Question Paper                   Accounting for Decision Making – I (MB2D1): January 2009                             •   ...
(a)    Understandability      (b)    Reliability      (c)    Relevance      (d)    Neutrality      (e)    Comparability.  ...
(d)     Current liabilities and current assets      (e)     Current assets and working capital.                           ...
25.   Which of the following is not a part of annual reports published by the company?      (a)    Financial statements   ...
errors or omissions in the preparation of financial statements of one or more previous periods?      (a)     Extraordinary...
(a)     Reporting      (b)     Substance      (c)     Analysis      (d)     Localization      (e)     Immateriality.      ...
Gross profit                             12,00,000      Inventory turnover ratio of Hans Shans Ltd., for the year ended Ma...
Secured loans                                    2,00,000                             Reserves & Surplus                  ...
Assuming a 365 days’ year, the average trade creditors are      (a)      Rs.1,07,675      (b)      Rs. 45,161      (c)    ...
Current assets                        9,00,000               11,00,000                              Fixed assets          ...
Return on total assets                  10%                                             Return on net worth               ...
(e)     2.50.                                                                                            ( 2 marks)70.   S...
Suggested Answers                Accounting for Decision Making – I (MB2D1): January 2009                                 ...
company. Hence, option (c) is correct answer.18.   E   ‘Secured loans’ is not a head under ‘application of funds’. The fol...
Sources of Funds = Shareholders funds + Loans Funds.          Therefore, Rs.35,00,000 = Rs.25,00,000 + Shareholders funds ...
10%)                              Profit available to equity shareholders                4,20,000                         ...
Add : Transfer to General Reserve             1,00,000                                    Balance in Profit & Loss A/c    ...
Particulars                              Rs.                                     Sales                                    ...
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Accounting for Decision Making-I-0109

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Accounting for Decision Making-I-0109

  1. 1. Question Paper Accounting for Decision Making – I (MB2D1): January 2009 • Answer all 71 questions. • Marks are indicated against each question. Total Marks : 1001. The categorization of assets into ‘fixed’ and ‘current’, presupposes the application of (a) Business entity concept (b) Going concern concept (c) Money measurement concept (d) Conservatism concept (e) Duality concept. ( 1 mark)2. The accounting equation is based on (a) Going concern concept (b) Dual aspect concept (c) Money measurement concept (d) Realization concept (e) Accounting period concept. ( 1 mark)3. Which of the following items appears as an asset in the Balance Sheet of a company? (a) Capital reserve (b) Retained earnings (c) Sinking fund investment (d) Securities premium (e) Specific reserve. ( 1 mark)4. A business concern is separate from its owner. This statement is based on (a) Money measurement concept (b) Accrual concept (c) Business entity concept (d) Going concern concept (e) Realization concept. ( 1 mark)5. Provision for taxation for the current year is (a) Deducted from profit before interest (b) Deducted from profit after tax (c) Deducted from profits available to shareholders (d) Deducted from operating profit (e) Deducted from profit before tax. ( 1 mark)6. Under the Companies Act, a company is normally not permitted to have an accounting period extending beyond (a) 12 months (b) 15 months (c) 18 months (d) 21 months (e) 24 months. ( 1 mark)7. In contract accounting, the percentage of completion method is an exception to the (a) Matching concept (b) Going concern concept (c) Historical cost concept (d) Business entity concept (e) Revenue recognition concept. ( 1 mark)8. Which of the following qualitative characteristics of financial statements is the ability to help users see similarities and differences among events and conditions to evaluate relative financial position and performance of companies?
  2. 2. (a) Understandability (b) Reliability (c) Relevance (d) Neutrality (e) Comparability. ( 1 mark)9. Which of the following accounting concepts enables the comparison of business performance over a period of time? (a) Conservatism concept (b) Cost concept (c) Consistency concept (d) Going concern concept (e) Time period concept. ( 1 mark)10. If a company believes that some of its debtors may “default”, it should act on this by making sure that sufficient provision is created in the books. This is an example of the application of (a) Matching concept (b) Money measurement concept (c) Consistency concept (d) Conservatism concept (e) Business entity concept. ( 1 mark)11. Under cash basis of accounting, revenue is recognized when (a) Sale is made (b) Cash is received (c) Goods are delivered (d) Services are rendered (e) Production is complete. ( 1 mark)12. Which of the following is not a cash flow from operating activity? (a) Cash receipts from sale of goods (b) Cash receipts from royalties received (c) Cash receipts from insurance claims for loss of stock (d) Cash receipts from rendering services (e) Cash receipts from sale of machinery. ( 1 mark)13. Which of the following is also called as ‘Statement of Financial Position? (a) Balance sheet (b) Cash flow statement (c) Profit and Loss account (d) Income statement (e) Comparative income statement. ( 1 mark)14. Which of the following is the correct order for arranging the assets in a balance sheet prepared according to liquidity order? (a) Fixed assets, current assets, short-term investments and cash (b) Cash, short-term investments, current assets and fixed assets (c) Short-term investments, cash, current assets and fixed assets (d) Current assets, short-term investments, cash and fixed assets (e) Fixed assets, short term investments, cash and current assets. ( 1 mark)15. Which of the following statements is false with respect to vertical form of Balance Sheet? (a) Vertical form of Balance Sheet is easily comprehensible (b) Vertical form of Balance Sheet helps to get a bird’s view of the position of the company (c) Net working capital can be easily figured out in vertical Form of Balance Sheet (d) Schedules in vertical form of Balance Sheet help in detailed disclosure of items being analyzed (e) Audit of vertical form of Balance Sheet gives a complete seal of accuracy. ( 1 mark)16. ‘Application of funds’ in the vertical balance sheet of a company comprise application of funds towards (a) Fixed assets and working capital (b) Fixed assets and current assets (c) Fixed assets and current liabilities
  3. 3. (d) Current liabilities and current assets (e) Current assets and working capital. ( 1 mark)17. Which of the following is classified as liquidity ratio? (a) Return on equity (b) Return on investment (c) Acid-test ratio (d) Debt-equity ratio (e) Fixed-assets ratio. ( 1 mark)18. Which of the following is not a head under ‘Application of funds’ in the balance sheet of a company? (a) Fixed assets (b) Investments (c) Net current assets (d) Miscellaneous Expenditure (e) Secured loans. ( 1 mark)19. Net block of fixed assets represent (a) Gross block of fixed assets minus depreciation (b) Gross block of fixed assets minus any purchases of current period (c) Gross block of fixed assets minus any sale of fixed assets in current period (d) Gross block of fixed assets plus any purchase of fixed assets (e) Gross block of fixed assets minus loss on sale of fixed assets in current period. ( 1 mark)20. Which of the following is an example of cash equivalent for preparation of cash flow statement? (a) Bills of exchange (b) Unexpired discount (c) Sundry debtors (d) Short-term investments (e) Prepaid insurance. ( 1 mark)21. The cost of acquiring and developing natural resources like oil and gas, other minerals and standing timber is allocated through (a) Depreciation (b) Allocation (c) Amortization (d) Depletion (e) Expiration. ( 1 mark)22. Which of the following statements best explains the practice of ‘Vendor Financing’ used in revenue manipulation? (a) It occur when a company loans money to a customer to purchase goods from the company (b) It occurs when a company overstates the amount of accounts receivables (c) It occurs when a company understates the allowance for uncollectible accounts (d) It occurs when a company overstates the current period equity and earnings (e) It occurs when a company records sales even before they are earned by shipping inventory to customers before they really need it. ( 1 mark)23. Financial Statement Analysis (FSA) is used to diagnose the strengths and weaknesses of a firm by assessing the profitability. In this context, FSA is used as a (a) Analytical tool (b) Diagnostic tool (c) Evaluation tool (d) Forecasting tool (e) Controlling tool. ( 1 mark)24. Which of the following is not a method used in analyzing financial statements? (a) Cash flow analysis (b) Funds flow analysis (c) Trend analysis (d) Common size statements (e) Technical analysis. ( 1 mark)
  4. 4. 25. Which of the following is not a part of annual reports published by the company? (a) Financial statements (b) Auditor’s Reports (c) Management and discussion analysis (d) Notes to the Financial Statements (e) Trend statements. ( 1 mark)26. Which of the following technique is part of the Time Series Analysis? (a) Trend statements (b) Income statements (c) Cash Flow statements (d) Common size statements (e) Cross-sectional statements. ( 1 mark)27. Free cash flows will be arrived by (a) Deducting net capital expenditure and dividends paid from operating cash flow (b) Adding net capital expenditure and dividends paid to operating cash flow (c) Deducting operating cash flow from net capital expenditure and dividends paid (d) Adding after tax proceeds from asset sales to operating cash flow (e) Deducting net capital expenditure and dividends paid from non-operating cash flow. ( 1 mark)28. International Accounting Standard Board publishes its standards in a series of pronouncements called (a) International Accounting Standards (b) International Financial Reporting Standards (c) Statement of Financial Accounting Standard (d) Accounting Standard Interpretations (e) Accounting Concepts Board Opinion. ( 1 mark)29. According to US GAAP, the proceeds of issuance of convertible debt are