Financial Accounting

Chapter-1 Self Assessment Questions 1) Any expense that gives benefit for a period of less than twelve months is called ...

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Chapter-1 Self Assessment Questions 1) Any expense that gives benefit for a period of less than twelve months is called ……………... (a) Capital Expense (b) Revenue Expense (c) Revenue Receipt (d) Deferred Expense 2) Prepaid rent given in the Trial Balance will be treated as a (an): (a) Asset (b) Liability (c) Revenue (d) Deferred expense 3) If Assets = Rs. 99,500 and Owner's equity = Rs. 50,500 then Liabilities =? (a) Rs. 49,000 (b) Rs. 55,000 (c) Rs. 125,000 (d) Rs. 115,700 4) Sale of goods to Amir is wrongly debited to Umair A/c instead of Amir A/c. Both are debtors of business, this is an example of: (a) Error of Omission (b) Error of Commission (c) Error of Principle (d) Error of Original entry 5) Which of the following is TRUE about a merchandising company? (a) A merchandising company's business is to buy and sell products. (b) A merchandising company must use the perpetual system to account for merchandising inventory. (c) A merchandising company's business is to provide services. (d) None of the given options 6) Money spent to acquire or upgrade physical assets is known as: (a) Revenue Expense (b) Capital Expense (c) Administrative Expense (d) Operating Expense 7) Goods of Rs. 1,000 purchased from Mr. “A” were recorded in sales book. The rectification of this error will: (a) Increase the gross profit (b) Reduce the gross profit (c) Have no effect on gross Profit (d) None of these 8) An amount of Rs. 200 received from Mr. "P" but credited to Mr. "Q" would affect: (a) Accounts of P & Q (b) Only Cash Account (c) Only P’s account (d) Only Q’s account 9) ………….. is the art of recording, classifying and summarizing the transactions and events of a business and interpreting the results thereof. (a) Book-keeping (b) Accounting (c) Management (d) Auditing

10) What will be debited, if Mohsin commenced business with cash? (a) Cash account (b) Capital account (c) Drawings account (d) Proprietor account 11) Current accounts of the partners should be opened when the capitals are: (a) Fixed (b) Fluctuating (c) Floating (d) Normal 12) which of the following is (are) type(s) of Public Limited Companies? (a) Listed company (b) Non listed company (c) Private limited company (d) Both Listed Company and non listed company 13) The charter of a company which defines the limitations and powers of the company is called: (a) The memorandum of association (b) Articles of association (c) Statutory report (d) Certificate of commencement 14) Merchandise on hand at either the beginning or end of the reporting period is called………………….. (a) Raw material (b) Cost of good sold (c) Work in process (d) Inventory 15) The balance sheet reported a beginning balance of $20,000 in Accounts Receivable and an ending balance of $15,000. Credit Sales of $200,000 were made during the year. Using this information, compute cash collected from customers. (a) $205,000 (b) $195,000 (c) $200,000 (d) $215,000 16) Financial statements are prepared: (a) Only for publicly owned business organizations. (b) For corporations, but not for sole proprietorships or partnerships. (c) Primarily for the benefit of persons outside of the business organization. (d) In either monetary or nonmonetary terms, depending upon the need of the decision maker. 17) The basic purpose of an accounting system is to: (a) Develop financial statements in conformity with generally accepted accounting principles. (b) Provide as much useful information to decision makers as possible, regardless of cost. (c) Record changes in the financial position of an organization by applying the concepts of doubleentry accounting. (d) Meet an organization's need for accounting information as efficiently as possible. 18) Information is cost effective when:

(a) The information aids management in controlling costs. (b) The information is based upon historical costs, rather than upon estimated market values. (c) The value of the information exceeds the cost of producing it. (d) The information is generated by a computer-based accounting system. 19) Although accounting information is used by a wide variety of external parties, financial reporting is primarily directed toward the information needs of: (a) Investors and creditors. (b) Government agencies such as the Internal Revenue Service. (c) Customers. (d) Trade associations and labor unions. 20) A complete set of financial statements for Hartman Company, at December 31, 1999, would include each of the following, except: (a) Balance sheet as of December 31, 1999. (b) Income statement for the year ended December 31, 1999. (c) Statement of projected cash flows for 2000. (d) Notes containing additional information that is useful in interpreting the financial statements. Answers for Self Assessment Questions 1. (b)

2.(a)

3.(a)

4.(b)

5.(a)

6. (b)

7.(b)

8. (a)

9.(a)

10.(a)

11.(a)

12.(d)

13.(b)

14.(d)

15. (a)

16.(c)

17.(d)

18.(c)

19.(a)

20. (c)

Chapter-2 Self Assessment Questions 1) What is a legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders that establish the terms of the bond issue? (a)Indenture.

(b)Debenture.

(c)Bond.

(d)Bond trustee.

2)………………. is a high-risk, high-yield bond rated below investment grade; while a/(an) …………. bond has its interest payment contingent on sufficient earnings of the firm. (a) A subordinated debenture; mortgage (b) A debenture; subordinated debenture (c) A junk bond; income (d) An income bond; mortgage

3) To acquire rail engines or similar equipment, a railroad might issue __________, which is a lease type of financing. (a) equipment trust certificates (b) special purpose securities (c) pooled certificates (d) asset-backed securities

4).The sinking fund retirement of a bond issue takes ……………………. (a) only one form -- the corporation purchases bonds in the open market and delivers a given number of bonds to the trustee. (b) only one form -- the corporation pays cash to the trustee, who in turn calls the bonds for redemption.

