservatism concept
(b) Realization concept
(c) Concept of full disclosure
(d) Time period concept
(e)
Consistency concept.
(1mark)

1
7. The capital of Ram Ltd., is Rs.7,00,000. The outside liabilities of the company are Rs.50,000. If <Answer
>
the total of assets are Rs.8,25,000, then the reserves & surplus of Ram Ltd., are
(a) Rs.1,25,000
(b) Rs.1,75,000
(c) Rs. 75,000
(d) Rs. 50,000 marks
(e) Rs. 25,000. (2 )
8. Which of the following accounting concepts assume that a business will carry on its operations <Answer
>
for an indefinite period?
(a) Business entity
(b) Going concern
(c) Periodicity
(d) Duality
(e) Consistency. (1mark)
9. According to the requirement of US GAAP compliance for Indian Corporate, an Indian company, <Answer
>
if it is incorporated under the laws of a jurisdiction outside of the United States, is called as
(a) Foreign Private Issuer
(b) Foreign Investor
(c) Foreign Incorporator
(d) Foreign Institutor
(e) Foreign Capitalist. (1mark)
10 According to which of the following accounting concepts, are the shareholders treated as creditors <Answer
. for the amount they pay on shares? >

(a) Cost concept


(b) Duality concept
(c) Going concern concept
(d) Money measurement concept
(e) Business entity concept. (1mark)
11 Every year inventory should be valued on the same basis. This is based on <Answer
. >
(a) Cost concept
(b) Consistency concept
(c) Conservatism concept
(d) Matching concept
(e) Accounting period concept. (1mark)
12 The following are the external users of financial statements, except <Answer
. >
(a) Government agencies
(b) Lenders
(c) Customers
(d) Investors
(e) Board of Directors. (1mark)
13 Which of the following is not an objective of accounting? <Answer
. >
(a) Maintenance of records for business transactions
(b) Ascertaining whether the business operations have been profitable or not
(c) Depicting the financial position of the business
(d) Providing information to the users of financial information
(e) Maintenance of the records of human resources of the company. (1mark)
14 Which of the following is not a qualitative characteristic of financial statements? <Answer
. >
(a) Understandability
(b) Relevance
(c) Reliability
(d) Comparability
(e) Periodicity. (1mark)

2
15 Death of the Chairman of a company is not recorded in the books of accounts in recognition of <Answer
. >
(a) Money measurement concept
(b) Cost concept
(c) Time period concept
(d) Revenue recognition concept
(e) Duality concept. (1mark)
16 Which of the following is the correct order for arranging the liabilities in a balance sheet <Answer
. prepared according to permanency order? >

(a) Capital, long-term liabilities, short-term liabilities and current liabilities


(b) Long-term liabilities, short term liabilities, current liabilities and capital
(c) Current liabilities, long-term liabilities, short term liabilities and capital
(d) Current liabilities, short term liabilities, long-term liabilities and capital
(e) Capital, short term liabilities, current liabilities and long-term liabilities. (1mark)
17 The following is the data pertaining to Axon Ltd., as on March 31, 2008: <Answer
. >
Particulars Rs.
Reserves & surplus 22,500
Closing stock 37,500
Fixed assets 2,70,000
Sundry debtors 22,500
Sundry creditors 34,000
Cash and bank 26,500
Share capital 3,00,000
The total of the ‘Sources of Funds’ in the balance sheet of Axon Ltd., as on March 31, 2008 was
(a) Rs.3,56,500
(b) Rs.3,34,000
(c) Rs.3,22,500
(d) Rs.2,96,500 marks
(e) Rs.3,71,500. (2 )
18 Normally, a complete set of financial statements does not include <Answer
. >
(a) Balance sheet
(b) Income statement
(c) Statement of cash flows
(d) Notes to balance sheet
(e) Prospectus. (1mark)
19 Which of the following items does not appear under the head ‘Reserves and Surplus’ in the <Answer
. balance sheet? >

(a) General reserve


(b) Sinking fund
(c) Proposed dividend
(d) Securities premium
(e) Capital redemption reserve. (1mark)
20 The activities that are basically related to the changes in share capital and long term borrowings <Answer
. of the company are known as >

(a) Cash flows relating to financing activities


(b) Cash flows relating to investing activities
(c) Cash flows relating to operating activities
(d) Cash flows relating to operating activities and financing activities
(e) Cash flows relating to financing activities and investing activities. (1mark)

3
21 The following data are available from the books of Alfa Ltd., for the year 2007-08: <Answer
. >
 Cash inflow from operating activities : Rs.1,29,000
 Net Cash outflow from investing activities : Rs.1,00,000
 Net Cash outflow from financing activities : Rs. 35,000
 Cash at the beginning of the period : Rs. 95,000
Cash at the end of the year 2007-08 amounted to
(a) Rs. 89,000
(b) Rs.1,01,000
(c) Rs. 31,000
(d) Rs. 98,000 marks
(e) Rs.1,59,000. (2 )
22 The total of application of funds of Daniel Ltd., amounted to Rs.90 lakh. The shareholders funds <Answer
. amounted to Rs.60 lakh. The loan funds of Daniel Ltd., amounted to >

