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Question PaperFinancial Accounting (CFA510): October 2007

Answer all questions.

Marks are indicated against each question.

1. Which of the following is a real account?

(1 mark)

(a) Bank account(b) Stock of stationery account(c) Returns inward account(d) Outstanding rent account(e) Capital account.

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2. Which of the following statements is false?

(1 mark)

(a) Ledger is the main book of account in which all accounts are maintained(b) The credit balance of a nominal account indicates income received(c) Debit balance in commission account indicates commission paid

(d) Cash account always shows credit balance(e) In case of bank overdraft bank account shows credit balance.

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3. In a manufacturing company, which of the following systems is called product costing system?

(1 mark)

(a) Perpetual inventory system(b) Periodic inventory system(c) Accrual system(d) Weighted average method(e) Specific identification method.

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4. The value of inventory far in excess of the normal requirement of a firm is shown under

(1 mark)

(a) Current assets(b) Fictitious assets(c) Intangible assets(d) Non-current assets(e) Miscellaneous expenditure.

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5. The books of Bharat Ltd. revealed the following information:

On March 31, 2007, the cost of missing inventory that may have been pilfered by the storekeeper was

estimated to be Rs.75,000. The companys rate of gross profit on sales has remained constant at 25%.The value of inventory on March 31, 2007 was

(2 marks)

Particulars Rs.

Opening inventory 6,00,000Purchases during the year 2006-2007 34,00,000Sales during the year 2006-2007 48,00,000

(a) Rs.3,25,000(b) Rs.1,25,000(c) Rs.1,00,000(d) Rs.1,50,000(e) Rs.2,25,000.

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6. Which of the following items is generally not considered as part of inventory?

(a) Raw-material

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(1 mark)

(b) Work-in-process(c) Consumables(d) Finished goods(e) Machinery spares.

7. Which of the following inventory valuation methods shows higher profits during a period of risingprices?

(1 mark)

(a) FIFO (First In First Out)(b) LIFO (Last In First Out)(c) Weighted average(d) Simple average(e) Specific cost.

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8. Mohan withdrew Rs.10,000 from firm bank account for his personal use. The entry to be passed is

(1 mark)

Debit (Rs.) Credit (Rs.)(a) Cash account Dr.

To Bank account10,000

10,000(b) Mohan account Dr.

To Cash account10,000

10,000

(c) Drawings account Dr.To Bank account 10,000 10,000(d) Bank account Dr.

To Cash account10,000

10,000(e) Bank account Dr.

To Drawings account10,000

10,000.

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9. Which method of depreciation is most appropriate for petroleum and mining companies for chargingdepreciation on oil wells and mines?

(1 mark)

(a) Straight line method(b) Diminishing balance method(c) Units-of-production method(d) Sum-of-the-years digits method

(e) Annuity method.

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10. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3 years isRs.66,000. If the company charges depreciation under straight line method, the rate of depreciation is

(2 marks)

(a) 25%(b) 20%(c) 18%(d) 15%(e) 12%.

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11. The balances extracted from the books of M/s. Good Food as on March 31, 2007 were as under:

Particulars Rs.

Salaries 11,000Interest on loan from Mr. Agarwal 2,000Sales 96,000Purchases 93,000Rent 13,000Machinery 1,00,000Sundry debtors 16,000Sundry creditors 29,0005% Loan from Mr. Agarwal (taken on April 01, 2006) 50,000Capital account 70,000

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However, Mr. Girish, the proprietor, forgot to consider the following information:

Outstanding salaries of Rs.1,000. Depreciation on Machinery at the rate of 10% per annum. Rent paid in advance of Rs.1,000.

The total of the adjusted trial balance after considering all the relevant information was

(2 marks)

Cash 10,000


12. Ex-ante income means

(1 mark)

(a) Original expectation of expected future cash flows at the end of the period less originalexpectation of expected future benefits at the beginning of the period

(b) Capital at the end of the period less capital at the beginning of the period(c) Revised expectation of expected future cash flows at the end of the period less original

expectation of expected future benefits at the beginning of the period(d) Gross sales less returns(e) The profit which is disclosed in profit and loss account.

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13. Under cash basis of accounting, revenue is recognized when

(1 mark)

(a) Sale is made(b) Cash is received(c) Goods are delivered(d) Services are rendered(e) Sales are accounted.

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14. Provision for bad debts is made as per the

(1 mark)

(a) Conservatism concept(b) Cost concept(c) Consistency concept(d) Going concern concept(e) Time period concept.

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15. The following account balances were extracted from the books of John & Co. as on April 01, 2007:

The capital account balance as on April 01, 2007 was

(2 marks)

Particulars Rs.

Cash on hand 330Cash at bank 6,050Bills payable 3,300Furniture & fittings 6,600Sundry creditors 11,400

Sundry debtors 14,520Stock in trade 12,200

(a) Rs.27,500(b) Rs.39,700(c) Rs.28,320(d) Rs.51,900(e) Rs.25,000.

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16. Following balances were extracted from the books of Prem Enterprises for the year ended March 31,2007:

The amount of gross profit for the year ended March 31, 2007 was

(2 marks)

Particulars Rs.

Opening stock 80,000

Purchases 2,50,000

Sales 3,50,000

Returns inward 10,000

Octroi 2,150

Freight inwards 1,500

Returns outward 12,500

Closing stock 1,10,000

Commission paid on sales @ 5%


17. Consider the following data pertaining to a company for the year 2006-07:

If the company maintains 5% provision for doubtful debts, the amount of bad debts written off duringthe year 2006-07 was

(2 marks)

Opening balance of sundry debtors Rs.2,20,000Closing balance of sundry debtors Rs.1,80,000Amount transferred from profit & loss account to the creditof provision for doubtful debts account

Rs. 20,000


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18. Sonny Ltd. has furnished the following information for the year 2006-07:

The company maintains a provision for bad debts at 5% and provision for discount on debtors at 2.5%of the debtors. If the debtors as on March 31, 2007, before writing off bad debts and discount allowedamounted to Rs.1,00,000, the balance in the provision for discount on debtors account on March 31,2007 stood at (rounded off to nearest rupees)

(2 marks)

Particulars Amount (Rs.)

