Test: Final Accounts Of Manufacturing Entities - 1 - CA Foundation MCQ

The balance of petty cash represents a small amount of cash that a business keeps on hand for minor expenses. It is classified as a current asset on the balance sheet because it is cash that is readily available for use.

• Asset: Petty cash is an asset because it is money owned by the business that can be used to pay for small, everyday expenses, such as office supplies, postage, or other minor purchases.
• Not an expense: While petty cash is used to pay for expenses, the cash itself is not classified as an expense until it is spent.
• Not income: Income refers to money received by the business, which is not the case for petty cash.
• Not a liability: A liability represents obligations or debts owed by the business, which petty cash is not.

Fixed assets are long-term tangible assets that a business uses in its operations to generate income. They are not intended for resale in the normal course of business. Here’s a breakdown of the options:

• A: kept in the business for use over a long time for earning income: This is correct. Fixed assets, such as machinery, buildings, and equipment, are utilized over an extended period to support the company's operations and generate revenue.
• B: meant for resale: This is incorrect. Fixed assets are not primarily meant for resale; they are used in the production of goods or services.
• C: meant for conversion into cash as quickly as possible: This is also incorrect. Fixed assets are not intended to be liquidated quickly; they are long-term investments.
• D: All of the above: Since options B and C are incorrect, this option cannot be true.

Thus, the only accurate statement about fixed assets is option A.

Goodwill refers to the value of a business's reputation, customer relationships, brand recognition, and other non-physical assets that contribute to its earning potential. It is classified as an intangible fixed asset because it does not have a physical presence but still holds significant value for the business.

• A: a current asset: This is incorrect. Goodwill is not a current asset, as it is not expected to be converted into cash or consumed within one year.
• B: an intangible fixed asset: This is correct. Goodwill is categorized as an intangible asset, and it is considered a fixed asset because it is expected to provide long-term benefits to the company.
• C: a tangible fixed asset: This is incorrect. Goodwill is not tangible, as it cannot be seen or touched.
• D: an investment: While goodwill may be related to investments in a business, it is specifically classified as an intangible fixed asset.

Therefore, the accurate classification of goodwill is B.

Stock (or inventory) refers to the goods and materials that a business holds for the purpose of resale. It is considered a current asset because it is expected to be sold or used up within one year as part of the normal operating cycle of the business.

• A: included in the category of fixed assets: This is incorrect. Fixed assets are long-term assets used in the operation of a business, while stock is a current asset.
• B: an investment: This is misleading. While stock may be an investment for some companies (e.g., investing in raw materials), in the context of business operations, it is primarily categorized as an asset, specifically a current asset.
• C: a part of current assets: This is correct. Stock is classified as a current asset on the balance sheet.
• D: an intangible fixed asset: This is incorrect. Stock is tangible and is not classified as an intangible asset.

Therefore, the accurate classification of stock is C.

The manufacturing account is primarily prepared to determine the total cost of manufacturing goods during a specific period. It includes various costs associated with production, such as raw materials, labor, and overheads, which are crucial for understanding the cost structure of goods produced.

• A: to ascertain the profit or loss on the goods produced: This is incorrect. While the manufacturing account contributes to understanding profitability, it does not directly calculate profit or loss; that is done in the income statement after considering sales revenue.
• B: to ascertain the cost of the manufactured goods: This is correct. The primary purpose of the manufacturing account is to outline the costs involved in the manufacturing process.
• C: to show the sale proceeds from the goods produced during the year: This is incorrect. The manufacturing account does not show sales proceeds; it focuses solely on production costs.
• D: both (b) and (c): Since option C is incorrect, this option is also incorrect.

Therefore, the accurate purpose of the manufacturing account is best represented by option B.

To determine the gross profit earned by the firm, we can follow these structured steps:

1. Calculate the Total Cost of Goods Sold (COGS)
   The total cost of goods purchased includes the cost of the goods and any additional expenses such as freight. Thus, we can calculate COGS as follows:
   COGS = Cost of Goods + Freight Inwards − Cost of Unsold Goods
   Substituting the values into the formula:
   COGS = 90,000 + 6,000 − 12,000
2. Perform the Calculation
   Now, we can compute the COGS: COGS = 90,000 + 6,000 − 12,000 = 84,000
3. Calculate Gross Profit
   Gross profit is calculated by subtracting the COGS from the total sales revenue. The formula for gross profit is:
   Gross Profit = Sales − COGS
   Substituting the values we have:
   Gross Profit = 120,000 − 84,000
4. Perform the Final Calculation
   Now, we can compute the gross profit:
   Gross Profit = 120,000 − 84,000 = 36,000