(a) Rs.145.00 lakh


(b) Rs.150.00 lakh
(c) Rs. 30.00 lakh
(d) Rs. 66.67 lakh marks
(e) Rs.100.00 lakh. (2 )
23 Which of the following items should not appear under the head ‘unsecured loans’ in the Balance <Answer
. Sheet of a company? >

(a) Sinking fund


(b) Short-term loans from others
(c) Short-term loans from banks
(d) Short-term advances from banks
(e) Fixed deposits. (1mark)
24 Which of the following is not classified as inventory in the financial statements? <Answer
. >
(a) Finished goods
(b) Work-in-progress
(c) Stores and spares
(d) Raw-materials
(e) Advance payment made to suppliers for raw materials. (1mark)
25 Following information pertaining to Alex Publishing Ltd., was extracted from the accounting <Answer
. records for the year ended March 31, 2008: >

Particulars Rs.
Cash received from sales 9,28,000
Royalties received 12,500
Cash paid to suppliers and employees 5,45,000
Office rent paid 1,30,000
Dividend paid 42,000
The net cash flow from operating activities for 2007-08 was
(a) Rs.2,58,500
(b) Rs.3,00,500
(c) Rs.2,65,500
(d) Rs.2,88,000 marks
(e) Rs.2,53,000. (2 )
26 Which of the following is treated as an extraordinary item in the income statement of a company? <Answer
. >
(a) Bad debts written off
(b) Loss on sale of asset
(c) Cash discount allowed
(d) Depreciation on assets
(e) Occurrence of fire in the company. (1mark)

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27 Inventories should be valued at <Answer
. >
(a) Market value
(b) Current cost
(c) Net realizable value
(d) Nominal value
(e) Lower of cost or Net Realizable Value. (1mark)
28 Balances with Customs and Port Trust, comes under the head <Answer
. >
(a) Loans and advances in the balance sheet
(b) Current liabilities and Provisions in the balance sheet
(c) Miscellaneous expenditure in the balance sheet
(d) Investments in the balance sheet
(e) Fixed assets in the balance sheet. (1mark)
29 Operating expenses does not include <Answer
. >
(a) Selling expenses
(b) Administrative expenses
(c) Bad debts
(d) Cash discount allowed
(e) Loss on sale of investments. (1mark)
30 Which of the following items is a financing activity in a cash flow statement? <Answer
. >
(a) Payment to acquire shares
(b) Payment of dividend tax
(c) Dividends received
(d) Payments to employees
(e) Acquisition of long lived assets. (1mark)
31 Brij Manufacturing Ltd., had the following activities relating to its stock investments during <Answer
. 2007-08: >

 Acquired 2,000 shares in Bhuvan Ltd., for Rs.26,000.


 Sold an investment for Rs.35,000 when the carrying value was Rs.33,000.
 Acquired 5-year Fixed deposit for Rs.50,000. (During the year, interest of Rs.3,750 was
received.)
 Collected dividends of Rs.1,200 on investments.
As per the statement of cash flows, the net cash outflow from investing activities of Brij
Manufacturing Ltd., for the year 2007-08 was
(a) Rs.37,250
(b) Rs.38,050
(c) Rs.39,800
(d) Rs.36,050 marks
(e) Rs.41,000. (2 )
32 Which of the following practices does not amount to revenue manipulation to inflate the <Answer
. earnings? >

(a) Vendor financing


(b) Trade loading
(c) Channel stuffing
(d) Overstating the allowance for uncollectible accounts
(e) Not recognizing rebates. (1mark)
33 Sai Ltd., invested Rs.6,00,000 in fixed interest bearing securities. If the capital gearing ratio of the <Answer
. company is 0.60, the equity shareholder’s fund is >

(a) Rs.10,00,000
(b) Rs. 3,60,000
(c) Rs. 6,00,000
(d) Rs. 2,40,000 marks
(e) Rs.12,00,000. (2 )

5
34 Which of the following will not appear in Profit and Loss Account of a business? <Answer
. >
(a) Interest on investment
(b) Bad debts
(c) Provision for doubtful debts
(d) Interest paid out of capital to the extent not written off
(e) Reserve for discount on sundry creditors. (1mark)
35 Which of the following heads is not shown under ‘Sources of Funds’ in the balance sheet of a <Answer
. company? >

(a) Share capital


(b) Reserves and surplus
(c) Miscellaneous expenditure
(d) Secured loans
(e) Unsecured loans. (1mark)
36 The following information is related to Arnika Industries Ltd.: <Answer
. >
Current liabilities Rs.150 lakh
Closing inventory Rs.100 lakh
Current ratio 1.50
Account receivables Rs.100 lakh
What is the amount of cash and bank balance (assuming there are no other current assets)?
(a) Rs.18 lakh
(b) Rs.10 lakh
(c) Rs.12 lakh
(d) Rs.15 lakh marks
(e) Rs.25 lakh. (2 )
37 Which of the following is not a limitation of a Balance Sheet? <Answer
. >
(a) It does not contain certain assets and liabilities despite its claim to be the statement of all assets
and liabilities
(b) The values of various assets within the balance sheet are not always measured according to the
same rule
(c) Personal judgment plays a great part in determining the figures of the balance sheet
(d) Balance sheet is prepared on a particular date and hence there is every possibility of window-
dressing
(e) Assets and liabilities are shown in the liquidity or permanency order in the balance sheet of a
company. (1mark)
38 The short-term creditors are interested in <Answer
. >
(a) Liquidity ratios
(b) Valuation ratios
(c) Leverage ratios
(d) Capital structure ratios
(e) Dividend ratios. (1mark)
39 The ratio that can be directly inferred from the income statement is <Answer
. >
(a) Debtors turnover ratio
(b) Current ratio
(c) Dividend pay-out ratio
(d) Debt-equity ratio
(e) Net profit margin ratio. (1mark)
40 The analysis which involves comparison of different entities belonging to the same industry is <Answer
. known as >

