Test: Accounting & Financial Management of Banking - 4 - Bank Exams MCQ

Characteristics of depreciation are:-

• It is decline in the value of fixed assets.
• The fall is of permanent nature.
• It is a gradual and continuing process.
• Allocates the cost of an asset to its effective value.
• It is a non-cash expense.

Thus, the correct option is (b)

All accounts are divided into five categories for the purposes of recording the transactions:
(a) Asset (b) Liability (c) Capital (d) Expenses/Losses, and (e) Revenues/Gains.
Two fundamental rules are followed to record the changes in these accounts:
For recording changes in Assets/Expenses (Losses):

• "Increase in asset is debited, and decrease in asset is credited."
• "Increase in expenses/losses is debited, and decrease in expenses/ losses is credited."
• For recording changes in Liabilities and Capital/Revenues (Gains):
• "Increase in liabilities is credited and decrease in liabilities is debited."
• "Increase in capital is credited and decrease in capital is debited."
• "Increase in revenue/gain is credited and decrease in revenue/gain is debited."

Hence the correct answer is Option (b).

Cost of Goods sold to Suresh =
75000+15%+25% = Rs 107812. 5
(Profit of 20% on sales means 25% on cost)

• The items in the balance sheet can be arranged either in the order of liquidity or in the order of permanence.
• In the order of liquidity, most liquid assets come first and the least liquid assets come last.
• In the given question, assets in order of liquidity are Bills Receivable, Debtors, Closing Stock, Prepaid Insurance and Goodwill.

• The future value of an annuity is the value of a group of recurring payments at a certain date in the future, assuming a particular rate of return, or discount rate.
• The higher the discount rate, the greater the annuity's future value.
• As long as all of the variables surrounding the annuity are known such as payment amount, projected rate, and number of periods, it is possible to calculate the future value of the annuity.
• Hence, option (d) is the correct answer.

Errors of Commission
These are the errors which are committed due to wrong posting of transactions, wrong totaling or wrong balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of amount in the books of original entry, etc.
Hence the correct answer is Option (a).

Under FIFO (First In First out) method the units completed and transferred are taken from both opening work-in-process (WIP) and freshly introduced materials/inputs. The cost to complete the opening WIP and other completed units is calculated separately. The cost of opening a WIP is added to the cost incurred on completing the incomplete (WIP). Further, the closing stock of work in process is valued at the current cost.

Amith purchased machinery worth Rs 15, 0000 for cash from Rajesh

In the books of Amit: The accounts affected are: (i) Machinery and (ii) Cash; Machinery comes in and as such Machinery account is debited and cash goes out and as such cash account is credited.

Hence the correct answer is Option (a).

Total amount 20,000
Less: 10% trade discount 2000
Net 18,000 (20,000- 2000)
Cash purchases 60% of 18,000 10,800
Less: Cash discount 2% of 10,800 216
Amount paid 10,584
Credit purchase 40% of 18,000 7200
Thus, the correct option is (a)

Bond price volatility refers to the degree of fluctuation in the price of the bond in response to the change in the market interest. Bonds have an inverse relationship with interest rates. Bond price volatility is influenced by the time to maturity. Bond price volatility leads to the price movement of the bond.
Hence, the correct answer is Option (b).

• The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided for in the books of account. To illustrate, valuing closing stock at cost or market value whichever is lower; creating provision for doubtful debts, discount on debtors; writing of intangible assets like goodwill, patents, etc. from the book of accounts are some of the examples of the application of the principle of conservatism.
• Statement II, valuing closing stock at cost or market value whichever is higher, is not related to the concept of conservatism but rather the principle of lower of cost or market (LCM) rule for valuing inventory.
• Hence the correct answer is Option (c).

A person who is assigned the obligation to pay taxes by the judicial system is known as deemed assesses. For the assessment of other ones who are liable to pay tax is known as representative assesse or deemed assessee. In that case all the above options are true.

• Late fee: ₹ 10,000 (₹ 5,000 for GSTR-1 and ₹ 5,000 for GSTR-3B) + ₹ 100 per day for each return from the due date until the actual date of filing, subject to a maximum of ₹ 5,000 per return. Therefore, the total late fee will be ₹ 10,000 + (20 days x ₹ 100 x 2 returns) = ₹ 12,000.
• Interest: The interest payable will be calculated at 18% per annum on the tax liability of ₹ 1 lakh from the next day of the due date of return till the actual date of payment. Therefore, the interest payable will be (₹ 1 lakh x 18% x 20 days)/365 days = ₹ 1,013.
• Hence, the total late fee and interest payable will be ₹ 12,000 + ₹ 1,013 = ₹ 13,013, which is closest to option B - ₹ 3,000 late fee and ₹ 5,048 interest.
• Therefore, the correct answer is - ₹ 3,000 late fee and ₹ 5,048 interest.

• Right issue is an issue of rights to a company's existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holding, within a fixed time. In a right offering, the subscription price at which each share may be purchased is generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them in the open market. The difference between the cum right and ex rate value of the share is the value of the right
• Bonus issue means an issue of additional shares to existing shareholders free of cost in proportion to their existing holding. Bonus shares should not be issued out of revaluation reserve.
• Private placement is the issue of security of a company direct to one investor or a small group of investors.
• A sweat equity share is an equity share issued by the company to employees or directors at a discount or for consideration other than cash for providing their talent to the company.

Financial leverage is defined as "the ability of a firm to use fixed financial charges to magnify the effects of changes in EBIT on the earnings per share". It involves the use of funds obtained at a fixed cost in the hope of increasing the return to the shareholders. "The use of long-term fixed interest bearing debt and preference share capital along with share capital is called financial leverage or trading on equity".