Thus, the gross profit earned by the firm is Rs. 36,000

The correct option is B.
Gross profit = revenue sales - Cost of goods sold
Cost of goods sold = Opening Stock + Purchases + Direct expenses - Closing Stock
= 25,000 + 1,30,000 + 5,000 - 15,000 = ₹1,45,000
Gross Profit = 1,90,000 - 1,45,000 = ₹45,000

• Prepayment of Insurance Premium: When a business pays for an insurance premium in advance, it represents a payment for services that will be received in the future. This creates a prepaid expense.
• Balance Sheet: On the balance sheet, prepaid insurance is classified as a current asset because it represents a future benefit (insurance coverage) that the business has already paid for.
• Insurance Account: In the insurance account, the prepayment will appear as a debit balance because it reflects an expense that has been incurred in advance.

Thus, the prepayment of an insurance premium will be shown as an asset (prepaid insurance) in the balance sheet and as a debit balance in the insurance account.

Work-in-progress is a measure of the costs of goods that have been partially completed but are not yet ready for sale. It is included in the cost of goods sold, which is a major expense on the income statement. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.

Here is a more detailed explanation of each option:

• A. Understate cost of goods manufactured in that period. This is incorrect because work-in-progress is included in the cost of goods manufactured. When work-in-progress is understated, the cost of goods manufactured will also be understated.
• B. Overstate current assets. This is incorrect because work-in-progress is not a current asset. It is an asset that is used in the production of goods and services.
• C. Overstate gross profit from sales in that period. This is incorrect because gross profit is calculated by subtracting the cost of goods sold from sales. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit.
• D. Understate net income in that period. This is correct because net income is calculated by subtracting expenses from revenues. When work-in-progress is understated, the cost of goods sold will also be understated. This will result in an overstatement of gross profit and net income.

To calculate the gross profit, we use the formula:

Gross Profit = Sales Revenue - Cost of Goods Sold (COGS)

Given:

• Sales Revenue = Rs. 4,00,000
• Cost of Goods Sold = Rs. 3,10,000

Calculation: Gross Profit = 4,00,000 − 3,10,000 = 90,000

Therefore, the correct answer is: B: Rs. 90,000.

The equation "Sales = COGS + Profit" is a fundamental accounting equation that represents the relationship between a company's sales, cost of goods sold (COGS), and profit. It is known as the gross profit equation.

Here's a breakdown of the equation:

Sales: The total revenue generated from the sale of goods or services during a specific period.

Cost of Goods Sold (COGS): The direct expenses incurred in producing the goods or services sold during that period. It includes the cost of materials, labor, and other manufacturing or production costs.

Profit: The difference between sales and COGS, representing the remaining portion of revenue after deducting the direct costs of production. It is also known as gross profit.

The gross profit equation highlights the relationship between a company's ability to generate revenue and its efficiency in managing production costs. A higher gross profit margin indicates that the company is effectively converting its sales into profit.

Here's an example of how to apply the equation:

Suppose a company has sales of $100,000 and COGS of $60,000. Using the gross profit equation, we can calculate the profit as:

Profit = Sales - COGS = $100,000 - $60,000 = $40,000

Therefore, the company's profit for the period is $40,000.

The gross profit equation is a crucial tool for businesses to understand their financial performance and identify areas for improvement. By analyzing the relationship between sales, COGS, and profit, companies can make informed decisions about pricing strategies, production efficiency, and cost management.

Let's assume the Selling price per unit = Rs.100

Profit on Selling price is given 20% i.e. Rs.20

Therefore cost per unit will be: Selling price per unit - Profit per unit

= Rs.100 - Rs.20 = Rs.80 = Cost Price per unit

Hence Cost price per unit is Rs.80 and the Profit per unit is Rs.20

Then profit % on cost = Profit/Cost Price *100 = 20/80*100 = 25 % on cost price.

This can be represented as:
Let us assume the Cost Price is Rs.100 
Profit Margin on Cost is @25% i.e. Rs.25
There fore the selling Price will be = Cost + Profit = SP
                                                    = Rs.100 + Rs.25 = Rs.125
If the Sales are Rs.2000
the cost of goods sold will be Rs.2000/125 * 100
              Cost of good sole = Rs.1600.