(a) Year-to-year change analysis


(b) Time series analysis
(c) Trend analysis
(d) Cross-sectional analysis
(e) Cash flow analysis. (1mark)

6
41 Ramosys Hardware Ltd., furnished the following information for the year ended March 31, 2008: <Answer
. >
Particulars Rs.
Income from Hardware services 4,00,00,000
Hardware development expenses 1,75,00,000
Selling and marketing expenses 66,00,000
General and administrative expenses 45,00,000
Interest on investments 2,50,000
The operating profit of Ramosys Hardware Ltd., was
(a) Rs.1,14,00,000
(b) Rs.1,06,50,000
(c) Rs.1,11,50,000
(d) Rs.1,80,00,000 marks
(e) Rs.1,59,00,000. (2 )
42 Shyam Ltd., furnished the following information: <Answer
. >
Particulars Rs.
Profit after tax 5,00,000
Average shareholders’ equity 22,50,000
If return on equity is 10%, then the preference dividends of Shyam Ltd., is
(a) Rs.17,50,000
(b) Rs. 2,25,000
(c) Rs. 50,000
(d) Rs. 5,00,000 marks
(e) Rs. 2,75,000. (2 )
43 The comparison of the business performance of a company over a period of time is known as <Answer
. >
(a) Trend analysis
(b) Cross sectional analysis
(c) Cross-industrial analysis
(d) Common size analysis
(e) Cost-benefit analysis. (1mark)
44 Harika Ltd., furnished the following information: <Answer
. >
Particulars Rs.
Cost of goods sold 6,00,000
Net Profit 3,00,000
Sales return 1,00,000
If the net profit margin of Harika Ltd., was 25% then the gross profit margin was
(a) 55%
(b) 60%
(c) 40%
(d) 50% marks
(e) 45%. (2 )

7
45 Seema Ltd., furnished the following information: <Answer
. >
Particulars Rs.
Sales
40,00,000
Gross profit
Dividends paid 25,00,000
Net profit 4,00,000
10,00,000
If there were no non-operating expenses, the percentage of operating expenses to sales was
(a) 27.50%
(b) 30.50%
(c) 37.50%
(d) 20.50% marks
(e) 30.00%. (2 )
46 RK Ltd., furnished the following information: <Answer
. >
Particulars 2006-07 (Rs.) 2007-08 (Rs.)
Assets:
Current assets 4,50,000 5,50,000
Fixed assets 4,87,500 4,50,000
Liabilities:
Stakeholder’s equity 6,37,500 6,37,500
Current liabilities 1,50,000 1,50,000
Secured loans 1,50,000 2,12,500
Compared to 2006-07, the percentage of net current assets to total assets in 2007-08 was
increased by
(a) 4.00%
(b) 2.00%
(c) 8.00%
(d) 3.80% marks
(e) 16.00%. (2 )
47 The paid-up capital of a company is arrived at <Answer
. >
(a) After deduction of calls-in-arrear from the subscribed capital
(b) After deduction of calls-in-arrear from the called-up capital
(c) After deduction of calls-in-arrear from the issued capital
(d) After deduction of calls-in-arrear from the authorized capital
(e) After addition of calls-in-arrear to the called-up capital. (1mark)
48 Pavithra Ltd., has furnished the following data for the year 2007-08: <Answer
. >
Cost of goods available for sale Rs.1,00,000
Total sales Rs. 80,000
Gross profit margin on sales 25%
Closing stock of goods as on March 31, 2008 was
(a) Rs.80,000
(b) Rs.60,000
(c) Rs.36,000
(d) Rs.40,000 marks
(e) Rs.20,000. (2 )
49 The accent of the Indian accounting standard is on <Answer
. >
(a) Reporting
(b) Substance
(c) Analysis
(d) Localization
(e) Immateriality. (1mark)

8
50 Which of the following is a not a difference between US GAAP and Indian Accounting Standard <Answer
. (Indian AS)? >

(a) US GAAP is Rule-based, whereas Indian AS is Principle-based


(b) US GAAP is relatively less flexible compared to Indian AS
(c) According to Indian AS, goodwill arising on amalgamation is amortized over a period of 5
years where as goodwill is generally not amortized as per US GAAP
(d) According to US GAAP, capitalization of interest on constructed assets is required
whereas according to Indian AS capitalization is not required
(e) Revaluation of plant and equipment is prohibited according to US GAAP but it is allowed
as per Indian AS. (1mark)
51 According to US GAAP, the emphasis is on protection of <Answer
. >
(a) Creditor
(b) Debtor
(c) Investor
(d) Liquidator
(e) Customer. (1mark)
52 Consider the following data of a company: <Answer
. >
Particulars Rs.
Net annual sales 18,25,000
Cost of sales 5,00,000
Average trade debtors 4,50,000
Accounts payable 3,00,000
The average collection period (assuming 365 days a year) was
(a) 60 days
(b) 90 days
(c) 150 days
(d) 200 days marks
(e) 100 days. (2 )
53 Sarika Ltd., presented the following information: <Answer
. >
Particulars Rs.
Preliminary expenses
45,000
Discount allowed on issue of shares
Development expenditure 66,000
Provision for proposed dividend
58,000
90,000