Balances as on April, 01, 2006:Provision for bad debts 5,000Provision for discount on debtors 2,000During 2006-07:Bad debts written off 1,000Discount allowed 1,500


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19. Swedish Ltd. depreciates machinery at 20% p.a. on the original cost. It purchased a second handmachine for Rs.5,00,000 on April 1, 2005 and spent immediately Rs.60,000 and Rs.40,000 on its repairsand installation respectively. On October 1, 2007 they disposed off the machinery purchased on April 1,

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2005 for Rs.4,00,000.

The profit/(loss) on sale of machinery was

(2 marks)

(a) Rs.1,20,000(b) (Rs.1,00,000)(c) Rs.1,60,000(d) Rs.1,00,000(e) (Rs.1,60,000).

20. Different valuation bases are used in accounting and in this context, realizable value means

(1 mark)

(a) The amount paid or payable to acquire a benefit(b) The amount that needs to be paid if the asset is to be acquired currently(c) The present discounted value of future inflows that an item is expected to generate in the normal course

of business(d) The net amount collectible in the event of the assets disposal(e) The amount paid or payable to lose a benefit.

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21. Errors disclosed by a trial balance include

(1 mark)

(a) Complete omission of the recording of a transaction from the books of accounts(b) Posting of an aspect of a transaction on the correct side of a wrong account(c) Recording both aspects of a transaction more than once in the books of accounts(d) Posting of an aspect of a transaction more than once(e) Recording a transaction at an amount which is totally different from the actual amount.

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22. Capital expenditure is an expenditure which

(1 mark)

(a) Benefits in the current accounting period only(b) Will benefit only in the next accounting period(c) Results in the acquisition of a permanent asset(d) Results in the acquisition of a current asset(e) Results in the acquisition of a current asset and a permanent asset.

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23. Manila who is yet to prepare the final accounts found that a cash sale of Rs.1,234 to Mr. Nadir correctlyentered in the cash book, was posted to the debit of Mr. Nadirs personal account in the ledger. Theaggregate amount of sales is correctly posted. The entry required to rectify the above error is

(2 marks)

Rs. Rs.

(a) Sales account Dr. 1,234

To Nadirs account 1,234

(b) Nadirs account Dr. 1,234

To Sales account 1,234

(c) Suspense account Dr. 1,234

To Nadirs account 1,234

(d) Sales account Dr. 1,234

To Suspense account 1,234

(e) Suspense account Dr. 2,468

To Sales account 1,234

To Nadirs Account 1,234.

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24. Accounting does not record non-financial transactions due to

(a) Business entity concept(b) Going concern concept(c) Accounting period concept(d) Money measurement concept

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(1 mark)

(e) Cost concept.

25. Which of the following is generally not used as a valuation base in accounting?

(1 mark)

(a) Historical cost(b) Opportunity cost(c) Current cost(d) Realizable value

(e) Present value.

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26. The annual financial statements should be approved by the _______ before being signed by the auditors.

(1 mark)

(a) Board of directors(b) Registrar of companies(c) Shareholders(d) Audit Committee(e) Nominee directors.

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27. Current liabilities are such obligations which are to be satisfied

(1 mark)

(a) Within three months

(b) Within six months(c) Within one year(d) Within two years(e) Within three years.

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28. The balances of prepaid expenses of a company as on March 31, 2006 and March 31, 2007 wereRs.40,320 and Rs.32,720 respectively. If the expenditure paid by the company during the year 2006-2007 was Rs.1,20,000, then the total expenditure incurred during the year was

(2 marks)

(a) Rs.1,60,320(b) Rs.1,52,720(c) Rs.1,27,600(d) Rs.1,20,000

(e) Rs.1,13,400.

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29. The amount of profit earmarked for distribution to the shareholders is known as

(1 mark)

(a) Net profit after tax(b) Retained earnings

(c) Dividends(d) Operating profit(e) Profit before tax.

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30. The balance sheet gives information regarding the

(1 mark)

(a) Results of operations of the firm for a particular period

(b) Financial position of the firm during a particular period(c) Profit earning capacity of the firm for a particular period(d) Financial position of the firm on a particular date(e) Operating efficiency of the firm on a particular date.

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31. The accountant of ABC Ltd. reported a profit of Rs.6,50,000 for the year ended March 31, 2007. Onscrutiny, the following errors were noticed:

Building rent of Rs.1,500 per month was paid upto January 2007. Rent debited to Profit and lossaccount was Rs.15,000.

Sales book was overcast by Rs.20,000.

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Rs.20,000 paid for the repair of second hand machinery purchased, to bring it to the workingcondition, was debited to Repairs and Maintenance as Rs.2,000.

Ignore depreciation on second hand machinery.

The correct net profit made by the company for the year ended March 31, 2007 after the rectificationwas

(2 marks)

(a) Rs.6,29,000(b) Rs.6,49,000

(c) Rs.6,32,000(d) Rs.6,25,000(e) Rs.6,47,000.

32. Consider the following data pertaining to Bond Bros.:

If fair rate of return in similar business is 12%, the value of goodwill on the basis of 3 years purchaseof super profits of the business, is

(2 marks)

i. Average profits of the last four years Rs.1,21,500

ii. Remuneration from alternative employment ofthe owners

Rs. 21,500

iii. Average capital employed Rs.6,00,000

(a) Rs.1,21,500

(b) Rs.1,00,000(c) Rs. 84,000(d) Rs. 72,000(e) Rs. 28,000.

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33. During the year 2006-07, Fizz Ltd. reported a profit of Rs.4,20,000 after paying tax at the rate of 50%.This profit includes an income of Rs.45,000 being a claim lodged in the month of January 2006 forwhich no entry was passed in the year 2005-06. The company expects to introduce a new product in theyear 2007-08. The introduction of the new product leads to an increase of fixed expenses by Rs.50,000.The estimates for the new product are as under:

The future maintainable post-tax profit of the company for the year 2007-08 (after introduction of thenew product) is

(2 marks)

Sales Rs.5,00,000Direct expenses (including material and wages) Rs.2,25,000


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34. The following data is extracted from the books of Sarovar Ltd. for the year ended March 31, 2007:

The Manager of the company is entitled to a commission of 6% on net profit after charging hiscommission. The commission payable to the Manager for the year ended March 31, 2007 was

Particulars Rs.

Gross profit 75,000

Salaries and wages 22,000Printing and stationery 3,000Rent paid 12,000Insurance 3,700Carriage outward 2,500

(a) Rs.1,800(b) Rs.1,668(c) Rs.2,366(d) Rs.1,908

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(2 marks)

(e) Rs.1,574.

