MCQs on Balance Sheet

1) Rent receivable (given in trial balance) is an item of:

A) Balance Sheet
B) Profit & Loss Account
C) Trading Account
D) Both Balance Sheet and Profit & Loss Account
2) When closing stock is given in trial balance, then it will effect:
A) Trading account only
B) Balance sheet only
C) Owner's equity only
D) Both Trading account and Balance sheet
3) Which of the following account is affected from the Drawings of cash in soleproprietorship business?
A) Capital account
B) Shareholder account
C) Liability account
D) Expense account

4) An asset is considered to be a current asset if:

A) It has been bought recently and was bought new and not used
B) It can be realized in cash or sold or consumed in the business within one year

C) It is a piece of new machinery that is expected to last for at least ten years
D) All of the given options
5) General office expenses are charged to which of the following head:
A) Administrative expenses
B) Marketing expenses
C) Selling expenses
D) Financial expenses
6) Which of the following would NOT be considered as a component of 'cost' of stock?
A) Salaries of selling staff
B) Transportation inward costs
C) Import duties
D) Purchase price

7) Consider the following data and identify the amount which will be deducted from
Sundry Debtors in Balance Sheet
Particulars
Bad debts (from trial balance)
Provision for doubtful debts (old)
Current years provision (new)
A) $400
B) $800
C) $2,000
D) $2,400

$
1,600
2,000
800

8) Which of the following is NOT correct about income tax?

A) Different companies pay tax on different rates
B) It is treated as an expense and debited in Profit & Loss account
C) When financial statements are prepared, an estimate of expected tax liability is made
D) It is treated as an expense and credited in Profit & Loss account
9) (Amount of new provision + Amount of bad debts) < Amount of old provision then
amount will be shown on:
A) Debit side of P & L account
B) Credit side of P & L account
C) Asset side of Balance Sheet
D) Liability side of Balance Sheet
Answers :
1)
2)
3)
4)
5)
6)
7)
8)
9)

A
D
A
B
A
A
B
B
B

Multiple Choice Questions on P&L Account

1) According to the double entry system of accounting, an account that

obtains benefit is:
A) Credit
B) Debit
C) Income
D) No need to show as accounting record

2) Term "Credit" means_______ by the business.

A) Receiving of benefits
B) It has no effect on business
C) Providing of benefits
D) It depends upon items

3) When a Liability is reduced or decreased, it is recorded on the:

A) Left or credit side of the account
B) Right or debit side of the account
C) Right or credit side of the account
D) Left or debit side of the account

4) When Capital is increased by an amount, it is recorded on the:

A) Right or debit side of the account

B) Left or credit side of the account
C) Left or debit side of the account
D) Right or credit side of the account

5) What type of expenses are paid out of Gross Profit?

A) General Expenses
B) Financial Expenses
C) Selling Expenses
D) All of the given options

6) Which of the following shows summary of a company's financial position

at a specific date?
A) Profit & Loss Account
B) Cash Flow Statement
C) Balance Sheet
D) Income & Expenditure Account

7) Which of the following is NOT an example of intangible assets?

A) Franchise rights
B) Goodwill
C) Patents
D) Land

8) Which of the following is an example of business liability?

A) Land
B) Building
C) Cash
D) Creditors

9) The unfavorable balance of Profit and Loss account should be:

A) Added in liabilities
B) Subtracted from current assets
C) Subtracted from capital
D) Subtracted from liabilities

Answers :
1) A
2) A
3) D

4)
5)
6)
7)
8)
9)

D
D
C
D
D
C

DESCRIPTIVE QUESTIONS
Questions on Balance Sheet: - (3 MKS Each)

1. Explain the following in short: a. Current Assets

The first major component of the balance sheet is current assets. These
assets can easily be converted to cash within one operating cycle -- the
amount of time the company needs to sell a product and collect cash from
that sale, often anywhere between 60 and 180 days.
Companies need current assets to fund their day-to-day operations. If current
assets fall short, the company will have to scramble for other sources of
short-term funding, either by taking on debtor issuing more stock.
There are five main kinds of current assets:

Cash and equivalents

Short- and long-term investments

Accounts receivable

Inventories

Prepaid expenses

b. Current Liabilities
Current liabilities are what a company currently owes to its suppliers and
creditors. These are short-term debts, all due in less than a year. Paying
them off normally requires the company to convert some of its current assets
into cash.
Current Liabilities are also a source of assets. Any money that a company
pulls from a line of credit, or postpones paying from its accounts payable, is
an asset that can be used to grow the business.
There are five main categories of current liabilities:

Accounts payable

Accrued expenses

Income tax payable

Short-term payables

Long-term payables

2. Write a Short Note on Capital Reserve.

It is the reserve, which does not include any amount regarded as free for
distribution through the P&L Account. Share Premium and Capital
Redemption Reserve Account should not be credited to capital reserve; these
accounts have to be kept separate. Only profits of a surplus of a capital
nature can be credited to such a reserve. Following are the instances of
surplus, which can be credited to capital reserve:

Capital profits on sale of fixed assets

Profits on Reissue of Forfeited Shares

Premiums received on issue of debentures

Profit on Sale of Investments

Profits on Purchase of New Business

3. What is Called Up, Authorized & Paid Up Capital?

Called Up Capital: - it is that part of the companys share capital that has
been called up by the company for payment.
Paid Up Capital: - it is that part of the companys called up share capital that
has been paid up by the shareholders of the company.
Authorized Share Capital: - it is the total permissible limit of capital that a
company can issue in its lifetime. It is decided upon during the formation of
the company & is explicitly mentioned in the Memorandum of the Company.