The total of Miscellaneous expenditure of Sarika Ltd., was


(a) Rs.2,59,000
(b) Rs.1,69,000
(c) Rs. 79,000
(d) Rs.2,01,000 marks
(e) Rs.1,48,000. (2 )
54 According to US GAAP, the foreign exchange differences on monetary transactions are <Answer
. >
(a) Recorded in net income
(b) Added to the cost basis of the asset
(c) Added to the cost of fixed asset
(d) Shown as a separate head in balance sheet
(e) Shown as a current liability in the balance sheet. (1mark)

9
55 The following balances were extracted from the books of Run Ltd., as on March 31, 2008: <Answer
. >
Particulars Rs.
Share capital 5,00,000
Secured loans 4,00,000
Current assets 3,01,200
Fixed assets 8,00,000
Reserves and surplus 1,40,000
Sundry creditors 61,200
The total of ‘Application of Funds’ in the balance sheet of Run Ltd., as on March 31, 2008 was
(a) Rs.11,01,200
(b) Rs.11,00,000
(c) Rs.10,40,000
(d) Rs.11,41,200 marks
(e) Rs.11,01,900. (2 )
56 The following data is extracted from the books of Dravida Ltd., for the year ended March 31, 2008: <Answer
. >
Particulars Rs.
Cash in hand 75,000
Cash at bank 1,00,000
Short-term Marketable securities 2,00,000
Current liabilities 3,00,000
The absolute liquid ratio was
(a) 1.25:1
(b) 0.67:1
(c) 0.58:1
(d) 1:1 marks
(e) 0.75:1. (2 )
57 The following data is extracted from the books of Sindh Motors Ltd., for the year ended March 31, <Answer
. 2008: >

Particulars
Creditors turnover ratio 30 times
Average trade creditors Rs.76,650
The average daily credit purchases of Sindh Motors Ltd., (assuming 365 days in a year) were
(a) Rs.6,300
(b) Rs.3,150
(c) Rs.3,500
(d) Rs.4,200 marks
(e) Rs.2,800. (2 )
58 The following information is related to Ashwini Industries Ltd.: <Answer
. >
Current liabilities Rs.400 lakh
Inventory turnover ratio 2.0
Quick ratio 1.50
Cost of good sold Rs.180 lakh
Opening stock Rs. 40 lakh
The total of current assets of the Ashwini Industries Ltd., were
(a) Rs.140 lakh
(b) Rs.740 lakh
(c) Rs.600 lakh
(d) Rs.180 lakh marks
(e) Rs. 90 lakh. (2 )

10
59 The following data is extracted from the books of Punjab Steels Ltd., for the year ended March 31, <Answer
. 2008: >

Particulars Rs.
Sales 15,60,000
Net worth 30,00,000
Sales returns 60,000
If the return on net worth is 0.25, then the net profit margin of Punjab Steels Ltd., was
(a) 48.00%
(b) 50.00%
(c) 25.00%
(d) 43.80% marks
(e) 40.50%. (2 )
60 In which of the following methods of financial statement analysis, the items in the income <Answer
. statement are expressed as percentages of total sales? >
(a) Common size analysis
(b) Time series analysis
(c) Revenue analysis
(d) Expense analysis
(e) Profitability analysis. (1mark)
61 Hari Ltd., furnished the following information: <Answer
. >
Particulars Rs.
Cash from operations 6,00,000
Dividends paid 1,00,000
Capital expenditure required to maintain productive
capacity used in the production of income 1,00,000
The free cash flow is
(a) Rs. 5,00,000
(b) Rs. 7,00,000
(c) Rs. 4,00,000
(d) Rs.14,00,000 marks
(e) Rs.10,00,000. (2 )
62 Raj Ltd., furnished the following information for the year 2007-08: <Answer
. >
Particulars Rs.
Opening balance of trade creditors 1,80,000
Closing balance of trade creditors 2,00,000
Net credit annual purchases 7,30,000
The average payment period (assuming 365 days a year) for the year 2007-08 was
(a) 100 days
(b) 95 days
(c) 80 days
(d) 55 days marks
(e) 65 days. (2 )

11
63 Savera-Kamath Hotels Ltd., furnished the following information as on March 31, 2008: <Answer
. >
Particulars Rs.
Cash paid to supplier of vegetables 6,00,000
Cash received from customers 18,00,000
Interest from investments 1,00,000
Administrative, selling and distribution expenses 1,00,000
Current debt 5,00,000
The operating cash flow to current debt ratio of Savera-Kamath Hotels Ltd., was
(a) 1.71 times
(b) 2.20 times
(c) 2.40 times
(d) 1.81 times marks
(e) 3.40 times. (2 )
64 Satguru Ltd., furnished the following information: <Answer
. >
Particulars Rs.
Fixed assets 6,00,000
Current assets 4,00,000
Current liabilities 3,00,000
The capital employed of Satguru Ltd., was
(a) Rs.10,00,000
(b) Rs. 6,00,000
(c) Rs. 5,00,000
(d) Rs. 7,00,000 marks
(e) Rs.13,00,000. (2 )
65 RXD Ltd., furnished the following information: <Answer
. >
Price earning ratio of the equity share 5
Net income available for equity shareholders Rs.3,00,000
Number of outstanding equity shares 2,000
The market price of each share was
(a) Rs.300
(b) Rs. 30
(c) Rs.750
(d) Rs.150 marks
(e) Rs.200. (2 )
66 The following information was furnished by Bajaz Ltd.: <Answer
. >
Equity shareholder’s fund Rs.18,00,000
Number of outstanding equity shares 90,000
Market price of each equity share Rs. 200
The Price to book value was
(a) 0.1
(b) 450.0
(c) 10.0
(d) 4,500 marks
(e) 9,000 (2 )