recorded entirely as a/an (a) Liability (b) Asset (c) Equity (d) Miscellaneous expenditure (e) Profit. ( 1 mark)30. According to International Accounting Standard, if redemption of preference shares is mandatory, it is recorded as a/an (a) Liability (b) Expense (c) Profit (d) Loss (e) Asset. ( 1 mark)31. Reporting of comprehensive income is compulsory according to I. US GAAP. II. International Accounting Standard. III. Indian Accounting Standard. (a) Only (I) above (b) Only (II) above (c) Only (III) above (d) Both (I) and (II) above (e) All (I), (II) and (III) above. ( 1 mark)32. Indian Accounting Standard-2 deals with (a) Presentation of Financial Statements (b) Valuation of inventories (c) Cash Flow Statements (d) Employee benefits (e) Interest in Joint Ventures. ( 1 mark)33. Which of the following refer to expenses and incomes which arise in the current period as a result of
  5. 5. errors or omissions in the preparation of financial statements of one or more previous periods? (a) Extraordinary items (b) Prior period items (c) Non-cash items (d) Abnormal items (e) Non-operating items. ( 1 mark)34. Which of the following is an advantage of Trend analysis? (a) It is difficult to segregate the inflationary growth by trend analysis (b) Selection of base for trend analysis is a critical point (c) Past is not a useful measure of adequacy (d) Trends reverse at times (e) Provides a database for assessing the strength and weakness of the business. ( 1 mark)35. Which of the following statements is false? (a) A shareholder looking for quick returns chooses companies whose dividend payout ratio is high (b) Price to book value ratio is used to know how many times that the share is overvalued or undervalued in the market (c) Earnings per share is a good measure of profitability (d) The net profit ratio indicates the efficiency of the management in manufacturing, selling, administrative and other activities of the firm (e) Dividend coverage ratio measures the safeguard that exists for the lenders of debt. ( 1 mark)36. The techniques and skills adopted to understand the position and performance of an enterprise with a focus on the financial statements is termed as (a) Fundamental analysis (b) Technical analysis (c) Break-even analysis (d) Cost-volume-profit analysis (e) Cross sectional analysis. ( 1 mark)37. Which of the following statements is false with respect to limitations of Profit and Loss account? (a) Profit and Loss account is prepared for a certain period and hence it is an interim statement (b) The profit disclosed by the Profit and Loss account is an absolute amount (c) The Profit and Loss account does not disclose the effect of non-financial items like efficiency of the management. (d) Net profits are ascertained on the basis of historical costs not reflecting inflationary trends (e) Since it is prepared on accrual system of accounting, non-cash items not associated with cash outflow decrease the net income. ( 1 mark)38. Randhir Ltd., furnished the following information for the year 2007-08: Particulars Rs. Opening balance of trade creditors 90,000 Closing balance of trade creditors 1,00,000 If the trade creditors turnover ratio is four times, the net annual credit purchases are (a) Rs.3,80,000 (b) Rs.4,00,000 (c) Rs.3,60,000 (d) Rs.4,20,000 (e) Rs.7,60,000. ( 2 marks)39. Which of the following is a valuation ratio? (a) Inventory turnover ratio (b) Average collection period (c) Dividend payout ratio (d) Debt-equity ratio (e) Profit to net worth ratio. ( 1 mark)40. The accent of the International Accounting Standards is on
  6. 6. (a) Reporting (b) Substance (c) Analysis (d) Localization (e) Immateriality. ( 1 mark)41. The total of application of funds of Radha Ltd., amounted to Rs.35,00,000 and its loan funds amounted to Rs.25,00,000. The shareholders funds of Radha Ltd., were (a) Rs.60,00,000 (b) Rs. 5,00,000 (c) Rs.10,00,000 (d) Rs.30,00,000 (e) Rs.25,00,000. ( 1 mark)42. The fixed assets of Venus Ltd., are Rs.12,45,000 and the current ratio is 5:2. If the current assets of the firm are Rs.7,70,000. The fixed assets ratio of the firm is (a) 0.73 (b) 1.00 (c) 0.69 (d) 0.98 (e) 0.87. ( 2 marks)43. Ram Ltd., has 1,00,000 equity shares of Rs.10 each, fully paid and its retained earnings are half of its equity share capital. The fixed and current assets are in the ratio of 3:1. The fixed assets are Rs.28,12,500. The outside liabilities of the company are (a) Rs.21,20,000 (b) Rs.23,00,000 (c) Rs.37,50,000 (d) Rs.35,00,000 (e) Rs.22,50,000. ( 2 marks)44. The following information is pertaining to Beta Pharmacies Ltd. Current ratio 4.0 Acid-test ratio 2.8 Current liabilities Rs.31 lakh The value of inventory is (a) Rs. 62.0 lakh (b) Rs. 43.0 lakh (c) Rs. 37.2 lakh (d) Rs.105.4 lakh (e) Rs. 12.4 lakh. ( 2 marks)45. Padmaja Chemicals Ltd., had the following activities during 2007-08: • Acquired 100 debentures in Lux Ltd., for Rs.35,000. • Sold an investment in Vanty Ltd., for Rs.48,000, when the carrying value was Rs.45,000. • Acquired Rs.70,000 four-year certificate of deposit from a bank. • Collected dividends of Rs.2,500 on stock investments. In Padmaja Chemicals Ltd.,’s, 2007-08 statement of cash flows, net cash used in investing activities should be (a) Rs.43,300 (b) Rs.45,900 (c) Rs.48,400 (d) Rs.54,500 (e) Rs.51,000. ( 2 marks)46. Hans Shans Ltd., has furnished the following data for the year ended March 31, 2008: Particulars Rs. Sales 30,00,000 Average inventory 5,00,000
