Accounting for Manager

Assignment - A

Question 1a): What do you understand by the concept of conservatism? Why it is also
called the concept of prudence? Why it is not applied as strongly today as it used to be
in the Past?

Answer:

Concept of Conservatism implies using conservatism while preparing financial statements i.e.
income should not be accounted for unless it has actually been earned but expenses, even if
just anticipated should be provided for. According to this concept, revenues should be
recognized only when they are realized, while expenses should be recognized as soon as they
are reasonably possible. For instance, suppose a firm sells 100units of a product on credit for
Rs.10, 000. Until the payment is received, it will not be recorded in the accounting books.
However, if the firm receives information that the customer has lost his assets and is likely to
default the payment, the possible loss is immediately provided for in the firms books. The
rule is to recognize revenue when it is reasonably certain and recognize expenses as soon as
they are reasonably possible. The reasons for accounting in this manner are so that financial
statements do not overstate the companys financial position.

It is also called the concept of prudence as it essentially involves exercising prudence in

recording income and expenses/losses in the financial statements so that anticipated income
are not recorded whereas likely losses are provided for.

However, this concept is not applied as strongly today as it used to be in the past for the
reason that the modern world saw a considerable increase in corporate frauds e.g. Enron case
in USA and Satyam in India. Also, there is a decline in assuming corporate social
responsibilities due to superfluous issues of gaining publicity and brand building. These two
major issues call for increased transparency in financial statements and hence, the decline in
use of age old concept of conservatism.

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Question 1 b): What is a Balance Sheet? How does a Funds Flow Statement differ from
a Balance Sheet? Enumerate the items which are usually shown in a Balance Sheet and
a Funds Flow Statement.

Answer: A Balance Sheet is a type of financial statement of an entity, indicating the financial
position at a given point of time. It is the statement of Assets and Liabilities as on a particular
date. The various items of a Balance Sheet can be grouped under two heads, viz: assets and
liabilities.

Funds Flow statement determines the sources of cash flowing into the firm and the
application of that cash by the firm. The various items of a Funds Flow Statement can be
grouped under two heads, viz: inflow of funds (sources) or outflow of funds (applications).

While the Balance Sheet shows only the monetary value of each source and application of
funds at the end of the year, funds flow statement depicts the extent of changes in each source
and application of funds during the year.

If we take the Balance Sheet for two consecutive years and work out the change for each
item, we are able to arrive at the Funds Flow Statement items.

The various items usually shown in a Balance Sheet are:

Assets side:
(1) Fixed assets

a) Gross block
b) Less depreciation
c) Net block
d) Capital work-in-progress

(2)Investments

(3)Current assets, loans, and advances:

a) Inventories
b) Sundry debtors
c) Cash and bank balances

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 d) Other current assets
e) Loans and advances

(4)Deferred Revenue Expenditure:

a) Miscellaneous expenditure to the extent not written off or adjusted

b) (Profit and Loss account

Liabilities side:

(1)Shareholder's funds
a) Capital
b) Reserves and Surplus

(2)Loan funds
a) Secured loans
b) Unsecured loans

Current liabilities and provisions:

(a) Liabilities
Sundry Creditors
Outstanding expenses
Provision for tax

Similarly, items in a Funds Flow Statement are:

Inflow of funds:
A decrease in assets
An increase in liabilities
An increase in shareholders funds Outflow of funds:
An increase in assets
A decrease in liabilities
A decrease in shareholders funds

Question 2a: Discuss the importance of ratio analysis for inter-firm and intra-firm
comparisons including circumstances responsible for its limitations .If any

Answer: Ratio analysis implies the systematic use of ratios to interpret the financial
statements so that the strength and weaknesses of a firm as well as its historical performance
and current financial position can be determined. With the help of ratio analysis conclusion
can be drawn regarding several aspects such as financial health, profitability and operational
efficiency of the undertaking.

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Ratio analysis is very useful in making inter-firm comparison as it helps to draw a
comparison between the entities within the same industry or otherwise following the same
accounting procedure. It provides the relevant financial information for the comparative firms
with a view to improving their productivity & profitability.

