Financial Accounting II

Workbook

The ICFAI University# 52, Nagarjuna Hills, Hyderabad 500 082

ICFAI April, 2005. All rights reserved.No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying or otherwise - without prior permission in writing from The ICFAI University.

ISBN. No. 81-314-0232-0 Ref. No. FA-II WB 04200501 For any clarification regarding this book, the students may please write to the ICFAI University giving the above reference number of this book specifying chapter and page number. While every possible care has been taken in type-setting and printing this book, the ICFAI University welcomes suggestions from students for improvement in future editions.

PrefaceThe ICFAI University has been upgrading its study material to make it more beneficial to the students for self-study through the Distance Learning mode. We are delighted to publish a workbook for the benefit of the students preparing for the examinations. The workbook is divided into three parts. Brief Summaries of Chapters A brief summary of all the chapters in the textbook are given here for easy recollection of the topics studied. Part I: Questions and Answers on Basic Concepts (with Explanatory Notes) Students are advised to go through the relevant textbook carefully and understand the subject thoroughly before attempting Part I. In no circumstances should the students attempt Part I without fully grasping the subject material provided in the textbook. Part II: Problems and Solutions The students should attempt Part II only after carefully going through all the solved examples in the textbook. A few repetitive problems are provided for the students to have sufficient practice. Part III: Model Question Papers (with Suggested Answers) The Model Question Papers are included in Part III of this workbook. The students should attempt all model question papers under simulated examination environment. They should self score their answers by comparing them with the model answers. Effective from April, 2003, the examinations for all the subjects of DBF/CFA (Level-I) consist of only multiple choice questions. Each paper consists of Part A and Part B. Part A is intended to test the conceptual understanding of the students. It contains 40 questions carrying one point each. Part B contains problems with an aggregate weightage of 60 points. Please remember that the ICFAI University examinations follow high standards that demand rigorous preparation. Students have to prepare well to meet these standards. There are no short-cuts to success. We hope that the students will find this workbook useful in preparing for the ICFAI University examinations. Work Hard. Work Smart. Work Regularly. You have every chance to succeed. All the best.

Detailed CurriculumAccounting for Intangible Assets: Characteristics, Operating Expenses versus Intangible Assets, Amortization, Valuation of Goodwill, Patents, Trade Marks and Trade Names, Copyrights, Other Intangibles and Deferred Charges, Research and Development Costs, Investments in Securities and Innovative Property. Accounting for Shares: Accounting Treatment for Issues of Shares, Issue of Shares at a Premium and discount, Forfeiture and Re-issue of shares, Rights and Bonus Shares, Preference Shares: Issue, Conversion and Redemption, Underwriting and Brokerage on Shares, Valuation of Shares. Accounting for Debentures: Issue of Debentures, Redemption of Debentures, Debenture Redemption Reserve, Purchase of Own Debentures, Fully Convertible, Partly Convertible and Nonconvertible Debentures. Preparation of Financial Statements of Limited Companies: Requirements of the Companies Act for presentation of Profit and Loss Account and Balance Sheet of a Company, Preparation of Trial Balance, Profit and Loss Account and Balance Sheet of Limited Companies, Treatment of Special items relating to Company Final Accounts. Statutory Audit and Annual Reports: Legal Requirements for Statutory Audit, Auditors Duties and Liabilities, Qualifications in Auditors Reports, Auditors Duties in relation to Accounting Standards. Contents of Annual Reports, Chairmans Statement, Directors Report, Notes to Financial Statements. Limitations of Financial Statements: Critical Review of Financial Statements, Reworking Financial Statements after Removing the Effect for Abnormal Items and Changes in Accounting Policies. Introduction to Consolidated Accounts of Holding and Subsidiary Companies: Introduction, Determining the Types of Control, Legal Definition and Requirement, Meaning of Holding Company and Subsidiary Company, Particulars of Balance Sheet of a Holding Company with regard to its Subsidiaries, Financial year of the Holding Company and its Subsidiaries, Rights of Holding Companys Representatives and Members, Advantages and Disadvantages of Consolidation of Financial Statements, Basic Rules for Preparing a Consolidated Balance Sheet, Forms and Techniques, Some Special Adjustments. Current Developments and ERP.

Contents

Brief Summaries of Chapters

1

Part I: Questions and Answers on Basic Concepts (with Explanatory Notes)

10

Part II: Problems and Solutions

65

Part III: Model Question Papers (with Suggested Answers)

223

Brief Summaries of ChaptersAccounting for Intangible Assets Intangibles are non-physical but valuable resources like goodwill, patents, and copyrights owned by the firm. The intangible assets can be classified into the following four categories: Goodwill: Arises when payment is made in acquiring another business or asset at higher than the book value. It represents the extraordinary profit earning capability of the enterprise due to reputation, brand name, location, management. Rights: Example, Patents, Copyrights, Trademarks, Licenses, Secret Processes, Franchises, etc. Deferred Revenue Expenditure: Expenditure for which the payment is incurred in one year and the benefits arising out of the asset would be for a number of years. Example, R&D costs are deferred, and appear on the assets side of the balance sheet. Debit balance or deficit in the profit and loss account representing accumulated losses.

Methods of Valuing Goodwill Simple Profit Method: While calculating the goodwill under this method, the following are ascertained: a. b. The average annual profit expected to accrue in the future. The number of years of purchase of goodwill.

Super Profit Method: This method tries to ascertain whether or not the existing business is capable of earning higher than the normal profit (i.e., are there any super profits). The super profits are then multiplied by an agreed number of years of purchase to arrive at the value of goodwill. To evaluate goodwill under this method, the following are ascertained: a. b. c. Expected average annual profits. Reasonable Rate of Return or Normal Rate of Earnings. Capital Employed in the Business.

Amortization of Goodwill Usually the value of the goodwill is amortized over a period of time. The journal entry to be passed for amortization of goodwill is Profit and Loss a/c To Goodwill a/c Technical know-how should be recorded in the books of account only when some consideration in money or moneys worth has been paid for it. Technical know-how can be of two types: i. Relating to manufacturing processes, and ii. Relating to plans, designs and drawings of buildings or plant and machinery. The cost of an intangible asset is measured by (a) the amount of cash disbursed or the fair value of other assets distributed, (b) the present value of amounts to be paid for liabilities incurred, and (c) the fair value of consideration received for stock issued. Dr

Cost of Intangibles

Disclosure A description of intangible assets, method of amortization, and estimated useful lives should be appropriately disclosed in the financial statement or in the footnotes (APB-17, par.30). Enterprises hold investments for diverse reasons. For some enterprises, investment activity is a significant element of operations and assessment of the performance of the enterprise may largely or solely depend on the reported results of this activity. Cost of an investment includes acquisition charges like brokerage, etc. On disposal of an investment, the difference between net disposable proceeds and carrying amount should be recognized as income or expenditure. The total capital of the company divided into units of small denominations are called shares.

Investments

Accounting for Shares

Classes of Shares The Companies Act provides for two classes of shares: Equity and Preference shares. Equity shareholders enjoy the voting rights but the company has no obligation to pay the dividends to them at a fixed rate every year. Even at the time of winding up of the company, they receive their share capital after payment to preference shareholders. The preference shareholders enjoy preferential treatment with regard to payment of dividend and return of capital at the time of winding up of the company. Share capital is the capital raised by the company by the issue of shares. a. Authorized or Nominal Share Capital: It is the maximum amount up to which a company is authorized to issue shares to the public without altering the memorandum of association. b. Issued Capital: The nominal value of the shares which are offered to the public for subscription. c. d. e. Subscribed Capital: The nominal value of the shares taken up by the public. Called-up Capital: It is that part of the subscribed capital which has been called up. Paid-up Capital: It is that part of the called up capital which has been paid-up by the shareholders.

Issue of Shares The Companies Act stipulates that when shares are issued to the public for cash, the company has to come up with prospectus. Prospectus is the document which includes notice, circular, advertisement or other document inviting public to subscribe for shares or debentures. If the company asks the subscribers to pay minimum amount along with application and the rest in two or more installments then the first installment is called application money; second installment is called share allotment money; third installment is called share first call and fourth installment is called share second call or final call. On receipt of application money Bank account Dr. To Share application account On allotment of shares Share application account Dr. To Share capital account For amount due on allotment of shares, the entry would be Share allotment account Dr. To Share capital account

Journal Entries 1.

2.

3.

2

4.

5.

6.

7.

If the shares are issued for a premium and the premium amount is required to be paid on allotment Share allotment account Dr. To Share capital account To Share premium account Refund of excess application money in case of oversubscription Share application a/c Dr. To Bank a/c When proportionate allotment is made for all applications in case of oversubscription Share application a/c Dr. To Share capital a/c To Share allotment a/c On receipt of allotment money Bank account To Share allotment account Dr.

