Accountancy: CUET Mock Test - 1 - CUET MCQ

Key PointsDissolution of Partnership Firm:

• Dissolution of partnership refers to the process by which the partners' relationship is terminated and all assets, shares, accounts, and liabilities are disposed of and settled . Section 39 of the Indian Partnership Act of 1932 defines the firm's dissolution.
• When a Partnership firm dissolves, the assets are distributed, the liabilities are disposed of in the proper order, with payment to third-party debt coming first, followed by amounts owed to partners, and finally the residual amount is divided among the partners in their profit sharing ratio.

Important PointsAfter Third Party loan amount: This option is Correct because When a Partnership firm dissolves, the assets are distributed, the liabilities are disposed of in the proper order, with payment to third-party debt coming first, followed by amounts owed to partners, and finally the residual amount is divided among the partners in their profit sharing ratio.

Before Third Party loan amount: This option is Incorrect because When a Partnership firm dissolves, the assets are distributed, the liabilities are disposed of in the proper order, with payment to third-party debt coming first, followed by amounts owed to partners, and finally the residual amount is divided among the partners in their profit sharing ratio.

After payment to Partners Capital Account: This option is Incorrect because When a Partnership firm dissolves, the assets are distributed, the liabilities are disposed of in the proper order, with payment to third-party debt coming first, followed by amounts owed to partners, and finally the residual amount is divided among the partners in their profit sharing ratio.

None of the Above: This option is incorrect because one of the options is Correct.

The correct answer is (D), (B), (C), (A), (E)

Key Points

• Calculation of Average profit
  • This is the first step in the process and is correctly placed at the beginning in option 2.
  • Average profit is essential to understand the profitability of the business over a period, which lays the foundation for further calculations in goodwill assessment.
• Calculation of Capital Employed
  • This is correctly identified as the second step in option 2.
  • Knowing the capital employed is crucial as it helps in determining the normal rate of return on the investments made in the business.
• Calculation of Normal profit
  • This step is correctly placed as the third step in option 2.
  • Normal profit is calculated to establish a benchmark for what the business would typically expect to earn as a return on its capital employed.
• Calculation of Super profit
  • This is the fourth step, as correctly shown in option 2.
  • Super profit is the excess of actual average profit over the normal profit. This figure is pivotal in calculating goodwill.
• Calculation of Goodwill
  • This is the final step in the sequence, accurately placed at the end in option 2.
  • Goodwill is calculated by valuing the super profit, usually by multiplying it with a certain number of years' purchase. This represents the intangible value of the business above its tangible assets and liabilities.

Therefore, the sequence (D) Calculation of Average profit, (B) Calculation of Capital Employed, (C) Calculation of Normal profit, (A) Calculation of Super profit, and (E) Calculation of Goodwill, as provided in option 2, is the correct sequence for calculating Goodwill under the super profit method.

The correct answer is (C), (E), (D), (B), (A).

Key Points

• Calculation Gaining/Sacrificing Ratio (C) is the first step.
  • This is correct because when a partner retires, it's necessary to calculate the new profit-sharing ratio among the remaining partners, which involves determining the gaining and sacrificing ratio.
• Preparation of Revaluation Account (E) follows.
  • This is correct as it involves revaluing the assets and liabilities to determine any profit or loss that should be credited or debited to the partners' capital accounts according to their old profit-sharing ratio.
• Adjusting the Partners' Capital Account (D) is the next step.
  • Correct, because after revaluation, the partners' capital accounts are adjusted to reflect their new balances, including any profits or losses from the revaluation account and the remaining capital after the retiring partner's share is settled.
• Transferring balance to Retiring partner's Loan Account (B) comes thereafter.
  • This is correct as the retiring partner's capital and current account balances are transferred to their loan account if not settled immediately in cash.
• Preparation of New Balance Sheet after Retirement (A) is the final step.
  • This is correct because it reflects the financial position of the firm after all adjustments have been made, including the retirement of the partner.

Hence, the correct sequence for the retirement of a partner is: Calculation of Gaining/Sacrificing Ratio (C), Preparation of Revaluation Account (E), Adjustment of Partners' Capital Account (D), Transferring balance to Retiring partner's Loan Account (B), and finally, Preparation of New Balance Sheet after Retirement (A).

The correct answer is 'Remaining partners (who have sacrificed) as well as retiring partner.'