Ratio analysis helps in intrafirm comparison by providing necessary data. An interfirm

comparison indicates relative position. It provides the relevant data for the comparison of the
performance of different departments. If comparison shows a variance, the possible reasons
of variations may be identified and if results are negative, the action may be initiated
immediately to bring them in line.

However, in spite of being such a useful tool, it is not free from its limitations. A single ratio
is of a limited use and it is essential to have a comparative study. The base used for ratio
analysis viz: financial statements have their own limitations. Also, they consider only the
quantitative aspects of business transactions where as there are various other non-
quantitative aspects such as quality of work force which considerably affect profitability and
productivity. Also, ratio analysis as a tool is also limited by changes in accounting
procedures/policies.

Question 2b: Why do you understand by the term 'pay-out ratio'? What factors are
taken into consideration while determining pay-out ratio? Should a company follow a
fixed pay-out ratio policy? Discuss fully.

Answer: Pay-out Ratio means the amount of earnings paid out in dividends to shareholders.
Investors can use the pay-out ratio to determine what companies are doing with their
earnings. It can be calculated as:

A very low pay-out ratio indicates that a company is primarily focused on retaining its
earnings rather than paying out dividends.

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The pay-out ratio also indicates how well earnings support the dividend payment. The lower
the ratio, the more secure the dividend because smaller dividends are easier to pay-out than
larger dividends.

The major factor to be considered in determining the pay-out ratio is the dividend policy of
the company. Young, fast-growing companies are typically focused on reinvesting earnings
in order to grow the business. As such, they generally sport low (or even zero) dividend pay-
out ratios. At the same time, larger, more-established companies can usually afford to return a
larger percentage of earnings to stockholders. Also, another factor to be considered is the type
of industry in which the company is operating. For example, the banking sector usually pays
out a large amount of its profits. Certain other sectors like real estate investment trusts are
required by law to distribute a certain percentage of their earnings.

Funds requirement of the company and its available liquidity is another factor which is
considered while determining the pay-out.

Some companies prefer to follow a fixed pay-out ratio policy irrespective of the earnings
made.

This is a welcome policy from the point of view of the investors. But, the company should
take into account various important factors such as its need for future investment and growth,
cash requirements and debt obligations.

Question 3a: From the ratios and other data given below for Bharat Auto Accessories
Ltd. indicate your interpretation of the company's financial position, operating
efficiency and profitability.
Year
I Year II Year III

Current Ratio 265% 278% 302%

Acid Test Ratio 115% 110% 99%

Working Capital Turnover 2.75 3.00 3.25

(times)

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Receivables Turnover 9.83 8.41 7.20

Average Collection Period 37 43 50

(Days)

Inventory to Working 95% 100% 110%

Capital
Inventory Turnover 6.11 6.01 5.41
(times)
Income per Equity Share 5.10 4.05 2.50

Net Income to Net Worth 11.07 8.5% 7.0%

Operating Expenses to 22% 23% 25%

Net Sales

Sales increase during the 10% 16% 23%

Cost of goods sold to Net 70% 71% 73%

Sales

Dividend per share Rs. 3 Rs.3 Rs.3

Fixed Assets to Net Worth 16.4% 18% 22.7%

Net Profit on Net Sales 7.03% 5.09% 2.0%

Answer: The financial position of a concern is mainly judged by its current ratio, acid test
ratio, working capital turnover, fixed assets to net worth.

In the given case of Bharat Auto Accessories Ltd, the current ratio has gone up from 265% to
302% over a period of three years. It is a measure of the degree to which current assets cover
current liabilities (Current Assets / Current Liabilities). A high ratio indicates a good
probability the enterprise can retire current debts. However, the acid test ratio has gone down
from 115% to 99%, which is not a very good sign. It is a measure of the amount of liquid

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assets available to offset current debt (Cash + Accounts Receivable / Current Liabilities). A
healthy enterprise will always keep this ratio at 1.0 or higher. Also, the fixed asset to net
worth ratio is 16.4% for Yr. I and has gone up to 22.7% for Yr. III. This ratio is a measure of
the extent of an enterprise's investment in non-liquid and often over valued fixed assets

(Fixed Assets / Liabilities + Equity). A ratio of .75 or higher is usually undesirable as it

indicates possible over-investment.