Questions on Profit & Loss Account: - (3 MKS Each)

1. What is a Profit & Loss Account? List any 10 items that appear
in a P&L Account?
The Profit and Loss (P&L) Statement is also known as the Income
Statement. It shows how well a company buys and sells inventory (or
services) to make a profit. Just as the Balance Sheet is a snapshot of the
financial condition of a company at a certain point in time, the Profit and
Loss statement shows the results of financial operations over a period of
time. The amount of time could be a month, a quarter of a year, a halfyear, or a year. Items appearing in Profit & Loss A/c include: Salaries, Legal Charges, Depreciation, Electricity charges, Bad Debts,
Discounts, Gross Profits, Commission, Advertising Expenses, Stock, etc.

2. What are Drawings? How are they treated for in a P&L

Account?
Whenever the proprietor of the firm decides to withdraw certain sums of
money for his personal use it is termed as drawings. Drawings in
accounting are the assets withdrawn from the business by the owners.
The assets can be in cash form or in any other form of asset withdrawn.
This can be salaries for work done by the owner, or dividends if it is for a
share of the profits. Drawings are not an expense to the firm and hence
should not be debited to the profit and loss account. They are directly
debited to the owners account as his personal expense.

3. What are Bad Debts? What is the treatment on Bad Debts in

the P&L Account?
The term bad debtsusually refer to accounts receivable (or trade accounts
receivable) that will not be collected. However, bad debts can also refer
to notes receivable that will not be collected. Bad Debts, in normal terms
are those debts that can no longer be recovered from the debtors and are
now a loss to the business. Since it is a loss, bad debts account is debited
to the Profit and Loss account, and since the money can no longer be
recovered from the customer, it is closed by crediting it to the customers
account.
i.e.
Bad Debts Account. Dr.
To Debtors (Name) Account

MULTI CHOICE QUESTIONS:

1. Presently Current assets and Current Liabilities of a company are 16,00,000 and 8,00,000
respectively. The current ratio will ______________ on purchase of new machinery of 6,00,000.
a Increase
b Decrease
c Not change
2. Purchase of Treasury Bills will ____________ acid test ratio.
a Weaken
b Not affect
c Strengthen
3. Four times stock turnover ratio implies ________________ months Inventory holding period.
a 3
b 4
c 12
d 3/12
4. Assume that the companys existing Debt-equity ratio is 2: 1, the ploughing back of profits by a
company will ____________ it.
a Increase
b Decrease
c Not change
5. A 2 months Debtor collection period implies that Debtors Turnover Ratio is _________.
a 6 times
b 2 times
c 3 times
d 12 times
6. ___________ is a more rigorous test of the solvency position of a business firm.
a Interest Coverage Ratio
b Debt Service Coverage ratio
c Debt Asset Ratio
d Debt Equity Ratio

7. Issue of 12 % Preference Shares will ____________ Debt-equity ratio of a corporate enterprise.

a Increase
b Decrease
c Not change
8. A firm has a higher quick (or acid test) ratio than the industry average, which implies:
a the firm has a higher P/E ratio than other firms in the industry.
b the firm is more likely to avoid insolvency in short run than other firms in the industry.
c A and B.
d None of the above.
9. An example of a liquidity ratio is _______.
a fixed asset turnover
b current ratio
c debt to equity
d a and c
10. The primary purpose of the liquidity ratios is to determine:
a how much working capital is tied up in inventory.
b the relative level of short-term debt.
c how well a firm is able to pay off short-term obligations.
d more than one of the above.
11. A decreased Stock Turnover Ratio exhibits:
a expanding business
b quick conversion of Inventory into sales
c slow conversion of inventory into sales
d rapid increase in sales
12. Cash collected from Customers will __________ the Current Ratio.
a Improve
b Reduce
c Not Change
d Cant say
13. A firm has a higher asset turnover ratio than the industry average, which implies:
a the firm has a higher P/E ratio than other firms in the industry.
b the firm is more likely to avoid insolvency in the short run than other firms in the
industry.
c the firm is more profitable than other firms in the industry.
d the firm is utilizing assets more efficiently than other firms in the industry.
14. For computing Stock Turnover ratio:
a Opening Stock is taken
b Closing Stock is taken
c a and b

d Average of Opening and Closing Stock

15. A companys long term solvency can be measured by:
a Asset Turnover ratios
b Activity Ratios
c Leverage Ratios
d Liquidity ratios
16. A companys efficiency to effectively use its assets can be measured by:
a Activity Ratios
b Leverage Ratios
c Liquidity ratios
d Internal Measurement Ratios
17. An organisationss short term ability to generate adequate amount of cash can be measured by:
a Leverage Ratios
b Liquidity ratios
c Current Ratios
d None of the above
18. The ratio which enables us to calculate the average number of days it takes to collect cash from
customers after a sale is made:
a Total Conversion period ratio
b Accounts Receivable Turnover Ratio
c Leverage Ratio
d Accounts Payable Turnover Ratio
I.