8.

On making first call Share first call account To Share capital account Dr.

9.

Calls in advance: The amount received by the company before the call is made is called calls in advance. The company is compelled to pay the interest. For interest on calls-in-advance Interest on calls-in-advance a/c To Bank a/c Dr.

10.

Adjustment of calls in advance Calls in advance a/c To Share call a/c Dr.

Calls in Arrears: When the shareholder does not pay his dues on allotment or on calls, it is called calls in arrears. This is transferred to a common account called calls in arrears account. Forfeiture and Reissue of shares: The shares can be forfeited in case of non-payment of allotment or call money and these can be reissued. Issue of Bonus Shares: Bonus shares are allotted to the existing shareholders without the receipt of any consideration from them. Issue of Rights Shares: The rights shares are those shares which are offered by the company to the existing shareholders. Intrinsic Value Method: Under this method, the net assets of the company including goodwill and non-trading assets are divided by the number of shares issued to arrive at the value of each share. Return on capital employed method =

Methods of Valuation of Shares

Yield Method a.

Return on capital employed x Paid-up value of shares Normal rate of return Expected rate of dividend x Paid-up value of shares Normal rate of dividend3

b.

Valuation on the basis of dividend =

The Value of Preference Shares: The value of non-participating preference shares would be face value plus the arrear, if any. As the Participating Preference Shareholders have a right to participate in the surplus the value would be face value + Arrears in preference dividend + Surplus of each preference share. Debentures is a credit shift security. The loan raised by a company is divided into a large number of segments, similar to the case of the share capital being divided into well-defined constituents called shares and each such segment is called debenture. The debentures are issued in the same manner as the shares are issued.

Accounting for Debentures

The difference between shares and debentures Shares They are ownership securities. Return to the shareholders is in the form of dividends subject to the company earning profits. The amount is paid only after the debentures claim is fully paid. Debenture Redemption Reserve (DRR) This is the reserve created by apportioning the part of profits in equal amounts or higher if profits permit. Debentures issued at par and redeemed at par Debentures issued at discount and redeemed at par Debentures issued at premium and redeemed at par. Legal Requirements Relating to the Preparation of Financial Statements of Limited Companies. In the case of Companies registered under the Companies Act, the Act specifies the books of accounts maintained and also prescribes the format and content of the financial statement. Section 209 of the Companies Act specifies the books of accounts to be maintained by a company. In accordance with this Section, every company maintains, at its registered office, proper books of account with respect to the following: a. b. c. All sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place. All sales and purchases of goods by the company. The assets and liabilities of the company. Debentures They are credit shift securities. Return to debentures is in the form of interest which is compulsory obligation even if the company makes losses. Given the first priority for payment during dissolution.

Terms of Issue and Redemption of Debentures

Preparation of Financial Statements of Limited Companies

Companies have to compulsorily maintain their accounts on accrual basis. Also the double entry system of accounting is to be followed. The Companies Act specifies with regard to the Annual accounts to be drawn up by a company that At every annual general meeting of the shareholders, the Board of Directors of the company should lay before the shareholders, a balance sheet as at the end of the accounting period which has just ended and also a profit and loss for such accounting period.

4

Requirements with respect to the Profit and Loss Account Part II of the Schedule VI of the Companies Act does not prescribe any format for the Profit and Loss account but only outlines the information to be included in the Profit and Loss account of the Company. Part II of Schedule VI specifies certain information to be provided by way of notes to Profit and Loss Account. Sometimes, the companies divide their income statement into the following three parts. a. Trading account showing the gross profit earned. b. Profit and Loss account showing the profit earned after tax and available for appropriation. c. Profit and Loss appropriation account. The profit and loss appropriation account shows in detail the appropriations made from the profits in respect of dividends and transfer to reserves, etc. The balance in the Profit and Loss appropriation account if it is credit will be shown on the liabilities side under the heading Reserves and Surplus. Part I of Schedule VI of the Companies Act specifies both the form and content of the balance sheet of the company. The assets of a company should be classified into: a. Fixed assets b. Investments c. Current assets, Loans and Advances d. Miscellaneous expenditure (to the extent not written off). The items appearing on the liabilities side are classified as: a. Share capital b. Reserves and surplus c. Secured loans d. Unsecured loans e. Current liabilities and Provisions. The fixed assets of the company must be, as far as possible, classified as: a. Goodwill b. Land c. Buildings d. Leasehold e. Railway sidings f. Plant and machinery g. Furniture and fittings h. Development of property i. Patents, trade marks and designs j. Livestock k. Vehicles. The investments held by a company shall be classified as: a. Investments in Government or Trust securities b. Investment in shares, debentures and bonds c. Immovable property d. Investment in the capital of partnership firms.

Details within Share Capital

5

The current assets, loans and advances assets should be broadly classified into Current assets and Loans and Advances. The following are shown under current assets: a. Interest accrued on investments b. Stores and spare parts c. d. e. f. g. h. Loose tools Stock-in-trade Work-in-progress Sundry debtors Cash balance on hand Bank balance.

Accounting treatment of special items in the financial statements of a Limited Company. According to the Companies Act, dividend can be declared or paid by a company for any financial year only out of the profits arrived at after providing for depreciation. The depreciation shall either be a. b. To the extent specified in Section 350. In respect of each item of depreciable asset, for such an amount as is arrived at by dividing ninety five percent of the original cost of the asset to the company by the specified period in respect of such asset. On any other basis approved by the Central Government which has the effect of writing off by way of depreciation ninety five percent of the original cost of the asset on the expiry of the specified period.

Depreciation

c.

Interest on Debentures: When a company raises funds by floating of debentures, the Profit and Loss account must be charged with the interest on the debentures. Income Tax: Dividends to both the equity and preference shareholders can be paid only out of the profits available after taking into account the income tax. The profits on which income tax is payable is termed as taxable profits and the calculation of taxable profits is based on the provisions of the Income Tax Act. Dividends: Dividends may be defined as the share of profits that is payable to each shareholder of the company. The Companies Act lays down that dividends can be paid out of profits only and prohibits the payment of any dividend out of capital. Dividends shall be paid only in cash. The dividends can be declared only by a resolution of the shareholders, if the articles of the company permit the directors can declare an interim dividend. The dividends declared by a resolution by the shareholders in the annual general meeting of the company is termed as the final dividend. The final dividend is over and above the interim dividend. Managerial Remuneration: As per the provisions of the Companies Act, commission to the managing staff should be calculated before charging such commission. However, a company may enter into an agreement to pay commission at a percentage of profits after charging such commission. The calculation of managerial remuneration shall be based on net profit after making certain adjustments as per the Companies Act. Every company has to maintain books of accounts not less than eight years along with vouchers prior to the current year. The books of accounts have to be at the registered office unless the Board of Directors have other place in mind. Section 514(2) says that proper books of accounts include such books, which are essential to explain the transactions and financial position of the company. Again by Section 209(4), other books and papers include account deeds, vouchers.

Statutory Audit and Annual Reports

6

The Managing Director or manager is responsible for the proper upkeep of books of accounts. Section 211(1) says that balance sheet must satisfy three basic conditions: A true and fair view of the company. It must confirm to Part 1 of Schedule VI or similar form approved by Central Government. Emphasizing on general instructions under notes.

The annual financial statements must first be approved by the Board of Directors, then signed as represented by board and then forwarded to auditors for the report. The Boards report must have an attachment to balance sheet in general meeting which comprises state of company, dividend, reserves, factors effecting financial position etc., it must also include a directors responsibility statement. The balance sheet and the P&L account are to be shown only at the AGM then filling the final accounts with register as to be done within the stipulated time frame. Regarding eligibility for appointment of an auditor, Section 226 is applicable for all types of companies where auditors qualification and disqualification are covered. Appointment of Auditors First auditors are appointed by directors, in case the director fails, the first auditors are appointed by shareholders, subsequent auditors are appointed at each AGM by ordinary resolution. The Central Government has the powers to appoint auditors if company fails to appoint or reappoint auditors. Reappointment of Auditors is done at the AGM by passing a resolution except in few cases. With respect to ceiling on number of audits, compliance of Section 224 from auditors before appointment or reappointment subject to certain exceptions. Removal of an Auditor Any auditor appointed under Section 224 (except first auditors) can be removed prior to expiry of his term by company at general meeting with prior approval of the Central Government. Rights of an Auditor The principal rights of an auditor are covered under Section 227 which confers the following rights: access to books, accounts, to call for information and explanations, to visit branches, receive remunerations, receive notices and to attend general meetings. Duties of an Auditor To report accounts pertaining to P&L account, Balance Sheet, every document attached to and annexed to them and be presented in the general meeting, facts and his opinion regarding complain with regard to Accounting Standards. Limitations of Balance Sheet 1. 2. 3. 4. 5. 6. Inability to quantify human assets. Balance Sheet is a historic document. Personal bias/judgment in creating provisions, stock valuation, depreciation, bad debts, etc. Possibility of manipulation of closing stocks, current assets. Lack of uniform accounting policies makes the comparison difficult with other entities. Window dressing is hard to escape.