35. Cost of production is equal to

(1 mark)

(a) Materials consumed + Other manufacturing cost(b) Materials consumed + Direct labour(c) Materials consumed + Direct labour Other manufacturing cost + Administration cost(d) Materials consumed + Direct labour + Other manufacturing cost + Opening WIP Closing WIP

(e) Materials consumed + Direct labour + Opening stock of finished goods Closing stock offinished goods.

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36. The cost of self-constructed assets is taken as

(1 mark)

(a) Direct material + Direct labour + Indirect cost for construction of the asset(b) Construction cost + Interest cost on funds borrowed for construction till all the inputs are

acquired(c) Construction cost + Interest cost on funds borrowed for construction till the asset is ready for its

intended use(d) Construction cost + Interest on borrowing Losses due to strikes(e) Total construction cost or market value, whichever is less.

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37. Which of the following statements is true with respect to depreciation under diminishing balancemethod?

(1 mark)

(a) The amount of depreciation keeps increasing every year while the rate of depreciation keepsdecreasing

(b) The amount of depreciation and the rate of depreciation decrease every year(c) The amount of depreciation decreases while the rate of depreciation remains the same(d) The amount of depreciation and the rate of depreciation increase every year(e) The amount of depreciation increases while rate of depreciation remains the same.

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38. As per Schedule VI of the Companies Act, 1956, which of the following statements is true regardingthe treatment of calls-in-arrears in the final accounts of a company?

(1 mark)

(a) The amount will be shown under the head current assets on the assets side of the balance sheet(b) The amount will be deducted from the called-up capital in the balance sheet

(c) The amount will be shown under the head current liabilities in the balance sheet

(d) The amount will be shown in the profit and loss account as a loss without showing it in thebalance sheet

(e) The amount will be added to the share capital in the balance sheet.

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39. A special auditor to conduct special audit of a company is appointed by the

(1 mark)

(a) Board of directors of the company(b) Members of the company(c) Central Government(d) Statutory auditors(e) Income tax authorities.

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40. According to Schedule VI of the Companies Act, 1956, which of the following assets is/are shownunder the head Investments in the balance sheet of a company?

I. Investments in the capital of partnership firms.II. Investments in trust securities.III. Investments in shares.IV. Investments in debentures.

(a) Only (I) above

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(1 mark)

(b) Only (II) above(c) Both (III) and (IV) above(d) (II), (III) and (IV) above(e) All (I), (II), (III) and (IV) above.

41. Which of the following items shouldnot be deducted from the gross profit to arrive at the net profit forcalculation of Managerial Remuneration?

(1 mark)

(a) Any tax notified by the Central Government as being in the nature of a tax on excess orabnormal profit

(b) Any tax on business profits imposed for special reasons or in special circumstances and notifiedby Central Government in this behalf

(c) Interest on unsecured loans and advances(d) Any compensation, damages or payments made voluntarily(e) Bad debt written-off or adjusted during the year.

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42. Which of the following items shouldnot appear under the heading unsecured loans in the BalanceSheet of a company?

(1 mark)

(a) Sinking fund(b) Loans and advances from subsidiaries

(c) Short term loans and advances from banks(d) Loans and advances from others(e) Fixed deposits from public.

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43. As per the Companies Act, the item Proposed additions to reserves should be included in

(1 mark)

(a) Reserves and surplus(b) Miscellaneous expenditure(c) Current liabilities and provisions(d) Share capital(e) Securities premium.

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44. According to Part II of Schedule VI of Companies Act, the classification of foreign exchange earningsdoes not include

(1 mark)

(a) Export of goods calculated on Free On Board (F.O.B.) basis(b) Dividends from subsidiary company in India(c) Royalty and know-how from foreign companies(d) Professional and consultation fees from foreign companies(e) Interest and dividend from foreign companies.

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45. Which of the following items appears in the Profit and Loss Appropriation account?

(1 mark)

(a) Provision for bad debts

(b) Provision for taxation for current year

(c) Directors remuneration

(d) Interim dividend

(e) Penalty paid for delay in payment of tax.

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46. The following balances have been extracted from the books of Statham Ltd., as on March 31, 2006:

Additional information:

Sale proceeds of freehold properties is Rs.1,20,000 (which had cost of Rs.1,00,000 and on whichdepreciation of Rs.20,000 had been provided).

Particulars Amount (Rs.) Particulars Amount (Rs.)

Freehold properties 28,57,000 Provision for depreciation:Freehold properties 4,27,000

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Depreciation on freehold properties of Rs.26,000 for the year ended March 31, 2007.

The net book value of freehold properties as on March 31, 2007 was

(2 marks)


47. Consider the following data pertaining to Rising Sun Ltd., as on March 31, 2007:

The company wants to create a Debenture Redemption Reserve and to transfer Rs.50,000 every year outof profits to redeem the debentures.

The company declared 10% dividends.

The balance of Profit and Loss Appropriation account transferred to Balance Sheet after effecting theabove transactions is

(2 marks)

Share Capital:Issued, subscribed and called-up Rs.20,00,000

Calls-in-arrears Rs. 10,000

Profit and loss account (Cr.) as on April 01, 2006 Rs. 67,000

Profit for the year Rs. 1,90,610

(a) Rs.1,88,549(b) Rs. 58,610(c) Rs. 8,610(d) Rs. 7,610(e) Rs.1,81,849.

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48. The directors of a company have proposed a dividend of 18% of the paid-up capital. The percentage ofprofits which will have to be compulsorily transferred to reserves is

(1 mark)

(a) 2.5%(b) 5.0%(c) 7.5%(d) 20.0%

(e) 12.5%.

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49. Which of the following is an unidentifiable intangible asset that increases the earning capacity of abusiness?

(1 mark)

(a) Patents(b) Copyrights(c) Trade marks(d) Licenses(e) Goodwill.

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50. Unearned income account is

(1 mark)

(a) A current asset(b) A current liability(c) An expense(d) An income(e) A contingent liability.

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51. Under Simple Profit Method, which of the following is/are to be considered to calculate the goodwill ofa business?

I. Average of the adjusted profits of the chosen period.II. The number of years of purchase.

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III. Normal Rate of Earnings.IV. Capital employed in the business.

(1 mark)

(a) Only (I) above(b) Only (II) above(c) Both (I) and (II) above(d) Both (III) and (IV) above(e) (I), (III) and (IV) above.

