Accountancy: CUET Mock Test - 5 - CUET MCQ

Ratio analysis is a financial analysis tool that involves evaluating various financial ratios to gain insights into a company's performance, financial health, and efficiency. By comparing different ratios and trends over time, ratio analysis can help identify areas of strength and weakness in a company's operations. This information can be used to determine potential areas that could be improved with focused efforts in the desired direction.

The correct answer is general reserve.

Sinking fund:

• A sinking fund may be defined as a fund, created by a charge against or an appropriation of profits represented by specific investments, which is brought into existence for a specific purpose, such as replacement of an asset at the expiration of its life or the redemption of debentures.
• A sinking fund is a fund containing money set aside or saved to pay off a debt or bond.
• A company that issues debt will need to pay that debt off in the future, and the sinking fund helps to soften the hardship of a large outlay of revenue.
• A sinking fund is established so the company can contribute to the fund in the years leading up to the bond's maturity.

Key-Points

1. The balance of the Debentures Sinking Fund after redemption of debentures is transferred to the General Reserve account.
2. It is the amount which is kept separately out of redeemed amount from debentures, that is why it is transferred to the general reserve account.

Therefore, where all the debentures are redeemed, the balance left in the debenture sinking fund account is transferable to the General Reserve account.

Additional Information

1. Debenture: In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.
2. Capital redemption reserve account is a type of reserve maintained by a company limited by shares and as the name suggests this reserve deals with shares that are redeemable.

Convertible debentures:

• Convertible debentures are long-term debt instruments issued by a company that can be converted into equity shares of the company on a future date.
• They can be fully, partially, or optionally convertible.
• They pay a lower coupon rate (interest) than pure debt instruments.
• A debenture holder is a creditor or lender of the company.
• Investors benefit from interest payment and have the option to convert the loan into equity to participate in the growth of the company.

Therefore, Convertible debentures are those on which Equity shares may be exchanged at the option of the debenture holders.

Important Points

• The debenture holders can approach the tribunals and seek relief if the company defaults in paying the interest on its due date or fails to repay the entire amount. They can redeem their amount with the assistance of the courts.

The correct answer is equal to.

Key Points

• The intrinsic value of a bond or any fixed-income security is a fundamental concept in finance, reflecting the actual value derived from its expected cash flows.
• This value is crucial for investors seeking to assess the worth of their investments accurately.
• The intrinsic value is determined by discounting the expected future cash flows of the bond back to their present value.
• This includes all coupon payments and the principal repayment at maturity.
• It is based on the premise that the value of money today is not the same as the value of money in the future due to inflation and the opportunity cost of capital.
• The discount rate used is typically the required rate of return by the investor, which reflects the risk associated with the bond.
• An accurate calculation of intrinsic value allows investors to compare the bond's current market price with its intrinsic value, aiding in investment decisions.

The Correct Answer is Uncalled capital

Key Points

Types of Share Capital

• Subscribed Capital - It is the capital subscribed by the public.
• Called up Capital - It is the capital called up for the payment by the company
• Uncalled capital - The difference between subscribed and called up capital is uncalled capital.

Additional Information

• Paid up capital - This is the capital called up by the company and paid up by the shareholders.
• Calls in arrears - Amount called up by the company but not paid up by the shareholders.
• Calls in advance - Amount paid up by the shareholders before the company make a call.

The correct answer is Debentures Suspense Account

Key Points Debentures:

• A debenture is a written instrument that accepts a debt under the enterprise's general certification.
• It includes an agreement for the repayment of principal after a set amount of time, at intervals, or at the enterprise's discretion, as well as the payment of interest at a specified rate, usually yearly or half-yearly on fixed dates.
• According to section 2(30) of the Companies Act, 2013, a 'debenture' is defined as: Debenture Inventory, Bonds, and any other securities of a company, whether or not they include a charge on the enterprise's assets.

Important Points Issue of Debentures as Collateral

• Debentures offered as collateral security serve as a backup or supplement to the company's original loan.
• If the borrower fails to repay the original loan, the lender can seize the collateral security.

There are the following two methods for recording this kind of debentures:

• Method 1: The company makes no entry when issuing these debentures using this manner. It reveals them in the 'Notes to Accounts' section of the Balance Sheet as a note under the liability secured by the issue of debentures and outstanding.
• Method 2: Under this method, a journal entry to record the issue of such debentures:
  • Debentures Suspense A/c Dr
    To Debentures A/c

In the second case, we will show the debentures account on the liabilities side of the Balance Sheet. While we will show the Debentures Suspense A/c on the assets side of the Balance Sheet under Other Non-Current Assets.