Limitations of Financial Statements

Limitations of P& L Account An Interim statement hence does not reflect the reality 1. 2. 3. The profit/loss vitiated by accounting conventions and policies Does not reflect management philosophy and efficiency Historical document. 7

Here, the emphasis is on consistency of profits and reasons for fluctuations in profits. In effect one has to make out how statements are manipulated and profits reworked after removing the effect of abnormal items and changes in accounting policies. Professional entries of an accountant specify certain fundamental principles, which are integrity, objectivity, independence, confidentiality, and technical standards, professional competence. Holding company is a company which acquires a complete or majority of shares in any other company. The company being acquired is called a subsidiary company. The holding company can also acquire controlling composition of directors, controlling the holding company which in turn controls a subsidiary. The balance sheet of holding companies must be attached with documents of subsidiary with copies of P&L account, Balance Sheet, Board of Directors, Auditors Report, Holding Companys interest. Rules for preparing consolidated statements: Before consolidating the balance sheet, investment of holding company in entire share capital of subsidiary company has to be changed with the assets and liabilities of the subsidiary company. Goodwill/Cost of control: It is the excess price paid for investment over the share of equity by holding company. Capital Reserve is the excess share in equity or net assets of subsidiary over the price paid for investment. Minority Interest: Shares held by outsiders in the subsidiary company are known as minority interest. After this, the companys profits or losses & reserves are treated accordingly if they are capital profit or losses and revenue profits or losses considering the date of acquisition wherein before the date comes under capital profits or losses, postacquisition becomes revenue profits or losses. Then intercompany transactions like goods sold on credit, bills of exchange, loans, which are owned by one company, should be eliminated. Also intercompany unrealized profit is also to be eliminated.

Consolidated Accounts of Holding and Subsidiary Companies

Capital and Revenue Profits:

Revaluation of Assets and Liabilities: If revaluation is done at the time of acquisition for the subsidiary company, the profit or loss arising out of revaluation is treated as capital profit or loss. Minority shareholders are to be treated accordingly. Preference Shares: If the preference shares of subsidiary are held by the holding company, the difference between cost and paid-up value of shares gives the cost of control. The minority interest share is up to the paid-up value plus the dividend till the date of consolidation. Bonus Shares: The treatment of bonus shares depends upon whether they are issued out of pre-acquisition profits or post-acquisition profits. It is only in case of post-acquisition that first, one has to adjust the bonus shares from post-acquisition profits and then only the holding companys share in the revenue profits of subsidiary company be calculated. Dividend: If the dividend of the subsidiary company pertains to pre-acquisition profits, it is treated as capital gain, which is utilized for reducing goodwill. If the dividend is from the post-acquisition profits, shareholders of the holding company have the right for their share. Some of the advantages of consolidating the final statements of holding and subsidiary companies are to understand and present a purposeful financial position of the group which in turn can aid in proper valuation of the holding company.

8

Some of the disadvantages of consolidating the final statements of holding and subsidiary companies are the inability to assess the creditworthiness of subsidiary from the final statements, which is difficult to interpret, the consolidated retained earnings rarely match with dividend for holding company shareholders, detailed information is difficult to analyze unless it is provided. The Accounting Standard 21 deals with procedures, preparation and presentation of consolidated financial statements. The Accounting Standard 23 deals with accounting for investments in associates in consolidated financial statements wherein accounting for these by investors are applied. Equity method is used here. The International Accounting Standard 27 deals with procedures, preparation and presentation of consolidated financial statements and accounting for investments in subsidiaries. It covers the financial position, operations and necessary disclosures. The US GAAP has FAS-94 which deals with consolidation of all majority owned subsidiaries, ARB-51 deals with consolidated financial statements and ARB-43 deals with comparative financial statements. Value added statement is an information communique of the addition of wealth the organization is able to make with the efforts of management and employees using capital. There are two concepts of value added Gross Value Added: This is arrived at by deducting from sales revenue and any other direct income and investment income, the cost of all materials and services and other extraordinary expenses. Net Value Added: This is arrived at by deducting the depreciation from the gross value added. Maximizing shareholders value has always been the main objective of a company. A company is said to have created economic value only if the return on its capital is greater than the opportunity cost. Economic Value Added (EVA) is only, one variation of residual income and capital. EVA is a residual income measure that subtracts the cost of capital from the operating profits generated by the business. Market value added is the difference between the market value of invested capital and book value of invested capital. Market value added is a measure of shareholders value. Brand valuation is a tool that quantifies the economic value of a brand. An increasing importance is being placed on brand creation and management. The value of a brand is found by Earnings Valuation Method: Under this method, the value of a brand (like any other asset) is the present value of the future earnings of that brand. Cost Method: This method involves stating the brand value at its cost to the company. This is relatively easy when brand is acquired.

Current Developments and ERP

Brand valuation is expected to acquire vital significance for most firms. Brands have a strong franchise in the market and are valuable assets which should be properly managed.

9

Part I: Questions on Basic ConceptsAccounting for Intangible Assets1. The valuation of goodwill is necessary in the case of a. b. c. d. e. 2. a. b. c. d. e. 3. a. b. c. d. e. 4. a. b. c. d. e. 5. a. b. c. d. e. 6. a. b. c. d. e. Sale of company Valuation of shares Purchase of other company Both (a) and (b) above All of (a), (b) and (c) above. The goodwill of established firms is more when compared to new businesses. Goodwill can never be negative. Goodwill differs in its composition in different trades. Both (a) and (c) above. All of (a), (b) and (c) above. Goodwill Secret processes Large marketing and advertisement campaign costs Both (a) and (c) All of (a), (b) and (c) above. Future maintainable profits Capital employed Normal rate of return Both (a) and (c) above. All of (a), (b) and (c) above. Can be shown in the assets side of the balance sheet Can be shown in the liabilities side of the balance sheet Can be shown in the trading account Can be shown in the profit and loss account It is not shown in the balance sheet. The value of goodwill is more in case of purchase of super profit method as compared to the annuity method of super profit. For the purpose of calculation of goodwill, past profits will have to be adjusted in order to determine the future expected profits. In annuity method, goodwill is equated to the future value of present profits earned by discounting them applying a normal rate of return. Net assets basis of valuation of shares is concerned with the asset backing per share. For calculating the value of shares, rate of earning and net rate of dividend should be taken into consideration if the shares are being acquired for control purposes.

Which of the following statements is/are true?

Intangible assets includes

Valuation of goodwill is dependent on

Purchased goodwill

Which of the following statements is not true?

7.

Which of the following is not a consideration in determining the useful life of an intangible asset? a. b. c. d. e. Legal, regulatory, or contractual provisions. Provisions for renewal or extension. Expected actions of competitors. Initial cost. None of the above. Simple profit method. Capitalization of super profits. Annuity method of super profits. Purchase of super profits method. Book-value method. Account receivable. Account payable. Demand bank deposits. Net long-term receivables. Patents and trademarks. Goodwill. Patents. Copyrights. Trademarks. Franchise. Capitalization of average profits methods. Capitalization of super profits method. Annuity method of super profits. Number of years purchase of average profits method. Super profits method. It represents a non-physical value over and above the physical assets. It is the present value of firms expected super earnings. It is a non-monetary fixed asset. It can either be purchased goodwill or inherent goodwill. It is a non-monetary identifiable intangible asset. Gross fixed assets + Current assets Gross fixed assets Depreciation + Current assets Gross fixed assets + Current assets Current liabilities Gross fixed assets Depreciation + Current assets Current liabilities Current assets Current liabilities.

8.

Which of the following is not a method of calculating goodwill? a. b. c. d. e.

9.

Which of the following is a non-monetary asset? a. b. c. d. e.

10.

Which of the following intangible assets is considered as an unidentifiable intangible asset? a. b. c. d. e.

11.

Which of the following methods of valuation of goodwill uses the present value factor? a. b. c. d. e.

12.

Which of the following is not a feature of goodwill? a. b. c. d. e.

13.

Capital employed is equal to a. b. c. d. e.

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14.