The operating efficiency of a concern can be viewed by its receivables turnover, average
collection period, inventory turnover, operating expenses to net sales. The receivables
turnover has gone down from 9.83 to 7.20, reflecting that expenses as a percentage of
revenue or earnings has gone down over the three year period, which is a good sign. An
increasing average collection period indicates that the concern is offering too liberal credit
terms and has inefficient credit collection. The inventory turnover has gone down from 6.11
to 5.41 times indicating declining sales and excessive inventory which again reflects poor
operating efficiency.

The operating expense to net sales has increased from 22% to 25% which indicates that the
organization has lowered its ability to generate profits in case of declining revenues.

The indicators of profitability are income per equity share, net income to net worth, and net
profit on net sales. All these ratios have declined considerably over the three year period.
This indicates declining profitability over the years.

Thus, on a review of the various ratios, we conclude that Bharat Auto Accessories Ltd does
not have a strong financial position, is not very efficient in its operations and is undergoing a
period of declining profitability.

Question 4: Bose has supplied the following information about his business to Summary
of Cash book for the year ended 31st March, 2004 is as follows:

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Assets and On 1st April 2003 On 31st March,
Liabilities 2004
(Rs.) (Rs.)
Sundry debtors 1,81,000 1,93,000

Stock 1,50,000 1,40,000

Machinery 2,50,000 ?

Furniture 40,000 ?

Sundry creditors 1,10,000 1,25,000

Receipts Rs. Payments Rs.

To Opening balance 5,000 By Payments to
creditors 3,50,000
To Cash sales 61,000
By wages 1,60,000
To Receipt from
debtors 7,53,000 By Salaries 1,50,000

To Misc. receipts 2,000 By Drawings 40,000

To Loan from Dass By Sunday office

@ 9% per annum 1,00,000 expenses 1,10,000
(taken on
1.10.2003) By Machinery
purchased (on 95,000
1.10.2003)

By Closing balance 16,000

9,21,000 9,21,000

Discount allowed totaled Rs.7,000 and discount received was Rs.4,000. Bad debts
written off were Rs.8,000. Depreciation was written off on furniture @5% per annum
and machinery @10% per annum under the straight line method of depreciation. The
office expenses included Rs.5,000 paid as insurance premium for the year ending 30th
June, 2004. Wages amounting to Rs.20,000 were still due on 31st March, 2004.
Prepare trading and profit and loss account for the year ended 31sl March, 2004 and
the balance sheet as on that date.

Answer) Trading and Profit and Loss Account for the yr ended 31st Mar 2004

Dr. Cr.

PARTICULARS AMOUNT PARTICULARS AMOUNT

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To opening stock 1,50,000 By Cash Sales 61,000
To purchases 3,69,000 By Credit Sales 7,80,000
To wages 1,80,000
To salaries 1,50,000 By closing stock 1,40,000
To Sunday office expenses 1,08,750
To Gross Profit c/d 23,250

TOTAL 9,81,000 TOTAL 9,81,000

To Discount allowed 7,000 By Gross Profit b/d 23,250

To Bad debts w/o 8,000 By Discount received 4,000
To Depreciation By misc income 2,000

- Furniture @5% By net loss c/d 26,750

2,000
- Machinery @10% 36,500
34,500

To interest on loan from Dass 4,500

TOTAL 58,500 TOTAL 58,500

Balance Sheet as at 31st Mar 2004

LIABILITIES AMOUNT ASSETS AMOUNT

FIXED ASSETS
OWNERS CAPITAL
Op balance 5,16,000 Machinery 3,45,000
Less drawings 40,000 Less dep 34,500
Less loss 26,750 4,49,250 Net block 3,10,500
Furniture 40,000
UNSECURED LOAN Less dep 2,000
Dass @9% 1,00,000 Net block 38,000 3,48,500
INVESTMENTS
CURRENT LIABILITIES & CURRENT ASSETS,LOANS &
PROVISIONS ADVANCES
Sundry Creditors 1,25,000 Stock 1,40,000
Wages outstanding 20,000 Sundry Debtors 1,93,000
Interest on loan 4,500 Bank 16,000
Unexpired insurance 1,250

TOTAL 6,98750 TOTAL 6,98,750

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WORKING NOTES:

1) Opening balance of Owners capital = stock + debtors + bank + machinery + furniture

sundry creditors
=1,50,000 +1,81,000+5,000+2,50,000+40,000-1,10,000 =5,16,000

Question (5a) What procedure would you adopt to study the liquidity of a business
firm?

