Questions for reference

State true or false.

1. Cash flow statement is based on accrual basis of accounting

2. Cash flow statement is useful for short-term financial analysis

3. Cash flow statement is a substitute of cash account.

4. Cash from operations and funds from operations means the same thing

5. Cash flows are classified under two main categories

6. Cash equivalents are short term, highly liquid investment that are
readily convertible into cash.

7. Cash flows resulting from sale of fixed assets are classified as cash flows
from investing activities.

1. Fill in the blanks

1. Cash comprises cash on hand and ----- deposits with banks

2. Cash flows are – and ---- of cash and cash equivalents

3. Cash payments to suppliers for goods and services are classified as cash
flows from --- activities

4. Decrease in creditors is --- -- of cash.

5. Income from investments is a cash flow from ---- activities

State true or false.

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1. Statement of changes in financial position is same as the difference in
opening and closing balance sheets

2. The term funds may be used to denote the net working capital of the
firm

3. SCFP can be prepared on different basis

4. As-3 provides for the preparation of funds flow statement

5. Depreciation reduces tax liability and hence it is a source of fund

6. A flow of fund arises when one of the accounts involved in a

transaction is a current account

7. Conversion of debentures into equity shares appears in FFS.

8. A decrease in current liability during the year results in increase in

working capital

9. Funds from operations are equal to the net profit after tax for the
year

10.Only non-cash expenses are added to net profit to find out funds
from operations

11.Interim dividend and proposed dividend, both should be treated as

non-current items

12.Listing agreement requires every listed company to prepare a cash

flow statement

13.In cash flow statement different cash flows are classified as direct
and indirect cash flows.

14.Payment of interest on loans is a cash flow from operating activities

15.Corporate dividend tax is a cash flow from financing activity

16.The term cash equivalents include short-term marketable

investments.

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 17. SCFP shows those transactions which are not explicitly shown in
Balance sheet.

Break-Even Analysis

1. Contribution is the difference between the sales and the total cost of
sales

2. At break-even point the company earn only marginal profit

3. Contribution is also known as Gross Margin

4. P/V ratio can be improved by increasing the selling price

5. P/v ratio can be improved by reducing the fixed costs

6. Margin of safety=Fixed expenses/P/Vratio

7. Margin of safety can be improved by reducing the fixed cost

8. Break-even analysis is fundamentally a static analysis.

Multiple choice questions.

1. The concept of conservatism takes into account

a. All future profits and all future losses

b. All future profits but leaves all future losses

c. All future losses but leaves all future profits

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2. According to the concept of conservatism the stock in trade is valued at

a. Market price

b. Cost price

c. Market price or cost price whichever is higher

d. Market price or cost price whichever is lower

3. The concept of conservatism will have the effect of

a. Over statement of assets

b. Understatement of assets

c. Understatement of liabilities

d. Understatement of provisions for bad and doubtful debts

4. According to the going concern a business is assumed as having

a. A limited life

b. An indefinite life

c. A very long life.

5. According to which of the following concept even the proprietor of the

business is treated as a creditor of the business

a. Money measurement concept

b. Cost concept

c. Dual aspect concept

d. Entity concept.

6. according to which of the following concepts for determining the net

income from business, all costs which are applicable to revenue of the
period should be charged against that revenue?

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a. Matching concept

b. Cost concept

c. Money measurement concept

d. Dual aspect concept

7According to money measurement concept which of the following will be

recorded in the books of accounts?

a. Extra profits arising out of revaluation of assets

b. Commission payable to a salesman

c. Quality control data

d. All of these

8. Non financial quantitative information is not recorded in accounts due to

a. Dual concept

b. Accrual concept

c. Measurement concept

d. Entity concept

9. Realization concept implies

a. The receipt of the order

b. The delivery of the goods

c. The receipt of cash from the customer.

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Model questions

1. Which of the following are important factors in ensuring the integrity of

accounting information?
a. Institutional factors, such as standards for preparing information
b. Professional organizations.
c. Competence, judgment, and ethical behaviour of individual
accountants.
d. All of the above

2. Financial accounting information is characterized by all of the following

except:
a. It is historical in nature
b. It results from inexact and approximate measures
c. It is factual so that it does not require judgment to prepare
d. It enhanced by management’s explanation.