Operating leverage may be defined as the company's ability to use fixed operating costs to magnify the effects of changes in sales on its earnings before interest and taxes. Operating leverage consists of two important costs viz., fixed cost and variable cost.

Difference between Operating leverage and financial leverage

• Lender of the Last Resort: The RBI also acts as the 'lender of last resort'. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank.
• The RBI extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of a bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy.
• Hence, the correct answer is option (c).

The primary purpose of project appraisal is to assess the viability and financial feasibility of a project. It involves analysing various aspects, such as market demand, technical feasibility, financial projection, risks, and other factors to determine whether the project is economically viable and financially sustainable.
Hence, the correct answer is Option (a).

• Rebate on bills discounted refers to the interest received in advance or unearned discounts for those bills which will mature after the close of the financial year.
• Rebate on bills discounted for the current year is debited to the discount account. In the Profit and Loss account, this item is deducted from Interest earned, schedule No.13 and in the Balance sheet it is shown on the liability side under the head other liabilities and provisions schedule No.5. In case of a ledger balance, it is shown under schedule No.5 only.
• The journal entry for the same is Interest and discount A/c Dr To Rebate on bills discounted.

Distinction between Journal and Ledger
The Journal and the Ledger are the most important books of the double entry mechanism of accounting and are indispensable for an accounting system.

Following points of comparison are worth noting :

• The Journal is the book of first entry (original entry); the ledger is the book of second entry.
• The Journal is the book for chronological record; the ledger is the book for analytical record.
• The Journal, as a book of source entry, gets greater importance as legal evidence than the ledger.
• Transaction is the basis of classification of data within the Journal;
• Account is the basis of classification of data within the ledger.
• Process of recording in the Journal is called Journalizing; the process of recording in the ledger is known as Posting.

Hence the correct answer is Option (a).

• An open market operation is an instrument which involves buying/selling of securities like government bond from or to the public and banks. The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow. When the central bank buys government bonds, it increases the money supply in the economy. The central banks sell government bonds to banks when the economy faces inflation. The central bank tries to control inflation by selling government bonds to banks.
• Hence, the correct answer is option (b).

[Total purchase = cash purchase + credit purchase
Net purchase = total purchase - purchase return
Total purchase = 235000 + 85000 = 320000
Net purchase = 320000 - 4000 = 316000]
Hence option (c) is correct

• The principle of materiality is essential in preparing financial statements, as it helps companies determine what information to include and what to exclude to prepare the entity's financial reports. Materiality is one of the four constraints of GAAP (Generally Accepted Accounting Principle). Companies use the materiality principle when accounting and measuring their transaction and expense in a year. This concept has an important bearing on the capital-revenue classification as some expenditures can be very small at times. So, it is important to distinct which is revenue and which is capital transactions.
• Hence option (a) is correct.

Sensitivity analysis is a financial model that determines how target variables are affected based on changes in other variables known as input variables. It is a way to predict the outcome of a decision given a certain range of variables. A sensitivity analysis generates quantitative data based on the behavior of outputs in response to changing inputs. It allows us to understand the effect of fluctuations in selected variables on your profitability . So the sensitivity analysis is used to understand the effect of a set of independent variables on some dependent variable under certain specific conditions.

Eg ; a financial analyst wants to find out the effect of a company's net worked capital on its profit margin.

Features of Depreciation

• It is a decline in the book value of fixed assets.
• It includes loss of value due to effluxion of time, usage or obsolescence.
• It is a continuing process.
• It is an expired cost and hence must be deducted before calculating taxable
• It is a non-cash expense. It does not involve any cash outflow. It is the process of writing-off the capital expenditure already incurred.
• Hence the correct answer is Option (b).

[Working capital = current assets - current liabilities.
Current assets - current liabilities = 81,000
Also current ratio = current assets/current liabilities
Current ratio = 4.5/1
Current assets/ current liabilities = 4.5/1
Current assets = 4.5* current liabilities
Now putting the value of current assets in working capital formula
4.5*current liabilities- current liabilities= 81,000
Current liabilities = 81,000/3.5= 23,142]
Hence, the correct answer is Option (b).

• Ind AS-16 This standard deals with accounting treatment for property, plant and equipment. The main issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges to be recognized. The standard does not apply to: (a) assets classified as held for sale in accordance with Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations (b) biological assets related to agricultural activity accounted for under Ind AS 41 Agriculture (c) the recognition and measurement of exploration and evaluation assets recognized in accordance with Ind AS 106 Exploration for and Evaluation of Mineral Resources (d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
• Hence the correct answer is Option (c).

• The Statement of profit and loss is prepared for a specific period to determine the operational results of an undertaking.
• It is a statement of revenue earned and the expenses incurred for earning the revenue.
• It is a performance report showing the changes in income, expenses, profits and losses as a result of business operations during the year between two balance sheet dates.
• Hence, the correct answer is option (a).

The profit and loss account of a banking company is prepared in Form B as per the third schedule of the Banking Regulation Act, 1949 and the Balance sheet is prepared as per Form A of the third schedule.

• The current yield of a bond is the measure of the annual income generated by the bond as a percentage of its current market price. It is calculated by dividing the bond's annual interest payment by its current market price.
• Hence, the correct answer is Option (d).

• Section 80C: Deduction on life insurance premia, contribution to provident fund, etc. available to individual/HUF for a maximum amount of Rs. 1,50,000.
• Section 80CCC: Deduction for contribution to pension fund - available to individuals for a maximum amount of Rs. 1,50,000.
• Section 80D: Deduction in respect of medical insurance premia - available to individual/HUF.
• Section 80G: Deduction in respect of donations to certain funds, charitable institutions, etc. available to all assessee subject to maximum of 50% of qualifying amount, 100% as the case may be.
• Hence, option (c) is the correct answer.