12
67 PVR Cinemas Ltd., provided the following information: <Answer
. >
Profit after tax Rs.5,41,800
Preference dividend coverage ratio 12.9 times
Equity dividends Rs.3,20,000
The equity dividend coverage ratio of PVR Cinemas Ltd., was
(a) 1.56 times
(b) 5.61 times
(c) 1.69 times
(d) 7.63 times marks
(e) 6.73 times. (2 )
68 Govind Ltd., furnished the following information: <Answer
. >
Particulars
Return on total assets ratio 25%
Return on net worth ratio 30%
Net worth Rs.15,00,000
The total assets of Govind Ltd., was
(a) Rs. 4,50,000
(b) Rs.18,00,000
(c) Rs. 1,57,500
(d) Rs. 5,25,000 marks
(e) Rs.15,00,000. (2 )
69 The dividend pay-out ratio of CAMEL Ltd., was 30%. If the net profit available for distribution <Answer
. was Rs.1,20,000, then the dividends paid by the company were >

(a) Rs.64,000
(b) Rs.36,000
(c) Rs.84,000
(d) Rs.10,000 marks
(e) Rs.16,000. (2 )
70 Which of the following does not help in expense manipulation? <Answer
. >
(a) Employee pension and other retirement benefit schemes
(b) Big-bath accounting
(c) Accounting for inventories
(d) Understating liabilities
(e) Overstatement of value of accounts receivables. (1mark)

END OF QUESTION PAPER

13
Suggested Answers
Accounting for Decision Making – I (MB2D1): October 2008
Section A : Basic Concepts

Answer Reason
1. B Earning revenue income will increase the owners’ equity. <

The following transactions will not result in an increase in the owners’ equity:
 Borrowing additional loans.

Sale of fixed assets at book value.

Sale of investments at book value.

Purchase of fixed assets.


2. E In order to determine the profits or losses accrued in an accounting period, the <
expenses are related to the goods or services sold during the period. This is in
recognition of matching concept.

3. A The duality concept states that: <

Owner’s equity + Outside liabilities = Assets


The sum of the Sources of Funds, must be equal to the sum of Uses of funds.

4. A Assets are to be recorded in the books of accounts at the price paid to acquire them. <
This statement is in recognition of cost concept.

5. C According to matching concept, if fixed assets are used to generate income, the cost <
of these assets (in the form of depreciation) is allocated over the effective life of the
asset.

6. C Contingent liabilities appearing as notes reiterate the principle of disclosure. The <
full disclosure concept implies that all material information that could affect the
decision of the user must be disclosed.

14
7. C According to Dual aspect concept : <

Total assets = Owner’s equity + Outside liabilities


Owner’s equity = Capital + Reserves & Surplus
Therefore, Rs.8,25,000 = Rs.7,00,000 + Reserves & surplus + Rs.50,000
Therefore, Reserves & Surplus = Rs.8,25,000 – Rs.7,50,000 = Rs.75,000.

8. B According to going concern concept (b), a business entity is assumed to carry on its <
operations for an indefinite period.

9. A According to the requirement of US GAAP compliance for Indian corporate, an <


Indian company, if it is incorporated under the laws of a jurisdiction outside of the
United States, is called as foreign private issuer.

10. E Shareholders are treated as creditors for the amount they have paid on shares <
subscribed by them according to the business entity concept. According to cost
concept, all transactions are recorded at cost. The duality concept emphasizes that
assets = owner’s equity + outside liability. A business entity is assumed to carry on
its operations forever under going concern concept. According to money
measurement concept, only those transactions that can be expressed in monetary
terms are recorded.

11. B The consistency concept requires that once an entity has decided to follow a <
particular method of valuation of inventory, it will follow the same unless there is
strong reason to change the method of valuation.

12. E The following are the external users of financial statements. <

 Government agencies.

Lenders.

Customers.

Investors.

Board of directors are not the external users of financial statements.


13. E Maintenance of records of human resources of the company is not an objective of <
accounting.

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14. E Periodicity is not a qualitative characteristic of financial statements. <

15. A Money measurement concept states that if events cannot be quantified in monetary <
terms then they do not facilitate accounting. Therefore, death of a Chairman of a
company, even though it has far reaching consequences for the health of the
business is not accounted for, since no monetary measurement of the event is
feasible.

16. A According to permanency order of balance sheet the order of the liabilities are <
shown as capital, long-term liabilities, short-term liabilities and current liabilities.
In the order of permanency, permanent assets are shown first and those of less
permanent are shown next.

