Accountancy: CUET Mock Test - 1 - CUET MCQ

The correct answer is capital receipt.

Key Points

• Donations are the amounts received by not–for–profit organizations as a gift. It may be general donation or specific donation.
• General donation: If the donation is received without any specific condition, then it is a general donation. It is a revenue receipt.
• Specific donation: If the donation is received with a specific condition for a particular purpose like donations for sports fund, prize fund, etc., it is known as specific donation. It is a capital receipt.

Additional Information

• Capital expenditure is an expenditure incurred during an accounting period, the benefits of which will be available for more than one accounting period.
• Revenue expenditure is the expenditure incurred for the day-to-day running of the business or for maintaining the earning capacity of the business.
• Revenue receipts are incomes derived from the normal activities of the business.
• Capital receipts are derived from transactions that are not the usual activities of the business.

The correct answer is Subscription.

Key PointsFeatures of not–for–profit organisations

• Not–for–profit organisations are the organisations which function without any profit motive.
• Their main aim is to provide services to a specific group or the public at large.
• Generally, they do not undertake business or trading activities.
• Their main sources of income include subscriptions from members, donations, grant-in-aid and legacies.

Additional Information

• Not–for–profit organisations usually collect subscriptions periodically from their members.
• These may be collected monthly, quarterly, half-yearly or yearly.
• In addition, some special subscriptions, for example, subscription for tennis, billiards, etc., are collected from the concerned members playing tennis or billiards as the case may be.
• All these subscriptions are revenue receipts.

The correct answer is Credit side of Income and Expenditure Account

Key Points

Non-profit-organisation:

• Not-for-profit organisations are those that are established for the benefit of society or to promote art and culture in society.
• These are usually established as a philanthropic organisation with a service mission.
• These organisations are managed by trustees. The trustees are chosen by the members of the organisation.
• Non-profit organisations raise donations from their members as well as the wider public to achieve their goals.
• These organisations' primary goal is to give service.
• These organisations do not typically create, purchase, sell, or provide services.
• As a result, they are relieved of the necessity to compile trading and profit and loss accounts. They deposit the money in the Capital Fund or the General Fund A/c.

Not-for-profit organisations must also prepare final accounts or financial statements according to accounting rules at the conclusion of the accounting year. These financial statements consist of :

1. Receipt and Payment A/c : The account statement is a summary of all cash and bank transactions. It aids in the preparation of the income and expense account as well as the balance sheet. We must also file it with the Registrar of Societies, along with the Income and Expenditure Account and the Balance Sheet.
2. Income & Expenditure A/c : It is comparable to the Profit and Loss A/c in that it determines if there is a surplus or deficit.
3. Balance Sheet : We prepare it in the same way that profit-oriented enterprises construct their balance sheets.

Important PointsThe profit amount received for sale of old sports materials by a Non-profit organisation is income for the firm, which is shown on credit side of Income & Expenditure Account.

Key PointsThe Final Accounts of non-trading concerns consists of:

• Receipts and Payments Account
• Income and Expenditure Account, and
• Balance Sheet.

Important Points

Statement I: The subscription amount collected for 'Bhagwati Jagran' is considered the income of the social club.

This statement is correct because the subscription amounts are treated as revenue receipts. Subscription received from members is credited to Income and Expenditure Account on accrual basis i.e., total amount receivable from all the members as subscription should be considered as income for the year.

Statement II: Receipts and payments of a revenue nature only are recorded in the Receipts and Payments Account.

This statement is false because Receipts and Payments may be of Capi­tal or Revenue nature; they may relate to the current or previous year or subsequent year; so long as they are actually received or paid, they must appear in this account.

Statement III: The Receipts and Payments Account is a summary of all capital receipts and payments.

This statement is false because Receipts and payments is a summary of total cash receipts and cash payments.

Statement IV: The total income and expenditure account is lined up in the Receipts and Payments Account.

This statement is false because Income & Expenditure Account shows the total expenditure/income of the year, whereas Receipt & Payment Account gives details regarding actual receipt of income and payments of expenditures.

Hence, it can be concluded that only statement I is correct.

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 correct answer is  1:4.
Step 1: Identify the Shared Profit Ratio
We know from the passage that A, B, and C shared profits and losses in the ratio of 2:2:1, respectively.
Step 2: Adding Up Total Shares
Combine the shares of A and B, we get:

• A’s Share = 2 parts
• B’s Share = 2 parts
• C's Share = 1 part

Total parts shared = 2 (for A) + 2 (for B) + 1 (for C) = 5 parts
Step 3: Compute Ratios Relative to Each Other
If we are examining C’s share in contrast to A and B collectively, we see that A and B share 4 parts between them (2 parts each), and C has 1 part.
Therefore, compared only to A and B's combined shares, C's portion (1 part) is to A and B's portion (4 parts) as represented in the ratio 1:4.
Explanation

• C’s share ratio (when considered amidst the partnership setup where the total shares = 5 parts) is reflected as getting 1 part out of every 5 parts available.
• Yet, this question subtly shifts the perspective, aiming to understand C's share in the context of A and B's collective share, ignoring the total partnership frame for a moment.
• Here, for every "batch" of profits split according to the original ratio, A and B together receive 4 parts out of 5 parts, and C receives 1 part. The comparison thus isn’t about C against the total but specifically against what A and B get collectively—rendering the ratio 1:4.