(c) only one form -- bonds mature periodically and the corporation retires them in the order that they mature. (d) two forms -- (1) the corporation purchases bonds in the open market and delivers a given number of bonds to the trustee; or (2) the corporation pays cash to the trustee, who in turn calls the bonds for redemption.

5) Which of the following statements is correct in distinguishing between serial bonds and sinkingfund bonds? (a) Serial bonds mature at a variety of dates, but sinking-fund bonds mature at a single date. (b) Serial bonds provide for the deliberate retirement of bonds prior to maturity, but sinking-fund bonds do not provide for the deliberate retirement of bonds prior to maturity. (c) Serial bonds do not provide for the deliberate retirement of bonds prior to maturity, but sinkingfund bonds do provide for the deliberate retirement of bonds prior to maturity. (d) None of the above are correct since a serial bond is identical to a sinking fund bond. 6) A 12% coupon rate, $1,000 par bond currently trades at 90 one year after issuance. Which of the following is the most likely call price? (a) 87 (b) 90 (c) 102 (d)112

7) An issue of preferred stock has __________ feature that requires all cumulative unpaid dividends on preferred stock to be paid prior to paying any dividends on common stock. (a) an arrearage (b) a cumulative dividends (c) a preceding condition (d) a participation

8) What type of long-term financing most likely has the following features: 1) it has an infinite life, 2) it pays dividends, and 3) its cash flows are expected to be a constant annuity stream? (a) Long-term debt. (b) Preferred stock. (c) Common stock. (d) Both the second and third answers are

9) What type of long-term financing most likely has the following features: 1) it has a finite life, 2) failure to pay the cash flows could lead to bankruptcy, and 3) its cash flows are expected to be a constant annuity stream? (a) Long-term debt. (b) Preferred stock. (c) Common stock. (d) Both the second and third answers are

10) What is the book value of common equity per share of common equity outstanding for the following firm? The firm has 20,000 common shares authorized of which 15,000 are outstanding at a par value of $1. Additional paid-in-capital represents $300,000 and retained earnings are an additional $300,000. (a) $1 (b) $20 (c) $21 (d) $41

11) The firm has 20,000 common shares authorized, 15,000 shares outstanding, and 3,000 shares of treasury stock. How many common equity shares are issued? (a) 2,000

(b) 5,000 (c) 17,000 (d) 18,000

12) Which of the following statements is correct regarding common stock and its features? (a) For most firms, book value exceeds liquidation value. (b) Firms usually prefer to have more shares authorized than are currently issued. (c) When shares of common stock are initially issued, they generally are sold to investors at par value. (d) All of the above are

13) Which of the following statements concerning the rights of common shareholders is correct, or most accurate? (a) Common shareholders are entitled to a share of the company's current earnings in cash. (b) Common shareholders are entitled to elect the board of directors under a majority-rule voting system. (c) Because of their preemptive right, common shareholders are entitled to always subscribe to new common stock so that they can maintain their pro rata interest in the company. (d) Voting by common shareholders can be done either in person at the shareholders' annual meeting or by proxy.

14) What is the maximum number of directors can you guarantee electing under the following conditions? You own 500,001 voting shares and the firm has 1,000,000 voting shares and will be electing 9 directors under a majority voting system? (a) 9 (b) 5 (c) 4

(d) 0

15) A proxy is ……………………. (a) a unique voting system that allows minority shareholders to elect at least one director. (b) a protective agreement that allows shareholder the ability to purchase new shares in the same percentage as their current ownership proportion. (c) a legal document giving one entity or person the authority to vote for another. (d) All of these

16) A firm has two classes of common stock outstanding. The first class is nonvoting; while the second class, owned by the original founders, has voting rights. This is usually referred to as …………….. (a) two-tier common stock (b) dual-class common stock (c) multi-class common stock (d) not possible in the U.S. because this system of ownership is not allowed under current SEC legislation

17) What is the main reason for a firm to engage in a refunding of an existing 30-year bond issue that still has 25 years until maturity when it has no sinking fund requirements? (a) To raise additional funds for the firm to use with new capital budgeting projects. (b) To drastically lower the firm's debt (and debt ratio) when there is no sinking fund requirement. (c) To lower the interest cost of long-term debt. (d) All of the above answers are

18) Who or what is a person or institution designated by a bond issuer as the official representative of the bondholders?

(a) Indenture. (b) Debenture. (c) Bond. (d) Bond trustee.

19) …………………… is a long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; while a/(an) ………………… bond issue is secured by the issuer's property. (a) A subordinated debenture; mortgage (b) A debenture; subordinated debenture (c) A junk bond; income (d) An income bond; junk

20) A special purpose vehicle (SPV) raises money by selling ……………….. where interest and principal payments are provided by cash flows from a discrete pool of assets. (a) equipment trust certificates (b) special purpose securities (c) pooled certificates (d) asset-backed securities

Answers for Self Assessment Questions 1. (a)

2.(c)

3.(a)

4.(d)

5.(c)

6. (d)

7.(b)

8. (b)

9.(a)

10.(d)

11.(d)

12.(b)

13.(d)

14.(a)

15. (c)

16.(b)

17.(c)

18.(d)

19.(a)

20. (b)

Chapter-3 Self Assessment Questions 1. In the Balance sheet of a firm, the debt equity ratio is 2:1.The amount of long term sources is Rs.12 lac.What is the amount of tangible net worth of the firm? (a) Rs.12 lac (b) Rs.8 lac (c) Rs.4 lac (d) Rs.2 lac.