52. An asset can be depreciated at 10% p.a. under the straight line method or at 25% p.a. under the writtendown value method. The straight line method will give higher amounts of depreciation from the

(2 marks)

(a) Fourth year(b) Fifth year(c) Sixth year(d) Seventh year(e) Eighth year.

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53. Which of the following is the correct response to indicate the impact of new capital introduced onassets, owners equity and total liabilities of a firm?

(1 mark)

Assets Owners equity Total Liabilities

(a) Increase Increase Decrease

(b) Decrease Increase No effect

(c) Increase Increase Increase

(d) No effect Increase Decrease

(e) Decrease Increase Decrease.

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54. The balance in the accumulated depreciation account of Vali Ltd. as on April 01, 2006 was Rs.2,00,000,when the original cost of the assets amounted to Rs.10,00,000. The company charges 10% depreciationon a straight line basis. One such asset costing Rs.5,00,000 (accumulated depreciation of Rs.80,000)was disposed off at the beginning of the year. The balance of the accumulated depreciation account ason March 31, 2007 was

(2 marks)


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55. Mr. Nair commenced his business on April 01, 2006 with a capital of Rs.57,000. The break-up of hiscapital includes cash amounting to Rs.40,000. All his transactions are on cash basis only. He purchasedstock worth Rs.25,000. He paid for miscellaneous expenses of Rs.2,700. During the year he withdrewRs.450 per month for his personal use. The depreciation for the year was estimated at Rs.3,500 andother expenses Rs.1,700. If the sales made during the year was Rs.32,000, cash balance as on March 31,2007 was

(2 marks)


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56. Alpha Ltd. agreed to purchase Beta Ltd. on April 1, 2007. Net profits of Beta Ltd. for the last five yearsare as follows:

Year Profit (Rs.) Year Profit (Rs.)

2002-2003 Rs.35,000 2005-2006 Rs.48,000

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If the goodwill of the company is valued at 3 years purchase of simple average profit of the last 5years, then the value of goodwill is

(2 marks)

2003-2004 Rs.40,000 2006-2007 Rs.50,000

2004-2005 Rs.44,000

(a) Rs. 66,300(b) Rs.1,42,000(c) Rs.1,24,810

(d) Rs.1,19,600(e) Rs.1,30,200.

57. The following payments were made by Sheeba & Co. in respect of insurance premium.

The insurance premium outstanding/prepaid as on March 31, 2007 (if any ) was

(2 marks)

Date of payment Particulars

April 02, 2006July 15, 2006December 31, 2006

Payment of Rs.32,000 for 3 months ended July 31, 2006Payment of Rs.64,000 for 6 months ended January 31, 2007Payment of Rs.48,600 for 4 months ended April 30, 2007

(a) Rs.10,667 (prepaid)(b) Rs.10,667 (outstanding)

(c) Rs.12,150 (prepaid)(d) Rs.12,150 (outstanding)(e) Nil.

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58. Which of the following is/are the basic requirement(s) in the preparation and presentation of finalaccounts of a company in terms of provisions of the Companies Act, 1956?

I. Balance sheet must exhibit a true and fair view of the state of affairs of the company.II. Balance sheet must be in the form set out as per Schedule VI of the Companies Act.III. Contingent liabilities should be shown by way of Notes to the balance sheet.

(1 mark)

(a) Only (I) above(b) Only (II) above(c) Both (I) and (II) above

(d) Both (II) and (III) above(e) All (I), (II) and (III) above.

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59. Which of the following statements is true with respect to dividends?

(1 mark)

(a) Dividend can always be paid out of capital(b) Interim dividend can always be declared by the directors only after obtaining approval of the

shareholders(c) Dividend is also payable on the calls paid in advance(d) Dividend declared is not regarded as a current liability(e) Dividend is payable on paid-up capital.

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60. As per the Companies Act, Interest accrued and due on debentures should be shown under

(1 mark)

(a) Debentures(b) Current liabilities(c) Provisions(d) Reserves and surplus(e) Current assets.

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61. The following data is extracted from the books of Dynamics Ltd.:

Year 2003-04 2004-05 2005-06 2006-07Profit (in Rs.) 16,000 20,000 24,000 36,000

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The firm has average capital investment of Rs.1,00,000

Rate of return on investment = 15%The landlord has decided to increase rent of building by Rs.1,000The value of goodwill under Capitalization of super profit method is

(2 marks)

(a) Rs.53,333(b) Rs.43,333(c) Rs.32,000

(d) Rs.42,000(e) Rs.56,667.

62. Cherry Ltd. maintains its inventory records under perpetual system of inventory. Consider the followingdata pertaining to the inventory of Cherry Ltd. for the month of September, 2007:

If the company sold 32 units on September 24, 2007, value of closing inventory under FIFO methodwas

(2 marks)

Date & Month Particulars Quantity in Units Cost per unit (Rs.)

September 1 Opening inventory 15 400

September 4 Purchases 20 450

September 6 Purchases 10 460


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63. The following figures are drawn from the books of a trader:

Net profit earned during the year is

(2 marks)

Particulars Rs.

Opening capital 2,00,000

Additional capital 50,000

Closing capital 4,00,000

Drawings 1,00,000Interest on opening capital 5%

Interest on drawings 6%


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64. If the difference in trial balance is transferred to Suspense A/c, what will be the Suspense A/c balance

due to the following errors?

i. Debited Purchases A/c by Rs.6,500 for furniture purchased.ii Debited Bansals A/c and Salary A/c by Rs.3,000 each for salary paid to Bansal.iii. Debited D.Gupta & Co.s A/c by Rs.7,350 for goods purchased from them on credit.iv. Credited M/s Roy & Co.s A/c by Rs.100 for cash discount allowed by them.


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(2 marks)

65. Leo Ltd. has provided the following information:

It is noticed that goods worth Rs.30,000 were destroyed due to fire. Against this, the insurance companyaccepted a claim of Rs.20,000.

The company sells goods at cost plus 33 5 %. The value of opening inventory, after taking into account

the above information was

(2 marks)

Particulars Rs.

Stock as on March 31, 2007 60,000

Accounts payable as on April 01, 2006 30,000

Accounts payable as on March 31, 2007 40,000

Amount paid to creditors during the year 2006-07 1,50,000Sales 2,00,000

(a) Rs. 10,000(b) Rs. 30,000(c) Rs.1,00,000(d) Rs.1,10,000(e) Rs. 80,000.