3. Which of the following statements is not consistent with generally

accepted accounting principles related to asset valuation?

a. Many assets are originally recorded in accounting records at their

cost to the business entity.
b. Subtracting total liabilities from total assets indicates what the
owners’ equity in the business is worth under current market
conditions.
c. Accountants assume that assets such as office supplies, land and
buildings will be used in business operations rather than sold at
current market prices.
d. Accounts prefer to base the valuation of assets upon objective,
verifiable evidence rather than upon appraisal or personal opinion.

4. What information would you find in a statement of cash flows that you
would not be able to get from the other two primary financial
statements?

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 a. Cash provided by or used in financing activities
b. Cash balance at the end of the period
c. Total liabilities due to creditors at the end of the period
d. Net income.

5. Which of the following is provided by a trial balance in which total

debits equal total credits?

a. Proof that no transaction was completely omitted from the

ledger during the posting process.
b. Proof that the correct debit or credit balance has been
computed for each account.
c. Proof that the ledger is in balance.
d. Proof that transactions have been correctly analyzed and
recorded in the proper accounts.

6. Which of the following accounts would never be reported in the income

statement as an expense?

a. Depreciation expense
b. Income taxes expense
c. Interest expense
d. Dividends expense

7. The statement of cash flows is designed to assist users in assessing each

of the following except

a. the ability of a company to remain solvent

b. the company’s profitability
c. the major sources of cash receipts during the period
d. The reason why net cash flows from operating activities differ
from net income

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8. Which of the following is not included in the statement of cash flows, or
in a supplementary schedule accompanying the statement of cash flows?

a. disclosure of the amount of cash invested in money market

funds during the accounting period
b. A reconciliation of net income to net cash flows from
operating activities
c. Disclosure of investing or financing activities that did not
involve cash
d. The amount of cash and cash equivalents owned by the
business at the end of the accounting period.

9. Which of the following business strategies is most likely to increase the

net cash flows of a software developer in the short run but reduce them
over a longer term?

a. Develop software that is more costly to create but easier to

update and improve
b. Lower the price of existing
c. Purchase the building in which the business operates
d. Reduce expenditure for the purpose of developing new
products.

10.Using ABC to allocate manufacturing overhead can help managers to

a. identify what activities drive overhead costs

b. set product prices
c. locate inefficiencies in the production process
d. Do all of the above

11.Costing technique in which all costs, variable as well as fixed are

charged to product operations or service, is called

a. historical cost

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 b. absorption costing
c. marginal costing
d. direct costing
e. standard costing

12.Rent paid for a factory building is an example of

a. sunk costs
b. controllable cost
c. committed cost
d. discretionary cost
e. programmed cost

13.An amount of Rs. 100,000 for raw material is to be paid after 3 months.
This is an example of

a. conversion cost
b. joint cost
c. programmed cost
d. future cost
e. none of the above

14.Costs that are not relevant for decision making and are not affected by
increase or decrease in volume are

a. Out of pocket cost

b. Differential cost
c. Imputed costs
d. Sunk costs
e. Marginal costs

15.A cost which has both a fixed and variable component is called a

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 a. step-fixed cost
b. step-variable cost
c. semi-variable cost
d. curvilinear cost
e. discretionary cost

16.Manufacturing costs can be defined as

a. Prime cost + opening WIP+Closing WIP

b. Prime cost + Labor cost + Factory overhead cost
c. Prime cost + Factory overhead cost + opening work in progress
–closing work in progress
d. Prime cost + Factory overhead cost
e. Conversion cost + opening work in progress - closing work in
progress

17.A job cost sheet basically does not contain

a. direct labor cost

b. indirect material cost
c. indirect labor cost
d. selling and distribution overhead cost
e. Manufacturing overhead cost.

18.Which of the following can improve the margin of safety?

a. lowering the fixed cost

b. lowering the variable cost so as to improve marginal
contribution
c. increasing volume of sales, if there is availability capacity
d. Both b and c above.
e. All of a b and c above.