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 alive till 7 month out 12 month.
• To find C's share, understand the ratio components: 2 parts for A, 2 parts for B, and 1 part for C – totaling 5 parts.
• Each part's value =  Profit till death / Sum of Ratio Parts = Rs.
• profit till death on the basis of last year profit = 2,40,000*7/12 = 1,40,000
• 1,40,000 / 5 = Rs. 28,000.
• Since C's share is 1 part, and each part is worth Rs. 48,000, C gets Rs. 48,000 as his share of the profit.

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 inflow and outflow of cash and cash equivalents from various activities of a company during a specific period.
• The primary objective of a cash flow statement is to provide useful information about the cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities, and financing activities.
• The main objectives of the cash flow statement are:
  • Analysis of Cash Position
  • Short term cash planning
  • Classification of Activities
• Assessing Liquidity and Solvency Position
• Evaluation of Future Cash Flows
• Supply Necessary Information to the Users
• Helps the Management to Ascertain Cash Planning

The correct answer is Both A and B.

• A common size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales.
  • It is used for vertical analysis, in which each line item in a financial statement is represented as a percentage of a base figure within the statement.
• A common size balance sheet is a balance sheet that displays both the numeric value and relative percentage for total assets, total liabilities, and equity accounts.
  • The common-size balance sheet shows the relative value of the various items.
• Common size financial statements help to analyze and compare a company's performance over several periods with varying sales figures.
  • The common size percentages can be subsequently compared to those of competitors to determine how the company is performing relative to the industry.
  • It is a financial report that presents all numbers as a percentage of a base number.

The correct answer is All are true.
Financial analysis means analysis and interpretation of financial statements. Financial analysis helps to know financial position, operational efficiency, future prospectus of business and also helps to make decisions in future.
(i) Comparative Financial Statement is an indicator of trend and helps in forecasting is true because
Comparative Financial statement- an item compared with itself in the previous year to know whether it has increased or decrease. The data in comparative statements can be used to determine the direction of changes as well as trends in various measures of an organization's performance & helps in Forecasting\projections.
(ii) In Common Size Financial Statement, 100% is taken as base and all other related amounts are expressed as a percentage of base is true because
Common size statement- an item compared with itself in the previous year to know whether it has increased or decreases in percentage ratio. Thus, in Common Size Financial Statement, 100% is taken as base and all other related amounts are expressed as a percentage of base.
(iii) Analysis through Comparative Financial Statement is also known as Horizontal Analysis is true because
Horizontal analysis takes the form of comparative statements. The profitability and financial condition of a company are shown in a comparative form in a common size statement to offer an impression of the status of two or more periods.
Thus, Option (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."

Capital Account (A → I)

• The Capital Account records the capital contributed by each partner and any permanent changes (additional capital or withdrawal of capital).
• This matches (I) "Records the partner’s capital and any changes in it during the year."

Current Account (B → IV)

• In a Fixed Capital Method, a separate Current Account is maintained to record fluctuations like drawings, interest on capital, salaries, and profit share, while the Capital Account remains fixed.
• This matches (IV) "Two accounts are maintained for each partner: one for capital and the other for current transactions."

Fluctuating Capital Method (C → III)

• In the Fluctuating Capital Method, only one account is maintained for each partner, and all transactions (capital, drawings, profit-sharing, interest on capital, etc.) are recorded in it.
• This matches (III) "Only one account is maintained for each partner, and all transactions are recorded in it."

Fixed Capital Method (D → II)

• Under the Fixed Capital Method, profit-sharing ratio, interest on capital, and drawings are recorded in the Current Account, and the Capital Account remains unchanged except for additional capital or permanent withdrawals.
• This matches (II) "Includes items such as profit-sharing ratio, drawings, and interest on capital."

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) Realisation Account: This account is primarily used during dissolution to record the sale of assets and settlement of liabilities, but in some contexts (e.g., partner admission/retirement), it captures revaluation changes. Here, (I) fits broadly: "Account used to record changes in the values of assets and liabilities when a partner leaves or joins" (though dissolution is more precise).
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.

Profits are shared equally.

Correct answer is C. Written agreement between all partners