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66. Tripti Ltd. follows perpetual inventory system. On March 31 of every year, the company undertakesphysical stock verification. On March 31, 2007, the value of stock as per the records differed from thevalue as per physical stock. On scrutiny, the following differences were noticed:

Stock register was overcast by Rs.6,000.

Goods purchased for Rs.10,000 were received and included in the physical stock but no entrywas made in the books.

Goods costing Rs.30,000 were sold and entered in the books but the stock is yet to be delivered.

Goods worth Rs.5,000 returned to the suppliers is omitted to be recorded.

If the inventory is valued in the books at Rs.1,50,000, the value of the physical inventory is

(2 marks)

(a) Rs.1,11,000(b) Rs.1,89,000

(c) Rs.1,79,000(d) Rs.1,59,000(e) Rs.1,19,000.

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67. If the opening inventory is understated and closing inventory is overstated

(1 mark)

(a) The gross profit will increase and current assets will also increase(b) The gross profit will decrease and current assets will decrease(c) The gross profit will increase but current assets will decrease(d) The gross profit will decrease but current assets will increase(e) There will not be any change in gross profit or current assets.

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68. Which of the following is entered in the sales book?

(1 mark)

(a) Promissory Notes for advance given(b) Credit sale of goods(c) Rent accrued but not received(d) Sale of old furniture on credit(e) Tax paid in advance.

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69. Astute Limited has been charging depreciation under the straight line method. It charges full yeardepreciation even if the machinery is utilized only for part of the year. An equipment which waspurchased for Rs.3,50,000 now stands at Rs.2,97,500 after being depreciated at the rate of 5% on astraight line basis. Now the company decides to change the method of depreciation with retrospective

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effect. The applicable reducing balance rate for this machinery would be 8% p.a. Assuming that beforethe effect of this change could be accounted, depreciation for the current year is already charged basedon straight line method and is reflected in the depreciated value of Rs.2,97,500, the extra depreciation tobe provided based on the changed method is

(2 marks)

(a) Rs.24,960(b) Rs.17,500(c) Rs.10,500(d) Rs.46,763

(e) Rs.36,263.

70. Consider the following data pertaining to Universal Computers Ltd.:

If the company charged depreciation under straight line method, the acquisition cost of the furniture is

(2 marks)

Book value of furniture (Rs.) 25,600Rate of depreciation (%) 12No. of years depreciation charged 3

(a) Rs.28,672(b) Rs.35,000(c) Rs.38,000(d) Rs.40,000

(e) Rs.42,000.

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71. Which of the following need not be stated in the Directors Report?

(1 mark)

(a) Technology absorption(b) Financial state of affairs of the company(c) Foreign exchange earnings of the company(d) Statement of accounting policies(e) Conservation of energy.

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Suggested AnswersFinancial Accounting (CFA510): October 2007

1. Answer : (b)

Reason : Bank account, capital account, and outstanding rent account are personal accounts. Returns inwardaccount is a nominal account. Stock of stationery account is a real account.

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2. Answer : (d)Reason : That cash account always shows credit balance is wrong statement. One cannot pay more than what is

received. Hence cash account will always show debit balance as cash is debited when received. All theother statements are true. Hence, (d) is correct answer.

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3. Answer : (a)

Reason : In a manufacturing company, the perpetual inventory system is called product costing system. In suchsystem, the cost of each product is accumulated as it flows through the production process

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4. Answer : (d)

Reason : The value of inventory far in excess of the normal requirement of a firm is shown under non-currentassets.

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5. Answer : (a)

Reason : Stock account

Particulars Rs. Particulars Rs.

To Balance b/d 6,00,000 By Cost of goods sold

(Rs.48,00,000 75%)

36,00,000

To Purchases 34,00,000

By Missing inventory 75,000By Balance c/d(balancing figure)

3,25,000

40,00,000 40,00,000

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6. Answer : (e)

Reason : Machinery spares is not considered as part of inventory. All other items are included in inventory andtreated as current asset.

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7. Answer : (a)

Reason : FIFO method is based on the assumption that costs are charged against revenue in the order in which

they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of theunits purchased last. If the prices are rising, goods are issued at lower price and closing stocks are valuedat higher price. It will help to create more profit. Hence, (a) is correct answer.

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8. Answer : (c)

Reason : The entry to record withdrawal of cash from firm bank a/c. for the personal use of the proprietor wouldbe

Drawings account Dr. Rs.10,000

To Bank account Rs.10,000.

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9. Answer : (c)

Reason : In case of companies extracting natural resources, after estimating the total production potential, the unitcost can be computed by using units of production method. Straight-line method Diminishing Balancemethod and Sum-of-The-Years-Digits methods are not appropriate. Hence, (c) is correct answer.

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10. Answer : (d)Reason : Let the rate of depreciation = x

The depreciated value of machine = Rs.1,20,000 (1 3x) = Rs.66,000

1 3x = = 0.55

3x = 1 0.55 = 0.45

x = 0.45 3 = 0.15 or 15%.

Thus, the rate of depreciation = 15%.

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11. Answer : (a) < TO

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Reason :

Adjusted Trial Balance

ParticularsDebit Credit

Rs. Rs.

Salaries (Rs.11,000 + Rs.1,000) 12,000Outstanding salaries 1,000Interest on loan from Mr. Agarwal (Rs.2,000

+ Rs.500)

2,500

Outstanding Interest 500Sales 96,000Purchases 93,000Rent (Rs.13,000 Rs.1,000) 12,000Prepaid rent 1,000Machinery (Rs.1,00,000-Rs.10,000) 90,000Depreciation (10% of Rs.1,00,000) 10,000Sundry debtors 16,000Sundry creditors 29,000Loan from Mr. Agarwal 50,000Capital account 70,000Cash 10,000

2,46,500 2,46,500

12. Answer : (a)

Reason : Ex-ante income = Original expectation of expected future cash flows at the end of the period lessoriginal expectation of expected future benefits at the beginning of the period.

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13. Answer : (b)

Reason : Under the cash basis of accounting, revenue is recognized when cash is collected for sale of goods andservices. Hence (b) is correct answer.

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14. Answer : (a)

Reason : Conservatism concept means the early recognition of unfavorable events. Under this concept, thebusiness must provide all expected losses but not for anticipated profit. Provision for bad debt is madeout of profit for future loss that may arise on account of bad debts. Hence (a) is correct answer.