2. Debt Equity Ratio is 3:1, the amount of total assets Rs.20 lac, current ratio is 1.5:1 and owned funds Rs.3 lac.What is the amount of current asset? (a) Rs.5 lac (b) Rs.3 lac (c) Rs.12 lac (d) None of these.

3. Banks generally prefer Debt Equity Ratio at: (a) 1:1 (b) 1:3 (c)2:1 (d) 3:1

4. If a company revalues its assets, its networth : (a)Will improve (b) Will remain same

(c) Will be positively affected (d) None of these

5. If a company issues bonus shares the debt equity ratio will (a)Remain unaffected (b) Will be affected (c) Will improve (d) None of these

6. An asset is a (a)Source of fund (b) Use of fund (c) Inflow of funds (d)None of these

7. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac & capital & reserves are Rs.2 lac .What is the debt equity ratio? (a) 1:1 (b) 1.5:1 (c) 2:1 (d)none of these

8. The long term use is 120% of long term source. This indicates the unit has (a) current ratio 1.2:1 (b) Negative TNW

(c)Low capitalization (d)Negative NWC.

9. In last year the current ratio was 3:1 and quick ratio was 2:1.Presently current ratio is 3:1 but quick ratio is 1:1.This indicates comparably (a) high liquidity (b) higher stock (c) lower stock (d) low liquidity

10. Authorized capital of a company is Rs.5 lac,40% of it is paid up. Loss incurred during the year is Rs.50, 000. Accumulated loss carried from last year is Rs.2 lac.The company has a Tangible Net Worth of (a) Nil (b) Rs.2.50 lac (c) (-)Rs.50,000 ( d) Rs.1 lac.

11. The degree of solvency of two firms can be compared by measuring (a) Net worth (b) Tangible Net Worth (c) Asset coverage ratio (d) Solvency Ratio.

12. Properietory ratio is calculated by (a) Total assets/Total outside liability

(b) Total outsideliability/Totaltangible assets (c) Fixed assets/Long term source of fund (d) Properietors’Funds/Total Tangible Assets.

13. Current ratio of a concern is 1,its net working capital will be (a) Positive (b) Negative (c) Nil (d) None of these

14. Current ratio is 4:1.Net Working Capital is Rs.30,000.Find the amount of current Assets. (a) Rs.10,000 (b) Rs.40,000 (c) Rs.24,000 (d) Rs.6,000

15. Current ratio is 2:5.Current liability is Rs.30000.The Net working capital is (a) Rs.18,000 (b) Rs.45,000 (c) Rs.(-) 45,000 (d) Rs.(-)18000

16.Quick assets do not include (a) Govt.bond (b) Book debts

(c) Advance for supply of raw materials (d) Inventories.

17. The ideal quick ratio is (a) 2:1 ( b) 1:1 (c) 5:1 (d) None of these

18. A very high current ratio indicates a) High efficiency (b) flabby inventory (c) position of more long term funds (d) b or c

19. Financial leverage means (a) Use of more debt capital to increase profit (b) High degree of solvency (c) Low bank finance (d) None of these

20. Business concern needs finance to meet their requirements in the……………… (a)organization (b) economic management (c) economic world

(d). economic business. Answers for Self Assessment Questions 1. (b)

2.(c)

3.(c)

4.(a)

5.(c)

6.(b)

7.(d)

8.(d)

9.(b)

10.(c)

11(d)

12.(d)

13.(c)

14.(b)

15.(d)

16.(d)

17.(b)

18.(d)

19.(a)

20.(c)

Chapter-4 Self Assessment Questions 1. The value of goodwill, according to the simple profit method, is— (a) The product of current year's profit and number of years (b) The product of last year's profit and number of years (c) The product of average profits of the given years and number of years. (d) None of these

2. The goodwill of a business is to be valued at 3 years' purchase of the average profits of the last three years. The profits of the last three years are Rs. 5,000, Rs. 6,000 and Rs. 7,000 respectively. Hence, the good¬will be valued at— (a) Rs. 18,000 (b) Rs. 12,000 (c) Rs. 15,000. (d) None of these

3. A business has a capital of Rs. 40,000 at the end. It had earned profits of Rs. 5,000 during the year. Hence, the average capital of the business will be — (a) Rs. 42,500 (b) Rs. 37,500 (c) Rs. 35,000. (d) None of these

4. If the average capital of a business is Rs. 60,000 and the normal rate of profit is 15%, then the normal pro¬fits will amount to— (a) Rs. 10,000

(b) Rs. 9,000 (c) Rs. 15,000. (d) All of these

5. If the super-profits of a business are Rs. 6,000 and the normal rate of profit is 10%, then the amount of

goodwill as per the capitalization method will be—

(a) Rs. 60,000 (b) Rs. 600 (c) Neither of the two. (d) None of these

6. It is given that net assets available for equity and preference shares amount to Rs. 90,000. The paid up capitals are 10,000 equity shares of Rs. 2 each and 5,000 preference shares of Rs. 10 each. Therefore, value of an equity share will be— (a) Rs. 2 per share (b) Rs. 4 per share (c) Rs. 5 per share. (d) All of these

7. It is given that net assets available for equity and preference shares amount to Rs. 1,87,000. The paid-up capitals are—10,000 equity shares of Rs. 4 each and 5,000 preference shares of Rs. 10 each. Therefore, value of a preference share will be— (a) Rs. 10 per share (b) Rs. 8 per share (c) Rs. 20 per share. (d) None of these