In this scenario, goods sold to Mr. A for Rs. 50,000 at a profit of 20% on cost are still lying in the godown (warehouse) at the buyer's risk. Since these goods have not yet been transferred out of the seller's possession (they remain in the seller's warehouse), they should be treated as part of closing stock.

• Sales: The goods should not be included in sales because they have not actually been delivered to the buyer. The sale is only recorded for accounting purposes, but the goods are still with the seller.
• Closing Stock: Since these goods are unsold and still in the godown, they will be considered part of the closing stock in the balance sheet, representing inventory that the business still holds.
• Goods in Transit: This term refers to goods that are on their way to the buyer but have not yet arrived. In this case, the goods are not in transit as they are still at the seller's location.
• Sales Return: This option does not apply here since the goods have not been returned; they simply remain unsold at the buyer's risk.

Thus, the appropriate treatment of these goods is to classify them as part of closing stock.

In the context of a sole trader's capital:

• A: a creditor being paid his account by cheque: This does not change the capital of the sole trader. It simply decreases cash (an asset) and decreases liabilities (the amount owed to the creditor) by the same amount, leaving the net capital unchanged.
• B: raw materials being purchased on credit: This also does not change capital. It increases inventory (an asset) and increases accounts payable (a liability), which keeps the capital unchanged.
• C: fixed assets being purchased on credit: Similar to the above options, purchasing fixed assets on credit increases both assets (the fixed assets) and liabilities (the amount owed), thus leaving the capital unchanged.
• D: wages being paid in cash: This reduces cash (an asset) and directly affects the profit of the business. If wages are an expense, they decrease the net income, which subsequently decreases the capital of the sole trader.

Thus, the correct understanding is that wages being paid in cash will reduce the capital, making D the appropriate choice in the context of changes to the sole trader's capital.

To determine the rent payable for the profit and loss account for the year ended 31 December 2005, we need to calculate how much of the rent paid covers the 2005 year. This involves the period from 1 January 2005 to 31 December 2005.

1. Rent paid on 1 October 2004 for the year to 30 September 2005 was Rs. 1,200. This payment covers:

   • 3 months of 2004 (October to December) and
   • 9 months of 2005 (January to September).

2. Rent paid on 1 October 2005 for the year to 30 September 2006 was Rs. 1,600. This payment covers:

   • 3 months of 2005 (October to December) and
   • 9 months of 2006 (January to September).

Calculation:

• Rent for 2004 payment applicable to 2005:

  • Full year rent is Rs. 1,200.
  • Monthly rent is Rs. 1,200 / 12 months = Rs. 100 per month.
  • Rent for 9 months (January to September 2005) = 9 months x Rs. 100 = Rs. 900.

• Rent for 2005 payment applicable to 2005:

  • Full year rent is Rs. 1,600.
  • Monthly rent is Rs. 1,600 / 12 months = Rs. 133.33 per month.
  • Rent for 3 months (October to December 2005) = 3 months x Rs. 133.33 = Rs. 400 (approximately).

• Total rent for 2005:

  • Rent from 2004 payment (Jan to Sep) + Rent from 2005 payment (Oct to Dec) = Rs. 900 + Rs. 400 = Rs. 1,300.

The rent payable, as shown in the profit and loss account for the year ended 31 December 2005, is Rs. 1,300. Therefore, the correct choice is C: Rs. 1,300.

The provision for doubtful debts is an accounting estimate set aside to cover potential losses from uncollectible accounts receivable. When there is a decrease in this provision, it implies that the business expects fewer bad debts than previously anticipated.
Here's how this affects financial statements:

• Increase in Net Profit: Decreasing the provision for doubtful debts reduces the expense recorded on the income statement. With lower expenses, the net profit increases because less money is being set aside for expected credit losses.
• No Impact on Liabilities: The provision for doubtful debts is a contra asset account, reducing the total assets (specifically, accounts receivable) on the balance sheet, not a liability. Therefore, decreasing this provision does not directly affect liabilities.
• No Direct Impact on Working Capital: Working capital is calculated as current assets minus current liabilities. While the decrease in provision increases the net accounts receivable (part of current assets), it doesn't directly change the current liabilities, so the overall effect on working capital is not a decrease but rather potentially an increase due to higher net current assets.
• No Decrease in Net Profit: Since reducing the provision reduces expenses, it does not cause a decrease in net profit.

Correct Answer: D: an increase in net profit.

Decreasing the provision for doubtful debts results in reduced expenses, thereby increasing net profit.