Which of the following factors is used as a multiplier of super profits in valuation of goodwill of a business? a. Average capital employed in the business. b. Simple profits. c. Number of years purchase. d. Normal rate of return. e. Normal profits. The amount to be collected on application of shares should be a. Not more than 5% of nominal value of shares b. More than 5% of nominal value of shares c. More than 5% of issue price of shares d. Not more than 5% of issue price of shares e. 5% of issue price of shares. What is the time specified for issue of shares at a discount once the sanction from the Company Law Board is obtained? a. 2 months. b. 1 year. c. 2 years. d. 6 months. e. 3 years. Discount on issue of shares is shown on a. Assets side under miscellaneous expenditure b. Assets side under current assets c. Liabilities side under current liability d. Liabilities side under reserves e. None of the above. Bonus shares can be issued out of a. General reserves b. Investment allowance reserve c. Share premium collected in cash d. Both (a) and (c) above e. All of (a), (b) and (c) above. Which of the following statements is/are not true? a. Bonus issue can be made in lieu of dividends. b. Residual reserves after issue of bonus shares should be at least 40% of called-up capital. c. Bonus issue cannot be made within 12 months of any rights issue. d. Both (a) and (b) above. e. Both (a) and (c) above. Preference shares redeemable within ____ years can be issued. a. 5 b. 7 c. 10 d. 15 e. 20.

Accounting for Shares15.

16.

17.

18.

19.

20.

12

21.

Preference shares can be redeemed from the a. b. c. d. e. Proceeds of fresh issue of shares Accumulated profits General reserve Both (a) and (c) above All of (a), (b) and (c) above. Brokerage and underwriting commission are the same. Broker does not guarantee the sale of a specified number of the securities. The broker buys the securities which have not been subscribed for. Both (a) and (b) above. All of (a), (b) and (c) above. 5% 10% 15% 20% There is no limit. 5% p.a. 6% p.a. 10% p.a. 4% p.a. 15% p.a. Economic policies of government Yield of other related shares in the stock exchange Demand and supply of shares Rate of dividend paid All of the above. Assessment of wealth tax Assessment of income tax Amalgamation Both (a) and (c) above All of (a), (b) and (c) above. The application money should not be less than 5% of the issue price of shares. The application money should not be less than 5% of the nominal value of shares. Bonus issue can be made within 12 months of any rights issue. Both (a) and (b) above. Both (a) and (c) above.

22.

Which of the following statements is/are true? a. b. c. d. e.

23.

The maximum rate of premium at which shares can be issued is a. b. c. d. e.

24.

The rate of interest paid on calls-in-advance is a. b. c. d. e.

25.

The value of the shares of a company depends on a. b. c. d. e.

26.

Valuation of shares has to be done for a. b. c. d. e.

27.

Which of the following is true? a. b. c. d. e.

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28.

29.

30.

31.

32.

33.

Securities premium account cannot be used for a. Issue of bonus shares b. Writing-off of preliminary expenses c. Declaration of dividend d. Writing-off of commission or discount on issue of shares and debentures e. Providing for premium payable on redemption of debentures. Profit on reissue of forfeited shares is transferred to the a. Share capital account b. General reserve account c. Bonus shares account d. Capital reserve account e. Forfeited shares account. Which of the following is true with regard to issue of shares at discount? a. The maximum rate of discount can be 15%. b. At least one year should have elapsed from the commencement of business before shares are issued at a discount. c. The issue should be authorized by a special resolution. d. The shares which are issued at a discount should not be of a class already issued. e. Sanction of the Company Law Board is not required. The discount allowed on re-issue of forfeited shares is debited to the a. Share capital account b. Profit and Loss account c. Discount allowed account d. Forfeited shares account e. Capital reserve account. When shares are issued at discount, the maximum rate shall not exceed a. 5% of the face value b. 10% of the face value c. 15% of the face value d. 10% of the value for which shares are issued e. 20% of the value for which shares are issued. Redeemable preference shares can be redeemed out of a. The sale proceeds of investments b. The proceeds of a fresh issue of shares c. Share premium d. The proceeds of issue of debentures e. The sale proceeds of fixed assets.Which of the following statements is/are true?

34.

a. b. c. d.

e. 14

Partly paid preference shares cannot be redeemed. Capital redemption reserve amount can be utilized for writing-off preliminary expenses. Redemption of preference shares cannot be made out of fresh issue of debentures. When preference shares are redeemed out of profits, a sum equal to the nominal amount of the shares so redeemed should be transferred out of profit to the General Reserve. Both (c) and (d) above.

35.

The minimum subscription amount that should be received on a public issue is a. b. c. d. e. 75% of the issued capital 90% of the issued capital 80% of the issued capital 75% of the authorized capital 90% of the authorized capital. Share premium. Capital reserve. Development rebate reserve. Profits prior to incorporation. Sinking fund. Decrease cost of control Increase cost of control Have no effect on cost of control Decrease capital losses Increase capital losses. A bonus issue can be made out of capital reserves. A bonus issue can be made only after 12 months from the date of incorporation. A bonus issue can be made only after 12 months from any public/rights issue. A bonus issue can be made only after 12 months from the date of commencement of business. Bonus shares can be issued in lieu of dividend. The application money should not be less than 5% of the issue price of share. The application money should not be less than 5% of the nominal value of share. The application money should not be less than 10% of the issue price of share. The application money should be 10% of the nominal value of share. The amount of application money to be collected is left to the discretion of the company.

36.

From which of the following accounts can transfers be made to capital redemption reserve? a. b. c. d. e.

37.

Issue of bonus shares by the subsidiary company out of capital profits will a. b. c. d. e.

38.

Which of the following is true? a. b. c. d. e.

39.

Which of the following statements is true with regard to issue of shares? a. b. c. d. e.

40.

Before forfeiting the shares, the Board of Directors shall give the defaulting shareholder, a notice period of a. b. c. d. e. 21 days 14 days 30 days 45 days 60 days.

41.

When shares to be forfeited are issued at a premium and the premium money which is duly received on the shares forfeited, the treatment of share premium amount will be: a. b. c. d. e. Share premium account will be further credited Share premium account will be further debited Share premium account already debited will not be canceled Share premium account credited will not be canceled Share premium account shall be transferred to capital reserve. 15

42.

Which of the following statements is not true with regard to redemption of preference shares? a. b. c. d. e. Partly paid shares cannot be redeemed. The redemption of preference shares shall be taken as reduction of Companys authorized share capital. When shares are issued for redemption in future, it will not be treated as increase in capital. Preference shares can be redeemed either out of the profit by capitalization or out of fresh issue of shares. Premium on redemption of preference shares is provided out of the share premium account.

43.

In case of oversubscription, if shares are allotted pro rata, the excess application money received on shares allotted is a. b. c. d. e. Refunded to the shareholders Forfeited and the amount is treated as share premium Adjusted against allotment money Adjusted against call monies Adjusted against both (c) and (d) above. It is paid to the underwriters on the amount of subscription procured by them. It is paid to the underwriters on the amount of shares or debentures underwritten by them. It is paid only for the amount subscribed by the general public and not on firm underwriting. Underwriting commission is not paid on the amount of shares or debentures devolved on the underwriters. Underwriting commission is paid on the amount of privately placed issue. If authorized by Articles With the sanction of the Company Law Board With the approval of the Central Government If authorized by a special resolution of the Company If authorized by an ordinary resolution of the Company. Of promoters quota Of applications by banks against their underwriting commitments Shares which are not underwritten Both (a) and (b) above Both (a) and (c) above. Right shares means the shares which are offered by a company to the existing shareholders. The price of the right shares is always above the market price of the shares. Right shares are those shares which are offered by the company by converting the partly paid shares into fully paid shares. Right shares are those shares which are offered by directors of the company to their friends and relatives at lower prices. The expenses on issue of right shares is always high.

44.

Which of the following statements is true with regard to the underwriting commission? a. b. c. d. e.

45.

Calls-in-Advance can be received only a. b. c. d. e.

46.

Brokerage will not be allowed in case a. b. c. d. e.

47.

Which of the following statements is correct? a. b. c. d. e.

16

48.

Securities premium account may be applied by the company for a. b. c. d. e. Issue of fully paid bonus shares Writing-off preliminary expenses The premium payable on the redemption of preference shares or debentures Writing-off discount allowed on shares or debentures All of the above. Value of rights Number of right shares x (Market value Issue price) = Number of old shares Value of rights Number of right shares = x Issue price Number of old shares Value of rights Number of right shares = x New price Number of old shares Value of rights Number of right shares x (Market value Issue price) = Number of old shares + New shares

49.

Which of the following items is true? a.

b.

c.

d.

50.

51.

52.