8. Under the yield method of valuation of equity share capital, if for an equity share of Rs. 50, the normal rate of return is 10% and the expected rate of return is 5%, then the value of an equity share will be— (a) Rs. 25 (b) Rs. 50 (c) Rs. 100. (d) All of these

9. For calculating the value of an equity share by intrinsic value method, it is essential to know— (a) Normal rate of return (b) Expected rate of return (c) Net equity. (d) None of these

10. For calculating the value of an equity share by yield method, it is essential to know— (a) Expected rate of return (b) Called-up equity share capital (c) Capital employed. (d) All of these

11. For calculating price-earnings ratio, it is essential to know— (a) Market value per share (b) Nominal value per share (c) Paid-up value per share. (d) None of these

12. For calculating the value of an equity share by earning capacity method, it is essential to know — (a) Nominal value per share (b) Rate of earning (c) Dividend per share. (d) All of these

13. A Ltd. and B Ltd. go into liquidation and a new company X Ltd. is formed. It is a case of— (a) Absorption (b) External reconstruction (c) Amalgamation. (d) None of these

14. X Ltd. goes into liquidation and a new company Z Ltd. is formed to take over the business of X Ltd. It is a case of— (a) Absorption (b) External reconstruction (c) Amalgamation. (d) All of these

15. X Ltd. goes into liquidation and an existing company Z Ltd. purchases the business of X Ltd. It is a case of— (a) Absorption (b) External reconstruction (c) Amalgamation.

(d) None of these

16. Accumulated profits include— (a) Provision for doubtful debts (b) Superannuation fund (c) Workmen's compensation fund. (d) All of these

17. Liabilities (not accumulated profits) of a company include— (a) General reserve (b) Pension fund (c) Dividend equalisation fund. (d) None of these

18. When the expenses of liquidation are to be borne by the vendor company, then the vendor company debits— (a) Realization account (b) Bank account (c) Goodwill account. (d) All of these

19. When the expenses of liquidation are to be borne by the purchasing company, then the purchasing company debits— (a) Vendor company's account (b) Bank account

(c) Goodwill account. (d) None of these

20. When the purchasing company makes payment of the purchase consideration, it debits— (a) Business purchase account (b) Assets account (c) Vendor company's account. (d) All of these Answers for Self Assessment Questions 1. (c)

2.(a)

3.(b)

4.(b)

5.(a)

6. (b)

7.(c)

8. (a)

9.(c)

10.(a)

11.(a)

12.(b)

13.(c)

14.(b)

15. (a)

16.(c)

17.(b)

18.(a)

19.(c)

20. (c)

Chapter-5 Self Assessment Questions 1. The method of valuation of shares is: (a) Goodwill Valuation Method (b) Income Valuation Method (c) Profit Valuation Method (d) All the above

2. In comparison to face value, the valuation of shares is usually: (a) More (b) Less (c) Equal (d) Less or More.

3. When value of shares is found out on the basis of its dividend or expected dividend, it is called : (a) Asset Valuation Method (b) Yield or Income Valuation Method (c) Fair Value Method (d) None of the above.

4. The most appropriate method of valuation of shares from the point of view of investor is : (a) Net Assets method (b) Income Valuation Method (c) Net Asset and Income Method

(d) None of the above.

5. In respect of the valuation of shares, the employed capital means: (a) Cost price of all the assets (b) Market value of all the assets (c) Book value of all the assets] (d) All the above values

6. The value of per shares on division of amount of net assets by number of share will be : (a) Intrinsic Value (b) Book Value (c) Cost Price (d) Market Value

7. When one company goes in liquidation and a new company is formed to take over the business of the company which goes in liquidation, this is called : (a) Amalgamation (b) Absorption (c) External Reconstruction (d) Internal Reconstruction

8. In internal reconstruction: (a) No company goes into liquidation (b) Only one company goes into liquidation (c) Two or more companies are liquidated

(d) One or more companies go into liquidation

9. If the net assets taken over by the company are less than the purchase consideration, the difference shall be treated as: (a) Secret Reserve (b) Goodwill (c) Capital Reserve (d) General Reserve

10. Interest on debentures is recorded in: (a) Capital account (b) Net Revenue account (c) Revenue account (d) Not in any account

11. Interest on bank loan is recorded in: (a) Revenue account (b) Net revenue account (c) Capital Account (d) Not in any account

12. Equity share capital is recorded in: (a) General balance Sheet (b) Net Revenue account (c) Capital account

(d) Not in any account

13. When was banking company regulation act implemented? (a) 1947 (b) 1949 (c) 1950 (d) 1956

14. How many schedules are there in the amended from of Final Account of Banking Company: (a) 8 (b) 10 (c) 12 (d) 16

15. What is the rate of statutory reserve to be maintained under section 17 of Banking Company Act? (a) 10% of Net Profit (b) 15% of Net Profit (c) 20% of Net Profit (d) 30% of Net Profit

16. In which year 14 Banks were Nationalised? (a) 1969 (b) 1971 (c) 1973 (d) 1977

17. Paid up capital of a bank should not be less then the following percentage of subscribed capital : (a) 25% (b) 50% (c) 75% (d) 100%

18. If nothing is given) What is the percentage maintained by Marine Insurance companies for Reserve for Unexpired Risk: (a) 40% of Net Premium (b) 50% of Net Premium (c) 60% of Net Premium (d) 100% of Net Premium.