Key Points

• Compensation to retiring or deceased partner and remaining partners who have sacrificed:
  • Upon the retirement or death of a partner, adjustments are made in the profit sharing ratios among the remaining partners.
  • Partners who gain an increased share in the profits due to these adjustments are required to compensate both the retiring or deceased partner (or their estate) and any remaining partners who have sacrificed their share of the profits.
  • This compensation is necessary to ensure fairness and maintain the balance of interests within the partnership, recognizing the value contributed by the retiring or deceased partner and the sacrifice made by others.

Additional Information

• Incorrect Options Explained:
  • No partner: This option is incorrect because the change in profit sharing ratio due to retirement or death of a partner does affect the financial interests of the remaining partners, necessitating compensation.
  • Retiring partner only: While the retiring partner (or the estate of a deceased partner) should receive compensation, this option ignores the need to compensate any remaining partners who have sacrificed their profit share.
  • Remaining partners only (Who have sacrificed.): This option incorrectly suggests that only the partners who have sacrificed should be compensated, disregarding the rights of the retiring or deceased partner.

The correct answer is Vertical analysis.

Key Points

• Vertical analysis:
  • Vertical analysis is a method used in financial statement analysis where each line item in a financial statement is listed as a percentage of another item.
  • This approach is most commonly applied to the income statement, where each line item is expressed as a percentage of sales, and to the balance sheet, where each item is expressed as a percentage of total assets or liabilities.
  • This method allows for easier comparison across companies and time periods by standardizing financial statements.

Additional Information

• Dynamic analysis:
  • Dynamic analysis refers to the evaluation of a company's financial information over a period of time to understand its performance trend.
  • This is not directly related to common size statements which focus on the structure rather than time-based performance.
• Horizontal analysis:
  • Horizontal analysis, also known as trend analysis, compares financial data over multiple periods.
  • This analysis method shows the changes in the financial figures over time, highlighting increases or decreases.
  • It differs from vertical analysis, which looks at financial statements at a single point in time.
• External analysis:
  • External analysis examines factors outside the company that can impact its performance, such as market trends and economic conditions.
  • This analysis is important for strategic planning but is unrelated to the structure of financial statements.

The correct answer is '₹11,40,000'.

Key Points

• First, to find the Revenue from operations, we use the given information that Other income (₹5,00,000) is 25% of the Revenue from operations. This implies that the Revenue from operations is ₹20,00,000 (₹5,00,000 / 25% = ₹20,00,000).
• Employee benefit expenses, which are 30% of the Revenue from operations, amount to ₹6,00,000 (30% of ₹20,00,000).
• Total income (Revenue from operations + Other income) is ₹25,00,000 (₹20,00,000 + ₹5,00,000).
• After deducting Employee benefit expenses (₹6,00,000) from the total income (₹25,00,000), the profit before tax is ₹19,00,000 (₹25,00,000 - ₹6,00,000).
• Applying the tax rate of 40%, the tax amount is ₹7,60,000 (40% of ₹19,00,000).
• The Net profit after tax is calculated by subtracting the tax amount from the profit before tax, which results in ₹11,40,000 (₹19,00,000 - ₹7,60,000).

Additional Information

• Understanding the relationship between different financial metrics such as revenue from operations, other income, expenses, and taxes is crucial for financial analysis and planning.
• Profit before tax (PBT) and net profit after tax are important indicators of a company's financial health and operational efficiency.

The profit-sharing ratio among A, B, and C is 2:2:1. This means C's share of the profit is 1/5 of the total profit.

Thus, C's profit share ratio is:

Correct answer:

(b) 1:5

The correct answer is Rs. 48,000.

• Total Profit = Rs. 2,40,000.
• Profit-sharing ratio among A, B, and C = 2:2:1.
• C is alive for 7 months out of 12 months.
• To find C's share, understand the ratio components: 2 parts for A, 2 parts for B, and 1 part for C – totalling 5 parts.
• Each part's value =  Profit till death / Sum of Ratio Parts = Rs.
• profit till death on the basis of last year's profit = 2,40,000*7/12 = 1,40,000
• 1,40,000 / 5 = Rs. 28,000.
•  

The correct answer is C’s share in profits is based on the partnership ratio prior to his death. 