LONG QUESTIONS:
1. Raj Ltd. sells goods on cash as well as credit. The following particulars are extracted from their
books of accounts for the current year end:
Total gross sales
Cash sales (included in above)
Sales Returns
Total Debtors at the end
Bills Receivable
Provision for Doubtful Debts at the end of
the year
Total Creditors at the end

Calculate: (a) Average Collection Period, (b) Debtor Turnover ratio.

2. Determine the sales of a firm given the following information:

1,00,000
20,000
7,000
9,000
2,000
1,000
10,000

Current Ratio = 1.4

Acid Test Ratio = 1.2
Current Liabilities = 1,600
Inventory Turnover Ratio = 8
3. Firms Current Assets and Current Liabilities are 1,600 and 1,000 respectively. How much can it
borrow on a short-term basis without reducing the Current Ratio below 1.25.
4. A firm has made credit sales of 2,40,000 during the year. The outstanding amount of Debtors at
the beginning and at the end of the year respectively was 27,500 and 32,500. Determine the
Debtors turnover ratio.
5. The firm has made Credit purchases of 1,80,000. The amount payable to the Creditors at the
beginning and at the end of the year is 42,500 and 47,500 respectively. Find out the Creditors
turnover ratio.
6. The following incomplete Balance sheet of Suman & Company is furnished together with certain
additional information. You are required to complete the missing figures in the Balance Sheet
using Ratio Analysis:
Balance sheet of Suman & Company
As on 31st March 1989
Capital & Liabilities
Share Capital
General Reserve

Rupees
2,00,000
1,00,000

Long-term Loans
Sundry Creditors

?
1,00,000

Assets
Fixed Assets:
Plant & Machinery
and Building
Current Assets:
Inventory
Sundry Debtors
Cash & Bank
Balance

Additional Information:
1.
2.
3.
4.
5.
6.
7.

Ratio of Long term loan to Net worth = 1 : 2

Asset Turnover = 2 times
Average Collection Period = 6 days
Inventory Turnover = 10 times
Gross Profit Margin = 10 % of Cost of goods sold
Acid Test Ratio = 1:1
Credit Sales= 50 %

Rupees
?

?
?
?

(Assume 360 days in a year)

ANSWERS
I.

MULTI CHOICE QUESTIONS:

1. b - Decrease
2. b - Not affect
3. a 3
4. b Decrease
5. a 6 times
6. b - Debt Service Coverage Ratio
7. b Decrease
8. b - the firm is more likely to avoid insolvency in short run than other firms in the industry.
9. b - current ratio
10. c - how well a firm is able to pay off short-term obligations.
11. c - slow conversion of inventory into sales
12. c - not change
13. d - the firm is utilizing assets more efficiently than other firms in the industry.
14. d - Average of Opening and Closing Stock
15. c Leverage Ratios
16. a Activity Ratios
17. b Liquidity Ratios
18. b - Accounts Receivable Turnover Ratio

II.

LONG QUESTIONS:
1. Total net credit sales = Gross Sales Cash Sales Sales Returns
=1,00,000 20,000 7,000 = 73,000

Debtors Turnover = Credit Sales /(Debtors + Bills Receivable)

=73,000 / 11,000 = 73 / 11

Average Collection Period = 365 days / Debtors Turnover (i.e. 73 / 11) = 55 days.

2. The sales figure may be derived as follows:

Current Assets = Current Liabilities * Current Ratio

= 1,600 * 1.4 = 2,240
Current Assets - Inventories = Current Liabilities * Asset Test Ratio
= 1,600 * 1.2 = 1,920
Inventories = 2,240 -1,920 = 320
Sales = Inventories * Inventories Turnover Ratio
= 320 * 8 = 2,560
3. Let the maximum short-term borrowing be A. The Current Ratio with this borrowing should
be 1.25.
= (1,600 + A) / (1,000 + A) = 1.25
Solving this equation, we get A = 1,400. Hence the maximum permissible short-term
borrowing is 1,400.
4. Debtors Turnover Ratio = 2,40,000 / [(27,500 + 32,500) / 2] = 8 times per year
Debtors Collection period = 12 months / Debtors Turnover
= 1.5 months
5. Creditors Turnover Ratio = 1,80,000 / [(42,500 + 47,500) / 2] = 4 times per year
Creditors payment period = 12 months / Creditors Turnover Ratio (4)
= 3 months
6. Balance sheet of Suman & Company as on 31st March 1989:
Capital & Liabilities
Share Capital
General Reserve

