Question Paper

Accounting for Decision Making – I (MB2D1): January 2009

 Answer all 71 questions.
 Marks are indicated against each question.
Total Marks : 100
<Answer>
1. 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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)

Page 1 of 23
 <Answer>
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?
(a) Understandability
(b) Reliability
(c) Relevance
(d) Neutrality
(e) Comparability. (1 mark)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
Page 2 of 23
 <Answer>
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
(d) Current liabilities and current assets
(e) Current assets and working capital. (1 mark)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)

Page 3 of 23
 <Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)

Page 4 of 23
 <Answer>
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)
<Answer>
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)
<Answer>
33.Which of the following 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 previous periods?
(a) Extraordinary items
(b) Prior period items
(c) Non-cash items
(d) Abnormal items
(e) Non-operating items. (1 mark)
<Answer>
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)
<Answer>
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)
<Answer>
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)
<Answer>
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)

Page 5 of 23
 <Answer>
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. (2marks)
<Answer>
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)
<Answer>
40.The accent of the International Accounting Standards is on

(a) Reporting
(b) Substance
(c) Analysis
(d) Localization
(e) Immateriality. (1 mark)
<Answer>
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)
<Answer>
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. (2marks)
<Answer>
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. (2marks)

Page 6 of 23
 <Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
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
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. (2marks)
<Answer>
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)
<Answer>
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. (2marks)

Page 7 of 23
 <Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
51.Intlizer Ltd., provided the following information:

Particulars Rs.
Fixed assets 8,75,000
Current assets 15,50,000
Current liabilities 8,00,000
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. (2marks)
<Answer>
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%. (2marks)

Page 8 of 23
 <Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
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%. (2marks)
<Answer>
56.Consider the following data regarding Delta Ltd.:

Particulars
Average payment period 29.5 days
Net annual credit purchases Rs.13,32,250
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. (2marks)
<Answer>
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. (2marks)

Page 9 of 23
 <Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
61.SVR Ltd., furnished the following information:

Particulars 2006-07 (Rs.) 2007-08 (Rs.)

Assets
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). (2marks)

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 <Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
65.Ravi Ltd., furnished the following information:

Particulars
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. (2marks)
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 <Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
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. (2marks)
<Answer>
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
(e) 2.50. (2marks)

Page 12 of 23
 <Answer>
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. (2marks)
<Answer>
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

Page 13 of 23
 Suggested Answers
Accounting for Decision Making – I (MB2D1): January 2009
Section A : Basic Concepts
Answer Reason
1. 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.

Page 14 of 23
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.

Page 15 of 23
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 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.

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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.

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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 <

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.

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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.22,50,000
44. 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 lakh

45. 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 16,34,000

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49. C <
Partiulars Rs.
Profit after tax 5,20,000
Less: Preference dividend (Rs.10,00,000 × 10%) 1,00,000
Profit available to equity shareholders 4,20,000
Earning per share (Rs.4,20,000 / 1,00,000) 4.20
50. 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 142.50
52. 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%.

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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
Add : Transfer to General Reserve 1,00,000
Balance in Profit & Loss A/c 2,50,000
Reserves & Surplus (at year end) 4,50,000
58. D <
Particulars 2007-08 2006-07
(Rs.) (Rs.)
Current assets 38,000 32,000
Current liabilities 6,000 24,000
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 3,35,000
of 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%.

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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 activities 1,29,000
Total cash inflows 2,24,000
Less: Cash used for investment activities 1,00,000
Less: Cash used for financing activities 35,000 1,35,000
Cash at the end of the period 89,000
64. A <
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) 10,55,000
65. 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 26,50,000

Page 22 of 23
68. 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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