Answer: Liquidity is the ability of the firm to convert assets into cash. It is also called
marketability or short-term solvency. In other words, it is the ability of the firm to meet
itsday-to-day obligations.

In order to study the liquidity of the firm, we need to thoroughly examine its asset structure,
mainly the current assets. The current assets, viz: stock, debtors, bank balance and other
current assets need to be seen to determine at what rate a firm can convert these into cash. A
business that collects its accounts receivable in an average of 20 days generally has more
cash on hand than a business that requires 45 days. Similarly, a business that turns over its
inventory 15 times a year has more cash on hand than a company that turns its inventory
only 10 times a year. A business which keeps surplus cash or an idle bank balance may be
readily able to meet its short-term or daily obligations but it is not effectively utilizing its
cash flow.

Another factor to determine the liquidity is to see the profitability of the firm. The more
profitable the firm is, the more cash resources it shall have.

Last, but not the least, we use make use of certain financial ratios like current ratio, quick
oracid-test ratio, net working capital to determine the liquidity of the firm.

Question 5 b: Who are all the parties interested in knowing this accounting
information?

Answer: The various parties interested in determining the liquidity of the firm would be the
business owners and managers, bankers, investors, creditors and financial analysts.

Business owners and managers use ratios to chart a company's progress, uncover trends and
point to potential problem areas in a business. One can also use ratios to compare your
company's performance with others within the industry.

Bankers and investors look at a company's ratios when they are trying to decide if they want
to lend you money or invest in your company.

Creditors are interested in the companys short-term and long-term ability to pay its debts.

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Financial analysts, who frequently specialize in following certain industries, routinely assess
the profitability, liquidity, and solvency of companies in order to make recommendations
about the purchase or sale of securities, such as stocks and bonds.

Question 5c: What ratio or other financial statement analysis technique will you adopt
for this.
Answer: The relevant ratios used to assess the liquidity of the firm are current ratio, quick or
acid test ratio, cash ratio and net working capital.
Current Ratio
Provides an indication of the liquidity of the business by comparing the amount of current
assets to current liabilities. A business's current assets generally consist of cash, marketable
securities, accounts receivable, and inventories. Current liabilities include accounts payable,
current maturities of long-term debt, accrued income taxes, and other accrued expenses that
are due within one year. In general, businesses prefer to have at least one dollar of current
assets for every dollar of current liabilities. However, the normal current ratio fluctuates from
industry to industry. A current ratio significantly higher than the industry average could
indicate the existence of redundant assets. Conversely, a current ratio significantly lower than
the industry average could indicate a lack of liquidity.

Formula
Current Assets
Current Liabilities

Acid Test or Quick Ratio

A measurement of the liquidity position of the business. The quick ratio compares the cash
plus cash equivalents and accounts receivable to the current liabilities. The primary
difference between the current ratio and the quick ratio is the quick ratio does not include
inventory and prepaid expenses in the calculation. Consequently, a business's quick ratio will
be lower than its current ratio. It is a stringent test of liquidity.

Formula
Cash + Marketable Securities + Accounts Receivable
Current Liabilities

Cash Ratio
Indicates a conservative view of liquidity such as when a company has pledged its
receivables and its inventory, or the analyst suspects severe liquidity problems with
inventory and receivables.

Formula
Cash Equivalents + Marketable Securities
Current Liabilities

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Working Capital
Working capital compares current assets to current liabilities, and serves as the liquid reserve
available to satisfy contingencies and uncertainties. A high working capital balance is
mandated if the entity is unable to borrow on short notice. The ratio indicates the short-
term solvency of a business and in determining if a firm can pay its current liabilities when
due.

Formula

Current Assets - Current Liabilities

6. From the following particulars, determine the bank balance as per pass book of Priya
& Co. as on 28th February 2008.
a) Credit balance as per cash book on 28th February, 2008 was Rs. 15,000
b) Interest charged by the bank up to 28th February Rs. 500 was recorded in the pass
book.
c) Bank charges made by the bank Rs. 125 were also recorded only in the pass book.
d) Out of the cheques of Rs. 25,000 paid into the bank, cheques of Rs. 18,750 were
cleared and credited by the bankers
e) Two cheques of Rs. 7,500 and Rs. 15,000 were issued but out of them only one
cheque of Rs. 7,500 was presented for payment upto 28th February.

