Accountancy: CUET Mock Test - 7 - CUET MCQ

The correct answer is Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Key Points Window Dressing:

• Actions performed to improve the appearance of a company's financial accounts are known as window dressing.
• Since it is misleading, the entire concept of window dressing is clearly unethical.
• Furthermore, it essentially takes outcomes from a future time in order to make the current period appear better, making it exceedingly short-term.

Important Points Assertion (A): A company has postponed paying suppliers, so that the period-end cash balance appears higher in the books of the company. This is an example of window dressing.

The Assertion(A) is true because postpone paying suppliers will result in the period-end cash balance appearing higher than it should be.

Reason (R): Through window dressing, a company can present a better financial position of the firm than the actual position.

The reason is true because

• When a corporation has a large number of shareholders, window dressing is common so that management may provide the impression of a well-run company to investors who are unlikely to have much day-to-day contact with the company.
• It can also be utilised when a business has to impress a lender in order to get a loan, as it can present a better financial position of the firm than the actual position.
• When a firm is closely held, the owners are usually more informed about the company's performance, thus there's no need for financial figures to be embellished.

The answer is (b) Straight-line method.Key Points

The straight-line method is the most common method of depreciation and is the simplest to understand and apply. It evenly allocates the cost of an asset over its useful life by charging the same amount of depreciation expense each year. This method is often used for assets that are expected to depreciate evenly over their useful life, such as buildings and equipment.

The other answer choices are incorrect because:

(a) Double declining balance method is a method that accelerates depreciation in the early years of an asset's useful life. This method is often used for assets that are expected to lose value more quickly in the early years, such as automobiles and machinery.
(c) Sum-of-the-years-digits method is another method that accelerates depreciation in the early years of an asset's useful life. This method is similar to the double declining balance method, but it is less aggressive.
(d) Units of production method is a method that bases depreciation on the number of units produced by an asset. This method is often used for assets that are expected to produce a certain number of units over their useful life, such as machinery and equipment.
Therefore, the straight-line method is the only method that evenly allocates the cost of an asset over its useful life.

Key Points

The built-in controls and untouchable aspects of data management enable accurate accounting reports that are hygienic, trustworthy, and can be depended upon.

Important PointsAdvantages of Computerized Accounting system are:

1. Increases the efficiency - Computers bring speed and accuracy in preparing the records and accounts.
2. Fast in preparing accounts - Using accounting software, the entire process of preparing accounts becomes faster.
3. Security - The data is secure under this system.
4. Reliable - financial statements prepared by computers are highly reliable and accurate.

The correct answer is The encryption of data.

Key Points

• The encryption of data:
  • Encryption is the process of converting information or data into a code, especially to prevent unauthorized access.
  • This is a fundamental aspect of data security, ensuring that even if data is intercepted or accessed without authorization, it remains unreadable and secure.
  • Encryption plays a crucial role in protecting sensitive information, thereby maintaining the confidentiality and integrity of data across various digital platforms.

Additional Information

• To secure the account, reports etc.:
  • While securing accounts and reports is essential, it is more a goal or outcome of various processes including encryption, rather than a process itself.
  • Security measures encompass a range of practices, of which encryption is a key component.
• Easy to process data, keeping proper records:
  • This refers to the organization and management of data for efficiency and accuracy in processing and retrieval.
  • Though crucial for operational effectiveness, it doesn't directly relate to the concept of codification, which involves the transformation of data into a secure format through encryption.
• The generation of mnemonic code:
  • Mnemonic codes are used for aiding memory recall, not specifically for securing data.
  • While they can be part of a security strategy (e.g., creating memorable passwords), they are not synonymous with the encryption process.

The correct answer is anywhere.

Key Points

• Legends can be reposition on the chart anywhere:
  • Legends in charts are flexible elements that describe the symbols, colors, or patterns used in the chart for data visualization.
  • They can be placed in various positions according to the design and readability requirements, including but not limited to corners, sides, or even outside the chart area.
  • This flexibility allows for optimized use of space and enhances the chart's clarity for better data interpretation.

Additional Information

• On the corner only:
  • While placing the legend in the corner is a common practice for many charts, it is not the only option available. This misconception might stem from default settings in some charting tools.
• On the right side only:
  • Positioning the legend on the right side is another popular choice, especially for charts where the right side space is not utilized for data visualization. However, this is not a limitation but a design choice.
• On the bottom of X-axis:
  • Placing the legend at the bottom of the X-axis can be effective, especially for charts where the bottom space can accommodate additional information without cluttering. Yet, this is just one of many viable positions.