  7. 7. Gross profit 12,00,000 Inventory turnover ratio of Hans Shans Ltd., for the year ended March 31, 2008 was (a) 3.60 times (b) 6.00 times (c) 2.40 times (d) 1.67 times (e) 2.00 times. ( 2 marks)47. In which of the following situations, price earnings ratio is applied? (a) To determine the financial risk of a business entity (b) To determine the expected market price of the shares of a company (c) To assess the earning potential of a company in the near future (d) To examine the operational efficiency of a company (e) To check how efficiently the assets are utilized by a firm. ( 1 mark)48. The following balances were extracted from the books of account of Dynch Ltd., for the year 2007-08: Particulars Rs. Operating expenses 5,40,000 Provision for taxation 8,60,000 Income from prior period items 2,25,000 Profit available for appropriation 9,99,000 The profit before tax is (a) Rs. 7,74,000 (b) Rs. 8,34,000 (c) Rs. 8,59,000 (d) Rs.16,34,000 (e) Rs.12,39,000. ( 2 marks)49. The following figures are collected from the annual report of Akhaya Ltd.: Profit after tax = Rs. 5,20,000 Number of outstanding equity shares = 1,00,000 10% Preference share capital = Rs.10,00,000 The earning per equity share for Akhaya Ltd., is (a) Rs.6.20 (b) Rs.5.20 (c) Rs.4.20 (d) Rs.2.60 (e) Rs.2.10. ( 2 marks)50. Ranjit Ltd., furnishes the following information: Particulars Issued capital of 10,000 shares @ Rs.100 each Rs.10,00,000 Called-up capital of 8,000 shares @ Rs.100 each Rs. 8,00,000 Calls-in-arrear Rs. 80,000 Final dividend 10% The amount of final dividend paid to the shareholders was (a) Rs.1,00,000 (b) Rs. 72,000 (c) Rs. 80,000 (d) Rs. 75,000 (e) Rs. 92,000. ( 2 marks)51. Intlizer Ltd., provided the following information: Particulars Rs. Fixed assets 8,75,000 Current assets 15,50,000 Current liabilities 8,00,000
  8. 8. Secured loans 2,00,000 Reserves & Surplus 3,00,000 Profit & Loss account 1,25,000 Owners’ equity (Equity shares @ Rs.100 each fully paid up) 10,00,000 The book value per share is (a) Rs.162.50 (b) Rs.142.50 (c) Rs.154.50 (d) Rs.176.75 (e) Rs. 48.75. ( 2 marks)52. Seizens Ltd., provided the following information: Profit before tax Rs.12,00,000 Dividend per share Rs. 10 Number of outstanding equity shares 9,000 Tax rate 40% The dividend pay-out ratio of Seizens Ltd., is (a) 15.00% (b) 16.67% (c) 12.50% (d) 20.00% (e) 21.00%. ( 2 marks)53. The Price-book value ratio of Rodent Ltd., is 12. The book value per share is Rs.250. The market price of the share is (a) Rs.2,500 (b) Rs.3,000 (c) Rs.2,083 (d) Rs.2,750 (e) Rs.3,500. ( 2 marks)54. Following particulars belong to Ratan Bye Ltd.: Particulars Rs. Opening balance of trade debtors 3,00,000 Closing balance of trade debtors 3,44,000 Net Sales 12,77,500 Assuming a 365 days’ year, the average collection period was (a) 92 days (b) 43 days (c) 49 days (d) 39 days (e) 80 days. ( 2 marks)55. The gross profit and the administrative expenses of Payal Ltd., for 2006-07 were Rs.3,00,000 and Rs.2,00,000 respectively. In 2007-08 the gross profit increased by 20% and administrative expenses also increased by 10%. If the sales during 2007-08 were Rs.8,00,000, the net profit margin for the year 2007-08 was (a) 17.50% (b) 12.50% (c) 6.25% (d) 4.50%. (e) 3.75%. ( 2 marks)56. Consider the following data regarding Delta Ltd.: Particulars Average payment period 29.5 days Net annual credit purchases Rs.13,32,250
  9. 9. Assuming a 365 days’ year, the average trade creditors are (a) Rs.1,07,675 (b) Rs. 45,161 (c) Rs.1,03,250 (d) Rs.3,02,250 (e) Rs.2,95,000. ( 2 marks)57. The reserves and surplus of Rahim Ltd., at the beginning of the accounting year was Rs.1,00,000. During the year the company made profit and appropriated the same as follows: Particulars Rs. Transfer to General Reserves 1,00,000 Balance of the profit carried forward to balance sheet 2,50,000 The amount shown under the head ‘Reserves and Surplus’ in the balance sheet at the end of the year was (a) Rs.2,00,000 (b) Rs.2,50,000 (c) Rs.4,50,000 (d) Rs.3,50,000 (e) Rs.1,00,000. ( 2 marks)58. The following balances are extracted from the books of Rio Ltd.: Particulars 2007-08 (Rs.) 2006-07 (Rs.) Current liabilities 6,000 24,000 Current assets 38,000 32,000 Compare to 2006-07, the working capital in 2007-08 has (a) Increased by Rs.32,000 (b) Decreased by Rs.32,000 (c) Decreased by Rs.24,000 (d) Increased by Rs.24,000 (e) Increased by Rs.12,000. ( 2 marks)59. The following were extracted from the books of Run Ltd., as on March 31, 2008: Particulars Rs. Proceeds from investments 45,000 Dividend tax paid during the year 23,000 Proceeds from issuance of share capital on exercise of stock options 3,35,000 Dividends paid during the year 1,50,000 Dividends received 35,000 The net cash inflows from financing activities are (a) Rs.5,08,000 (b) Rs.1,62,000 (c) Rs.4,85,000 (d) Rs.3,24,000 (e) Rs.2,45,000. ( 2 marks)60. The equity dividend coverage ratio of Stanley Ltd., is 2 times. The profit after tax of the company is Rs.14,00,000 and the preference dividends are Rs.3,50,000. The equity dividend is (a) Rs. 5,25,000 (b) Rs.10,50,000 (c) Rs.21,00,000 (d) Rs. 7,00,000 (e) Rs.28,00,000. ( 2 marks)61. SVR Ltd., furnished the following information: Particulars 2006-07 (Rs.) 2007-08 (Rs.) Assets