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15. Answer : (e)

Reason : The balance of capital in the books of John & Co. as on April 1, 2007

Particulars Rs. Rs.

Cash on hand 330Cash at bank 6,050Sundry debtors 14,520Furniture & fittings 6,600Stock in trade 12,200 39,700

Sundry creditors 11,400Bills payable 3,300 14,700

Capital account balance as on April1,2007

25,000

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16. Answer : (d)

Reason : Trading account of Prem Enterprises for the year ended March 31, 2007Particulars Rs. Rs. Particulars Rs. Rs.

To Opening stock 80,000 By Sales 3,50,000To Purchases 2,50,000 Less returns

inwards10,000

3,40,000

Less: Returnsoutwards

12,5002,37,500

To Octroi 2,150To Freight inwards 1,500

By closing stock 1,10,000To Gross profit (Bal

1,28,850

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fig)

4,50,000 4,50,000

17. Answer : (c)

Reason :

Dr. Provision for Bad debts account Cr.

Amount of bad debts written off = Rs.11,000 + Rs.20,000 Rs.9,000 = Rs.22,000.

Partciulars Rs. Particulars Rs.To Bad debts written off 22,000 By Balance b/d (Rs.2,20,000

5%)

11,000

To Balance c/d (Rs.1,80,000 x 5%) 9,000 By Profit and loss account 20,00031,000 31,000

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18. Answer : (d)

Reason :

Provision for Discount on Debtors

Sundry debtors Rs.1,00,000

Less Bad debts written off Rs. 1,000

Discount allowed Rs. 1,500

Rs. 97,500

Less: Provision for bad debts @5% Rs. 4,875

Rs. 92,625

Provision for discount @2.5% on Rs. 92,625 = Rs.2315.6 = Rs.2,316.


To Discount allowed 1,500 By Balance b/d 2,000

To Balance c/d(2.5% on Rs.92,625)

2,316 By Profit and Loss a/c. 1,816

3,816 3,816

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19. Answer : (d)

Reason :

Date Particulars Rs. Rs.

01.04.2005 Cost of second hand machine 5,00,000

01.04.2005 Repairs of second handmachine

60,000

01.04.2005 Installation charges 40,000 6,00,000

31.03.2006 Less: Depreciation for 2005-06 @ 20% on Rs.6,00,000

1,20,000

31.03.2006 Less: Depreciation for 2006-07

1,20,000

01.10.2007 Less: Depreciation for sixmonths

60,000 3,00,000

01.10.2007 Book value of machinery 3,00,000

01.10.2007 Sale value of machinery 4,00,000

01.10.2007 Profit on sale of machinery 1,00,000

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20. Answer : (d)

Reason : Realizable value is the net amount collectible in the event of the assets disposal. (a) Historical cost isthe amount paid or payable to acquire a benefit. (b) the amount that needs to be paid if the asset is to beacquired currently is the current cost. (c) the present discounted value of the future inflows that an itemis expected to generate in the normal course of business is the present value (e)any valuation cannot bedone with a view to lose benefit. Hence the correct answer is (d).

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21. Answer : (d)

Reason : Posting an aspect of transaction more than once is disclosed by a trial balance, for example, if anamount of Rs.2,000 paid to X has been posted to the debit of X account twice, then the debit will exceedthe credit by Rs.2,000. The other errors will not be disclosed by trial balance. Hence the correct answeris (d).

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22. Answer : (c)

Reason : Capital expenditure is a non-recurring expenditure whose benefit lasts for more than one accountingperiod. So acquisition of permanent asset is a capital expenditure. Hence, (c) is correct answer.

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23. Answer : (c)

Reason : The entry required to rectify the mistake is

Partciulars Rs. Rs.

Suspense account Dr.

To Nadirs account

1,234

1,234

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24. Answer : (d)

Reason : Accounting records only those transactions which are expressed in monetary terms. Accounting doesnot record non-financial transactions. It is the concept of money measurement. Hence, (d) is correctanswer.

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25. Answer : (b)

Reason : The frequently used valuation bases in accounting are Historical Cost, Current cost, Realizable valueand present value. Opportunity cost will not be used generally. Hence, (b) is correct answer.

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26. Answer : (a)

Reason : The annual financial statements should be approved by the Board of directors before being signed bythe auditors.

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27. Answer : (c)

Reason : Current liabilities are such obligations which are to be satisfied within one year.

Hence, (c) is correct answer.

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28. Answer : (c)

Reason :

Expenditure paid by the company Rs.1,20,000Add : Prepaid expenditure as on March 31, 2006 Rs. 40,320

Rs.1,60,320Less : Prepaid expenditure as on March 31, 2007 Rs. 32,720

Total expenditure for the year 2006-2007 Rs.1,27,600

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29. Answer : (c)

Reason : (a) Profit after tax is the difference between profit before tax and tax for the year.

(b) Retained earnings is the difference between profit after tax and dividend.(c) Dividends represent the amount earmarked for distribution to share holders.

(d) Operating profit is the difference between gross profit and operating expenses.

(e) Profit before tax is obtained by deducting interest from profits before interest and taxes.

Hence, (c) is correct answer.

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30. Answer : (d)

Reason : Balance sheet is prepared on a particular date to know the financial position of the concern.

Hence, option (d) is correct answer.

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31. Answer : (a)

Reason :

Particulars Rs.

Profit as per Profit & Loss a/c. 6,50,000() Outstanding building rent 3,000

6,47,000() Overcast of sales book 20,000

6,27,000(+) Repairs for machinery (wrongly debited) 2,000

Correct net profit 6,29,000

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32. Answer : (c)

Reason :

Particulars (Rs.)

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Goodwill: 3 years purchase of super profits

3 Rs.28,000 = Rs.84,000.

Average profits: 1,21,500Less: Remuneration from alternative employment 21,500

1,00,000Less: Normal profit @ 12% on average capital

employed (12% of Rs.6,00,000)72,000

Super Profit 28,000

33. Answer : (b)

Reason :

Particulars Rs. Rs.

Post-tax profits of 2006-2007 4,20,000Pre-tax profits of 2006-2007 (4,20,000 / 50%) 8,40,000Less: Income relating to 2005-2006 45,000

Normal profit of 2006-2007 7,95,000Add: Estimated profit from new productSales for the year 2007-08 5,00,000Less: direct expenses 2,25,000Less: Additional fixed expenses 50,000 2,25,000

10,20,000

Less: Tax @50% 5,10,000Future maintainable post tax profit for the year 2007-2008

5,10,000

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34. Answer : (a)

Reason :

Profit and loss account of Sarovar Ltd. for the year ended March 31, 2007

Dr. Cr.

