Accountancy: CUET Mock Test - 5
40 Questions MCQ Test CUET Mock Test Series | Accountancy: CUET Mock Test - 5
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Ratio analysis can help know about the potential areas which can be improved with the effort in the desired direction.
Their role is essentially indicative and of whistle blowing and not providing a solution to the problem.
The working capital of IAN Ltd. is ₹ 2,00,000 and its current assets are ₹ 6,00,000. What is its current ratio?
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 is the excess of current assets over current liabilities.
Working capital = Current assets - Current liabilities
If current assets and current liabilities both reduce by the same amount, the current ratio will
If the numerator and denominator reduces by the same amount the ratio improves.
Purchase of goods ₹ 40,000 for cash will increase the operating ratio.
Since purchase of goods will increase the operating cost so the operating ratio will increase.
A ratio reflects quantitative as well as qualitative aspects of results.
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.
Current ratio of Vidur Pvt. Ltd. is 3:2. Accountant wants to maintain it at 2:1. Following options are available
(i) He can repay bills payable.
(ii) He can take short-term loan.
(iii) He can purchase goods on credit.
Choose the correct option.
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
What will be the effect on current ratio if a bills payable is discharged on maturity?
Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio.
Ratios are comparable even if different accounting policies and procedures are followed by different firms.
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.
Which of the following ratios measure the long-term solvency of an organisation?
Liquid ratio measures short-term solvency of an enterprise. It indicates whether a firm is able to pay its current liabilities immediately.
Which of the following is/are not the component(s) of quick asssets?
Quick assets = Current assets - Inventories - Prepaid expenses
The Current Assets of APE Ltd. are T 6,00,000 ; Current Liabilities are ₹ 2,00,000; Inventories are ₹ 1,50,000; Prepaid Expenses are ₹ 50,000 and Cash and Cash Equivalents are ₹ 1,00,000. What is its quick ratio?
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, a lower current ratio is considered better.
Generally, higher the current ratio the better it is because it indicates that the firm will be able to meet its current liabilities.
Purchase of machinery for cash will _____ the quick ratio.
This is purchase of machinery for cash will reduce the current assets but current liabilities remain unchanged, so the ratio will decrease.
What is the debt to equity ratio when the following information is available Total Assets ₹ 35,00,000; Total Debts ₹ 25,00,000; Current Liabilities ₹ 8,00,000.
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
ARYA Ltd has a term Loan of ₹ 10,00,000. Interest on Loan for the year is ₹ 1,25,000 and its PBIT is ₹ 5,00,000. Its interest coverage ratio is
Interest coverage ratio — PBIT/Interest on long-term debt = 5,00,000/1,25,000 = 4 times.
If P Ltd obtains a Bank Loan of ₹ 30,00,000 payable after 5 years, then its proprietary ratio will
Total assets will increase by the amount of loan but Shareholders’ funds will remain the same so proprietary ratio will decrease.
Purchase returns amounting to ₹ 20,000 will deteriorate the inventory turnover ratio
It will improve the ratio as COGS remains unchanged but average stock decreases.
Debt-equity ratio expresses the relationship between short-term debt and equity share capital of an enterprise.
Debt-equity ratio = Long-term debt/Shareholder’s funds
What is the inventory turnover ratio, when the following is given?
COGS = ₹ 1,50,000;
Closing Inventory = ₹ 60,000;
Excess of Closing Inventory over Opening Inventory ₹ 20,000.
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
A rise in operating ratio will indicate a rise in efficiency.
A higher operating ratio indicates a decline in efficiency. It is a cost ratio. Higher operating ratio will mean there is a greater component of cost in price and hence lesser profits.
Debt-equity ratio of a company is 1:2.
Purchase of a fixed asset for ₹ 5,00,000 on long-term deferred payment basis will
Purchase of a fixed asset for ? 5,00,000 on long-term deferred payment basis will increase the debt component but not the equity component and hence ratio will increase.
If the debtor’s turnover ratio of MON Ltd. is 6 times, creditors turnover ratio is 4 times then what is its average collection period in months?
Average collection period = 12/Debtor’s turnover ratio = 12/6 = 2
Which ratio indicates the speed with which amount is being paid to the creditors?
Trade payables turnover ratio indicates the speed with which amount is being paid to creditors.
XYZ Ltd. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its average collection period was.
If the average collection period exceeds the credit terms its credit collection would be considered poor.
Which of the following groups of ratios primarily measure risk?
Liquidity ratios measure the risk that whether the firm will be able to pay its short-term obligations. Similarly, debt ratio is also a measure of risk or the ability of the firm to pay its long-term obligations. Activity ratios measure how efficiently a company is using its assets to generate sales, i.e. whether the investment in assets is risky for the business or not.
What will be the effect of purchase of goods for cash ₹ 3,000 on gross profit ratio?
Operating profit ratio = Operating Profit / Net Sales = x 100
What will be the current ratio of a company whose net working capital is zero?
Net working capital = 0
Current assets - Current liabilities = 0
So, Current assets = Current liabilities ....(i)
Current ratio = Current assets/Current liabilities
Using Eq.(i); Current ratio = Current liabilities/Current liabilities = 1
Directions: There are two statements marked as Assertion (A) and Reason (R). Read the statements and choose the appropriate option from the options given below
Assertion (A): The debt to equity ratio will increase at the time of issue of equity shares for cash.
Reason (R): Issue of equity shares will increase the shareholders’ funds but the long-term debts will remain the same.
The debt to equity ratio will decrease at the time of issue of equity shares for cash.
Directions: There are two statements marked as Assertion (A) and Reason (R). Read the statements and choose the appropriate option from the options given below
Assertion (A): Inventories and prepaid expenses are not considered as quick assets.