19.Break even sales is

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 a. The sales required to earn a particular amount of profit
b. The sales at which there is neither profit or loss
c. The sales equal to amount of fixed expenses incurred by the
company
d. The sales equal to amount of variable expenses incurred by the
company
e. The total sales of the company.

20.The contribution per unit does not depend on

a. selling price
b. direct material cost
c. fixed cost
d. direct labor
e. direct expenses

21.Cost volume profit analysis is a key factor in many decisions including

choice of product lines, pricing of products, marketing strategy and
utilization of productive facilities. A calculation used in a CVP analysis
is the break even point. Once the break even point has been reached
operating income will increase by the

a. gross margin per unit for each additional unit sold

b. contribution margin per unit for each additional unit sold
c. fixed cost per unit for each additional unit sold
d. variable cost per unit for each additional unit sold
e. Sales price per unit for each additional unit sold.

22.Margin of safety can be improved by

a. Increase of variable cost per unit

b. Decease of sale price per unit
c. Increase of fixed cost
d. Decrease of sales volume
e. Decrease of variable cost per unit.

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23.The contribution per unit does not depend upon

a. direct material cost

b. direct labor cost
c. direct expenses
d. fixed expenses
e. Manufacturing variable cost.

24.which of the following statements is true of CVP relationship

a. planning and forecasting of profits at various levels of activity

can be done using CVP
b. CVP helps in developing fixed budgets
c. CVP helps in developing flexible budgets
d. Both a and b above
e. Both a and c above.

25.P ltd. has a current P/V ratio of 40%. The company is considering
reduction in selling price by 10%. By what percentage should the sales
revenue increase to maintain the existing level of profit?

a. 10.00%
b. 15.00%
c. 20.00%
d. 25.00
e. 33.33%

26.Which of the following relate to cost drivers?

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 a. Events within the activities that cause work are cost drivers.
b. Cost drivers are used to forecast future costs and provide
motivation to meet future cost and provide motivation to meet
the future costs goals.
c. Cost drivers can not apply overhead to product
d. Cost drivers can not apply overhead to services
e. Two cost pools can not use the same cost drivers.

27.To decrease the Break Even point one must

a. Increase the Fixed Cost

b. Decrease the Unit Contribution
c. Decrease the Selling Price
d. Increase Variable cost
e. Decrease Fixed cost

28.Capital expenditure is an expenditure which

a. Benefits the current accounting period

b. Will benefit the next accounting period
c. Result in acquisition of a permanent asset
d. Results in the acquisition of a current asset
e. Results in the acquisition of current asset or permanent asset.

29.Computers taken on hire by a business for a period of twelve months

should be classified as

a. Fixed assets.
b. Current assets
c. Intangible assets
d. Deferred revenue expenditure
e. Not an asset.
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 30.If a company has contingent liabilities they appear in

a. Balance sheet
b. Directors’ report
c. Notes on account to balance sheet
d. Chairman’s report
e. Notice to shareholders.

Financial Accounting –I

1. Profit and Loss account is prepared for a period of one year by following

a. Consistency concept
b. Conservatism concept
c. Time period concept
d. Cost concept
e. None of the above.

2. Accounting does not record non-financial transaction because of

a. Entity concept
b. Accrual concept
c. Cost concept
d. Measurement concept
e. Continuity concept.

3. If a company has contingent liabilities they appear in the

a. Balance Sheet

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 b. Directors report
c. Notes on account to balance sheet
d. Chairman’s report
e. Notice to the shareholders.

4. The accounting Standard on Revenue Recognition deals with

a. Revenue obtained from execution of constructions contracts.

b. Revenue from sale under hire purchase and lease agreements
c. Interest, royalties and dividends obtained from other concerns using
the resources of the enterprise.
d. Revenues from government grants and subsidies
e. Insurance premium relating to contracts received by insurance
companies

5. Trade discount allowed at the time of sale of goods is recorded in

a. Sales book

b. Cash book

c. Journal
d. Debtors ledger
e. Petty cash book.

6. Bank Reconciliation statement is prepared

a. To rectify the mistakes in the cash book,
b. To rectify the mistakes in the bank statement
c. To arrive at the bank balance
d. To arrive at the cash balance
e. To bring out the reasons for the difference between the balance as per
cash book and the balance as per bank statement.