Dividends on shares Rs. 4,500 were collected by the bankers directly, for which Priya &
Co. did not have any information.

Answer 6:
1) Bank balance as per pass book of Priya & Co. as on 28th Feb.2008:

(Rs.) (Rs.)

Cr. Balance as per cash book on 28th Feb 15,000

Less: interest charged by bank not recorded in cash book 500
Bank charges made by bank not recorded in cash
book 125
Cheques paid into bank but not yet credited 6,250 6,875
8,125
Add: Cheques issued but not yet presented 7,500
Dividends collected directly by bank 4,500 12,000

Bank balance as per pass book of Priya & Co as on 28th Feb 2008 20,125

Answer 7a:

Decision whether new product should be introduced

Sale price of new product 2000@Rs.60 = Rs.1, 20,000

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Less: Direct costs Direct material 2000@16 =Rs.32,000
Direct labour 2000@15 =Rs.30,000
Direct expenses 2000@1.5 =Rs. 3,000 Rs.65,000
Indirect costs-Variable factory overheads
2000@2.00 =Rs. 4,000
Variable selling & distribution overheads
2000@1.50 =Rs. 3,000 Rs. 7,000
Rs.72,000
=
CONTRIBUTION from new product =120000-72000 Rs.48,000

Answer 7b)

Profitability
Profits from present production
Sales 5,40,000
Direct material 96,000
Direct labour 1,20,000
Direct
expenses 19,000 2,35,000

Variable factory ohds 25,000

Variable S&D overheads 5,000 30,000

Net Profits 2,75,000

Fixed costs
Fixed factory overheads 1,75,000
Fixed admve overheads 20,000
Fixed S&D overheads 19,000 2,14,000
Net Profits Rs.61,000

Answer 8 a)

The master budget is a summary of company's plans that sets specific targets for sales,
production, distribution and financing activities. It generally culminates in cash budget,a
budgeted income statement a budgeted balance sheet. In short, this budget represents a
comprehensive expression of management's plans for future and how these plans are to be
accomplished.

It usually consists of a number of separate but interdependent budgets. One budget may be
necessary before the other can be initiated. More one budget estimate effects other budget

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estimates because the figures of one budget is usually used in the preparation of other budget.
This is the reason why these budgets are called interdependent budgets.

The master budget is a comprehensive planning document that incorporates several other
individual budgets. A master budget is usually classified into two individual budgets: the
Operational budget and the financial budget. The operation budget consists of eight
individual budgets: Sales Budget, Production Budget, Direct Material Budget, Direct Labour
Budget, Factory overhead Budget, Ending inventory budget, selling and administrative
expenses budget, Budgeted income statement.

The second part of the master budget will include the financial budget. The financial budget
consists of two individual budgets Cash Budget and Budgeted Balance Sheet.

Thus, cash budget is a part of Master budget. The Cash budget will show the effects of all the
budgeted activities on cash. By preparing a cash budget your business management will be
able to ensure that they have sufficient cash on hand to carry out activities. It will also allow
them enough time to plan for any additional financing they might need during the budget
period, and plan for investments of excess cash. A cash budget should include all items that
affect the business cash flow and should also include three major sections; cash available,
cash disbursements, and financing.

Answer 8 b)
The various methods of inventory valuation are:
i. FIFO(first-in-first-out) method
ii. LIFO(last-in-first-out)method
iii. Weighted average method
iv. Moving average method
v. Lower of cost or market value(LCM)
vi. Dollar value-LIFO
vii. Gross Profit method
viii. Retail method

During times of inflation, different methods have different effect on inflation.

FIFO gives the highest amount of gross profit because the lower unit costs of the first units
purchased are matched against revenues, especially in times of inflation. LIFO gives the
lowest amount of net income during inflationary times.

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Average costs approach tends to give profit which lies in between that given by FIFO and
LIFO method.