Value of rights Number of right shares x (Market value Issue price) = Number of old shares New shares Which of the following methods is not related to the valuation of equity shares? a. Intrinsic value method. b. Yield method. c. Fair value method. d. Super profit method. e. Both (c) and (d) above. When redeemable preference shares are due for redemption, the entry passed is a. Debit redeemable preference share capital account; Credit cash account b. Debit redeemable preference share capital account; Credit preference shareholder account c. Debit preference shareholder account; Credit cash account d. Debit preference shareholder account; Credit redeemable preference share capital account e. Debit redeemable preference capital account; Credit capital redemption reserve account. Which of the following statements is true in respect of brokerage? a. Brokerage will be paid when the applications are made by the banks against their underwriting commitments. b. The listed companies are allowed to pay brokerage on private placement of capital at a maximum rate of 0.25%. c. Brokerage will not be allowed in respect of promoters quota, including the amounts taken up by the directors. d. The mailing cost and other out-of-pocket expenses for canvassing of public issues, etc., will be borne by the companies but not stock brokers. e. The broker is an insurer against the undersubscription and is personally liable for subscription of unsubscribed shares. 17

e.

53.

54.

55.

56.

57.

58.

The premium collected on issue of debentures is transferred to a. Profit & Loss account b. Profit & Loss appropriation account c. Security premium account d. Reserve capital account e. General reserve account. As per Schedule VI, which of the following is true regarding the treatment of calls-inarrears in the final accounts of a company? a. The amount will be shown under the head current assets on the assets side of the balance sheet. b. The amount will be deducted from the share capital in the balance sheet. c. The amount will be shown under the head current liabilities. d. The amount will be shown in the P & L account as a loss without showing it in the balance sheet. e. The amount will be added to the share capital in the balance sheet. Which of the following cannot be utilized for the redemption of Preference Shares of a company? a. Proceeds of fresh issue of shares b. Securities premium on fresh issue of shares c. General reserve d. Profit and loss account e. Dividend equalization reserve. The accounting entry involved for issue of shares to promoters for the services rendered by them is a. Debit goodwill account and credit share capital account b. Debit cash account and credit share capital account c. Debit promoters account and credit share capital account d. Debit share capital account and credit cash account e. Debit goodwill account and credit calls-in-arrear account. Underwriting commission will not be paid on the amount of shares taken by a. Promoters b. Directors c. Employees d. Directors friends e. All of the above. At the time of forfeiture of shares which were originally issued at a discount, the accounting entry involves i. A debit to Share capital account with the called-up value of shares forfeited. ii. A credit to Share forfeiture account with the amount received on forfeited shares. iii. A credit to Discount on issue of shares with the amount of discount allowed on forfeited shares. iv. A credit to Calls-in-arrears with the amount due but not paid on forfeited shares. v. A debit to Share capital account with the paid-up value of shares. a. Both (i) and (iv) above b. Both (iv) and (v) above c. Both (i) and (ii) above d. (i), (ii) and (iii) above e. (i), (ii), (iii) and (iv) above.

18

104.

The directors of a company have proposed a dividend of 18% of the paid-up capital. The percentage of profits which will have to be compulsorily transferred to reserve is a. b. c. d. e. 2.5% 5.0% 7.5% 10.0% 12.5%. Dividend is payable on the calls paid in advance by the shareholder. Capital redemption reserve can be utilized for writing-off miscellaneous expenses and losses. Profit on cancellation of debentures is to be transferred to general reserve. Any dividend remaining unpaid after 3 years from the date on which it became due can be transferred to capital reserve. When the proposed dividend does not exceed 10%, it is not obligatory on the company to transfer any profits to its reserve.

105.

Which of the following statement is true? a. b. c. d. e.

106.

The amount of capital which can be called-up only at the time of winding up of the company is called a. b. c. d. e. Contributory capital Capital reserve Reserve capital Share reserve Authorized capital. Reserves and surplus Secured loans Unsecured loans Current liabilities Provisions.

107.

As per Schedule VI to the Companies Act, 1956 unclaimed dividends are to be shown as a. b. c. d. e.

108.

The directors of a company have proposed a dividend of 8% of the paid-up capital, the percentage of profits which will have to be compulsorily transferred to reserves is a. b. c. d. e. 2.5% 5.0% 7.5% 10.0% Nil.

109.

Which of the following is/are true regarding the treatment of interim dividend in the financial statements? a. b. c. d. e. It is debited to the profit and loss appropriation account. It is debited to the profit and loss account. It is shown under the head current liabilities in the balance sheet. It is shown under the head provisions in the balance sheet. Both (a) and (d) above.

26

110.

Which of the following is true if the dividend is not claimed within 7 years from the date of its transfer to a special bank account? a. b. c. d. e. The company retains it. The amount is distributed to the remaining shareholders. The amount is transferred to the Registrar of Companies under its general revenue account. The amount is transferred to the Revenue account of the Company Law Board. The amount is transferred to the Investor Education and Protection Fund. Board of Directors Board of Directors after obtaining approval of shareholders Board of Directors after approval of Stock Exchange Only by shareholders Board of Director after approval of Central Government. Dividends can be paid out of profits arrived at after setting-off depreciation. Central Government may allow any company to declare dividends out of profits before providing depreciation. A company paying dividends must also transfer a prescribed percentage of profit to reserve. The shareholders have the power to enhance the dividend recommended by the Board of Directors. Dividend shall be paid only in cash. Liability for calls on partly paid-up shares. Liability in respect of bills discounted. Liability under guarantee. Interim dividend. Arrears of dividend on cumulative preference shares. Dividend and interest can be paid out of capital. Premium on issue of debentures can be utilized for paying dividends. Capital profit realized in cash can be used for paying dividends. Capital profit transferred to capital reserve can be used for paying dividends. Dividends can be paid out of capital but interest cannot be paid out of capital. 10 years 8 years 5 years 4 years 2 years.

111.

Interim Dividend of a company can be declared by a. b. c. d. e.

112.

Which of the following is not true regarding declaration of dividends by a company? a. b. c. d. e.

113.

Which of the following is not an example of contingent liability? a. b. c. d. e.

114.

Which of the following statements is correct? a. b. c. d. e.

115.

As per Law, the books of accounts of a company should be preserved for a period of a. b. c. d. e.

27

116.

Which of the following deductions is permitted under Section 350 of the Companies Act, for the calculation of managerial remuneration? a. b. c. d. e. Any tax notified as a tax on excess or abnormal profits. Special depreciation. Initial depreciation. Development rebate reserve. Any compensation, damages or payments made voluntarily. A sum set aside to provide for repayment of debentures. The surplus arising on a professional revaluation of fixed asset. An amount set aside to provide for the increased cost of replacement of fixed asset. A sum set aside from profit towards a special publicity campaign, which is to be started in the following year. A sum retained to provide for loss that may arise out of doubtful debts. When they are proposed by the directors Only after 42 days of declaration Only after the approval of proposed dividend at the Annual General Meeting Only after the approval of the Registrar of Companies When provision is made in the books of accounts.

117.

Which of the following is a capital reserve? a. b. c. d. e.

118.

A shareholder can claim the dividends a. b. c. d. e.

119.

Which of the following items is not considered for deduction from profit in respect of calculation of managerial remuneration? a. b. c. d. e. Directors remuneration. Interest on mortgages executed by the company and loans and advances secured by a charge on its fixed or floating assets. Any compensation or damage to be paid by virtue of any legal liability, including a liability arising from a breach of contract. Expenses on repairs, whether to immovable or to movable property, provided the repairs are not of capital nature. Loss of capital nature including loss on sale of the undertaking or any of the undertakings of the company or any part thereof.

120.

Managerial remuneration payable to directors, manager, managing director is based on net profit. Which of the following statements is not true in respect of calculation of net profit for managerial remuneration? a. b. c. d. e. Credit shall be given for any subsidy received from Central Government. Credit shall be given for profit on sales by the company of forfeited shares. Credit shall be given for revenue profit, i.e., difference between original cost and WDV, on sale of fixed assets. Debit shall be given for any compensation or damage to be paid in virtue of any legal liability, including a liability arising from a breach of contract. Debit shall not be given for income tax payable by the company under Indian Income Tax Act, 1921.

28

121.

122.

123.

124.

125.

126.

127.

Which of the following information is/are required by way of notes to profit and loss a/c according to Part II of Schedule VI of the Companies Act, 1956? a. Managerial remuneration paid or payable under section 198 of the Companies Act. b. Other allowances and commission including guarantee commission. c. In case of manufacturing companies, the notes relating to licensed capacity, installed capacity and actual production in respect of goods manufactured. d. Value of imports calculated on C.I.F basis by the company during the financial year in respect of raw materials, components, spare parts and capital goods. e. All of the above. Which of the following items cannot be shown as reserves? a. Capital reserves. b. Share premium. c. Sinking fund. d. Capital redemption reserve. e. Profit and loss account at the beginning of the year. Which of the following is not an item under Current Assets, Loans and Advances under Part 1 of Schedule VI of the Companies Act, 1956? a. Interest accrued on investment. b. Bill of exchange. c. Balances with customs, port trust, etc. d. Development expenditure not adjusted. e. Prepaid Insurance. Which of the following reserves does not represent Revenue Reserve? a. Investment allowance reserve. b. Statutory Reserve. c. Dividend equalization reserve. d. Reserve on revaluation of assets. e. General reserve. The term Divisible Profits means a. Profit disclosed by P&L a/c b. Profit disclosed by P&L a/c minus corporate tax c. Profit disclosed by P&L a/c minus corporate tax minus dividend d. Profit available to shareholders for distribution as dividend e. Profit disclosed by P&L a/c minus corporate tax plus depreciation and provisions. Which of the following is not a secured loan? a. Debentures. b. Fixed deposits. c. Loans and advances from banks d. Loans and advances from subsidiaries. e. Other loans and advances. Which of the following statements is not true? a. Goodwill is one of the few assets which is usually not depreciated. b. Future bad debts are usually projected as a percentage of debtors. c. An expenditure which will benefit the future period is capital expenditure or prepaid expenditure. d. Goods spoiled and lost by fire are credited to trading account. e. Appreciation of the market value of assets must be taken into account if the correct profit of the year is to be determined. 29

128.