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

Key Points

• Over Subscription (A) matches with (II) Application received is more than shares issued.
  • When a company issues shares and receives applications for more shares than are available, it is known as over subscription.
  • This indicates a high demand for the company's shares in the market.
• Minimum subscription (B) matches with (I) Minimum amount that must be raised by issue of shares.
  • Minimum subscription is the least amount that must be raised by the company through the issue of shares to meet its capital requirements before it can proceed with the allotment of shares.
  • If this amount is not met, the company cannot proceed with the issue, and the application money must be refunded to the applicants.
• Under Subscription (C) matches with (IV) Application received is less than shares issued.
  • This situation occurs when the company does not receive enough applications to cover all the shares it has issued.
  • Under subscription indicates a lack of demand for the company's shares.
• Private Placement (D) matches with (III) Allotment of shares without issue of prospectus.
  • Private placement refers to the direct sale of securities to a limited number of sophisticated investors.
  • It bypasses the public offering process and does not require the issuance of a prospectus.

Therefore, the correct pairing is:
(A) - (II): Over Subscription - Application received is more than shares issued
(B) - (I): Minimum subscription - Minimum amount that must be raised by issue of shares
(C) - (IV): Under Subscription - Application received is less than shares issued
(D) - (III): Private Placement - Allotment of shares without issue of prospectus

The correct answer is Rent received.

Key Points

• Rent received:
  • Rent received is considered an operating activity, not a financing activity. It is associated with the primary operations of the business rather than with its financing.
  • Financing activities involve transactions between the company and its investors or creditors that impact the equity and debt of the business. Rent received does not fit this category.

Additional Information

• Issue of Shares:
  • Issuing shares involves obtaining equity financing by selling shares of the company to investors. This increases the company's equity and is a financing activity.
• Repayment of Bank Loan:
  • Repaying a bank loan involves the outflow of funds to settle the company’s debt obligations. This is a financing activity because it affects the company’s financial structure.
• Redemption of Debentures:
  • Redeeming debentures refers to repaying the borrowed amount to debenture holders. Like loan repayment, it is a financing activity because it involves managing the company's debt.

The correct answer is Shareholders.

Key Points

• Shareholders:
  • An annual report is a comprehensive report on a company's activities throughout the preceding year, intended primarily for shareholders.
  • The purpose of the report is to give shareholders and other interested people information about the company's activities and financial performance.
  • It serves as a means of communication between the company's management and its investors, providing details on operations, financial condition, and future outlook.

Additional Information

• Directors:
  • While directors are involved in the preparation of the annual report, it is not furnished specifically for them; they already have access to the information being reported as part of their governance role.
• Auditors:
  • Auditors review the financial statements which are a part of the annual report, but the report itself is not primarily for them. Their role is to provide an independent opinion on those financial statements.
• Management:
  • Management is responsible for the preparation and accuracy of the annual report. However, the report is designed for shareholders and potential investors, not for the management team itself.

A) Creditors' Settlement: The amount creditors agree to accept (sometimes less than owed). Matches (I) "The amount creditors agree to accept when they settle their debts."
B) Asset Realisation Profit: Profit from selling assets above book value. Matches (II) "Profit made from selling the firm’s assets at amounts above their book value."
C) Unrecorded Liabilities: Liabilities not in the books, settled during dissolution. Matches (III) "Liabilities not listed in the firm’s financial books but that need to be settled during dissolution."
D) Partner's Capital Balance: The final balance in each partner’s capital account after settlement. Matches (IV) "The balance of each partner’s capital after liabilities and profits are settled."

A) Realisation Expenses: Costs for selling assets and settling debts. Matches (II) "The costs incurred for selling assets and settling debts."
B) Partner's Capital Account: Reflects each partner’s contribution post-dissolution. Matches (I) "The account that reflects each partner's contribution to the firm after the dissolution process."
C) Dissolution by Notice: Initiated by a partner giving notice. Matches (III) "Dissolution initiated by one partner giving notice to others."
D) Surplus or Deficit: Final balance after settlement and distribution. Matches (IV) "The final balance remaining after settlement of liabilities and distribution of profits."