  10. 10. Current assets 9,00,000 11,00,000 Fixed assets 9,75,000 9,00,000 Liabilities Stakeholder’s equity 12,75,000 12,75,000 Current liabilities 3,00,000 3,00,000 Secured loans 3,00,000 4,25,000 The change in percentage of net current assets to stakeholder’s equity from 2006-07 to 2007-08 was (a) 14.25% (increase) (b) 15.75% (decrease) (c) 18.00% (increase) (d) 14.25% (decrease) (e) 15.75% (increase). ( 2 marks)62. Xavier Ltd., furnished the following information: Particulars Rs. Fixed assets 30,00,000 Current assets 12,00,000 Investments 16,00,000 Current liabilities 8,00,000 Secured loans 4,00,000 The total of ‘Sources of funds’ of Xavier Ltd., is (a) Rs.50,00,000 (b) Rs.58,00,000 (c) Rs.42,00,000 (d) Rs.56,00,000 (e) Rs.45,00,000. ( 2 marks)63. The following data are available from the books of Alfa Ltd., for the year 2007-08: Particulars Rs. Cash inflow from operating activities 1,29,000 Cash used for investing activities 1,00,000 Cash used for financing activities 35,000 Cash at the beginning of the period 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 (e) Rs.1,59,000. ( 2 marks)64. Keshav Ltd., furnished the following information for the year 2007-08: Particulars Rs. Sales 45,50,000 Increase in stock 4,50,000 Depreciation 7,50,000 Operating expenses 34,00,000 Non-operating income 2,05,000 The Profit Before Tax (PBT) of Keshav Ltd., for the year 2007-08 was (a) Rs.10,55,000 (b) Rs.52,05,000 (c) Rs.18,05,000 (d) Rs.50,00,000 (e) Rs.45,50,000. ( 2 marks)65. Ravi Ltd., furnished the following information: Particulars
  11. 11. Return on total assets 10% Return on net worth 20% Net worth Rs.10,00,000 The total assets of Ravi Ltd., were (a) Rs.10,00,000 (b) Rs.20,00,000 (c) Rs.12,00,000 (d) Rs.15,00,000 (e) Rs.18,00,000. ( 2 marks)66. The return on equity of Zingle Ltd., is 0.6. The net income of the company is Rs.5,70,000. The preference dividends paid by the company are Rs.90,000. The average shareholders’ equity is (a) Rs.7,00,000 (b) Rs.6,05,000 (c) Rs.6,00,000 (d) Rs.7,50,000 (e) Rs.8,00,000. ( 2 marks)67. Kashyap Ltd., furnished the following information: Particulars Rs. Operating profit before tax (PBT) 42,50,000 Provision for taxation 15,00,000 Income from extraordinary items 5,00,000 Dividends paid 4,00,000 Transfers to general reserve 2,00,000 The profit transferred to balance sheet is (a) Rs.26,50,000 (b) Rs.21,50,000 (c) Rs.16,50,000 (d) Rs.20,50,000 (e) Rs.22,50,000. ( 2 marks)68. Harks Ltd., presented the following information: Particulars Rs. General reserve 45,00,000 Sinking fund 66,00,000 Proposed dividend 7,50,000 Securities premium 90,00,000 Capital redemption reserve 58,00,000 The total of Reserves & Surplus of Harks Ltd., was (a) Rs.2,59,00,000 (b) Rs.1,69,00,000 (c) Rs. 79,00,000 (d) Rs. 20,10,000 (e) Rs.1,48,00,000. ( 2 marks)69. Kumar Ltd., furnished the following information: Particulars Rs. 9% Preference share capital 6,00,000 12% Debentures 4,00,000 Equity Shareholder’s fund 25,00,000 The capital gearing ratio of Kumar Ltd., was (a) 0.60 (b) 0.40 (c) 1.67 (d) 1.44
  12. 12. (e) 2.50. ( 2 marks)70. Susruth Ltd., presented the following information: Particulars Rs. Shareholder’s fund 12,50,000 Loan funds 10,50,000 Fixed assets 9,50,000 Investments 10,00,000 Net current assets 3,50,000 The total of the balance sheet of Susruth Ltd., (under vertical format) was (a) Rs.23,00,000 (b) Rs.22,00,000 (c) Rs.20,00,000 (d) Rs.25,00,000 (e) Rs.24,00,000. ( 2 marks)71. Which of the following is equal to the difference between the enterprise’s assets and its liabilities? (a) Gains (b) Losses (c) Equity (d) Revenues (e) Expenses. ( 1 mark) END OF QUESTION PAPER
  13. 13. Suggested Answers Accounting for Decision Making – I (MB2D1): January 2009 Section A : Basic Concepts Answer Reason1. B Classification of assets into “fixed” and “current” presupposes the going concern concept. Going concern concept implies that the business entity is assumed to carry its operations forever. It is because, that the assets like land, buildings, machinery etc., would continue to be with the concern for a long time for producing and selling the end products, these assets are termed as fixed assets. If this assumption is invalid and the assets were to be sold off, such assets will be termed as current assets. Therefore, the categorization of assets into ‘fixed’ & ‘current’ presupposes the going concern concept.2. B As per the dual aspect concept, for every debit there is a corresponding credit on account of which the total of all debits are invariably equal to the total of all credits. The accounting equation is based on this dual aspect concept.3. C Sinking Fund investment is cash or investment made against any specific reserve or purpose and hence it is an asset. All other options will appear on the liability side of the Balance sheet under the head ‘Reserves and Surplus’. Hence, (c) is correct answer.4. C Business entity concept states that a business concern is a separate legal entity and is thus different from its owners. Thus option (c) is the correct answer.5. E Provision for taxation for the current year is deducted from profit before tax .6. B Under the Companies Act, a company is normally not permitted to have an accounting period extending beyond fifteen months.7. E In the case of long-term construction