AS per Accounting Standard of ICAI (AS-2), inventory cost should comprise of all cost of
purchases, cost of conversion and other costs incurred in bringing the inventories to the
present location and condition. Cost of purchases should be exclusive of duties which are
recoverable from the taxing authorities. (E.g. Cenvat).

Inventory should be valued at lower of cost or net realisable value. Inventory should be
valued on FIFO (First in First Out) method or weighted average method. [LIFO is not
permitted]. According to AS-2, inventory of raw materials should be valued at cost, without
considering excise duty, as manufacturer has availed credit of the same. However, this
reduces value of stock and hence profits are lower.

CASE STUDY

Question 1: Describe the impact of different types of standards on motivations, and

specifically, the likely effect on motivation of adopting the labor standard recommended
for Geeta & Company by the engineering firm.

Answer: Different standards have different impact on motivation. In the given case, where
the labor standard recommended by the engineering firm is adopted by Geeta & company,
the six-month operation period showed a decline in production and an unfavourable quantity
variance for each of the six months in the said period. In the other case where the
management used the internally set labour standard, there was a favourable quantity variance
for the first three months; thereby implying that the actual production was more than the
standard production. In the fourth month, there was no variance in production and in the fifth
and sixth month, there was an unfavourable variance, thereby implying that the actual
production was less than standard production.

Thus, we see that the standard recommended by the engineering firm had a negative impact
on motivation as it was less than the standard production. But, in the case of internally set
standards, there was a positive impact on motivation for first three months; neutral in the
fourth month; and negative impact in fifth and sixth month.

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Question 2: Please advise the company in reviewing the standards.

Answer: The labour standard recommended by the consulting firm should not be used as a
motivational device as it is having a negative impact.

The cost standard used for reporting had a positive or neutral impact for greater part of the
period and a negative impact for two months. Therefore, the company should try and adopt
labour standards similar to those ones.

Assignment - C

Question No: 1

Which of the following statements is true concerning assets?

a) They are recorded at cost and adjusted for inflation.

b) They are recorded at market value for financial reporting because historical cost is
arbitrary.

c) Accounting principles require that companies report assets on the income statement.

d) Assets are measured using the cost concept.

Question No: 2

When the concept of conservation is applied to the Balance Sheet, it results in

a) Overstatement of Capital

b) Understatement of Capital

c) Overstatement of Assets

d) Understatement of Assets.

Question No: 3

Which of the following is a correct expression of the accounting equation?

a) Assets - Liabilities + Owners Equity

b) Assets = Liabilities - Owners Equity

c) Assets + Owners Equity = Liabilities

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 d) Assets = Liabilities + Owners Equity

Question No: 4

How is the balance sheet linked to the other financial statements?

a) The beginning retained earnings balance on the statement of retained earnings

becomes the amount of retained earnings reported on the balance sheet.

b) Retained earnings is added to total assets and reported on the balance sheet.

c) Net income increases retained earnings on the statement of retained earnings,

which ultimately increases retained earnings on the balance sheet.

d) There is no link between the balance sheet and the other statements.

Question No: 5

The process of recording the economic effects of business transactions in a book of original
entry:

a) Double entry system

b) Debit

c) Credit

d) Journalizing

Question No: 6

If the sum of the debits and credits in a trial balance is not equal, then

a) There is no concern because the two amounts are not meant to be equal.

b) The chart of accounts also does not balance.

c) It is safe to proceed with the preparation of financial statements.

d) Most likely an error was made in posting journal entries to the general ledger or
in preparing the trial balance.

Question No: 7

Z Ltd had Rs1800 of supplies on hand at January 1, 2006. During 2006, supplies with a cost
of Rs7, 000 were purchased. At December 31, 2006, the actual supplies on hand amounts to
Rs2, 300. After the adjustments are recorded and posted at December 31, 2006, the balances
in the Supplies and Supplies Expense accounts will be:

a) Supplies, Rs7, 000; Supplies Expense, Rs2, 300.

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 b) Supplies, Rs1, 800; Supplies Expense, Rs7, 000.

c) Supplies, Rs2, 300; Supplies Expense, Rs6, 500.

d) Supplies, Rs2, 300; Supplies Expense, Rs3, 900.