19. When were General Insurance Companies nationalized: (a) 1955 (b) 1969 (c) 1971 (d) 1973

20. (If nothing is given) What is the percentage maintained for Additional Reserve : (a) 10% of Net Premium (b) 20% of Net Premium (c) 0% of Net Premium (d) 25% of Net Premium

Answers for Self Assessment Questions 1. (b)

2.(d)

3.(b)

4.(b)

5.(b)

6. (a)

7.(c)

8. (a)

9.(b)

10.(b)

11.(b)

12.(c)

13.(b)

14.(d)

15. (c)

16.(a)

17.(b)

18.(d)

19.(c)

20. (c)

Chapter-6 Self Assessment Questions 1. Any loss on revaluation of the assets at the time of internal reconstruction, will be charged from— (a) Revaluation account (b) Share capital account (c) Capital reduction account. (d) None of these

2. In internal reconstruction : (a) No company goes into liquidation (b) Only one company goes into liquidation (c)Two or more companies are liquidated (d) One or more companies go into liquidation

3. If the net assets taken over by the company are less than the purchase consideration, the difference shall be treated as : (a) Secret Reserve (b) Goodwill (c) Capital Reserve (d) General Reserve

4. Interest on debentures is recorded in : (a) Capital account (b) Net Revenue account (c)Revenue account

(d) Not in any account

5. Interest on bank loan is recorded in : (a) Revenue account (b) Net revenue account (c) Capital Account (d) Not in any account

6. Equity share capital is recorded in : (a) General balance Sheet (b) Net Revenue account (c) Capital account (d) Not in any account

7. Capital reduction account is used in the case of (a) internal reconstruction (b) external reconstruction (c) amalgamation of Companies (d) absorption of one company by another

8. Banks prepare the accounts for the (a) Calendar year (b) Financial year (c) Cooperative year (d) Diwali year

9. Banks show the provision for income-tax under the head (a) Contingency accounts (b) Contingent liabilities (c) Other liabilities and provisions (d) Borrowings

10. The heading other assets does not include (a) Silver (b) Interest accrued (c) Inter-office adjustment (Dr.) (d) Gold

11. Rebate on bills discounted is (a) An item of income (b) A liability (c) income received in advance (d) Income Outstanding

12. A non-banking asset is (a) An item of office equipment (b) Any asset acquired from the debtors in satisfaction of claim (c) Money at call and short notice (d) Furniture and fixtures

13. A non-performing asset is (a) Money at call and short notice (b) An asset that ceases to generate income (c) Cash balance in till (d) Cash balance with RBI

14. When income is to be recognised on cash basis, a distinction should be made between (a) Performing and non-performing assets (b) Banking and non-banking assets (c) Monetary and non-monetary assets (d) Current and non-current assets

15. A valuation balance sheet is prepared by a (a) trading company (b) banking company (c) manufacturing company (d) life insurance company

16. A general insurance business carrying on more than one type of insurance business prepares (a) a separate revenue account for each type of business. (b) a separate profit and loss account for each type of business. (c) a separate revenue account and combined profit and loss account. (d) a separate revenue account and profit and loss account for each type of business.

17. Survey expenses for marine insurance claims must be

(a) added to claims (b) added to law charges (c) added to management expenses (d) shown as a separate item

18. The primary private sector agency that oversees external financial reporting standards is the: (a). Financial Accounting Standards Board. (b). Federal Bureau of Investigation. (c). General Accounting Office. (d). Internal Revenue Service.

19. Which of the following equations properly represents a derivation of the fundamental accounting equation? (a). Assets + liabilities = owner's equity. (b). Assets = owner's equity. (c). Cash = assets. (d). Assets - liabilities = owner's equity.

20. Wilson Company owns land which cost $100,000. If a "quick sale" of the land was necessary to generate cash, the company feels it would receive only $80,000. The company continues to report the asset on the balance sheet at $100,000. This is justified under which of the following concepts? (a). The historical-cost principle. (b). The value is tied to objective and verifiable past transactions. (c). Neither of the above. (d). Both "a" and "b".

Answers for Self Assessment Questions 1. (c)

2.(a)

3.(b)

4.(b)

5.(b)

6. (c)

7.(a)

8. (d)

9.(c)

10.(b)

11.(c)

12.(b)

13.(b)

14.(a)

15. (d)

16.(c)

17.(a)

18.(a)

19.(d)

20. (c)

Chapter-7 Self Assessment Questions 1. When amalgamation is in the nature of merger, the accounting method to be followed is: (a)Equity method (b) Purchase method (c) Pooling of interests method (d) Consolidated method

2. Amalgamation adjustment account is opened in the books of transferee company to incorporate (a) The assets of the transferor company (b) The liabilities of the transferor company (c) The statutory reserves of the transferor company (d) The non-statutory reserves of the transferor company

3. Under the “purchase method of accounting”, the transferee company incorporates in its books: (a) The assets and liabilities of the transferor company (b) The assets, liabilities and statutory reserves of the transferor company (c) The assets, liabilities and non-statutory reserves of the transferor company (d) The assets, liabilities and reserves of the transferor company.