Additional Information Collateral Security:

Collateral is a term used to describe an asset that a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan.

The correct answer is A - II, B - IV, C - III, D - I.

Key Points

• Current Ratio - Liquidity Ratios (A - II).
  • This ratio measures a company's ability to pay short-term obligations or those due within one year.
  • It is an indication of a firm’s market liquidity and ability to meet creditor’s demands. Acceptable current ratios vary by industry.
• Inventory Turnover Ratio - Activity Ratios (B - IV).
  • This ratio shows how many times a company's inventory is sold and replaced over a period.
  • A higher ratio implies more efficient management of inventory whereas a lower ratio indicates inefficiency in controlling inventory levels.
• Return on Investment - Profitability Ratios (C - III).
  • This ratio measures the gain or loss generated on an investment relative to the amount of money invested.
  • ROI is used to evaluate the efficiency or profitability of an investment or compare the efficiency of several different investments.
• Proprietory Ratio - Solvency Ratios (D - I).
  • This ratio indicates the long-term or overall solvency position of the business.
  • The proprietary ratio is calculated by dividing the proprietor's funds by the total assets. It shows the proportion of the total assets financed by the owners.

Therefore the correct pairing is:

A - II: Current Ratio - Liquidity Ratios

B - IV: Inventory Turnover Ratio - Activity Ratios

C - III: Return on Investment - Profitability Ratios

D - I: Proprietary Ratio - Solvency Ratios

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

Key Points

• Demand deposits with Bank
  • This is correct.
  • Demand deposits are highly liquid and can be used or withdrawn on demand, thus qualifying as cash equivalents.
• Bills receivables
  • This statement is incorrect.
  • While bills receivable are short-term in nature, they are not as liquid as cash or cash equivalents because they cannot be converted into cash instantly without significant risk of loss.
• Treasury bill
  • This is correct.
  • Treasury bills are short-term government securities that are considered highly liquid and safe. They mature in a year or less, making them ideal as cash equivalents.
• Commercial Paper
  • This is correct.
  • Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts payable and inventories. It is highly liquid and often matures within a short period, thereby considered a cash equivalent.
• Marketable Securities
  • This is correct.
  • Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price. Examples include stocks and bonds that are traded on a public exchange.

Hence, the statements A, C, D, and E are correct, making option 1 the correct answer. Bills receivables (B) are not considered cash equivalents due to their lesser liquidity and potential for loss upon conversion to cash, thus excluding them from the correct set of options.

The correct answer is (A) - (IV), (B) - (I), (C) - (II), (D) - (III).

Key Points

• Application money should be at least 5% of the face value of the share.
  • This requirement ensures that investors are genuinely interested in the shares and have a stake in the application process.
  • It acts as a commitment from the investors to purchase the shares at the given price.
• The amount of Call should not exceed 25% of the face value of the share.
  • This limitation is set to protect investors from being asked to pay too high an amount in a single installment after the initial application stage.
  • It helps in managing the financial burden on shareholders.
• Minimum subscription of capital cannot be less than 90% of the issued amount according to SEBI guidelines.
  • This rule ensures that there is sufficient interest and financial backing for the venture before it goes ahead.
  • It serves as a safeguard for the company and its investors, ensuring the company has enough capital to operate.
• Interest charged on call-in-arrears is @ 10% p.a.
  • This interest rate is charged to encourage shareholders to pay their due amounts on time.
  • It acts as a penalty for late payments, ensuring the company receives the funds it needs in a timely manner.

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

Key Points

• Ascertain net profit after providing for all charges (C) is the first step in preparing the Profit and Loss Appropriation account.
  • This is correct. The process begins with determining the net profit of the firm after accounting for all the necessary charges and expenses. This ensures that the profit available for appropriation among the partners is accurately calculated.
• Transfer the net profit to the credit side of P & L Appropriation A/c (A) follows as the second step.
  • This statement is correct. Once the net profit is ascertained, it is transferred to the credit side of the Profit and Loss Appropriation account, indicating that this profit is now available for appropriation among the partners as per the agreed terms.
• Debit the P & L Appropriation A/c with all appropriations like partners' salary etc. (D) is the third step.
  • This is correct. Appropriations such as partners' salaries, interest on capital, and any other agreed-upon distributions are debited to the P & L Appropriation account. These are the amounts set aside from the net profit before dividing the remaining profit among the partners.
• Credit the P & L Appropriation A/c with interest on drawing and deficiency on account of partner's guarantee of earnings to the firm (E) is the fourth step.
  • This statement is correct. If there are any interests on drawings by partners or any deficiency due to a partner's guarantee to the firm, these are credited to the P & L Appropriation account. These entries adjust the overall appropriation of profits.
• Divide the Profit among partners in the Profit Sharing ratio (B) is the final step.
  • This is correct. After all appropriations have been accounted for, the remaining profit (or loss) is divided among the partners in their agreed-upon profit-sharing ratio. This final step ensures that each partner receives their share of the profit according to the partnership agreement.