• The partnership ratio defines how profits and losses are shared among partners.
• The passage states that the profit-sharing ratio between A, B, and C was 2:2:1.
• This ratio is used to distribute profits among partners according to their agreed-upon share.
• In the event of C's death, his entitlement to profits up to the date of death is still governed by this same ratio.
• The calculation of his share, therefore, relies on the pre-established agreement on how profits are divided, which remains in force up to the point of his death, ensuring fairness and adherence to the partnership deed.

The correct answer is It marks the end of the fiscal year for the partnership.

• The significance of the 31st March is directly mentioned as the date when the partnership’s books are closed annually.
• The closing of books is a standard accounting procedure that involves summarizing all financial transactions for the fiscal year, calculating the year's profit or loss, and preparing financial statements.
• This activity marks the end of a financial or fiscal year – a period used for calculating annual financial statements in businesses and other organizations.
• In the context of the partnership, 31st March is significant because it delineates the boundary of each financial reporting period, affecting how and when profits are calculated and distributed.

The correct answer is The profit of the last financial year.

• In partnerships, it's common to stipulate in the partnership deed how profits should be allocated upon the occurrence of specific events, including the death of a partner.
• This particular partnership deed specifies that the deceased partner's share of profit up to the date of death is to be calculated based on the profit of the last completed financial year.
• Given the statement in the passage, this means that for any calculation concerning profit share due to a partner's executors in the event of death, the profit figure to reference is the one from the most recently closed financial year prior to the partner's demise.
• Here, that is the financial year ending on 31st March 2018.

The correct answer is All the above.
A Cash Flow Statement shows the inflows and outflows of cash and cash equivalents from operating, investing, and financing activities during a specific period. Its primary objectives include:

• Analysis of cash position: Assessing the availability and sources of cash.
• Short-term cash planning: Supporting decisions for managing cash in the near term.
• Evaluation of liquidity: Determining the ability to meet short-term obligations.
  Additional Information:
  Other objectives may include assessing solvency, forecasting future cash flows, and providing information for decision-making.

The correct answer is both A and B.

• Statement A: True. A common-size balance sheet expresses each item (assets, liabilities, equity) as a percentage of total assets, showing relative values.
• Statement B: True. A common-size income statement expresses each line item as a percentage of net sales (revenue), aiding vertical analysis.
• Statement C: False. Common-size income statements use net sales, not gross profit, as the base figure.
  Common-size statements facilitate comparison across periods and competitors by standardising financial data as percentages.

The correct answer is All are true.

• Statement (i): True. Comparative Financial Statements compare financial data across periods to identify trends and support forecasting.
• Statement (ii): True. Common Size Financial Statements express each item as a percentage of a base figure (e.g., total assets for balance sheets, net sales for income statements) within the same period.
• Statement (iii): True. Comparative Financial Statement analysis, which compares data across periods, is known as Horizontal Analysis.
  Additional Information:
• Financial analysis interprets financial statements to assess financial position, operational efficiency, and future prospects.
• Common-size statements enable vertical analysis, while comparative statements enable horizontal analysis.

Thus, Statements (i), (ii) & (iii) are true.

A) Interest on Capital: This is an amount credited to partners as a return on their capital investment, calculated based on their capital contribution and an agreed interest rate. It matches (IV) "Paid to the partner based on their share of capital and agreed rate."
B) Profit and Loss Appropriation Account: After the Profit and Loss Account determines the net profit or loss, this account allocates it among partners after adjustments like interest on capital and salaries. It matches (II) "This account distributes the net profit or loss among partners."
C) Partner’s Salary: This is a fixed payment to a partner for their active work or management in the firm, treated
as an appropriation of profit. It matches (III) "Amount paid to a partner as remuneration for their work."
D) Interest on Drawings: This is a charge (debit) applied to partners for withdrawing funds from the firm, typically recorded in their capital accounts to discourage excessive withdrawals. It matches (I) "Charged on drawings by partners, to be recorded in the capital accounts."

Here is how the items in List I match with the descriptions in List II:

• A) Capital Account → (I) Records the partner’s capital and any changes in it during the year
  A partner’s Capital Account reflects the amount of capital contributed by the partner and (under the fluctuating method) any subsequent changes—like additional capital introduced or capital withdrawn.

• B) Current Account → (II) Includes items such as profit‑sharing ratio, drawings, and interest on capital
  Under the fixed capital method, day‑to‑day changes (e.g., drawings, interest on capital, share of profit) go to the Current Account, keeping the Capital Account fixed.