4. Under the pooling of interests method the differences between the purchase consideration and share capital of the transferee company should be adjusted to; (a) General reserve (b) amalgamation adjustment account (c) Goodwill or capital reserve

(d) Either (ii) or (iii)

5. Any balance is the capital reduction account after writing off lost capital is transferred to (a) Capital reserve account (b) Share surrendered account (c) Capital reorganisation account (d) Contingency reserve

6. In a scheme of reorganisation amount of shares surrendered by shareholders is transferred to (a) Capital reduction account (b) Share surrendered account (c) Capital reorganisation account (d) Capital reserve

7. Amounts sacrificed by shareholders are credited to (a) Capital reserve account (b) General reserve account (c) Capital reduction account (d) Contingency reserve account

8. For a company to carry out capital reduction, permission is required from (a) The competent court (b) Controller of Capital issues (c) Company Law Board (d) Central Government.

9. Consent of the creditors is required for (a) Sub-dividing the shares (b) Consolidation of shares (c) Increasing share capital (d) Return of capital.

10. A firm that acquires another firm as part of its strategy to sell off assets, cut costs, and operate the remaining assets more efficiently is engaging in …………………. (a) a strategic acquisition (b) a financial acquisition (c) two-tier tender offer (d) shark repellent

11. A would-be acquirer's offer to buy stock directly from shareholders is referred to as ……………….. (a) a white knight (b) a joint venture (c) a tender offer (d) a takeover

12. The restructuring of a firm should be undertaken if ……………………….. (a) the restructuring is expected to create value for shareholders (b) the restructuring is expected to increase earnings per share (EPS) next year (c) the restructuring is expected to increase the firm's market share power within the industry

(d) the current employees will receive additional stock options to align employee interest

13. Economies of scale, market share dominance, and technological advances are reasons most likely to be offered to justify a …………………………… (a) financial acquisition (b) strategic acquisition (c) divestiture (d) supermajority merger approval provision

14. Suppose that the market price per share of Company A is $100 and that of Company B is $40. If A offers one-half (1/2) a share of common stock for each share of B, the exchange ratio with respect to market prices would be …………………… (a) 0.40 (b) 0.80 (c) 1.25 (d) 2.50 15. A reason suggested by the authors for a divestiture, such as a sell-off or spin-off, is ………………… (a) synergy (b) reverse synergy (c) hubris (d) economies of scale

16. What is the most likely reason that a firm (who is highly profitable) might consider acquiring a firm that has had large recent losses and will continue to have losses into the near future? (a) Hubris. (b) White knight.

(c) Tax-loss usage. (d) Increase assets.

17. Richard Roll makes a case with the …………… hypothesis that takeovers are motivated by bidder pride and confidence in their abilities relative to others. (a) hubris (b) efficient markets (c) management success (d) synergy

18. A merger that signals to the investors in the market place a change in strategy or operating efficiency that can not be conveyed in another manner is referred to as ……………….. (a) the information effect (b) the wealth effect (c) strategic effect (d) bootstrapping effect 19. A firm that acquires another firm as part of its overall business strategy is engaging in ………………. (a) a strategic acquisition (b) a financial acquisition (c) a two-tier tender offer (d) a shark repellent 20. The average takeover premium a target firm has historically received is closest to which of the following percentages? (a) 5% (b) 12%

(c) 30% (d) 80%

Answers for Self Assessment Questions 1. (c)

2.(c)

3.(b)

4.(a)

5.(a)

6. (b)

7.(c)

8. (a)

9.(d)

10.(b)

11.(c)

12.(a)

13.(b)

14.(c)

15. (b)

16.(c)

17.(a)

18.(a)

19.(a)

20. (c)

Chapter-8 Self Assessment Questions 1. A firm has a DOL of 3.5 at Q units. What does this tell us about the firm? (a) If sales rise by 3.5% at the firm, then EBIT will rise by 1%. (b) If EBIT rises by 3.5% at the firm, then EPS will rise by 1%. (c) If EBIT rises by 1% at the firm, then EPS will rise by 3.5%. (d) If sales rise by 1% at the firm, then EBIT will rise by 3.5%. 2. A firm has a DFL of 3.5 at X dollars. What does this tell us about the firm? (a) If sales rise by 3.5% at the firm, then EBIT will rise by 1%. (b) If EBIT rises by 3.5% at the firm, then EPS will rise by 1%. (c) If EBIT rises by 1% at the firm, then EPS will rise by 3.5%. (d) If sales rise by 1% at the firm, then EBIT will rise by 3.5%. 3. Higher operating leverage is related to the use of additional ………………………. (a) fixed costs (b) variable costs (c) debt financing (d) common equity financing 4. Lower financial leverage is related to the use of additional …………………………… (a). fixed costs (b). variable costs (c) debt financing (d) common equity financing 5. Calculate the break-even (quantity) point given the following information. The firm has $1,000,000 in fixed costs. The firm produces only one product and anticipates selling each unit for $25 with variable costs of $5 per unit.