17. C Balance sheet of Axon Ltd., as on March 31, 2008 <

Sl Figures as at Figures as at Figures as at


no the current the current the previous
Particulars financial financial financial
year year year
Rs. Rs.
1. Sources of funds
Share holders funds
Capital 3,00,000
Reserves & surplus 22,500
3,22,500

2. Application of funds
Fixed assets 2,70,000
Current assets:
Sundry debtors 22,500
Closing stock 37,500
Cash and bank 26,500

86,500
Less: Current liabilities
Sundry creditors 34,000 52,500
Total 3,22,500
18. E A complete set of financial statements normally does not consist of prospectus. A <
complete set of financial statement includes
 Income statement
Balance sheet
Cash flow statement
Notes to balance sheet.
19. C Proposed dividend does not come under the head ‘reserves and surplus’. It comes <
under current liabilities. Remaining all other options come under reserves and
surplus.

16
20. A The activities that are basically related to the changes in share capital and long-term <
borrowings of the company is known as Cash from financing activities. They
account for cash flows generated from issue of shares, issue of debentures, loans
raised, redemption of debentures, repayment of loans, etc.

21. A <

Particulars Rs. Rs.


Cash at the beginning of the period 95,000
Add : Cash inflow from operating activities 1,29,000
Total cash inflows 2,24,000
Less: Net Cash Outflow from investing 1,00,000
activities
Less: Net Cash Outflow from financing 35,000 1,35,000
activities
Cash at the end of the year 2007-08 89,000
22. C The balance sheet is based on the concept that <

Sources of funds = Applications of funds


Sources of funds is divided into Shareholders funds and loan funds
Therefore, Shareholders funds + Loans funds = Applications of funds
Therefore, Loan funds = Applications of funds – shareholders funds
Loan funds = Rs.90 lakh – Rs.60 lakh = Rs.30 lakh.

23. A Sinking fund is created out of profits. It is the part of profit and should be listed <
under the heading “Reserves and Surplus” and not under “unsecured loans”. Short-
term loans from others, short term loans from banks, short-term advances from
banks and fixed deposits are unsecured loans.

24. E Advance payment made to suppliers for raw materials is not treated as inventory in <
the financial statements.

25. C <

Particulars Rs. Rs.


Cash received from sales 9,28,000
Royalties received 12,500 9,40,500
Less: Cash paid to suppliers and employees 5,45,000
Less: Office rent paid 1,30,000 6,75,000
Net cash flow from operating activities 2,65,500
Payment of dividend is a financing activity. Therefore, it does not come under
operating activity.

26. E Occurrence of fire is an extraordinary item. Therefore option (e) is the correct <
answer.

17
27. E Inventories should be valued at lower of cost or net realizable value. <

28. A Balances with Customs and Port Trust, comes under the head Loans and advances <
in the balance sheet of a company.

29. E Operating expenses does not include loss on sale of investment. It is a non <
operating expense. Remaining all other options are operating expenses.

30. B Payment of dividends tax is a financing activity in a cash flow statement. <

i. Payment made to acquire shares is an investing activity


ii. Payment of dividend tax is a financing activity
iii. Dividends received is an investing activity.
iv. Payments to employees is an operating activity
v. Acquisition of long lived assets is an investing activity.
Hence, (b) is correct answer.

31. D Investing activities include all cash flows involving assets, other than operating <
assets. The investing activities are:
Particulars Rs.
Purchase of shares (26,000)
Sale of investment 35,000
Acquisition of 5-year Fixed Deposit (50,000)
Interest received on Fixed Deposit 3,750
Dividend received on investments 1,200
Net cash outflow from investing activities 36,050
Note that the sale of investments is reported in the investing section at the cash
inflow amount (Rs.35,000), not at the carrying value of the investment (Rs.33,000).

18
32. D Revenue manipulation is the most common type of earnings management. The <
sales transaction is the pillar for recognition of revenue in the business and it is this
figure that is manipulated to inflate earnings. This is resorted to by any of the
following practices:
 Vendor financing.

Trade loading.

Channel stuffing.

Understating the value of accounts receivables.

Not recognizing rebates.

Overstating the allowance for uncollectible accounts is not revenue manipulation to


inflate the earnings. Hence, (d) is correct answer.

33. A Capital gearing ratio = Fixed interest bearing securities/ Equity Shareholder’s fund <

Capital gearing ratio = 0.6


Fixed interest bearing securities = Rs.6,00,000
0.6 = Rs.6,00,000 ÷ Equity shareholder’s fund
Therefore, Equity Share holder’s fund = Rs.6,00,000 ÷ 0.6 = Rs.10,00,000.

34. D Interest paid out of capital to the extent not written off is a miscellaneous <
expenditure. Hence it does not appear in Profit and Loss account of a company.

35. C The following heads are shown under the ‘sources of funds’ in the balance sheet of <
the company:
1. Share capital.
2. Reserves and surplus.
3. Secured loans.
4. Unsecured loans
The head ‘Miscellaneous expenditure’ is shown under the ‘application of funds’ in
the balance sheet.

36. E Current assets = Current liabilities x current ratio = Rs.150 x 1.5 = Rs.225 lakh <

So, the amount of cash and bank balance is Rs.225 lakh – Rs.100 lakh – Rs.100
lakh = Rs.25 lakh.