7. When bill discounted with the bank is dishonored

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 a. Acceptor’s account is debited in the books of drawer
b. Bills receivable account is credited in the books of drawer
c. Bank account is debited in the books of drawer
d. Bills payable account is debited in the books of drawer
e. None of the above.

7. Which of the following are/is a current asset?

a. Sundry debtors
b. Stock
c. Prepaid insurance
d. Both a and b above
e. All of a b and c above

8. Capital expenditure is an expenditure which

a. Benefits the current accounting period

b. Will benefit 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 or permanent asset.

9. Cash Profit is

a. Gross profit – Net profit

b. Net Profit-Non-trading profit-Depreciation and provisions
c. Gross profit –Non-trading profit+Depreciation and provision
d. Net Profit+Depreciation and provisions
e. Gross profit –Operational expenses.

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 10.Which of the following is not deferred revenue expenditure?

a. Expenses in connection with issue of equity shares.

b. Preliminary expenses
c. Preoperative expenses
d. Heavy advertising expenses to introduce a new product
e. Legal expenses incurred in defending a suit for breach of contract to
supply goods.

12.From the accounting point of view loss means

a. Increase in liability
b. Decrease in asset
c. Increase in asset
d. Increase in owner’s equity
e. Decrease in owner’s equity

11.Which of the following is an item of capital expenditure?

a. Annual fire insurance premiums on plant and equipment

b. Research ad development costs during the year.
c. Interest on borrowed fund utilized for acquisition of office furniture.
d. Sales tax paid in conjunction with the purchase of office equipment
e. Monthly rent of machinery used in the business.

12.Which of the following is false?

a. Owners equity+Outsiders liability=Assets

b. Assets-Capital=Liability
c. Assets+capital=Liabilities
d. Both a and b above
e. None of the above

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13.Which of the following is a non-monetary asset?

a. Account receivable
b. Account payable
c. Demand bank deposits
d. Net long-term receivable.
e. Patents and trademarks

14.Discount on issue of shares is shown on

a. Assets side under miscellaneous expenditure

b. Assets side under current assets

c. Liabilities side under current liability

d. Liabilities side under reserves

f. None of the above.

15.Bonus shares can be issued out of

a. General reserves
b. Investment allowance reserve
c. Share premium collected in cash
d. General reserves and sharepreium
e. All of the above

16.For redemption of debentures, sinking fund is created out of

a. Share capital
b. Debenture capital
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 c. Share premium reserve
d. Current year profits
e. Capital reserve

17.The premium payable on the redemption of debenture is

a. Written off from the share premium a/c

b. Written off from the capital profits
c. Written off from the accumulated profits.
d. Both a and c
e. None of the above

18.Debentures can be issued

a. For cash
b. For consideration other than cash
c. As collateral security
d. In lieu of dividends
e. All a b c above.

19.Which of the following items cannot be shown as reserves?

a. Capital reserve
b. Share Premium
c. Sinking Fund
d. Capital redemption reserve
e. None of the above

20.Which of the following intangible assets is considered an unidentifiable

intangible assets/

a. Patent right
b. Trademark
c. Franchise
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 d. Goodwill
e. Copyright

21.Working Capital is:

a. Current assets

b. Current liabilities

c. Current assets minus current liabilities

d. Margin of on loans

c. Portion of Share Capital used in operations.

22.The meaning of “fund”flow statement is

a. Cash
b. Net working capital
c. Gross working capital
d. Profit
e. Either a or b above.

23.Which of the following is not a use of funds?

a. Increase in cash
b. Buy-back of shares
c. Decrease in working capital
d. Increase indepreciation
e. Decrease in bank borrowing.

24.Which of the following is a source of cash in a funds flow statement drawn

on cash basis?
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 a. Dividend payment
b. Increase in fixed assets.
c. Increase in receivable
d. Repayment of short-term bank
e. Depreciation.

25.Prepaid expenses are valued on the balance sheet at

a. Replacement Cost
b. Current Cost
c. Cost to acquire the asset
d. Cost to acquire less accumulated amortization
e. Cost less expired portion.