Question No: 8

In the statement of changes in financial position, uses of resources are defined as:

a) Transaction debits

b) Fund increases

c) Transaction credits

d) Fund decreases

Question No: 9

Most firms elected to define funds in the statement of changes in financial position as:

a) Cash

b) Working capital

c) Current assets

d) Owners Equity

Question No: 10

The funds flow statement included:

a) All sources and uses of resources.

b) Only cash transactions.

c) Only transactions affecting current assets.

d) Only transactions affecting fund accounts.

Question No: 11

Which of the following is not an example of a non-fund adjustment to income required in

preparing the statement of changes in financial position when funds were defined as working
capital?

a) Depreciation expense

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 b) Gain from asset disposal

c) Interest expense

d) Amortization of premium on debt

Question No: 12

In the cash flow statement, cash is defined as:

a) Quick assets

b) Literal cash on hand or on demand deposit, plus cash equivalents.

c) Literal cash on hand or on demand deposit, plus marketable securities.

d) All of the above.

Question No: 13

Flexible budgets

a) Accommodate changes in the inflation rate.

b) Accommodate changes in activity levels.

c) Are used to evaluate capacity utilization.

d) Are static budgets that have been revised for changes in prices.

Question No: 14

Which of the following statements regarding changing inventory methods is true?

a) A change in inventory methods can be justified if the change is made to better match
profits with revenue.

b) The effect of changing inventory method does not need to be disclosed.

c) Tax advantages are valid justification for changing inventory methods.

d) One place that the reader of an annual report would be able to identify that a
company changed inventory methods is the footnotes to the financial statements.

Question No: 15

Use the information presented below to answer the questions that follow. Solid Co. received a
non-interest-bearing note from Y Ltd. on October 1, 2006. The amount of the note due at the

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maturity date is Rs6, 200. The note was accepted by Solid for merchandise sold to Bedrock
with a selling price of Rs6, 000. The note is due in 3 months.

The difference of Rs200 between the amount of the note (Rs6, 200) and the sales price of the
merchandise (Rs6, 000)

a) Is the interest explicitly included in the amount of the note.

b) Will be recorded in a contra account, Discount on Notes Receivable, by Co.

c) Will be recorded as interest revenue on October 1, 2006.

d) Is an error made in preparing the note.

Question No: 16

Use the information presented below to answer the questions that follow. Solid Co. received a
non-interest-bearing note from Y Ltd. on October 1, 2006. The amount of the note due at the
maturity date is Rs6, 200. The note was accepted by Solid for merchandise sold to Bedrock
with a selling price of Rs6, 000. The note is due in 3 months.

The difference of Rs200 between the amount of the note (Rs6, 200) and the sales price of the
merchandise (Rs6, 000)

Which of the following combination of financial statements would provide the most in-
depth information to help understand a companys liquidity?

a) Income statement and statement of cash flows.

b) Balance sheet and statement of cash flows.

c) Balance sheet and income statement.

d) Statement of retained earnings and statement of cash flows.

Question No: 17

Use the information presented below to answer the questions that follow. Solid Co. received a
non-interest-bearing note from Y Ltd. on October 1, 2006. The amount of the note due at the
maturity date is Rs6, 200. The note was accepted by Solid for merchandise sold to Bedrock
with a selling price of Rs6, 000. The note is due in 3 months.

Y Ltd sold equipment for Rs4, 000. This resulted in a Rs1, 500 loss. What is the impact of
this sale on the working capital?

a) Reduces working capital.

b) Increases working capital.

c) Has no affect on working capital at all.

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 d) The increase offsets the decrease.

Question No: 18

Use the information presented below to answer the questions that follow. Solid Co. received a
non-interest-bearing note from Y Ltd. on October 1, 2006. The amount of the note due at the
maturity date is Rs6, 200. The note was accepted by Solid for merchandise sold to Bedrock
with a selling price of Rs6, 000. The note is due in 3 months.

If a companys asset turnover rate increased from 2005 to 2006, which of the following
conclusions can be made?

a) The company was less efficient during 2006 in using its assets to produce profits.

b) The company produced more sales in 2006 for each dollar invested in assets.

c) The company was more profitable in 2005.

d) The company is over-invested in assets in 2006.