Reason (R): Inventories take some time before it is converted into cash while prepaid expenses can be converted into cash.
Inventories take some time before it is converted into cash and prepaid expenses are the expenses paid in advance and cannot be converted into cash.
Directions: Read the following case study and answer questions on the basis of the same.
Tony and Rony started a partnership firm, TR CDs to manufacture music CDs way back in 1990. Now since the music CDs are out of business, they plan to sell the business to one of the major content production houses in Mumbai. For the purpose of selling business, they reached to their accountant to calculate the goodwill and other financial advice. He suggested that since the CDs are very less in demand, their goodwill value will be hampered. Nonetheless, the framework for goodwill calculation was decided as follows
‘The goodwill be valued at 4 years’ purchase of super profits.’ The following financial information was obtained at the end of this transaction
Super Profit = Average Profit - Normal Profit
250 = Average Profit - 700
Average Profit = ₹ 950
Directions: Read the following case study and answer questions on the basis of the same.
Tony and Rony started a partnership firm, TR CDs to manufacture music CDs way back in 1990. Now since the music CDs are out of business, they plan to sell the business to one of the major content production houses in Mumbai. For the purpose of selling business, they reached to their accountant to calculate the goodwill and other financial advice. He suggested that since the CDs are very less in demand, their goodwill value will be hampered. Nonetheless, the framework for goodwill calculation was decided as follows
‘The goodwill be valued at 4 years’ purchase of super profits.’ The following financial information was obtained at the end of this transaction
What is the super profit of business?
Goodwill = Super Profit x Number of Years’
Purchase 1,000 = Super Profit x 4
Super Profit = ₹250
Directions: Read the following case study and answer questions on the basis of the same.
Tony and Rony started a partnership firm, TR CDs to manufacture music CDs way back in 1990. Now since the music CDs are out of business, they plan to sell the business to one of the major content production houses in Mumbai. For the purpose of selling business, they reached to their accountant to calculate the goodwill and other financial advice. He suggested that since the CDs are very less in demand, their goodwill value will be hampered. Nonetheless, the framework for goodwill calculation was decided as follows
‘The goodwill be valued at 4 years’ purchase of super profits.’ The following financial information was obtained at the end of this transaction
What is the normal profit of business?
Normal Profit = Capital Employed x Normal Rate of Return / 100
= (8,000 -1,000) x 10/100 = ₹ 700 100
Pinky and Chinky are partners in a firm. They share their profits in 2 : 3 ratio. The accountant of the firm, finalised the profit and loss and capital account and presented the accounts to them. Pinky disagreed with accounts because Pinky’s capital account showed negative balance. Pinky is in doubt, this cannot happen. Give your opinion.
Pinky is wrong because, if debit side of the partners’ capital account is more than its credit side, then it shows negative balance.
Jay and Viru started partnership with guarantee given to Jay of ₹30,000 profits per year. The profits for 2020-21 are ₹60,000. Assuming 2 : 1 as profit sharing ratio, calculate Jay’s share o f profit.
Jay’s share without guarantee (₹ 40,000) is already more than guarantee.
Munit and Seema came together to provide free food to poor covid patients during the pandemic. They can call this as partnership.
Profit making is mandatory purpose for business partnership.
Mr. X and Mr. Y are partners in a firm. Mrs. X extended loan to firm @10% p.a. of ₹ 1,00,000. Interest on loan given to Mr. X will be
No interest will be provided to Mr. X as loan is of Mrs. X and not Mr. X.
Directions: Read the following case study and answer questions on the basis of the same.
Sam and Tom decided to set up a partnership to sell low-sodium, plant based vegan snacks. Since both of them had a family, they decided to withdraw a salary of 112,000 per quarter.
Sam also withdrew ₹ 1,00,000 on 31st December, 2020 to get her wife treated for Covid-19. The partnership deed provided for 10% p.a. interest on drawings.
Tom introduced ₹ 50,000 as additional capital on 31stjanuary, 2021 to increase the inventory. The net distributable profit was ₹ 2,00,000 which was divided between Sam and Tom after providing 25% to general reserve.
Total amount of salary credited to the partner’s account is
Total Salary = 2 x (4 x 12,000) = ₹ 96,000
Directions: Read the following case study and answer questions on the basis of the same.
Sam and Tom decided to set up a partnership to sell low-sodium, plant based vegan snacks. Since both of them had a family, they decided to withdraw a salary of 112,000 per quarter.
Sam also withdrew ₹ 1,00,000 on 31st December, 2020 to get her wife treated for Covid-19. The partnership deed provided for 10% p.a. interest on drawings.
Tom introduced ₹ 50,000 as additional capital on 31stjanuary, 2021 to increase the inventory. The net distributable profit was ₹ 2,00,000 which was divided between Sam and Tom after providing 25% to general reserve.
Interest on Tom’s capital will be
Interest on Tom’s Capital = Nil (Deed is silent)
Directions: Read the following case study and answer questions on the basis of the same.
Sam and Tom decided to set up a partnership to sell low-sodium, plant based vegan snacks. Since both of them had a family, they decided to withdraw a salary of 112,000 per quarter.
Sam also withdrew ₹ 1,00,000 on 31st December, 2020 to get her wife treated for Covid-19. The partnership deed provided for 10% p.a. interest on drawings.
Tom introduced ₹ 50,000 as additional capital on 31stjanuary, 2021 to increase the inventory. The net distributable profit was ₹ 2,00,000 which was divided between Sam and Tom after providing 25% to general reserve.
What was the profit credited in both partner’s accounts?
Profit credited = 2,00,000 - 25% = ₹ 1,50,000
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