A) Authorised Capital: This is the maximum amount of capital a company is allowed to raise as per its Memorandum of Association. Matches (III) "The maximum amount the company is authorised to raise."
B) Issued Capital: This is the portion of authorised capital offered to the public for subscription. Matches (II) "The capital which is offered for public subscription."
C) Subscribed Capital: This is the portion of issued capital that the public or members actually subscribe to. Matches (IV) "The capital subscribed by the public or its members."
D) Paid-up Capital: This is the amount shareholders have actually paid on the subscribed capital. Matches (I) "The amount called from shareholders and actually received."

A) Application Money: This is the initial money received when shareholders apply for shares. Matches (III) "Money received on the application for shares."
B) Allotment Money: This is the amount due from shareholders once shares are allotted to them. Matches (II) "Amount due from shareholders on allotment."
C) First Call: This is an installment of money requested from shareholders after allotment (e.g., first call payment received). Matches (IV) "Money received from shareholders for the second installment" .
D) Second Call: This is another installment where money is due and received. Matches (I) "Calls due and money received".

(A) Correct: Goodwill is shared between the remaining partners when a partner retires or dies, typically in their gaining ratio.
(B) Incorrect: The capital of the new firm is not always fixed by the remaining partners, it depends on the terms of the partnership agreement.
(C) Correct: The retiring partner’s capital account is credited with their share of goodwill, which is adjusted with the continuing partners.
(D) Correct: Revaluation of assets and liabilities is done to reflect their current values at the time of a partner’s retirement.
(E) Incorrect: The amount due to the retiring partner is not always paid immediately; it can be settled in installments.

(A) Incorrect: The retiring partner’s share of goodwill is not always paid in cash; it can be adjusted in the capital accounts.
(B) Correct: The gaining ratio determines how the share of goodwill is adjusted between the remaining partners.
(C) Incorrect: The new profit-sharing ratio is not always calculated; sometimes, the remaining partners continue in the old ratio.
(D) Correct: Upon a partner’s death, the amount due is transferred to the legal representatives' account for settlement.
(E) Correct: The balance sheet of the new firm is prepared after making necessary adjustments like goodwill, revaluation of assets, and liabilities.

(A) Correct: The retiring partner is entitled to their share of profits up to the date of their retirement.
(B) Correct: Unrecorded assets and liabilities are brought into the firm’s books and adjustments are made in the revaluation account.
(C) Incorrect: When goodwill does not appear in the books, it is not credited directly but instead adjusted through the capital accounts of the remaining partners.
(D) Incorrect: The new capital is usually decided based on the new profit-sharing ratio, not the old one.
(E) Correct: The deceased partner’s capital account is transferred to their legal representatives' account for settlement.

Financial analysis is used by a wide range of stakeholders, including management, creditors, and investors, to assess a firm’s financial performance.

The main focus of financial analysis is to identify the financial strengths and weaknesses of a firm.

Financial analysis provides insights into key financial aspects such as profitability, liquidity, solvency, and operational efficiency.

Financial analysis varies for different users based on their specific interests, such as profitability for investors or liquidity for creditors.

Financial analysis helps in evaluating a firm’s financial health, which is crucial for informed decision-making.

Comparative financial statement analysis helps understand the changes in financial performance and position over time

Comparative analysis typically involves comparing the income statement and balance sheet for different periods.

Comparative analysis helps identify trends and variations in the financial performance and position of a firm.

Comparative analysis involves comparing financial data from different periods to observe changes over time.

Comparative financial statements involve calculating absolute and percentage changes to understand the variations in financial data.

The Partner's Current Account can have:

• Debit balance - This occurs when the partner has withdrawn more than they have contributed.
• Credit balance - This happens when the partner has contributed more than they have withdrawn.

Therefore, it can have either a debit or credit balance, depending on the transactions made by the partner.

A partnership firm has several key features:

• It is formed by two or more persons who agree to carry on a business together.
• The profits and losses are shared among the partners in a fixed ratio.
• The business can be conducted by all partners or any one of them acting on behalf of all.

In the absence of a partnership deed, there is no provision to charge interest on capital. Therefore, the interest rate is set at nil.

Interest on partners' capital is treated as an appropriation of profit in partnership accounts.

• It is not considered an expense because it is part of the profit-sharing mechanism.
• Interest is given to partners based on their capital contribution, affecting the distribution of profits.
• This ensures that partners are rewarded for their investment in the business.

Partners are required to pay interest on drawings only under specific conditions:

• When it is provided for in the partnership agreement.
• When it is agreed upon by the partners.

Therefore, both options (a) and (c) are correct.