Which of the following will appear in the profit and loss appropriation account? a. Provision for taxation for current year. b. Directors fees. c. Auditors fees. d. Proposed dividend. e. Penalty paid under disputes. Which of the following is incorrect? a. Dividend can be declared out of current profits arrived at after providing for depreciation on assets, not only for the current year but also for any arrears of depreciation of the past years. b. c. d. e. Dividend can be declared out of undistributed profits of the past years. Dividend can be declared out of any money provided by the Central or State Government for the payment of dividend. Dividend shall be payable only in cash. Dividend can be declared out of current profits without transferring any part of the distributable profit to reserves. As an expense in the profit and loss account As an appropriation of profits in the profit and loss appropriation account As a current liability in the balance sheet Under the head current assets along with other current assets such as sundry debtors Under the head loans and advances in the balance sheet. A body corporate. Managing Director of the company. Wife of the Managing Director of the company. A shareholder of the company. An individual who is indebted to the company for a sum exceeding Rs.1,000.

129.

130.

Advance tax that appears in the trial balance is shown a. b. c. d. e.

131.

Who among the following is not disqualified for appointment as auditor of a company? a. b. c. d. e.

132.

Under which of the following circumstances, is a special resolution not required to appoint an auditor of a company? a. b. c. d. e. Where 27% of equity share capital is held by a State Government. Where 30% of preference share capital is held by a public financial institution. Where 49% of equity share capital is held by the Central Government. Where 78% of debentures is held by a nationalized bank. Both (b) and (d) above.

133.

Which of the following statements is/are not true with regard to maintenance of books of accounts by a company? a. b. c. d. e. The books of account can be either on cash system or accrual system of accounting. Companies have to compulsorily follow double entry system of accounting. A set of cost accounts must be maintained in addition to the financial accounts by the companies that are engaged in manufacturing, processing or mining activities. The books of accounts should be preserved for a period of eight years preceding the current year. The books of accounts shall be open to inspection by any director during business hours.

30

134.

The auditor of a company gives a report that the financial statements of the company reflect a true and fair view subject to certain reservations. Such a report is known as a. b. c. d. e. Clean report Qualified opinion Unqualified opinion Provisional report subject to issue of final report Both (a) and (c) above.

135.

Which of the following conditions is/are essential for the reappointment of the retiring auditor? i. ii. iii. iv. a. b. c. d. e. Passing of resolution at the Annual General Meeting. Approval from the Central Government. The retiring auditor should be qualified for reappointment. The retiring auditor has not notified in writing his unwillingness to be reappointed. Only (i) above Only (ii) above Both (i) and (ii) above (i), (ii) and (iii) above (i), (iii) and (iv) above.

136.

In addition to the Managing Director or Manager of the company, who among the following is/are responsible for keeping proper books of accounts of a company? i. ii. iii. iv. v. a. b. c. d. e. Every legal advisor of the company. Every banker of the company. Every officer and other employee and agent in default. Every auditor of the company. Every member of the company. Only (iii) above Both (i) and (iv) above Both (iii) and (iv) above Both (iv) and (v) above All (i), (ii), (iii), (iv) and (v) above. Board of Directors of the company Members of the company Central government Statutory auditors Income tax authorities.

137.

Special Auditor is appointed to conduct special audit of a company by the a. b. c. d. e.

138.

Who among the following persons held responsible for the failure to take reasonable steps to keep proper books of account of a company? a. b. c. d. e. Auditor. Chief Finance Officer. Chief Accounts Officer. Managing Director. Legal Advisor.

31

139.

140.

141.

142.

Which of the following persons can be appointed as an auditor of a company? a. A body corporate. b. A person indebted to the company for Rs.1,500. c. A person holding the shares of the company as a trustee. d. A person disqualified to be appointed as an auditor of its subsidiary company. e. An officer of the company. In terms of Part I Schedule VI of the Companies Act, 1956, which of the following assets is categorized under Fixed Assets? a. Vehicles. b. Loose tools. c. Debts outstanding for a period exceeding six months. d. Fixed deposit with nationalized bank. e. Long-term investments. The maximum amount beyond which a company is not allowed to raise funds, by issue of shares is a. Issued capital b. Reserve capital c. Nominal capital d. Subscribed capital e. Paid-up capital. When should the first auditor of the company be appointed by the Board of Directors? a. In the first Annual General Meeting of the company. b. Within one month from the date of registration of the company. c. Within 3 months from the date of registration of the company. d. Within 6 months from the date of registration of the company. e. Within 12 months from the date of registration of the company. Annual reports must be submitted to the registrar within _____ days of Annual General Meeting. a. 7 b. 14 c. 30 d. 40 e. 60. Which of the following is optional while submitting the annual report? a. Directors report. b. Auditors report. c. P & L account. d. Balance sheet. e. Funds flow statement. Audit begins where _________ ends. a. Selling b. Accounting c. Business d. Accounting year e. Stock valuation.

Statutory Audit and Annual Reports143.

144.

145.

32

146.

Auditing is compulsory in the case of a. b. c. d. e. Charitable trusts Joint stock company Partnership Both (a) and (c) above All of the above. By the management of the company As specified in the Memorandum of company As specified in the Articles of company By the appointing authority Both (b) and (c) above.

147.

Remuneration of auditor is fixed a. b. c. d. e.

148.

The auditor shall inform the registrar of companies in writing about his acceptance within days from the receipt of the offer from the company a. b. c. d. e. 7 days 10 days 14 days 21 days 30 days. B cannot be appointed as an auditor of A Ltd. B can be appointed as an auditor of A Ltd. B can be appointed as an auditor if permitted by central government. B cannot be appointed as an auditor of any Limited Company. B can be appointed as an auditor it permitted by shareholders.

149.

B, a chartered accountant gave guarantee for the goods purchased from A Ltd. a. b. c. d. e.

150.

An audit firm consisting of 2 partners have taken up audit of companies with Rs.30 lakh of paid-up share capital. How many companies can the firm take up? a. b. c. d. e. 10 40 30 15 20.

151.

If the paid-up share capital is less than Rs.25 lakh, how many public companies can a firm consisting of 2 partners take? a. b. c. d. e. 10 40 20 30 15. Negligent discharge of their duties Misfeasance Misstatements in the prospectus Fraud and for furnishing false information Professional misconduct. 33

152.

An auditor will be held liable under I.P.C for a. b. c. d. e.

153.

A qualified report is given when a. b. c. d. e. The auditor is not completely satisfied with the accounts He was unable to get the required information There is a significant error in the accounts Both (b) and (c) above All of (a), (b) and (c) above.

154.

Which of the following is not considered as statutory books required to be maintained by the company? a. b. c. d. e. Register of charges. Register of investments not held in the companys name. Register of debenture holders. Register of employees. Register of members. The amount of dividend declared. The status of affairs of the company. The amount proposed to be transferred to reserves. Appointment of additional director. Material changes affecting financial position of the company. Is liable for damages occasioned by failure to exercise maximum level of skill in discharging his duties Is exempted from liability under the Indian Penal Code for furnishing false information Is liable for professional misconduct if he does not mention deviations from mandatory accounting standards Can be held liable for making misstatements in the prospectus All of (a), (c) and (d) above. Technology absorption. Financial state of affairs of the company. Foreign exchange earnings of the company. Statement of accounting policies. Conservation of energy.

155.

Which of the following does not form part of the Directors Report? a. b. c. d. e.

156.

A statutory auditor a. b. c. d. e.

157.

Which of the following need not be stated in the Directors Report? a. b. c. d. e.

158.

According to the Companies Act, the books of accounts of a company are required to be maintained on_________. a. b. c. d. e. Accrual basis only Accrual basis or cash basis and on double entry system Cash basis and double entry system Accrual basis and double entry system Cash basis only.

34

159.

160.

161.