Rupees
2,00,000
1,00,000

Long-term Loans
(note 1)
Sundry Creditors

1,50,000
1,00,000

5,50,000

Assets
Fixed Assets:
Plant & Machinery
and Building

Current Assets:
Inventory (note 4)
Sundry Debtors (note
2)
Cash & Bank
Balance (note 3)

Rupees
3,50,000

1,00,000
9,167
90,833
5,50,000

Notes:
1. Long term loan = * Net worth = * 3,00,000 = 1,50,000
2. Asset Turnover Ratio = 2 times
Sales = 2 * Total Assets = 2 * 5,50,000 = 11,00,000
Credit Sales = 0.5 * 11,00,000 = 5,50,000
Average Collection Period = 6 days
Sundry Debtors = (6 * Credit Sales) / 360 = (6 * 5,50,000) / 360 = 9,167
3. Acid Test Ratio = 1 : 1
(Sundry Debtors + Cash and Bank balance) / Sundry creditors = 1
Sundry Debtors + Cash and Bank balance = Sundry creditors
9,167 + Cash and Bank balance = 1,00,000
Cash and Bank Balance = 90,833
4. Inventory turnover = Cost of goods sold / Inventory = 10
Gross Profit Margin = 10% of COGS
COGS = (10/11) * sales = (10/11) * 11,00,000 = 10,00,000
Inventory = COGS / 10 = 10,00,000 /10 = 1,00,000

Topic:- Profitability and shareholders ratio

Question 1.
Stock is not included in the current assets when calculating the acid test ratio because:

Only debtors can be included, as they will be converted into cash shortly
Stock is not a liquid asset
Banks only recognise cash and debtors as liquid assets
It makes comparison easier as only two current liabilities are included in the acid
test ratio

Question 2.
If a firm sold stock on credit then which of the following would be the result?

Acid test ratio decreases

Current ratio increases
Current ratio decreases
Acid test ratio increases

Question 3.
A firm experiencing difficulties due to rapid growth in sales is known as one which is:

Insolvent
Bankrupt
Solvent
Overtrading

Question 4.
Comparison of the market price of the share with the earnings per share gives us which ratio?

Interest cover
Price/Earnings ratio
Dividend yield
Divide cover

Question 5.
If we want to examine the efficiency of a firm, which of the following ratios would be helpful?

Stock turnover
Gearing
Dividend cover
Current ratio

Question 6.
The proportion of sales that is accounted for by total costs can be ascertained by which ratio?

Return on capital employed

Stock turnover
Gross profit percentage
Net profit percentage

Question 7.
Which of the following factors does not suggest overtrading is taking place?

Build up of cash in bank

Lower profit margins
Increases in sales volume
Reliance on short term finance

Question 8.
FRS 14 defines which ratio?

Return on equity
Dividend yield
Earnings per share
Return on capital employed

Question 9.
Creditors would not be interested in which group of ratios?

Solvency
Capital structure
Profitability
Shareholder

Question 10.
Which item would not be included in the calculation of the Price/Earnings ratio?

Number of ordinary shares outstanding

Total dividends distributed
Profit available to ordinary shareholders
Market price of share

Question 11.
Why is profit after interest and tax used for shareholder ratio calculations?

Compliance with company law

Historical precedence
It is prudent to do so
This measure of profit shows what is available to the shareholder

Question12.
Which of the following is not a category of ratios?
o
o
o
o

Efficiency
Management
Profitability
Solvency

Question 13.
Profitability may be more important than solvency when:

When the firm has few options for short-term finance

Shareholders pressure for higher returns
The firm has recently begun trading
During period of economic downturn

Question 14.
Which of the following is not an efficiency ratio?

Interest cover
Asset turnover
Debtor days
Stock turnover

Question 15.
Which of the following would not be normally considered as ratio concerned with profitability?
o
o
o
o

Expenses as a % of sales.
Net profit as a % of sales.
Selling costs as a % of sales.
Sales as a % of working capital.

Question 16
. Ratios can be grouped into certain categories, each of which reflects a particular aspect of the
financial performance or position of an entity. Those ratios which measure the extent to which
assets can be quickly turned into cash are commonly called:

Liquidity ratios
Investment ratios
Profitability ratios

Gearing ratios

Question 17.
Which of the following would not be a signal of overtrading?

Lengthening debtor and creditor ratios.

Rapid accumulation of cash.
Need for overdraft arrangements.
Rapid increases in sales.

Question 18.
There is usually a trade off to be made between profitability and sales volume. Some businesses
are prepared to accept a low net profit percentage in return for generating a high volume of sales.
Which one of the following types of business is typified by low profitability but high sales
volume?