Profit before charging Managers commission = Rs. 31,800

Managers Commission = .


To Salaries and wages 22,000 By Gross profit 75,000To Printing and stationery 3,000To Rent 12,000To Insurance 3,700To Carriage outward 2,500To Managers commission 1,800To Net Profit 30,000

75,000 75,000

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35. Answer : (d)

Reason : Cost of production = Material consumed + Direct labour + Other Manufacturing cost + Opening WIP Closing WIP.

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36. Answer : (c)

Reason : The cost of self-constructed assets is taken as construction cost plus Interest cost on funds borrowed for

construction till the asset is ready for its intended use. Hence, (c) is correct answer.

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37. Answer : (c)

Reason : Under the written-down value method of depreciation, the percentage of depreciation is fixed, but itapplies to the value of the asset at which the asset stands in the books in the beginning of the year.Therefore, the amount of depreciation decreases as the fixed rate of depreciation is charged on written-down values of the asset. Hence, (c) is correct answer.

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38. Answer : (b)

Reason : As per Schedule VI of the Companies Act, 1956, the amount of calls-in-arrears will be deducted fromthe called-up capital in the liability side of the balance sheet. Hence, (b) is correct answer.

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39. Answer : (c) < TO

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Reason : Special Auditor to conduct special audit of a company is appointed by the Central Government. Hence,alternative (c) is correct answer.

40. Answer : (e)

Reason : According to the Schedule VI of the Companies Act, 1956, the following assets are shown under thehead Investments in the balance sheet of a companyI. Investments in the capital of partnership firms

II. Investments in trust securities

III. Investments in sharesIV. Investments in debentures.

Hence the alternative (e) the combination of all the investments mentioned above is the correct answer.

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41. Answer : (d)

Reason : Any compensation, damages or payments made voluntarily shall not be deducted from the gross profit,except this all the other above mentioned items should be deducted from the gross profit to arrive at thenet profit to calculate managerial remuneration. Hence the answer is (d).

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42. Answer : (a)

Reason : Sinking fund is created out of profit. It is the part of profit and should be listed under the headingReserves and Surplus and not under unsecured loans. Loans and advances from subsidiaries, shortterm loans and advances from banks, loans and advances from others and fixed deposits are unsecuredloans.

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43. Answer : (a)Reason : As per the Companies Act, the item Proposed additions to reserves should be included under (a)

Reserves and Surplus in the Balance Sheet of a company

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44. Answer : (b)

Reason : Dividend fromsubsidiary companies in India is included in Profit and loss a/c. Except this, all the otheritems are the classification of foreign exchange earnings. Hence alternative (b) is correct answer.

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45. Answer : (d)

Reason : Profit and loss appropriation account depicts appropriation of net profit. Interim dividend (d) isappropriation of net profit. It appears in Profit and loss appropriation account. Provisions for bad debts(a), provision for taxation for current year (b), Directors remuneration (c) and penalty paid for delay inpayment of tax (e) all are charged against profit and loss account. Hence, (d) is correct answer.

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46. Answer : (c)

Reason :

Fixed assets Freehold (Rs)

Cost as on 31.03.2006 28,57,000Less: Freehold sold on 01.11.06 1,00,000

27,57,000Less: Depreciation Up to 31.03.06 4,27,000

23,30,000Add: Depreciation recouped on sale 20,000

23,50,000Less: Depreciation for the year 26,000

Book value as on 31.03.07 23,24,000

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47. Answer : (c)

Reason :Dr. Profit and Loss appropriation account Cr.


To Transfer to Debenture By Balance b/d 67,000Redemption Reserve 50,000 By Profit for the year

b/d1,90,610

To Proposed Dividend (10% ofRs.19,90,000)

1,99,000

To Surplus carried to Balance Sheet 8,610

2,57,610 2,57,610

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48. Answer : (c) < TO

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Reason : The directors of a company have proposed a dividend of 18% of the paid-up capital. The percentage ofprofits which will have to be compulsorily transferred to reserve is 7.5%.

49. Answer : (e)

Reason : Goodwill is the unidentifiable intangible asset that increases the earning capacity of a business. Theother intangible assets (a), Patents (b) Copyrights, (c) Trade marks and (d) Licenses are identifiableintangible assets that increase the earning capacity of business. Alternative (e) is the correct answer.

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50. Answer : (b)

Reason : Unearned income is a current liability till it is earned. Once it is earned, it becomes income. (b) is thecorrect answer.

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51. Answer : (c)

Reason : Under Simple Profit Method, (I) Average of the adjusted profits of the chosen period and (II) Thenumber of years of purchase are to be considered to calculate goodwill of a business. The combinationof the statements in (I) and (II) i.e. alternative (c) is the correct answer.

The average annual profit expected to accrue in the future is to be arrived at based on the past profits ofthe chosen period adjusting against non-recurring incomes and expenses. The statements in (III) Normalrate of earnings and (IV) Capital employed of the business are to be considered in case of calculation ofgoodwill under Super Profit method.

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52. Answer : (b)

Reason : Let the original value of the asset be Rs.100, depreciation under SLM and WDV is as follows:

Thus, the straight line method will give higher amount of depreciation from fifth year.

Year SLM WDV1 10 25.002 10 18.753 10 14.064 10 10.545 10 7.91

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53. Answer : (c)

Reason : When capital is introduced owners equity increases, total liabilities increase and assets also increase.Hence, (c) is correct answer.

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54. Answer : (b)

Reason :

Particulars Rs.The opening balance in the accumulated depreciation A/cas on April 01, 2006

2,00,000

Less : Accumulated depreciation of the asset disposed 80,000

1,20,000Add : Current years depreciation

(10,00,000 5,00,000) x

50,000

The balance of the accumulated depreciation account ason March 31, 2007

1,70,000

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55. Answer : (b)

Reason :

Cash Account in the books of Mr. NairDr. Cr.


To Capital Account 40,000 By Purchases 25,000To Sales 32,000 By Misc. expenses 2,700

By Drawings (450 x 12) 5,400By Other expenses 1,700By balance c/d 37,200

72,000 72,000

To Balance b/d 37,200

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56. Answer : (e)

Reason : Average profits

= (35,000 + 40,000 + 44,000 + 48,000 + 50,000)/5 = Rs.2,17,000/5 = Rs.43,400

Since goodwill is based on 3 years average = 3 Rs.43,400 = Rs.1,30,200.