(a) 200,000 (b) 50,000 (c) 40,000 (d) There is not sufficient information provided to calculate the sales break-even point. 6. Calculate the break-even point for sales revenues given the following information. The firm has $1,000,000 in fixed costs. The firm anticipates that variable costs will be $1 for every $5 in sales. (a) $1,250,000 (b) $1,000,000 (c) $250,000 (d) $200,000 7. Calculate the degree of operating leverage (DOL) at 400,000 units of quantity sold. The firm has $1,000,000 in fixed costs. The firm anticipates selling each unit for $25 with variable costs of $5 per unit. (a) 3.33 (b) 1.25 (c) 1.14 (d) There is not sufficient information provided to calculate the degree of operating leverage (DOL). 8. Which of the following formulas represents a correct calculation of the degree of operating leverage? (a) (Q - QBE)/Q (b) (EBIT) / (EBIT - FC) (c) [Q(P-V) + FC] / [Q(P-V) ] (d) [Q(P-V)] / [Q(P-V) - FC] 9. Calculate the degree of financial leverage (DFL) for a firm when its EBIT is $2,000,000. The firm has $3,000,000 in debt that costs 10% annually. The firm also has a 9%, $1,000,000 preferred stock issue outstanding. The firm pays 40% in taxes. (a) 0.78

(b) 0.80 (c) 1.24 (d) 1.29 10. Which of the following formulas represents the correct calculation of the degree of financial leverage? (a) [ NI + T + I ] / [ NI - I - PD/(1-T) ] (b) EBIT / [ EBIT - I - PD/(1-T) ] (c) EBIT / [ NI - I - PD/(1-T) ] (d) All of the above are correct methods to calculate the degree of financial leverage (DFL). 11. A firm is considering three different financing alternatives -- debt, preferred stock, and common equity. The firm has created an EBIT-EPS chart that shows several indifference points. What does each indifference point show the firm? (a) The level of EBIT that generates identical EPS under two alternative financing plans. (b) The level of sales that generates identical EBIT and EPS figures. (c) It shows the level of EBIT and EPS at which DFL is identical under two alternative financing plans. (d) None of these. 12. Which of the following statements is correct? (a) The coefficient of variation of EBIT, CVEBIT, is a measure of relative financial risk. (b) The coefficient of variation of EPS, CVEPS, is a measure of relative total firm risk. (c) Total firm risk equals business risk times financial risk. (d) A relative measure of relative business risk equals the difference, CVEPS - CVEBIT.

13. A Ltd. and B Ltd. go into liquidation and a new company X Ltd. is formed. It is a case of— (a) Absorption (b) External reconstruction

(c) Amalgamation. (d) None of these

14. X Ltd. goes into liquidation and a new company Z Ltd. is formed to take over the business of X Ltd. It is a case of— (a) Absorption (b) External reconstruction (c) Amalgamation. (d) All of these

15. X Ltd. goes into liquidation and an existing company Z Ltd. purchases the business of X Ltd. It is a case of— (a) Absorption (b) External reconstruction (c) Amalgamation. (d) None of these

16. Accumulated profits include— (a) Provision for doubtful debts (b) Superannuation fund (c) Workmen's compensation fund. (d) All of these

17. Liabilities (not accumulated profits) of a company include— (a) General reserve

(b) Pension fund (c) Dividend equalisation fund. (d) None of these

18. When the expenses of liquidation are to be borne by the vendor company, then the vendor company debits— (a) Realisation account (b) Bank account (c) Goodwill account. (d) All of these

19. When the expenses of liquidation are to be borne by the purchasing company, then the purchasing company debits— (a) Vendor company's account (b) Bank account (c) Goodwill account. (d) None of these

20. When the purchasing company makes payment of the purchase consideration, it debits— (a) Business purchase account (b) Assets account (c) Vendor company's account. (d) All of these Answers for Self Assessment Questions 1. (d)

2.(c)

3.(a)

4.(d)

5.(b)

6.(a)

7.(c)

8.(d)

9.(d)

10.(b)

11(a)

12.(b)

13.(c)

14.(b)

15. (a)

16.(c)

17.(b)

18.(a)

19.(c)

20. (c)

Chapter-9 Self Assessment Questions 1. The main object of providing depreciation is: (a) To calculate true profit. (b) To show true financial position. (c) To reduce tax. (d) To provide funds for replacement. 2. Depreciation arises because of: (a) Fall in the market value of an asst. (b) Physical wear and tear. (c) Fall in the value of money. (d) None of them. 3. Depreciation is a process of: (a) Valuation (b) Allocation (c) Both valuation and allocation (d) None of them. 4. Under the straight line method of providing depreciation it: (a) Increase every year. (b) Remain constant every year. (c) Decreases every year (d) None of them. 5. Under the diminishing balance method depreciation it: (a) Increases every year (b) Decreases every year.

(c) Remain constant every year. (d) None of them. 6. Under the fixed installment method of providing depreciation it is calculated on: (a) Original cost (b) on balance amount (c) On scrap value (d) None of them 7. Under the diminishing balance method, depreciation is calculated on: (a) Scrap value (b) On original value (c) On book value (d) None of them 8. The amount of depreciation charged on a machinery will be debited to:

(a) Machinery account (b) Depreciation account (c) Cash account (d) Repair account 9. Loss on sale of plant and machinery should be written off against: (a) Share premium (b) Depreciation fund account (c) Sale account (d) Profit & loss account 10. Loss on sale of machinery will be: (a) Debited on machinery A/c

(b) Credited to machinery A/c (c) Credited to profit and loss A/c (d) None of them (11) Asset which have a limited useful life are termed as: (a) Limited assets (b) Depreciation assets (c) Unlimited asset (d) None of these 12. Process of becoming out of date or obsolete is termed as:

(a) Physical deterioration (b) Depletion (c) Obsolescence (d) Amortization 13. Which of the term is used to write off in reference to tangible fixed assets. (a) Depreciation (b) Depletion (c) Amortization (d) Both (b) and (c) 14. The economic factors causing depreciation: (a) Time factor (b) Obsolescence and inadequacy (c) Wear and tear (d) Money valuation 15. Profit prior to incorporation is an example of:

(a) Capital reserve (b) Revenue reserve (c) Secret reserve (d) None of these 16. Total depreciation cannot exceeds its:

(a) Scrap value (b) Cost value (c) Market value (d) Depreciable value 17. Depreciation value of an asset is equal to:

(a) Cost + Scrap value (b) Cost + Market price (c) Cost – Scrap value (d) None of these 18. Depreciation does not depend on fluctuations as:

(a) Market value of asset (b) Cost of price of asset (c) Scrap value of asset (d) None of these 19. Depreciation is: (a) An income (b) An asset

(c) A loss (d) A liability 20. The books value of an asset is obtained by deducting depreciation from its:

(a) Market value (b) Scrap value (c) Market + Cost price (d) Cost Answers for Self Assessment Questions 1. (a)

2.(b)

3.(a)

4.(b)

5.(b)

6. (a)

7.(c)

8. (b)

9.(b)

10.(b)

11.(b)

12.(c)

13.(a)

14.(b)

15. (a)

16.(d)

17.(c)

18.(a)

19.(c)

20. (d)

Chapter-10 Self Assessment Questions 1. Assuming no returns outwards or carriage inwards, the cost of goods sold will be equal to: (a)Closing inventory less purchases plus opening inventory (b)Opening inventory plus purchases plus closing inventory (c)Purchases plus closing inventory less opening inventory (d)Sales less gross profit 2. Given the following data: Gross profit £6700, Carriage inwards £400; Carriage outwards £250, Rent received £575 and Other expenses £3600, the net profit for the firm would be: (a) £3,425 (b) £3,025 (c) £2,450 (d) £3,275

3. The characteristics of a current asset would not include: (a) Likely to change before the next accounting period is over (b) Liquidity (c) Not bought for resale (d) Use as part of the firm's trading operations

4. Valuing closing inventory at cost is an application of which concept? (a)Consistency (b)Prudence (c)Money measurement (d) Dual aspect

5. A firm which charges the purchase of office furniture to the profit and loss account could be an application of the concept of: (a) Materiality (b) Going concern (c)Prudence (a) Historical cost 6. Gross profit less expenses is known as: (a) Net profit (b) Cost of goods sold (c) Total drawings (d) Net turnover

7. Which of the following statements is not true? ‘The going concern concept can be ignored if …………………..’. (a) parts of the business are likely to face closure (b) business closure is in the near future (c) the business is likely to fail in the forthcoming accounting period (d) similar firms also have chosen to ignore the concept

8. Net turnover can be calculated as: (a) Gross profit plus cost of goods sold (b) Sales less returns outwards (c) Purchases plus opening inventory less returns outwards (d) Sales plus returns inwards

9. The balance sheet can illustrate: (a) The number of units of inventory left (b) The total value of all debts at a particular date (c) The amount spent by the firm on acquiring assets in a particular year (d) Profit earned during a previous period of time

10. The trading account does not: (a) Calculate gross profit (b) Compare the sales with the cost of those sales (c) Show the effect of profit on capital (d) Include the cost of goods sold

11. Which of the following statements is not true? (a) Carriage inwards and carriage outwards do not both appear in the trading account (b) Returns inwards and returns outwards are both debit balances (c) Carriage inwards and carriage outwards are both debit balances (d) Both types of returns appear in the trading account

12. Net current assets is equivalent to: (a) Current liabilities less current assets (b) Working capital (c) Stock plus accounts receivable plus cash (d) Non-current assets plus current assets less current liabilities

13. Given the following data: inventory £3,400, Debtors £1,350, Bank overdraft £950, Cash in hand £60 and accounts payable £885. The firm’s working capital is valued at: (a) £2,975 (b) £4,875 (c) £3,925 (d) £5,760

14. Which of the following would not appear on the balance sheet? (a) Money owed by the firm to suppliers (b) Carriage inwards (c) Drawings (d) Machinery

15. Including private costs incurred in running a car as business costs would violate the concept of: (a) Business entity (b) Dual aspect (c) Consistency (d)Going concern

16. The cost of delivery of goods to the firm would be treated as: (a) Carriage outwards – debited to the profit and loss account (b) Carriage inwards – credited to the trading account (c) Carriage outwards – credited to the profit and loss account (d) Carriage inwards – debited to the trading account

17. Given the following data: Purchases £26,000, Returns outwards £1,470, Returns inwards £2,100, Carriage outwards £1,230, Carriage inwards £890, Opening inventory £4,500, and closing inventory £6,130. The value of the cost of goods sold is: (a) £23,790. (b) £23,160. (b) £26,730. (c) £22,270.

18. Which of the following would not appear in the profit and loss account? (a)Rent received. (b) Cash expenses. (c) Drawings. (d) Carriage outwards.

19. Changing the value of closing inventory from cost to expected selling price might be an application of which accounting concept? (a) Going concern. (b) Prudence. (c) Consistency. (d) Historical cost. 20. Given the following data, calculate the value of the firm’s capital: Non-current assets£4,000; inventory £350; accounts receivable £180; cash at bank £650 and accounts payable £280. (a) £5,460 (b) £5,000 (c) £4,900 (d) £5,180

Answers for Self Assessment Questions 1. (d)

2.(a)

3.(c)

4.(b)

5.(b)

6. (a)

7.(d)

8. (a)

9.(b)

10.(c)

11.(b)

12.(b)

13.(a)

14.(b)

15. (a)

16.(d)

17.(a)

18.(d)

19.(b)

20. (c)