Hence, the sequence (C), (A), (D), (E), (B) correctly outlines the steps in preparing the Profit and Loss Appropriation account.

The correct answer is (A), (B) and (D) only.

Key Points

• Debentures issued to bank as additional security.
  • This is correct.
  • Companies sometimes issue debentures to banks as an additional form of security for loans or overdrafts taken. This is a common practice to provide assurance to the bank regarding the repayment of borrowed funds.
• Debentures issued to vendor.
  • This statement is correct.
  • Issuing debentures to vendors is a method used by companies to settle accounts payable or to finance the purchase of goods and services. This is considered a transaction in kind, where debentures are issued in lieu of cash payments to vendors.
• Debentures issued to public.
  • This statement is incorrect in the context of the question.
  • Issuing debentures to the public typically involves cash transactions where the public invests money into the company by purchasing debentures. Thus, it does not fit the criterion of being issued for consideration other than cash.
• Debentures issued to creditor.
  • This statement is correct.
  • When debentures are issued to creditors, it is usually done to convert existing debt or loans into debentures. This can be a strategic move to manage the company's debt by changing the terms of repayment or to take advantage of lower interest rates.
• Debentures issued for cash.
  • This statement is incorrect in the context of the question.
  • Issuing debentures for cash is essentially the opposite of what is being asked, as the question focuses on debentures issued for consideration other than cash.

Hence, the statements (A) Issued to bank as additional security, (B) Issued to vendor, and (D) Issued to creditor are correct, making option 2 the correct answer.

Working capital = Current assets - Current liabilities
Current liabilities = Current assets - Working capital
= 6,00,000 - 2,00,000 = ₹ 4,00,000
Current ratio = Current assets/Current liabilities = 6,00,000/4,00,000 = 1.5

Working capital = Current assets - Current liabilities 

If the numerator and denominator reduces by the same amount the ratio improves.

Operating Ratio = Operating Cost/Net Sales × 100

Also, Operating Cost = Cost of Goods Sold + Operating Expenses

Since cost of goods sold includes purchases as well as closing stock so a purchase of ₹ 40,000 worth of goods will increase the value of both closing stock as well as purchases and hence will lead to change in the value of COGS.

Thus, the operating ratio will remain unchanged.

Accounting data provides information about quantitative (or monetary) aspects of business. Hence, the ratios also reflect only the monetary aspects, ignoring completely the non-monetary (qualitative) factors.

Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio. Other two options will deteriorate it

Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio.

There are differing accounting policies for valuation of inventory, calculation of depreciation, etc., available for various aspects of business transactions. As there are variations in accounting practices followed by different business enterprises, ratios may not be comparable.

Liquid ratio measures short-term solvency of an enterprise. It indicates whether a firm is able to pay its current liabilities immediately.

Quick assets = Current assets - Inventories - Prepaid expenses

Quick assets = Current assets - Inventories - Prepaid expenses
= 6,00,000 - 1,50,000 - 50,000 = ₹ 4,00,000 
Quick ratio = Quick assets/Current liabilities = 4,00,000/2,00,000 = 2

Generally, higher the current ratio the better it is because it indicates that the firm will be able to meet its current liabilities.

This is purchase of machinery for cash will reduce the current assets but current liabilities remain unchanged, so the ratio will decrease.

Debt to equity ratio = Debt/Equity
Debt = Total debt - Current liabilities = 25,00,000 - 8,00,000 = ₹ 17,00,000
Equity = Total assets - Total debts = 35,00,000 - 25,00,000 = ₹ 10,00,000
Debt to equity ratio = 17,00,000/10,00,000 = 1.7 : 1

Interest coverage ratio — PBIT/Interest on long-term debt = 5,00,000/1,25,000 = 4 times.

Total assets will increase by the amount of loan but Shareholders’ funds will remain the same so proprietary ratio will decrease.

It will improve the ratio as COGS remains unchanged but average stock decreases.

Debt-equity ratio = Long-term debt/Shareholder’s funds

Inventory turnover ratio = COGS/Average inventory
Opening inventory = Closing inventory - 20,000 = 60,000 - 20,000 = ₹ 40,000
Average inventory = (Opening inventory + Closing inventory)/2 = 40,000 + 60,000/2
= 1,00,000/2
= ₹ 50,000
Inventory turnover ratio = 1,50,000/50,000 = 3 times