contracts, etc., the contractor may elect to follow the percentage of completion method or the completed contract method. Under the percentage of completion method, revenue is recognized as the contract activity progresses based on the stage of completion reached. This is an exception to the revenue recognition concept. Hence, option (e) is correct answer.8. E Comparability is the ability to help users see similarities and differences among events and conditions. It enhances the ability of investors and creditors to compare information across companies to make their resource allocation decisions. The financial statement users must be able to compare the statements of an entity through time in order to identify trends in financial position and compare the financial statements of different entities in order to evaluate their relative financial position and performance. Hence, option (e) is correct answer.9. C The concept of consistency requires a business enterprise to follow consistent accounting procedures and practices from time to time. Steady application of practices and procedures enables a comparative study of the performance of the business over a period of time. Thus option (c) is correct answer.10. D Conservatism concept (d) can be viewed as a practical justification for certain accounting treatments. This requires the business enterprise to record an event in such as way as to ‘play safe’ at the time of uncertainty. The practice of bringing into books the anticipated losses on default and making sure all losses are brought to books is because of Conservatism concept. Hence (d) is the right option.11. B Under cash basis of accounting, revenue is recognized when cash is received. Revenue is recognized under accrual basis when sale is made or goods are delivered or services are rendered when there is reasonable certainty regarding the amount of consideration.12. E A cash receipt from sale of machinery is an investing activity. Remaining all other options are cash receipts from operating activity. Hence, option (e) is correct answer.13. A Balance sheet is called the ‘Statement of Financial Position’. Hence, option (a) is correct answer.14. B The assets, which are easily convertible into cash (called as liquid assets) come first and those, which cannot be readily converted, come next and so on. Therefore the correct order is Cash, short-term investments, current assets and fixed assets. Therefore, option (b) is the correct answer.15. E One of the limitations of balance sheet is that even audited balance sheets also cannot give a complete seal of accuracy. Deliberate manipulations in the profits, current assets and closing stocks make the balance sheets unreliable. Therefore, it is incorrect to suggest that audit of vertical form of Balance Sheet gives a complete seal of accuracy Hence, option (e) is correct answer.16. A ‘Application of funds’ in the vertical balance sheet of a company comprises application towards ‘Fixed assets’ and ‘Working capital’. Hence, option (a) is correct answer.17. C Debt – equity ratio and fixed assets ratio are capital structure ratios. Return on equity and return on investment represents the profitability ratios of a business entity. Acid test ratio indicates the liquidity status of a
  14. 14. company. Hence, option (c) is correct answer.18. E ‘Secured loans’ is not a head under ‘application of funds’. The following are the heads of balance sheet under ‘Application of Funds’. 1. Fixed assets. 2. Investments. 3. Net Current Assets. 4. Miscellaneous Expenditure. Hence, option (e) is correct answer.19. A Net block of fixed assets represent gross block of assets minus depreciation. Gross block represents the original cost of the assets and additions and adjustments arising due to the purchase, sale or transfer of assets.20. D Cash include cash on hand and demand deposits and other items such as cheques and money orders acceptable for deposit in the bank account. Managers often invest idle cash in some short-term, highly liquid investments that can be readily converted into cash with little risk of loss. Such short-term, highly liquid investments that are readily convertible into known of cash and which are subject to an insignificant risk of changes in value are called equivalents. Hence, option (d) is correct answer.21. D The cost of acquiring and developing natural resources like oil and gas, other minerals and standing timber is allocated through depletion.22. A Vendor Financing occurs when a company loans money to a customer to purchase goods from the company.23. B Financial statement Analysis (FSA) is used to diagnose the strength and weakness of a firm by assessing the profitability. In this context, FSA is used as a diagnostic tool. Hence, option (b) is correct answer.24. E Technical analysis focuses on the stock market measures. Remaining all other options are the methods used in analyzing financial statements. Hence option (e) is the correct answer.25. E Trend statements do not form part of the annual reports published by the company.26. A Trend statements are part of Time series analysis. Remaining all other options are not part of Time series analysis.27. A Free cash flow is equal to cash from operations less the amount of net capital expenditure required to maintain the firm’s productive capacity used up in