Question No: 19

X Ltds master budget calls for the production of 6,000 units of product monthly. The master
budget includes indirect labor of Rs396,000 annually; X Ltd considers indirect labor to be a
variable cost. During the month of September, 5,600 units of product were produced, and
indirect labor costs of Rs30,970 were incurred. A performance report utilizing flexible
budgeting would report a flexible budget variance for indirect labor of:-

a) Rs170 unfavorable.

b) Rs170 favorable

c) Rs2, 030 unfavorable.

d) Rs2, 030 favorable.

Question No: 20

Which of the following is not an advantage for using standard costs for variance analysis?

a) Standards simplify product costing.

b) Standards are developed using past costs and are available at a relatively low
cost.

c) Standards are usually expressed on a per unit basis.

d) Standards can take into account expected changes planned to occur in the budgeted
period.

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Question No: 21

The main purpose of cost accounting is to-

a) Maximize profits

b) Provide information to management for decision making

c) help in fixing selling price

d) To watch cash flows

Question No: 22

Conversion cost is total of:

a) Direct material and direct wages

b) Direct material, direct wages, and production overheads

c) Direct wages and production overheads.

d) None of the above

Question No: 23

A cost, which does not involve cash outlay, is called:

a) Historical cost.

b) Imputed cost

c) Out of pocket cost.

d) Explicit cost.

Question No: 24

Committed fixed costs are those, which:

a) Arise from yearly budget appropriations

b) Are incurred because management can afford.

c) Arise from additional capacity.

d) All the above

Question No: 25

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Cost of research undertaken at the request of the customer should be:

a) Charged to costing profit and loss account.

b) Charged to selling overheads.

c) Recovered from the customer.

d) All the above.

Question No: 26

Salaries due for the month of March will appear

a) On the Receipt side of the Cash Book

b) On the Payment side of the Cash Book

c) As a contra entry

d) Nowhere in the Cash Book.

Question No: 27

Liabilities of business are Rs. 11,220 and owner's equity is Rs. 15,000. The assets of the
business will be.

a) Rs. 3,780

b) Rs. 26,220

c) Rs. 11,220.

d) Rs. 15,000.

Question No: 28

An entry of Rs. 320 has been debited to Eknath's account at Rs. 230. If is an error of

a) Principle.

b) Omission.

c) Commission.

d) Compensatory.

Question No: 29

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Unearned revenues are:

a) Prepayments.

b) Liabilities.

c) Temporary accounts.

d) Both a and b above.

Question No: 30

The revenue recognition principle requires that sales revenues be recognized:

a) When cash is received.

b) When the merchandise is ordered.

c) When the goods are transferred from the seller to the buyer.

d) None of the above.

Question No: 31

All of the following are other receivables except:

a) Petty cash.

b) Interest receivable.

c) Income taxes refundable.

d) Advances to employees.

Question No: 32

Depreciation is dependent on a number of estimates. When a change in an estimate is

required, the change is made:

a) in the current year

b) in the future year

c) to prior periods

d) both a and b above

Question No: 33

In order to pay a dividend:

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 a) The corporation must have adequate retained earnings.

b) The board of directors must declare a dividend.

c) The corporation must have adequate cash.

d) All of the above.

Question No: 34

Cash flow activities that include the cash effects of transactions that create revenues and
expenses and thus enter into the determination of net income are referred to as:

a) Investing activities.

b) Financing activities.

c) Operating activities.

d) All of the above.

Question No: 35

All of the following are used in preparing a statement of cash flows except:

a) A trial balance.

b) Comparative balance sheet.

c) Current income statement.

d) Additional information.

Question No: 36

Depreciation is result of

a) Usage

b) Time.

c) Obsolescence.

d) All of the above.

Question No: 37

Outstanding Expenses are the examples of

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 a) Personal Accounts.

b) Real Accounts.

c) Nominal Accounts.

d) None of the above.

Question No: 38

Liquid Assets are inclusive of all current assets except

a) Inventories.

b) Prepaid Expenses.

c) Cash.

d) Both (a) and (b) above.

Question No: 39

Management Accounting is mainly related to

a) Presentation of Figures from Financial Accounting.

b) Presentation of Figures from Cost Accounting.

c) Principles.

d) Both (a) and (b) above

Question No: 40

Variance Analysis is done with regards to actuals with-

a) Standards.

b) Budgeted Figures.

c) Benchmarks

d) All of the above.

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