Discount food retailer

Pharmaceuticals manufacturer
Marketing agency
Luxury car make

1. Investment cash flow is the cash received from the sale of

_________________________
2. What are the 3 segments of cash flow?
3. A corporation reported the following information for the past year:
Net income 200000
Depreciation expense 30000
Gain on sale of truck 5000
Proceeds from sale of truck
8000
Decrease in accounts receivable 10000
Assuming these are the only facts, what amount will the corporation
report as the Cash Provided by Operating Activities on the cash flow
statement?
a) 225,000
b) 235,000
c) 253,000
4. Gain on the Sale of Automobile formerly used in the business.
a) Operating b) Investing c) Financing d) Supplemental
5. For a recent year a corporation's financial statements reported the
following:
Net income 100000
Depreciation expense 10000
Decrease in accounts receivable
Decrease in accounts payable
Based on the above information, what amount will the corporation report
as Cash Provided by Operating Activities on the cash flow statement?
a) 65,000
b) 125,000
c) 155,000

6) According to the accounting profession, which of the following would be considered a cashflow item from an "investing" activity?
a) cash flow from interest income
b) Cash flow from dividend income
c) Cash outflow to acquire fixed assets
d) All of the above

7) Which of the following would be included in a cash budget?

a)depreciation charges
b) Goodwill
c) Dividends
d) Patent amortization
8) Which of the following is NOT a cash outflow for the firm?
a) Interest payment
b) Dividend
C) Taxes
d)depreciation
9) Use the following information to calculate net cash from
operating activities: cash sales 100,000; cash from account
receivable payments 200,000; cash dividends received 3,000;
dividends paid 4,000; rent paid 5,000; and amortization expense
6,000.
a) 294000
b) 298000
c) 98000
d) 292000
10) Use the following information to calculate net cash from
investing activities: sell a capital asset for 10,000 cash and a

1,000 gain; purchase a bond investment for 16,000; receive 2,000

interest payment from the bond investment; and pay off a 3,000
mortgage payable.
a) 9,000 net cash outflow from investing activities
b) 6,000 net cash outflow from investing activities
c) 5,000 net cash outflow from investing activities

d) 4,000 net cash outflow from investing activities

11) The information in a cash flow statement will help users assess all of the following
except
a.the companys ability to generate future cash flows.
b.the companys ability to pay dividends and meet obligations.
c.the companys ability to turn over its accounts receivable.
d.the reasons for the difference between net income and cash provided or used by
operating activities.
12) 6.Potter Limited reported a net loss of 10,000 for the year ended December 31,
2007. During the year, accounts receivable decreased 5,000, merchandise inventory
increased 8,000, accounts payable increased by 10,000, and amortization expense of
5,000 was recorded. During 2007, operating activities
a.used net cash of 2,000.
b.used net cash of 8,000.
c.provided net cash of 2,000.
d.provided net cash of 8,000.

13) Use the indirect method to answer questions 17-20. The following
information is available for Casey Company:

Net income 200

equipment 90

increase in plant and

Depreciation expenditure 50
dividend 25

payment of

Increase in accounts receivable

debt 100

30 increase in long term

Decrease in inventories 10
payable 20

decrease in accounts

What is cash flow from operating activities for Casey Company?

a)210
b)290
c)310
d)195

14) Retirement of long-term Bonds Payable.

a)Operating

b)Investing

c)Financing

d)None of the above

15) What is the immediate effect of making a capital repayment on a

loan on cash flow and profits?
a) On profit - Increase; On cash - Decrease
b) On profit - Decrease; On cash - Decrease
c) On profit - Decrease; On cash None
d) On profit - None; On cash Decrease

16) In an IAS 7 Statement of Cash Flows where would you find a

bank current account debit balance?
a) In investing activities

b) In financing activities
c) In cash and cash equivalents
d) In operating activities

17) Which one of the following is false?

a) A profitable company will never run out of cash
b) Rapidly expanding companies can sometimes face a cash shortage
c) If cash outflows exceed cash inflows on an ongoing basis, the business
will eventually run out of cash
d) Cash is the lifeblood of a business and without it the business will die

18)A company with healthy profits is facing a cash shortage. Which

of the following events could account for this?
a)An increase in dividends proposed by the directors
b) Delaying payments to creditors
c) The recent acquisition of equipment
d) The shortening of the credit period granted to debtors

19) A company has a negative cash flow from operating

activities. What could explain this negative cash flow?
a) The repayment of a loan

b) A sudden increase in credit sales

c) High levels of dividend payments
d) A substantial investment in new fixed assets

20) Uses of funds include a (an):

a) decrease in cash.
b) increase in any liability.
c) increase in fixed assets.
d) tax refund.

21) An examination of the sources and uses of funds statement is part of:
a) a forecasting technique.
b) a funds flow analysis.
c) a ratio analysis.
d) calculations for preparing the balance sheet.