37. E The option (e) assets and liabilities are shown in the liquidity or permanency order <
in the balance sheet of a company is a not a limitation of balance sheet. Remaining
all other options are limitations of balance sheet.

19
38. A In short run, the amount of liquid assets of a company determines the ability to <
clear its current obligations. Therefore, creditors are interested in liquidity ratio.

39. E The ratio that can be directly inferred from the income statement is net profit <
margin ratio.

40. D The analysis which involves comparison with different entities belonging to the <
same industry or comparing with the industry average is known as cross sectional
analysis.

41. A Operating Profits only include operating income and expenses. Income on <
investments is not an operating income.
Therefore, operating profit =
Income from Hardware services –
(Hardware development expenses + Selling and marketing expenses + General and
administrative expenses)
= Rs.4,00,00,000 – (Rs.1,75,00,000 + 66,00,000 + 45,00,000)
= Rs.1,14,00,000.

42. E Return on equity = (Profit after tax – Preference dividends)/Average shareholders’ <
equity
Let x be treated as preference dividends
10% = (Rs.5,00,000 – x)/Rs.22,50,000
Rs.5,00,000 – x = 10% of Rs.22,50,000
x = Rs.5,00,000 − Rs.2,25,000
Therefore, preference dividends = Rs.2,75,000.

43. A The comparison of the business performance over a period of time is called as trend <
analysis.

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44. D Net Profit margin = 25% <

Net Profit margin = (Net Profit/ Net Sales) x 100


Net Profit = Rs.3,00,000
or 0.25 = Rs.3,00,000/ Net Sales
Therefore net sales = Rs.3,00,000/0.25 = Rs.12,00,000
Gross Profit = Net sales – Cost of goods sold
Gross Profit = Rs.12,00,000 – Rs.6,00,000
Gross Profit = Rs.6,00,000
Therefore, Gross Profit margin = (Gross Profit / Net sales ) x 100
or (Rs.6,00,000 / Rs.12,00,000) x 100 = 50%.

45. C Operating expenses = Gross Profit – Net Profit <

= Rs.25,00,000 – Rs.10,00,000
= Rs.15,00,000
Therefore percentage of operating expenses on sales = (Operating
expenses/sales) x 100
=
(Rs.15,00,000/Rs.40,00,
000) x 100
= 37.5%.

46. Particulars 2006-07 2007-08 <


C
Rs. Rs.
Current Assets
Current assets 4,50,000 5,50,000
Current Liabilities
Current liabilities 1,50,000 1,50,000
Net Current Assets 3,00,000 4,00,000
% of net current assets to total assets in 2006-07 = Rs.3,00,000/Rs.9,37,500 = 32%
% of net current assets to total assets in 2007-08 = Rs.4,00,000/Rs.10,00,000 =
40%
Therefore percentage of net current assets to total assets from 2006-07 to 2007-08
has increased by 40% – 32% = 8%.

47. B The paid-up capital of a company is arrived at after deduction of calls-in-arrear <
from the called up capital.

48. Particulars Rs. <


D
Cost of goods available for sale 1,00,000
Less: Cost of goods sold
Sales Rs.80,000
Less: Gross profit (25%) Rs.20,000 60,000
Closing stock of goods 40,000

21
49. A The accent of Indian accounting standard is on reporting. <

50. D According to US GAAP, capitalization of interest on constructed assets is required <


whereas according to Indian AS capitalization is not required is the false statement,
because even as per Indian Accounting Standard capitalization of interest on
constructed assets is required.

51. C According to US GAAP, the emphasis is on protection of investor. <

52. B Sales per day = Annual net sales/ 365 days <

Sales per day = Rs.18,25,000/ 365 = Rs.5,000


Average collection period = Average trade debtors ÷ Sales per day
= Rs.4,50,000/Rs.5,000 = 90 days.

53. B Provision for proposed dividends does not come under Miscellaneous expenditure. <
Therefore, the total of preliminary expenses, discount allowed on the issue of
shares, development expenditure is Rs.45,000 + Rs.66,000 + Rs.58,000 =
Rs.1,69,000.

54. A According to US GAAP, the foreign exchange differences on monetary transactions <
are recorded in net income.

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55. C Balance Sheet of Run Ltd., as on March 31, 2008 <

Figures as at the current Figures as at


financial year (Rs.) the previous
financial
year
1. Sources of funds
Share holders funds
Capital 5,00,000
Reserves and 1,40,000
surplus
Loan funds
Secured loans 4,00,000
Total 10,40,000
Application of funds
Fixed assets 8,00,000
Current assets: 3,01,200
Less: Current liabilities 61,200 2,40,000
Total 10,40,000
56. A Absolute liquid ratio = <

(Cash in hand + Cash at bank + Short-term Marketable securities)/Current


liabilities
Absolute liquid ratio = (Rs.75,000 + Rs.1,00,000 + Rs.2,00,000)/Rs.3,00,000
= 1.25:1.

57. A Let annual credit purchases =x <

Creditors turnover ratio = Annual credit purchases/Average trade creditors


30 = x/Rs.76,650
x= = Rs.76,650 × 30 = Rs.22,99,500
Average daily credit purchases = Rs.22,99,500 /365 = Rs.6,300.