26.AS-2 on inventory valuation does not cover the inventories such as

a. Work-in-progress arising under service contracts

b. Inventoies of forest products
c. Land or other property held for use
d. Both a and b above
e. Both a and c above

27.Loss on the issue of debentures is shown as a

a. Current asset
b. Current liability
c. Fictitious asset
d. Fixed asset
e. None of the above

28.Which of the following methods involve creation of Sinking Fund in case of

redemption of debentures?

a. Redemption in lump sum

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 b. Drawings of lots
c. Redemption by purchase in open market
d. By conversion
e. All of the above.

29. Which of the following appears in the profit &loss appropriation account?

a. Profit or loss on sale of asset

b. Subsidy received from Central government
c. Provision for taxation
d. Interim dividend
e. Penalty paid under dispute.
f.

Inventory—AS 2

1.The inventory costing method that is based on the assumption that cost
should be charged against revenue in the order in which they were incurred is

a. FIFO
b. LIFO
c. Average cost
d. Perpetual inventory

1. The following units of a particular item were purchased and sold during
the period

Beginning inventory – 40 units at Rs.20

First purchase—50 units at Rs.21
Second purchase -50 units at Rs.22
First sale-110 units
Third purchase – 50 units at Rs.23
Second sale- 45 units
What is the cost of the 35 units on hand at the end of the period as determined
under perpetual inventory system by the LIFO costing method

a. Rs.715

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 b. Rs.705
c. Rs.700
d. Rs.805
Ans: The LIFO method of costing is based on the assumption that costs should be
charged against revenue in the reverse order in which costs were incurred.Thus the
oldest costs are assigned to inventory. Thirty of 35 units would be assigned a unit
cost of Rs.20 (since 10 of the beginning inventory units were sold on the first sale),
and the remaining 5 units would be assigned a cost of Rs.23 for a total of Rs.715

2. The following units of a particular item were available for sale during
the period:
Beginning inventory- 40 units at Rs.20
First purchase -50 units at Rs.21
Second purchase 50 units at Rs.22
Third purchase- 50 units at Rs. 23

What is the unit cost of the 35 units on hand at the end the period as determined
under the periodic inventory system by the FiFo costing method?

A.20 B.21C.22 D.23

Ans: d The FIFO method of costing is based on the assumption that costs should be
charged against revenue in the order in which they were incurred(first in first out)
The most recent costs are assigned to inventory. The 35 units would be assigned a
unit cost of 23

3. If merchandise inventory is being valued at cost and the price level is stadily
rising the method of costing that will yield the highest net income is
a. LIFO
b. FIFO
c. Average
d. Periodic

Ans: When the price level is steadily rising, the earlier unit costs are lower than
recent unit costs. Under the FIFO method these earlier costs are matched against
the revenue to yield the highest possible net income. The periodic inventory system
is a system and not a method of costing.

4. If the inventory at the end of the year is understated by Rs.7500 the error
will cause on
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 a. Understatement of cost of merchandise sold for the year by 7500
b. Overstatement of gross profit for the year by 7500
c. Overstatement of merchandise inventory for the year by 7500
d. Understatement of net income for the year by 7500

Fixed assets

1.which of the following expenditures incurred in connection with acquiring

machinery is a proper charge to the asset account?

a. Fieght
b. Installation cost
c. Both a and b
d. Netiher a and b

Ans: all amounts spent to get fixed asset in place and ready for use are proper
charges to the asset account. In case of machinery acquired the freight and
installation costs are both proper charges the machinery account

2. What is the amount of depreciation using the double declining balance

method for the second year of use for equipment costing rs.9,000 with an
estimated residual value of rs.600 and an estimated life of three years?

a. 6000
b. 3000
c. 2,000
d. 400

The periodic charge for depreciation under the double declining balance method
for the second year is determined by first computing the depreciation charge for the
first year. The depreciation for the first year of 6,000 is computed by multiplying
the cost the equipment, rs.9000 by 2/3 (the straight line method with rate of 1/3
multiplied by 2) the depreciation for the second year of 2,000 is then determined
by multiplying the book value at the end of first year,3000 by 2/3. The third year
depreciation is 400 which is determined by multiplying the book value at the end
of the second year, rs.1,000 by 2/3 thus yielding 667.however, the equipment
cannot be depreciated.

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