22) All of the following are true regarding the investing activity
section of the cash flow statement except
a) investing activities include the purchase and sale of income-producing
assets
b) large purchases of capital assets may signal an emergency
c)investing activities require analysis of long-term asset accounts
d)selling off capital assets may be good news if the company is getting rid of
unprofitable divisions

23) If the following are balance sheet changes:

5,005 decrease in accounts receivable
7,000 decrease in cash
12,012 decrease in notes payable
10,001 increase in accounts payable
a "use" of funds would be the
a) 7,000 decrease in cash.
b) 5,005 decrease in accounts receivable.
c) 10,001 increase in accounts payable.
d) 12,012 decrease in notes payable.
24) All of the following are true regarding the operating activity
section of the cash flow statement except
a)a negative cash flow warrants investigation
b) it includes cash transactions affecting (non-cash) current asset and
current liability accounts
c) the direct method includes the sale of assets reporting a gain or a loss
d) the direct or indirect format may be used to present the information

Answers
1. a) long-life assets, or spent on capital expenditure
2. a)Cash flow from operating activities; b) cash flow from investing activities c)
cash flow from financing activities.
3. b)

4. a)
The gain (computed as proceeds minus the book value) appeared on the income
statement and increased the company's net income. However, the

entire proceeds from the sale of a company's assets are shown in the investing
section. In order to avoid double-counting the gain, the gain must be subtracted
from the net income amount appearing in the operating activities
section of the statement of cash flows

5. a)
The solution is shown below.

6) c
7)c
8)d
9)b
10)b
11) c. the companys ability to turn over its accounts receivable.
12) 6.Potter Limited reported a net loss of 10,000 for the year ended December
31, 2007. During the year, accounts receivable decreased 5,000, merchandise
inventory increased 8,000, accounts payable increased by 10,000, and
amortization expense of 5,000 was recorded. During 2007, operating activities
c. provided net cash of 2,000.
13) a)
14) c)
Bonds Payable is a long-term liability. Changes in long-term liabilities and
changes in stockholders' equity are shown in the financing activities section. A
decrease in Bonds Payable will be shown as a decrease in cash from financing
activities.
15) d)
16)c)

17)a)
18)c)
19) c)
20)c)
21)b)
22)b)
23)d)
24)c

1) When merger is between two companies that are into the same products or services, it is
called a merger.

Horizontal
Vertical
Diagonal
Reverse

2) When a larger or healthier company merges into a smaller or weaker company, it is called
a merger.

Horizontal
Vertical
Diagonal
Reverse

3) In which of the following, values are not assigned to individual assets?

Merger
De-merger
Reverse merger
Slump sale
4) Fair value of assets and liabilities in a merger are determined as of the date.
Appointed
Effective
Ex-merger date
Beginning of the financial year
5) Buyback of securities are governed by
Companies Act, 1956
Securities and Exchange Board of India (Buy Back of Securities) Regulations,
1998
Both the above
None of the above

6) Buy-back is permitted from

Share premium account
Free reserves
Prior issue
All the above
7) Period during which investors can give their shares in a take-over situation is called
Tendering period
Offer period
Public issue period
None of the above

8) Which of the following are permitted form/s of payment in a take over?

listed shares in the equity share capital of the acquirer or of any person acting in
concert
listed secured debt instruments issued by the acquirer or any person acting in
concert
convertible debt securities
All the above
9) Which of the following are allowed to be de-listed from all stock exchanges

Equity
Convertible securities
Both the above
None of the above

10) Share-holders resolution is required for all forms of de-listing.

True
False
11) For FDI in unlisted companies, RBI insists on valuation based on

P/E Ratio
P/BV Ratio
DCF
Enterprise Value

12) Non-compete fee paid to promoters does not affect the pay-off for other shareholders.
True
False
13) A leveraged buyout involves the purchase of a company financed primarily by debt.
True
False
14) Which of the following are commonly cited reasons for M&As?

Synergy
Market power
Strategic realignment
All of the above

15) A merger is a combination of businesses in which

two businesses combine to form a new business.
the participants are necessarily comparable in size, competitive position,
profitability, and market capitalization.
one of the two firms becomes a wholly owned subsidiary of the other firm.
none of the above.
16) Vertical mergers are those in which the participants are

in the same industry.

in different industries
in different phases of the value chain.
none of the above.

17) The complete absorption of one company by another, wherein the acquiring firm retains
its identity and the acquired firm ceases to exist as a separate entity, is called
Merger
Consolidation
tender offer
spinoff
divestiture.

18) An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes
to replace the current board of directors is called a:
Tender offer
Proxy contest
Going-private transaction
Leveraged buyout
Consolidation.
19) Which of the following is NOT commonly used M&A terminology?

Consolidation.
Alliances.
Joint Venture.
Licensing.

20) The merger of a dairy farming business with a supplier of agricultural foodstuffs is an
example of

A complementary merger
A horizontal merger
A conglomerate merger
A vertical merger

21) Assuming we are valuing a going concern, which of the following types of income
streams would be most appropriate for valuing the company?