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57. Answer : (c)

Reason : The payments made on April 02, 2006 for 3 months ended July 31, 2006 and July 15, 2006 for 6 monthsended January 31, 2007 fully belong to the relevant accounting year, 2006-07. However, in respect of

the payment of Rs.48,600 made on December 01, 2006 in respect of the period ended April 30, 2007 onemonth insurance is prepaid, since the financial year 2006-2007 ends on March 31, 2007. This implies amonths advance payment was made in respect of the next financial year.

Hence, the prepaid insurance = Rs.48,600/4 = Rs.12,150.

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58. Answer : (e)

Reason : Section 211 and 212 (1) of the Companies Act, 1956 lays down that the final accounts of a companymust present an overall true and fair view of the affairs of the company presented in the form set out asper schedule VI of the Companies Act, 1956 and giving due regard to Notes at the end of balance sheetfor contingent liabilities. Hence, (e) is the correct answer.

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59. Answer : (e)

Reason : Dividend is payable only on paid-up capital. It is not payable on calls-in-advance amount, dividenddeclared should be regarded as current liability. Dividend cannot be paid out of capital. Interim dividend

can be declared by the directors without any approval of shareholders. Therefore (e) is correct answer.

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60. Answer : (a)

Reason : Interest accrued and due on debentures (though it is a short-term liability) as per the Companies Act, itmust be shown in the Balance Sheet along with the amount outstanding in respect of debentures. Hence,(a) is correct answer.

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61. Answer : (a)

Reason :

Particulars Calculations Rs.

Average profit Rs.(16,000 + 20,000 + 24,000 + 36,000)/4 24,000Maintenable profit Average profit increase in rent

Rs.24,000 Rs.1,000 = Rs.23,00023,000

Normal profit Capital employed x Normal rateRs.1,00,000 x 15%

15,000

Super profit Maintenable profit Normal profit 8,000Under capitalization of superprofit method Goodwill will be

Super prfoit /Normal rate of return =Rs.8000/15%

53,333

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62. Answer : (e)

Reason : Total units in hand before sale = 15 + 20 + 10 = 45

Number of units sold = 32

Number of units in hand = 13

Under first in first out method of inventory valuation, value of closing inventory is calculated asfollows:

3 Units @ Rs.450 = Rs.1,350

10 Units @ Rs.460 = Rs.4,600

Value of closing inventory = Rs.5,950

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63. Answer : (c)

Reason :

Particulars Rs. Rs.

Closing capital 4,00,000Add: Drawings 1,00,000Interest on drawings @ 6% 6,000 1,06,000Total 5,06,000Less: Additional capital 50,000Interest on opening capital @ 5% on Rs.2,00,000 10,000Opening capital 2,00,000 2,60,000

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Net profit earned during the year 2,46,000

64. Answer : (c)

Reason : Purchase A/c debited for furniture purchased is an error of principle and does not affect trial balance.

For salary paid Bansals A/c is also debited. This is an excess debit of Rs.3,000.

For goods purchased from D. Guptas, their account should have been credited by Rs.7,350 instead ofbeing debited their A/c. The difference in trial balance due to the above error is double the amount i.e.,

Rs.7,350 2 = Rs.14,700. For cash discount allowed by Roy & Co., their A/c should have been debited

instead of giving rise to a difference of Rs.200 in the trial balance. So the Suspense A/c will have a debitof Rs.17,700 (Rs.3,000 + Rs.14,700) and a credit of Rs.200. The net difference is Rs.17,700 less Rs.200= Rs.17,500.

Dr. Suspense account Cr.


To Bansal account 3,000 By Difference in Trial balance 17,500To D Gupta account 14,700 By M/s Roy & Co. 200

17,700 17,700

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65. Answer : (e)

Reason :

Dr. Accounts Payable Cr.

Dr. Stock A/c Cr.

Profit is on cost of goods sold = on cost or on sales.

*Cost of goods sold = Rs.2,00,000 = Rs.1,50,000


To Cash 1,50,000 By Balance b/d 30,000To Balance c/d 40,000 By Purchases

(Balancing figure)1,60,000

1,90,000 1,90,000


To Balance b/d(Balancing figure)

80,000 By Cost of goods

sold*1,50,000

To Purchases 1,60,000 By Goods lost 30,000By Balance c/d 60,000

2,40,000 2,40,000

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66. Answer : (c)

Reason :

Computation of Inventory

Particulars Rs. Rs.

Inventory as per books 1,50,000Add Purchases received but not

accounted for10,000

Sales yet to be delivered 30,000 40,000

1,90,000Less Returns outward 5,000

Amount overcast in stock sheet 6,000 11,000

Value of physical inventory 1,79,000

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67. Answer : (a)

Reason : When opening stock is understated and closing stock is overstated, the gross profit as well as net profitwill increase. Closing stock appearing as an asset in the Balance-sheet when overstated, will alsoincrease the current assets. Hence, (a) is correct answer.

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68. Answer : (b)

Reason : Credit sale of goods is entered in sales book. The transactions mentioned in other options are notentered in sales book. Hence, (b) is the correct answer.

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69. Answer : (a)

Reason : Straight line depreciation per annum = Rs. 3,50,000 x 5% = Rs. 17,500

Number of years for which depreciation has been charged on this basis

= years

If 8% depreciation was charged by the reducing balance method, written down values (WDVs) wouldbe

WDV at the end of the 1st year (3,50,000 x 92%) Rs.3,22,000

WDV at the end of 2nd year (3,22,000 x 92%) Rs.2,96,240

WDV at the end of 3rd year (2,96,240 x 92%) Rs.2,72,541

So extra depreciation to be provided = 2,97,500 2,72,541 = Rs. 24,959 or Rs. 24,960

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70. Answer : (d)

Reason : Rate of Depreciation : 12%

No. of years : 3

Depreciation method : Straight line

Book value : Rs.25,600

Cost of machine (x) : x(1 0.36) = Rs.25,600

x0.64 = Rs.25,600

x = 100 = Rs.40,000

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71. Answer : (d)

Reason : Statement of accounting policies need not be stated in the Directors Report. It is to be stated inAuditors Report.

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0710 FA (CFA510)