• C) Fluctuating Capital Method → (III) Only one account is maintained for each partner, and all transactions are recorded in it
  Under the fluctuating method, there is just one account (the Capital Account) for each partner, and all transactions—drawings, interest on capital, share of profit—are recorded in that single account.

• D) Fixed Capital Method → (IV) Two accounts are maintained for each partner: one for capital and the other for current transactions

• Two accounts are maintained for each partner: one for capital and the other for current transactions.

A) Admission of a Partner: When a new partner joins, the existing profit-sharing ratio changes, often involving revaluation of assets or goodwill adjustments. It matches (I) "The process of distributing profits or losses when a new partner enters."
B) Retirement of a Partner: The firm continues with the remaining partners, who adjust their profit shares after settling the retiring partner’s dues. It matches (II) "The partnership firm continues after one partner exits and the remaining partners share the profits."
C) Death of a Partner: The firm may continue, but the deceased partner’s account is settled, impacting profit distribution. It matches (IV) "The death of a partner affects the distribution of profits and the settlement of accounts."
D) Dissolution of the Firm: This is the complete winding up of the partnership, involving the sale of assets and settlement of liabilities. It matches (III) "Legal process of ending the partnership firm and distributing assets and liabilities."

A) Realisation Profit: During dissolution, if assets are sold for more than their book value, the excess is realisation profit, credited to partners. Matches with (I): "Profit made when the assets are sold above their book value."
B) Capital Gain: This is the profit from selling fixed (capital) assets like land or machinery, often a broader term but applicable in partnerships. Matches with (II): "Profit from the sale of capital assets like property or equipment."
C) Partnership Agreement: A legal document specifying partners’ rights, duties, profit-sharing, etc. Matches with (III): "Written agreement that outlines the rights and responsibilities of partners."
D) Drawings: Cash or goods withdrawn by partners for personal use, debited to their accounts. Matches with (IV): "Money withdrawn by a partner for personal use."

A) Revaluation Account: An account used to record any increase or decrease in the values of assets and liabilities when there is a change in the profit-sharing ratio or when a partner enters or leaves the partnership.
B) Dissolution Expenses: Costs like legal fees or asset disposal expenses incurred during the firm’s closure. Matches with (II): "Costs incurred while closing down the firm."
C) Unrecorded Liabilities: Liabilities not in the books (e.g., a pending lawsuit) discovered during dissolution or reconstitution. Matches with (III): "Liabilities not previously documented in the firm’s books."
D) Partner’s Capital Account: Shows each partner’s equity or financial stake in the firm, adjusted for profits, drawings, etc. Matches with (IV): "Account showing the financial interest of each partner in the firm."

A debenture is a written instrument that acknowledges a debt, representing a loan taken by the company to meet its financial needs.

Debentures are used by companies to raise long-term funds to meet their capital requirements when funds raised through shares are insufficient.

Companies raise capital through shares, but often find that the funds are inadequate for long-term financial needs. Therefore, debentures, which are a form of long-term debt, are issued to meet these requirements.

Debentures are a form of long-term debt that companies issue to raise funds. This type of financing helps meet the long-term financial needs of a company.

Debentures can be issued through private placement, where the company offers debentures directly to a select group of investors, or through public offering, where they are offered to the general public.

• The interest on drawings is usually debited to the Capital Account.
• It reduces the owner's capital in the business.
• This charge reflects the cost of using business funds for personal purposes.

When a new partner is admitted into a partnership business. He gets following rights:
1.Right to share future profits of the firm
2.Right to share in the assets of the firm
New partner is not entitled to the profits and other incomes earned by a partnership business before his admission

Retiring or outgoing partner:

A retiring partner is liable for obligations incurred before their retirement. This means:

• The partner remains responsible for any debts or liabilities that arose while they were still part of the firm.
• They are not liable for any new obligations that occur after their retirement.
• If the retiring partner consented to any obligations, they may also be liable for those.

In summary, a retiring partner's liability is limited to obligations incurred prior to their exit from the firm.

In the absence of a partnership deed, profits are shared equally among partners.

• Equal Distribution: All partners receive the same share of profits.
• No Preference: There is no distinction between active or sleeping partners.
• Legal Basis: This follows the default rules of partnership law.

Correct answer is C. Written agreement between all partners

Suppose if the first drawing is made on 31st March( 1st quarter Jan-March), then 9 months will be left, and in the last quarter, October to December last drawing will be made on 31st December and 0 months will be left.