Earnings Before Interest and Taxes

Free Cash Flows
Operating Income After Taxes
Price to Earnings Ratio

22) Pooling of interests is used in the case of

Amalgamation in the nature of merger

Amalgamation in the nature of purchase
Both the above
None of the above

23) Benefit of indexation is not available for Capital indexed bonds issued by the government
Depreciable assets

 Both the above

None of the above
24) Share-holders special resolution is not required if buy-back does not exceed

25% of paid up capital and free reserves

10% of paid up capital and free reserves
10% of paid up equity capital
25% of paid up equity capital

25) Hostile takeovers can be funded by:

i.
Cash only.
ii.
Shares only.
iii.
Cash and shares.
iv. Other incentives.
Which of the above is/are true?
a)
b)
c)
d)

A. I only.
B. I and II.
C. I, II and IV.
D. I, II, III and IV.

Questionnaires on EVA
1:How is economic value added (EVA) calculated?

o It is the difference between the market value of the firm and the book value of
equity.
o It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital
charge.
o It is the net income of the firm less a dollar cost that equals the weighted average
cost of capital multiplied by the book value of liabilities and equities.
o None of the above are
http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6680/1710177.cw/conten
t/

ANS: It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge

2: What is the difference between economic profit and accounting profit?

o Economic profit includes a charge for all providers of capital while accounting
profit includes only a charge for debt.
o Economic profit covers the profit over the life of the firm, while accounting profit
only covers the most recent accounting period.

o Accounting profit is based on current accepted accounting rules while economic

profit is based on cash flows.
o All of the above are

ANS: Economic profit includes a charge for all providers of capital while accounting profit
includes only a charge for debt.
http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_12/26/6680/1710177.cw/conten
t/

3: A Negative EVA (Economic Value Added) for the year implies that the firm has not earned
enough during the year to cover its capital of capital and the value of the firm has declined
a.True
b.False
ANS:

(TRUE)

https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDEQFjAB&url=http%3A%2F
%2Fjpkc.suibe.edu.cn%2Fmod%2Fnews%2Fdownload.php%3Ft%3D1372782694%26tmd
%3D8ede7dc1%26cat%3D90%26siteid%3D101704%26id%3D3768%26bid%3D20%26md
%3Dbd9b03b&ei=QTREU7zFC8mGrgeoh4G4CA&usg=AFQjCNEdx3XLHZ3DEf8V0PD_VR
rEPo8hFA
4: While EVA is considered an internal performance measure,MVA is considered to be an
external performance measure
a.True
b.False
ANS: (TRUE)
https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDEQFjAB&url=http%3A%2F
%2Fjpkc.suibe.edu.cn%2Fmod%2Fnews%2Fdownload.php%3Ft%3D1372782694%26tmd
%3D8ede7dc1%26cat%3D90%26siteid%3D101704%26id%3D3768%26bid%3D20%26md
%3Dbd9b03b&ei=QTREU7zFC8mGrgeoh4G4CA&usg=AFQjCNEdx3XLHZ3DEf8V0PD_VR
rEPo8hFA

5: Which of the following is not a value added performance measure?

a.Economic Value Added
b.Market Value Added
c.Franchise Factor
d.Company Vlue Added.
ANS: D,.
https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDEQFjAB&url=http%3A%2F
%2Fjpkc.suibe.edu.cn%2Fmod%2Fnews%2Fdownload.php%3Ft%3D1372782694%26tmd
%3D8ede7dc1%26cat%3D90%26siteid%3D101704%26id%3D3768%26bid%3D20%26md
%3Dbd9b03b&ei=QTREU7zFC8mGrgeoh4G4CA&usg=AFQjCNEdx3XLHZ3DEf8V0PD_VR
rEPo8hFA
6:Studies between EVA and MVA has found
a.Inverse relationship
b.Positive relationship
c.Poor relationship
d. EVA exceeds MVA.
ANS C.
https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDEQFjAB&url=http%3A%2F
%2Fjpkc.suibe.edu.cn%2Fmod%2Fnews%2Fdownload.php%3Ft%3D1372782694%26tmd
%3D8ede7dc1%26cat%3D90%26siteid%3D101704%26id%3D3768%26bid%3D20%26md
%3Dbd9b03b&ei=QTREU7zFC8mGrgeoh4G4CA&usg=AFQjCNEdx3XLHZ3DEf8V0PD_VR
rEPo8hFA
7. Economic value added (EVA) was first implemented and popularized by the consulting firm
of:
A)

Stern-Stewart.

B)

Anderson Counting

C)

McKinsey and Company

D)

None of the above

ANS:A
http://highered.mcgrawhill.com/sites/0072467665/student_view0/chapter12/multiple_choice_quiz.html

8.
The following are disadvantages of using EVA as a measure of performance except:
A)

EVA does not measure present value

B)
EVA rewards taking project with quick paybacks and penalizes taking projects
with longer payback periods
C)

EVA is difficult to apply for start up ventures

D)

EVA reduces explicit monitoring by top management

ANS : D
http://highered.mcgrawhill.com/sites/0072467665/student_view0/chapter12/multiple_choice_quiz.html
9.
EVA is used for:
A)

Measuring performance within the firm

B)

Rewarding performance within the firm

C)

Improving performance within the firm

D)

All of the above

ANS:D
http://highered.mcgrawhill.com/sites/0072467665/student_view0/chapter12/multiple_choice_quiz.html

10.
EVA is a measure of NPV.

A)

True

B)