production of income and dividends paid.28. B The International Accounting Standard Board publishes its standards in a series of pronouncements called International Financial Reporting Standards.29. A According to US GAAP, the proceeds of issuance of convertible debt are recorded entirely as a liability.30. A According to International Accounting Standard, if redemption of preference shares is mandatory, it is recorded as a liability.31. A Reporting of comprehensive income is compulsory according to USGAAP only.32. B Accounting standard-2 deals with valuation of inventories.33. B Prior period items refer to expenses and incomes which arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more periods.34. E It provides a database for assessing the strengths and weaknesses of the business is an advantage of Trend analysis. Remaining all other options are disadvantages of Trend analysis. Hence, option (e) is correct answer.35. E Dividend coverage ratio measures the safeguard that exists for the lenders of debt is a false statement. Debt coverage ratio measures the safeguard that exists for the lenders of debt.36. A The techniques and skills adopted to understand the position and performance of an enterprise with a focus on the financial statements is termed as fundamental analysis.37. B The profit disclosed by the Profit and Loss account is not an absolute but is relative as the Profit &Loss is based upon various accounting conventions and concepts and depends upon correct recognition of revenue and calculation of expired costs. Hence option (b) is the correct answer.38. A The creditors turnover ratio = Net credit annual purchases ÷ Average trade creditors Average trade creditors = (opening trade creditors + closing trade creditors) ÷ 2 = (Rs.90,000 +Rs.1,00,000) ÷ 2 = Rs.95,000 Trade creditors turnover ratio = x ÷ Rs.95,000 = 4 times. So, x = Rs.95,000 × 4 = Rs.3,80,000.39. C Dividend payout ratio is a valuation ratio.40. A The accent of the International Accounting Standard is on reporting.41. C Application of Funds = Sources of Funds
  15. 15. Sources of Funds = Shareholders funds + Loans Funds. Therefore, Rs.35,00,000 = Rs.25,00,000 + Shareholders funds Therefore, Shareholders funds = Rs.35,00,000 – Rs.25,00,000 Shareholders funds = Rs.10,00,000.42. A Fixed assets = Rs.12,45,000 Current assets of the firm = Rs.7,70,000 Current ratio = 5:2 5/2 = Rs.7,70,000 / Current liabilities Current liabilities × 5 = Rs.7,70,000 x 2 Current liabilities = Rs.15,40,000 / 5 = Rs. 3,08,000 Capital employed = Net total assets = Fixed assets + Current assets – Current liabilities Therefore capital employed = Rs.12,45,000 + Rs.7,70,000 – Rs.3,08,000 = Rs.17,07,000 Fixed assets ratio = Fixed assets / Capital employed Fixed assets ratio = Rs.12,45,000 / Rs.17,07,000 = 0.729 = 0.73.43. E Since the fixed assets and current assets are in the ratio of 3:1 Fixed assets = Rs.28,12,500 Current assets = Rs.28,12,500 × 1/3 = Rs. 9,37,500 Total assets = Rs.37,50,000 As total assets = Total liabilities = Rs.37,50,000 Equity share capital = 1,00,000 × Rs.10 = Rs.10,00,000 Retained earnings = 50% of capital Rs.10,00,000 Rs. 5,00,000 Outside liabilities Rs.22,50,00044. C Current ratio = CA/CL = 4, OR CA = 4 CL = 4 × 31= Rs.124 lakh Acid test ratio = (CA-Inventory) / CL = 2.80 Or Ca-Inventory = 2.8 × 31 = Rs.86.8 lakh Therefore, Inventory = Rs.124 lakh – Rs.86.8 = Rs.37.2 lakh45. D Investing activities include all cash flows involving assets, other than operating assets. The investing activities are: Particulars Rs. Purchase of debentures (35,000) Sale of investment 48,000 Acquisition of CD (70,000) Collection of dividends 2,500 Net cash used (54,500)46. A Cost of goods sold = Sales – Gross profit = Rs.30,00,000 – Rs.12,00,000 = Rs.18,00,000 Inventory turnover = Cost of goods sold / Average inventory = 18,00,000 /Rs.5,00,000 = 3.6 times.47. B Price-earnings ratio is used to determine the expected market price per share of the company. One may project the EPS of a company for the next few years and thereafter by assuming the continuity of the same P/E multiple, the future market price per share may be calculated.48. D Particulars Rs. Amount available for appropriation 9,99,000 Less: Income from prior period item 2,25,000 Profit after tax 7,74,000 Add: Provision for taxation 8,60,000 Profit before tax 16,34,00049. C Partiulars Rs. Profit after tax 5,20,000 Less: Preference dividend (Rs.10,00,000 × 1,00,000
  16. 16. 10%) Profit available to equity shareholders 4,20,000 Earning per share (Rs.4,20,000 / 1,00,000) 4.2050. B Dividend is paid on paid-up capital of the firm. Therefore the paid-up capital = Called-up capital – Calls-in-arrear = Rs. 8,00,000 – Rs.80,000 = Rs. 7,20,000 Therefore 10% on paid-up capital is Rs.7,20,000 × 10/100 = Rs.72,000.51. B Particulars 2007-08 (Rs.) Fixed Assets Fixed assets 8,75,000 Current assets 15,50,000 A 24,25,000 Liabilities Current liabilities 8,00,000 Secured loans 2,00,000 B 10,00,000 Preference Share capital funds Preference share capital Dividends due to Preference shareholders Equity Share holders Funds (A – B) C 14,25,000 Number of equity shares D 10,000 Book value per share C ÷ D 142.5052. C Dividend payout ratio = Dividends / Profit after tax Dividend per share = Rs.10 No. of outstanding equity share = 9,000 Total dividends paid = 9,000 × Rs.10 = Rs.90,000 Profit before tax = Rs.12,00,000 Profit after tax = Rs.12,00,000 × 40 / 100 = Rs.7,20,000 Therefore, dividend payout ratio = (Rs.90,000 / Rs.7,20,000) × 100 = 12.5%.53. B Price/Book Value ratio = Market price of the share/ book value per share Price/Book value ratio = 12 Book value per share = Rs.250 The market price per share = Rs.250 × 12 = Rs.3,000.54. A Average collection period = Average trade debtors / Sales per day Average trade debtors = (Opening trade debtors + Closing trade debtors) / 2 = (Rs.3,00,000 + Rs.3,44,000) / 2 = Rs.3,22,000 Sales per day = Rs.12,77,500 ÷ 365 = Rs.3,500 Average collection period = Rs.3,22,000 ÷ Rs.3,500 = 92 days.55. A Increase in gross profit in 2007-08 = 3,00,000 × 20/100 = Rs.60,000 Increase in operating expenses in 2007-08 = 2,00,000 × 10/100 = Rs.20,000 Net profit of 2007-08 = Rs.3,60,000 – Rs.2,20,000 = Rs.1,40,000 Net profit margin = (Net Profit / Sales) × 100 = (Rs.1,40,000 ÷ Rs.8,00,000) × 100 = 17.5%.56. A Average Payment Period = Average Trade Creditors / Average daily purchases Net annual credit purchases = Rs.13,32,250 Daily credit purchases = Rs.13,32,250 / 365 = Rs.3,650 29.5 = Average trade creditors / Rs.3,650 Average trade creditors = 29.5 × Rs.3,650 Average trade creditors = Rs.1,07,675.57. C Particulars Rs. Reserves & Surplus (opening balance) 1,00,000
  17. 17. Add : Transfer to General Reserve 1,00,000 Balance in Profit & Loss A/c 2,50,000 Reserves & Surplus (at year end) 4,50,00058. D Particulars 2007-08 2006-07 (Rs.) (Rs.) Current assets 38,000 32,000 Current 6,000 24,000 liabilities Working capital 32,000 8,000 The net increase in working capital =Rs.32,000 − Rs.8,000 = Rs.24,000.59. B Particulars Rs. Dividend tax paid during the year (23,000) Proceeds from issuance of share capital on exercise of 3,35,000 stock options Dividends paid during the year (1,50,000) Net cash inflows from financing activities 1,62,000 Both proceeds from investments and dividends received are investing activities.60. A Equity dividend coverage ratio = (Profit after tax − Preference dividends) / Equity dividends Therefore, 2 = (Rs.14,00,000 – Rs.3,50,000) / Equity dividends Equity dividends = Rs.10,50,000 / 2 = Rs.5,25,000.61. E Particulars 2006-07 2007-08 Rs. Rs. Current Assets Current assets 9,00,000 11,00,000 Current Liabilities Current liabilities 3,00,000 3,00,000 Net Current Assets 6,00,000 8,00,000 % of net current assets to Stakeholders equity in 2006-07 = Rs.6,00,000/ Rs.12,75,000 = 47% % of net current assets to Stakeholders equity in 2007-08 = Rs.8,00,000/ 12,75,000 = 62.75% Therefore percentage of net current assets to total assets from 2006-07 to 2007-08 has increased by (62.75%− 47%) = 15.75%.62. A Sources of Funds = Application of Funds Particulars 2007-08 (Rs.) Fixed assets 30,00,000 Investments 16,00,000 Current assets Rs.12,00,000 Less: Current liabilities Rs. 8,00,000 Net current assets 4,00,000 Application of Funds 50,00,000 Therefore, Sources of funds = Rs.50,00,000.63. A Particulars Rs. Rs. Cash at the beginning of the period 95,000 Add : Cash inflow from operating 1,29,000 activities Total cash inflows 2,24,000 Less: Cash used for investment 1,00,000 activities Less: Cash used for financing activities 35,000 1,35,000 Cash at the end of the period 89,00064. A
  18. 18. Particulars Rs. Sales 45,50,000 Add: Increase in stock 4,50,000 Non-operating income 2,05,000 52,05,000 Less: Depreciation 7,50,000 Operating expenses 34,00,000 Profit before interest and tax (PBT) 10,55,00065. B Return on net worth = Profit after tax/Net worth 20% = Profit after tax / Rs.10,00,000 Therefore, Profit after tax = Rs.2,00,000 Return on total assets = Profit after tax/ Total assets 10% = Rs.2,00,000 / Total assets Total assets = Rs.20,00,000.66. E Return on equity = (Profit after tax – Preference dividends) / Average equity shareholders Let x be treated as Average equity shareholders 0.6 = (Rs.5,70,000 – Rs.90,000) / x 0.6x = Rs.4,80,000 x = Rs.4,80,000 / 0.6 = Rs.8,00,000 Therefore, average equity shareholders = Rs.8,00,000.67. A Particulars Rs. Operating profit before tax (PBT) 42,50,000 Less: Provision for taxation 15,00,000 Add: Income from extraordinary items 5,00,000 Less: Dividends paid 4,00,000 Less : Transfers to general reserve 2,00,000 Amount transferred to balance sheet 26,50,00068. A Proposed dividend does not come under Reserves & surplus. Therefore, the total of General reserve, sinking fund, securities premium and capital redemption reserve. = Rs.45,00,000 + Rs.66,00,000 + Rs.90,00,000 + Rs.58,00,000 = Rs.2,59,00,000.69. B Capital gearing ratio = Fixed interest bearing securities / Equity Shareholder’s fund Fixed interest bearing securities = 9% Preference shares + 12% Debentures = Rs.6,00,000 + Rs.4,00,000 = Rs.10,00,000 = Rs.10,00,000 / Rs.25,00,000 = 0.4.70. A Total of balance sheet = Sources of funds + Application of funds Sources of funds = Shareholders fund + Loans Fund Application of funds = Fixed assets + Investments + Net Current assets Sources of funds = Rs.12,50,000 + Rs.10,50,000 = Rs.23,00,000. Application of funds = Rs.9,50,000 + Rs.10,00,000 + Rs.3,50,000 = Rs.23,00,000.71. C Equity is equal to the residual interest that remains in the assets after deducting an entity’s liabilities. Hence, option (c) is correct answer.

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