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58. B Quick ratio = (Current assets-Inventory) / current liabilities <

To find out Inventory


Inventory turnover ratio = Cost of goods sold / Average inventory
Cost of goods sold = Rs.180 lakh
Inventory turnover ratio = 2
Therefore, 2 = Rs.180 lakh/ Average inventory
Therefore, Average inventory = Rs.180 lakh ÷ 2 = Rs.90 lakh
Opening stock = Rs.40 lakh
Average inventory = Rs.90 lakh
Average inventory = (Opening stock + Closing stock ) /2
Opening stock = Rs.40 lakh
Rs.90 lakh = ( Rs.40 lakh + Closing stock) /2
Therefore, Closing stock = (Rs.90 lakh x 2 ) – Rs.40 lakh
Closing stock = Rs.140 lakh
Quick ratio = 1.5
Therefore 1.5 = (Current assets – Rs.140 lakh) / 400 lakh
Current assets – Rs.140 lakh = Rs.400 lakh x 1.5 = Rs.600 lakh
Current assets = Rs.600 lakh + 140 lakh = Rs.740 lakh.

59. B Return on net worth = Profit after tax / Net worth <

Net worth = Rs.30,00,000


0.25 = Profit after tax / Rs.30,00,000
Profit after tax = Rs.30,00,000 x 0.25 = Rs.7,50,000
Net Profit margin = Net profit/ net sales
Net sales = Sales – Sales returns = Rs.15,60,000 – Rs.60,000 =
Rs.15,00,000
Net Profit Margin = Rs.7,50,000/Rs.15,00,000 x 100 = 50%.

60. A In common size analysis, the income statement is expressed as a percentage of total <
sales. Time series analysis, involves the study of financial statements over a period
of time. Revenue analysis involves change in sales revenue, change in sales volume
and change in other income. Expense analysis involves change in operating
expenses, employee expenses, selling and marketing expenses, and depreciation
expenses. Profitability analysis involves change in profit after tax, and change in
PBDIT as a percentage of sales.

61. C <

Particulars Rs.
Cash from operations 6,00,000
Less: Capital expenditure required to maintain productive
capacity used in the production of income 1,00,000
Dividends paid 1,00,000
Free cash flow 4,00,000

24
62. B Average Payment Period = Average trade creditors / Average daily purchases <

Average Trade creditors = (opening trade creditors+ closing trade creditors) ÷ 2


= (Rs.1,80,000 + Rs.2,00,000) ÷ 2 = Rs.1,90,000
Net annual purchases = Rs.7,30,000
Average daily purchases = Rs.7,30,000/ 365 = Rs.2,000
Therefore, average payment period = Rs.1,90,000 /Rs.2,000 = 95 days.

63. B Operating cash flow to current debt= Net Cash flow from operating activities/ <
current debt
Current debt = Current maturities of long-term debts and current notes payable
Net cash flow from operating activities = Rs.18,00,000 – Rs.6,00,000 –
Rs.1,00,000
Net cash flow from operating activities = Rs.11,00,000
Operating cash flow to current debt ratio = Rs.11,00,000/ Rs.5,00,000 = 2.2 times.
Interest from investments is not considered because it is an investing activity.

64. D Capital employed = Fixed assets + Current assets – Current liabilities <

= Rs.6,00,000 + Rs.4,00,000 – Rs.3,00,000 = Rs.7,00,000.

65. C Option (c) is the correct answer because <


Earnings per share = Net income available for shareholders ÷ Number of
outstanding equity shares
= Rs.3,00,000 ÷ 2,000 = Rs.150
Price – earnings ratio = Market price of the share ÷ Earnings per share
Market price of the share = Rs.150 x 5 = Rs.750.

66. C Option (c) is the correct answer because:- <


Price to book value = Market price of the share ÷ Book value per share
Book value per share = Equity shareholders fund ÷ Number of
outstanding equity shares
Book value per share = Rs.18,00,000 ÷ 90,000
Book value per share = Rs.20.
Market price of the share = Rs.200
Therefore, Price to book value = Rs.200 ÷ Rs.20 = 10.

67. A Preference dividend coverage ratio = Profit after tax/Preference dividends <

Therefore, 12.9 = Rs.5,41,800 / Preference dividends


Therefore, Preference dividends = Rs.5,41,800 /12.9 = Rs.42,000
Equity dividend coverage ratio = (Profit after tax − Preference dividends) /Equity
dividends
Therefore, Equity dividend coverage ratio = (Rs.5,41,800 – Rs.42,000) / Rs.3,20,000
Equity dividend coverage ratio = 1.56 times.

25
68. B Return on net worth = Profit after tax/Net worth <

30% = Profit after tax /Rs.15,00,000


Therefore Profit after tax = Rs.4,50,000
Return on total assets = Profit after tax/ total assets
25% = Rs.4,50,000 / total assets
Total assets = Rs.18,00,000.

69. B Dividend pay-out ratio = Dividends/Net income available to shareholders <

30% = Dividends /Rs.1,20,000 = Rs.36,000.


Dividends = Rs. 36,000.
Therefore, dividends paid by the company are Rs.36,000.

70. E (a) Employee Pension and Other Retirement Benefit Schemes, (b) Big-Bath <
accounting, (c) Accounting for inventories and (d) Understating liabilities help in
expense manipulation. Overstatement of value of accounts receivables helps in
revenue manipulation.
Hence, the answer is (e).

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