162.

163.

164.

Auditors are said to issue an unqualified opinion when they a. Are not independent of the company being audited b. Are not familiar with the company or the industry within which the company operates c. Find the financial statements to be inconsistent with standards d. Consider the financial statements a fair presentation e. Are not qualified for being appointed as the auditor of the company. The first auditors of the company shall be appointed by the board, a. Within six months from the date of registration of the company b. In the first AGM of the company c. Within one month from the date of registration of the company d. Within 12 months from the date of registration of the company e. Within 3 months from the date of registration of the company. Which of the following is optional and not a legal requirement while submitting the Annual Report of a listed company? a. Chairmans statement. b. Directors report. c. Auditors report. d. Statement of contingent liabilities. e. Statement of sources and application of funds. A professional auditor will be held liable under specific statutory liabilities for a. Misstatements in the prospectus b. Fraud and furnishing false information c. Professional misconduct d. Negligent discharge of his duties e. Both (a) and (d) above. Which of the following statements is not correct? a. The first auditor of the company shall be appointed by the Board of Directors within one month from the date of registration of the company. b. The auditor shall be appointed at the annual general meeting and shall hold office from the conclusion of that meeting to the conclusion of the next annual general meeting. c. The auditor should inform the Registrar his acceptance or non-acceptance within 60 days from the receipt of the offer from the company. d. The remuneration of auditor is fixed by the appointing authority. e. The auditor is entitled to receive notices and other communications pertaining to all general meetings of the company. Which of the following statements is true with regard to issue of shares by a joint stock company? a. Shares cannot be issued for consideration other than cash. b. In the event of oversubscription, the company can allot more number of shares than those specified in the prospectus. c. As per the SEBI guidelines, the minimum subscription clause is applicable only to the first issue of shares by the company. d. The share application money is converted into share capital only after the board of directors approving the allotment of shares. e. The first issue of shares can be made at a discount.

35

165.

Which of the following will not form part of Miscellaneous Expenditure of the Balance Sheet of a company? a. b. c. d. e. Preliminary expenses. Underwriting expenses. Loss on sale of fixed assets. Discount on issue of shares. Interest paid out of capital during construction. Share capital General administrative expenses Preliminary expenses Profit and loss appropriation account Legal expenses.

166.

The costs in incorporating a company should be debited to a. b. c. d. e.

167.

Which of the following receipts is included in calculation of net profits for the purpose of calculating remuneration payable to managerial personnel? a. b. c. d. e. Subsidy received from any Government. Profit on sale of forfeited shares. Profit from the sale of part of undertaking. Profit from the sale of immovable property. Profit on issue of shares at a premium.

168.

As per Schedule VI of the Companies Act, 1956, which of the following is not shown in the Balance Sheet of a company under the head Fixed Assets? a. b. c. d. e. Lease hold property. Development of property Railway sidings. Designs. Unadjusted development expenditure. .

169.

According to Schedule VI of the Companies Act, 1956, which of the following assets is/are shown under the head investments in the balance sheet of a company? i. ii. iii. iv. a. b. c. d. e. Investments in the capital of partnership firms. Investment in trust securities. Investment in shares. Investment in debentures. Only (i) above Only (ii) above Both (iii) and (iv) above (ii), (iii) and (iv) above All (i), (ii), (iii) and (iv) above. Authorized share capital Net profit Paid-up capital Called-up capital Called-up share capital plus calls-in-advance less unpaid calls.

170.

Dividends are usually paid as a percentage of a. b. c. d. e.

36

171.

Declared dividend should be classified in the Balance Sheet as a a. b. c. d. e. Provision Current liability Reserve Current asset Miscellaneous expenditure.

172.

According to the Companies Act, 1956, which of the following items is/are not shown under the head Provisions in the balance sheet? a. b. c. d. e. Proposed dividends Provision for taxation Unclaimed dividends Provisions for insurance, pension and similar staff benefit schemes Both (b) and (c) above.

173.

On June 10, 2001, Santosh Ltd. has taken a bank loan on which interest at the rate of 8% per annum is payable on June 30 and December 31, every year. The loan is secured by a charge on the factory building. The interest accrued and due as on March 31, 2003 was shown in the Balance Sheet of the company under the head a. b. c. d. e. Current liabilities Secured loans Miscellaneous expenditure Loans and advances Unsecured loans.

174.

Which of the following items should not appear under the head unsecured loans in the Balance Sheet of a company? a. b. c. d. e. Sinking funds. Loans and advances from subsidiaries. Short-term loans and advances from banks. Loans and advances from others. Fixed deposits accepted.

175.

Which of the following denotes the dividend declared by the directors between two annual general meetings? a. b. c. d. e. Proposed dividend. Final dividend. Interim dividend. Declared dividend. Unpaid dividend. Provision Current liability Reserve Current asset Miscellaneous expenditure. 37

176.

Proposed dividend should be classified in the Balance Sheet as a. b. c. d. e.

Limitations of Financial Statements177. Which of the following area(s) is/are prone to multiplicity of accounting policies to inflate or deflate profits? a. b. c. d. e. 178. Valuation of inventories. Conversion of foreign currency items. Depreciation methods. Recognition of revenues/expenses. All of the above.

Which of the following is/are limitation(s) of a Balance Sheet? i. ii. iii. a. b. c. d. e. It does not contain certain assets and liabilities despite its claim to be the statement of all assets and liabilities. The factors, which have a vital bearing on the earnings of the organization, are not disclosed. Personal judgment plays a great part in determining the figures of the balance sheet. Only (i) above. Only (ii) above. Only (iii) above. Both (ii) and (iii) above. All (i), (ii) and (iii) above.

Consolidated Accounts of Holding and Subsidiary Companies179. If the proposed dividend appears in the balance sheet of subsidiary company, while preparing the Consolidated Balance Sheet, the share of minority shareholders should be a. b. c. d. e. 180. Shown under proposed dividend in the consolidated balance sheet Credited to investment account Credited to consolidated profit and loss account Added to minority interest in consolidated balance sheet Credited to goodwill account.

Which of the following statements is/are true? Holding company can acquire controlling interest over the subsidiary company by a. b. c. d. e. Holding more than 50% of shares in subsidiary company having voting rights. Controlling the composition of board of directors. Controlling a holding company which controls a subsidiary company. Both (a) and (c) above. All of (a), (b) and (c) above.

181.

The time interval between the dates of balance sheet of holding company and subsidiary company a. b. c. d. e. Can be up to 1 year Cannot be more than 6 months Can be more than 6 months Can be more than 1 year Can be more than 9 months.

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182.

183.

184.

185.

186.

187.

188.

Minority interest consists of a. Face value of the shares held by outsider b. Proportional capital profits c. Proportional revenue profits d. Both (a) and (c) above e. All of (a), (b) and (c) above. Cost of control is a. The excess of price paid for the investment over and above the share in equity b. Excess of price paid for investment over and above the net assets acquired by the holding company c. The excess of share in equity over and above the price paid for the investment d. Either (a) or (b) above e. Either (b) or (c) above. Revenue profits are a. The post-acquisition profits of subsidiary company b. The post-acquisition profits of holding company c. The profits earned by the subsidiary company from regular transactions d. The profits earned by the holding company from regular transactions e. None of the above. Which of the following statements is/are true? a. Revaluation profit is treated as capital profit. b. Revaluation reserve can be used for paying dividend. c. Revaluation reserve can be used for writing-off goodwill. d. Both (a) and (b) above. e. Both (a) and (c) above. Capital profits are a. Profits earned by the subsidiary company up to the date of acquisition of shares by the holding company b. Post-acquisition profits of the subsidiary company c. Post-acquisition profits of the holding company d. Pre-acquisition profits of the holding company e. Profits earned by the subsidiary company by unusual transactions. The share of holding company in the proposed dividend of the subsidiary company from its pre-acquisition profit should be a. Credited to the investment account b. Debited to the investment account c. Credited to consolidated profit and loss account d. Debited to consolidated profit and loss account e. None of the above. Which of the following statements is true? a. Capital reserve is the excess of the share in equity of the subsidiary over and above the price paid for the investment. b. Goodwill is the excess of the share in equity of the subsidiary over and above the price paid for the investment. c. Capital reserve is the excess price paid for the investment over and above the share in equity. d. Both (a) and (b) above. e. Both (a) and (c) above. 39

189.

Which of the following statements is not true? a. b. c. d. e. A company is a subsidiary of a holding company when the latter company controls the composition of the Board of Directors of the former company. Dividends paid out of pre-acquisition profits by the subsidiary company must be credited to investment account by the holding company. Bonus shares issued out of pre-acquisition profits by the subsidiary company will have no effect on the Consolidated Balance Sheet. The parent organization acquiring controlling interest in another company is called the holding company. Minority Interest = Paid-up value of shares held by outsiders.