False

ANS:A
http://highered.mcgrawhill.com/sites/0072467665/student_view0/chapter12/multiple_choice_quiz.html
11. How economic value is added (EVA) calculated?
a. It is the difference between the market value of the firm and the book value of equity
b. ANS :It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital
charge
c. It is the net income of the firm less a dollar cost that equals WAAC multiplied by the
book value of liabilities and equities
d. None of the given option
ANS B
http://www.vusr.net/course/mgt201-financial-management/mcqs/index?
CourseMcqs_page=62#axzz2yJZGR38x

12:
In corporate finance, Economic Value Added (EVA), is an estimate of a firm's economic profit
being the value created in excess of the required return of thecompany's investors
(being shareholders and debt holders).
a.true
b.false
Ans A
http://en.wikipedia.org/wiki/Economic_Value_Added

Questionnaires On NOPAT

1:TSW Inc. had the following data for last year: Net income = $800; Net operating profit after
taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information
for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes
(NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free
cash flow did the firm generate during the just-completed year?

$383

$425

$468

$514

$566

ANS B

http://www.scribd.com/doc/214675219/19-Mcq

2: Consider the following statement: The discounted abnormal NOPAT growth model defines
the value of net assets as the sum of the capitalized next-period NOPAT forecast and the present
value of forecasted NOPAT beyond the next period. This statement is
a.True
b.False
http://cws.cengage.co.uk/palepu_peek2/students/MCQs/Application%20files/Chapter07.htm

Ans True

3: Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT).
Which of the following definitely cannot help explain this decline?

a. Sales revenues decreased.

b. Costs of goods sold increased.
c. Depreciation increased.
d. Interest expense increased.
e. Taxes increased.

https://brainmass.com/business/capital-asset-pricing-model/83123

4 : What are the abnormal earnings of a firm that has NOPAT of $40,000
with an equity cost of capital of 10%, when the book value at the beginning of period is
$800,000?
a. $ (40,000)
b. $ (80,000)

c. $ 40,000
d. $ 80,000
ANS a.
http://www.uic.edu/classes/actg/actg516rtr/Review-Fin-Actg/06-Valuation%20&%20Cash
%20Flow%20Analysis.pdf

Refer to Table 6-2 for next 5 questions:

Firm A
$6,000

Firm B
$14,000

Firm C
$18,000

10%
$100,000

8%
$150,000

12%
$190,000

NOPAT
R
BVt

5:. Refer to Table 6-2. What are the abnormal earnings for Firm A?
a. $ (4,000)
b. $ (6,000)
c. $ 4,000
d. $ 6,000
ANS A

http://www.uic.edu/classes/actg/actg516rtr/Review-Fin-Actg/06-Valuation%20&%20Cash
%20Flow%20Analysis.pdf

6. Refer to Table 6-2. What are the abnormal earnings for Firm B?
a. $ 1,000
b. $ 2,000
c. $ 12,000
d. $ 14,000
ANS:B
http://www.uic.edu/classes/actg/actg516rtr/Review-Fin-Actg/06-Valuation%20&%20Cash
%20Flow%20Analysis.pdf

7.. Refer to Table 6-2. What are the abnormal earnings for Firm C?
a. $ (2,400)
b. $ (4,800)
c. $ 4,800
d. $ 9,600
ANS:B
http://www.uic.edu/classes/actg/actg516rtr/Review-Fin-Actg/06-Valuation%20&%20Cash
%20Flow%20Analysis.pdf

8. Refer to Table 6-2. Assume that Firm A can increase NOPAT by $4,000, by cutting costs.
Abnormal earnings would be
a. $ (1,000).
b. $ 0.
c. $ 1,000.
d. $ 1,500.

ANS:b
http://www.uic.edu/classes/actg/actg516rtr/Review-Fin-Actg/06-Valuation%20&%20Cash
%20Flow%20Analysis.pdf

9.Refer to Table 6-2. Assume that Firm B can divest itself of $20,000 of unproductive capital
with NOPAT falling by only $3,000. Abnormal earnings are
a. $200.
b. $400.
c. $600.
d. $800
ANS: c

http://www.uic.edu/classes/actg/actg516rtr/Review-Fin-Actg/06-Valuation%20&%20Cash
%20Flow%20Analysis.pdf

10: NOPAT subtracts which one of teh following group of items from the net income?
a.Non recurring items,interest,distortions realting to acounting quality concerns.
b.Non operating,non recurring items and after tax interest.
c :Non operating,non recurring items and after tax interest and distortion related to accounting
quality concerns.

ANS D.
http://www.uic.edu/classes/actg/actg516rtr/Review-Fin-Actg/05-Financial%20Stratement
%20Analysis.pdf

11. NOPAT is frequently used in calculations of Economic value added and Free cash flow

a.true
b.false
ans a.
http://en.wikipedia.org/wiki/NOPAT
12. In corporate finance, net operating profit after tax (NOPAT) is a company's aftertax operating profit for all investors, including shareholders and debt holders
a.true
b.false
Ans a.
http://en.wikipedia.org/wiki/NOPAT