190.

XYZ Company purchased ABC Company. If the purchase consideration paid by XYZ. Company exceeds the value of net assets of ABC Company, the balance is a. b. c. d. e. Debited to goodwill a/c. Debited to capital reserve a/c. Credited to goodwill a/c. Credited to capital reserve a/c. Shown as a loss by debiting the profit and loss a/c.

191.

In the process of preparing consolidated financial statements, which of the following items need not to be eliminated? a. b. c. d. e. Inter-company profit in beginning inventory. Inter-company profit in ending inventory. Inter-company profit on inter company sale of a fixed asset. Inter-company dividends receivable/payable. Inter-company profit on inventory sold to a non-affiliated company.

192.

Which of the following statements is/are not true with regard to the treatment of postacquisition profits of a subsidiary company? a. b. c. d. e. The holding company and minority shareholders should share such profits in proportion to their respective holdings. The share of such profits of minority shareholders should be added to the amount of minority interest. The share of such profit of holding company shall be added to the cost of investments for calculation of cost of control/goodwill. The share of such profit of holding company should be treated as revenue profits and shall be credited to profit and loss account of holding company. Both (a) and (d) above.

193.

Revenue profits for consolidation of balance sheet of holding company and subsidiary company are a. b. c. d. e. The post-acquisition profits of holding company The post-acquisition profits of subsidiary company The profits after the financial year but before the date of acquisition of subsidiary company The profits earned by the holding company from regular transactions The profits earned by the subsidiary company from regular transactions.

40

194.

Which of the following statements is/are not true? a. b. When holding company acquires all the shares of the subsidiary company, the latter company becomes a wholly owned subsidiary. When the holding company acquires more than half of the shares of subsidiary company, those shareholders who have a minority share are referred to as minority shareholders. Minority interest is always calculated at the date of the consolidated balance sheet but not when the holding company takes the control. Minority interest in the consolidated balance sheet is a liability to the shareholder of the holding company. Both (c) and (d) above. Post-acquisition profits of the subsidiary company are always capital profits. Every holding company is required to prepare consolidated balance sheet and profit and loss account under the Companies Act, 1956. Holding company means the company which holds the entire shares of another company. A company is a subsidiary of a holding company when the latter company controls the composition of the board of directors of the former company. Both (c) and (d) above.

c. d. e. 195. a. b. c. d. e. 196.

Which of the following statements is/are true?

According to AS-23, which of the following accounting methods is adopted in accounting of an Associate in the Consolidated Financial Statements? a. b. c. d. e. Cost method. Equity method. Amortized cost method. Super profit method. Moving average method.

197.

In the Consolidated Balance Sheet of a Holding Company, the value of minority interest consists of the proportionate share of minority shareholders in the i. ii. iii. iv. v. a. b. c. d. e. Nominal value of share capital of subsidiary company. Reserves of the holding company. Reserves and profits of the subsidiary company at the time of acquisition by the holding company. Income of the holding company after its acquisition. Income of the subsidiary company after its acquisition by the holding company. Only (i) above Both (i) and (ii) above Both (i) and (iv) above (i), (iii) and (iv) above (i), (iii) and (v) above.

198.

When the amount of investment in subsidiary is more than the nominal value of the share capital acquired by the holding company, the difference represents a. b. c. d. e. Goodwill Capital reserve Securities premium Capital profit Both (a) and (d) above. 41

199.

Dividends paid by a subsidiary company out of pre-acquisition profits are a. b. c. d. e. Adjusted against investment in subsidiary at the time of consolidation of accounts Adjusted against general reserve at the time of consolidation of accounts Credited to profit and loss account as revenue receipts at the time of consolidation of accounts Ignored for consolidation purposes The claims of the shareholders of the holding company.

200.

According to Accounting Standard-18, an individual is considered to have a substantial interest in an enterprise, if that individual, directly or indirectly, has a. b. c. d. e. 20% interest in the preference share capital of the enterprise 10% or more interest in the equity share capital of the enterprise 15% or more interest in the voting power of the enterprise 20% or more interest in the voting power of the enterprise 5% or more interest in the voting power of the enterprise.

201.

According to Accounting Standard-23, which of the following evidences the existence of significant influence by an investor? a. b. c. d. e. Representation on the board of directors of the investee. Participation in policy making processes. Provision of essential technical information. Both (a) and (b) above. All (a), (b) and (c) above.

202.

At the time of consolidation of accounts of the holding company, which of the following is/are to be considered while calculating the cost of control? i. ii. iii. iv. v. a. b. c. d. e. Value of shares acquired. Pre-acquisition profits/losses. Profits/losses on revaluation of assets. Profits/losses on revaluation of liabilities. Post-acquisition profits/losses. Only (i) above. Both (i) and (ii) above. (i), (ii) and (iii) above. (i), (ii), (iii) and (iv) above. All (i), (ii), (iii), (iv) and (v) above.

203.

The assets of the subsidiary company are revalued as on the date of acquisition by the holding company. In the consolidated Balance Sheet, the reduction in the value of assets (if any) of the subsidiary company is to be debited to a. b. c. d. e. Goodwill Capital reserve of the holding company Profit and loss account of the holding company Profit and loss account of the subsidiary company General reserve of the holding company.

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204.

In which of the following situations, a holding company need not prepare the consolidated financial statements? i. Where the holding company is a subsidiary of another company. ii. Where the control in the subsidiary company is intended to be temporary. iii. Where the subsidiary company operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the parent. a. Only (i) above b. Only (ii) above c. Only (iii) above d. Both (ii) and (iii) above e. All (i), (ii) and (iii) above. Value addition is a. The difference between sales and cost of material and services purchased from outside b. The difference between sales and cost of material purchased c. Pre-tax profit + Labor + Depreciation + Interest d. Both (b) and (c) above e. Both (a) and (c) above. Value addition is equal to a. Conversion cost b. Conversion cost + Administration cost c. Conversion cost + Administration cost + Selling costs + Profits d. Conversion costs + Opening stock e. Conversion costs + Opening stock + Closing stock. Which of the following is not true with regard to Value Added Statements? a. Value added statements enhance the attitude of employees towards their employers firms. b. Value added statements help in introducing the productivity linked bonus scheme for employees. c. Ratios based on value added statements can be used for international comparisons. d. Value added statements show the companys contribution to national income. e. Value added statements serve as a substitute to the existing financial statements. The possible use(s) of information provided in the value added statement is/are a. A means of predicting managerial efficiency b. A means of evaluating the relative rewards of shareholders against the company c. A means of indicating a companys wage paying ability in wage negotiations d. A means of evaluating what is nebulously referred to as the social performance of a company e. All of the above. The difference between gross value added and net value added is a. Investment income b. Extraordinary expenses c. Dividend on shares d. Depreciation e. Capital profit. 43

Current Developments and ERP205.

206.

207.

208.

209.

210.

Value added is measured as a difference between the a. b. c. d. e. Sales revenue and the cost of material bought Sales revenue and the cost of services bought Pre-tax profit and the depreciation Sales revenue and the cost of labor, depreciation and interest Sales revenue and the cost of material and services bought.

211.

While computing the profits of a business, which of the following measures considers the cost of debt as well as the cost of equity? a. b. c. d. e. Gross value added. Net value added Market value added. Brand value added. The computation of EVA involves a complex procedure. EVA can be improved by downsizing profitable operations. EVA is a residual income measure that subtracts the cost of capital from the operating profit generated by a business. EVA can be used for making day-to-day decisions as well as for strategic planning. EVA is one variation of residual income with adjustments in the method of calculation. . Economic value added.

212.

Which of the following is not true with regard to Economic Value Added (EVA)? a. b. c. d. e.

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Part I: Answers on Basic Concepts (with Explanatory Notes)Accounting for Intangible Assets1. 2. (e) Valuation of goodwill is necessary in the case of valuation of shares, sale of company, purchase of other companies, companies amalgamation etc. (d) The value of Goodwill is more for established firms when compared to new businesses. Goodwill is different for different trades. If the purchase consideration payable on takeover exceeds the net value of the assets to be taken over, it is termed as goodwill. If the net value of the assets to be taken over exceeds the purchase consideration, it is termed as negative goodwill. The term negative goodwill is used in America, but in India, it is termed as capital reserve. (e) Intangible assets lack physical substance but possess economic value and are long-term assets of a firm. These assets include goodwill, rights i.e. patents etc., secret processes, deferred revenue expenditure and debit balance of profit and loss account. Thus, the correct option is (e). (e) The value of goodwill is the present value of the expected future incomes that will be generated over and above the normal rate of return. Thus, the valuation of goodwill is based upon profitability of the firm i.e. the profits which are maintainable in the future and the capital employed i.e. funds of the equity shareholders and normal rate of