To find the value of the closing stock, we can use the formula: Cost of Goods Sold = Opening Stock + Purchases − Closing Stock
Given:

• Cost of Goods Sold = Rs.9,000
• Opening Stock = Rs.6,000
• Purchases = Rs.10,000

Plug the values into the formula and solve for the Closing Stock: 9,000 = 6,000 + 10,000 − Closing Stock
Closing Stock = 6,000 + 10,000 − 9,000 = Rs.7,000
The value of the closing stock is Rs. 7,000 (Option D).

Accounting Calculations:

• Sales: Rs. 15,000
• Opening Stock: Rs. 6,000
• Purchases: Rs. 10,000
• Closing Stock: Rs. 7,000 (Calculated)
• Cost of Goods Sold: Rs. 9,000
• Gross Profit: Rs. 6,000 (Calculated)
• Trading Expenses: Rs. 4,000
• Net Profit: ? (Needs Calculation)

Calculations:

Closing Stock Calculation:

Closing Stock = Opening Stock + Purchases - Cost of Goods Sold

Closing Stock = Rs. 6,000 + Rs. 10,000 - Rs. 9,000 = Rs. 7,000

Gross Profit Calculation:

Gross Profit = Sales - Cost of Goods Sold

Gross Profit = Rs. 15,000 - Rs. 9,000 = Rs. 6,000

Given:

• Sales: Rs. 15,000
• Cost of Goods Sold: Rs. 9,000
• Trading Expenses: Rs. 4,000

Calculations

• Calculate Gross Profit: Gross Profit = Sales − Cost of Goods Sold
  Gross Profit = 15,000 − 9,000 = Rs.6,000
• Calculate Net Profit: Net Profit = Gross Profit − Trading Expenses
  Net Profit = 6,000 − 4,000 = Rs.2,000

Based on the calculations, the net profit for the year would be Rs. 2,000. Therefore, the correct answer is C: Rs. 2,000.

Given Data:

• Opening Capital: Rs. 16,000
• Investment by Proprietor: Rs. Nil (0)
• Drawings: Rs. 3,000
• Capital at the End of the Year: Rs. 13,500

Calculation:

• Calculate the Expected Capital at Year End without Profit/Loss: Expected Capital = Opening Capital + Investment − Drawings
  Expected Capital = 16,000 + 0 − 3,000 = Rs.13,000
• Determine the Effect of Net Profit/Loss: The actual ending capital is Rs. 13,500, which is Rs. 500 more than the expected capital without considering profit or loss (Rs. 13,000). This indicates a net profit.
• Calculate Net Profit: Net Profit = Capital at the End of the Year − Expected Capital
  Net Profit = 13,500 − 13,000 = Rs.500

Based on the calculations, the net profit for the year would be Rs. 500. Therefore, the correct answer is B: Rs. 500.

We can describe profit as the difference between the selling price and the cost price of a product/service. Profit in company accounting can be divided into two – gross profit and net profit. Gross profit is the revenue minus cost of goods sold. Earned income is the income from the sales of goods or services.

Cost of goods sold = Opening stock + Purchases + direct expenses - Closing stock

= 20000 + 85800 + 2300 - 18000

= 90100

Gross profit = Revenue from sales - COGS

= 140700 - 90100 = ₹50600

Given Data:

• Gross Profit: Rs. 50,600 (as previously calculated)
• Carriage on Sales: Rs. 3,000
• Rent of Office: Rs. 5,000

Calculation:

• Total Operating Expenses: Total Operating Expenses = Carriage on Sales + Rent of Office
  Total Operating Expenses = 3,000 + 5,000 = Rs.8,000
• Calculate Net Profit: Net Profit = Gross Profit − Total Operating Expenses
  Net Profit = 50,600 − 8,000 = Rs.42,600

Based on the calculations, the net profit would be Rs. 42,600. Therefore, the correct answer is A: Rs. 42,600.

Given Data for June 2006:

• Total Sales: Rs. 17,00,000
• Selling price is 125% of the purchase price.

Calculations: 
Determine the Purchase Price from the Selling Price:


This value represents the cost of goods that were sold to achieve the total sales for June 2006.

The cost of goods sold for the month of June, 2006 is Rs. 13,60,000, which corresponds to Option D: Rs. 13,60,000.

Given Data for July 2006:

• Opening Stock: Rs. 4,34,400
• Closing Stock: Rs. 4,60,800 (assuming closing stock for July is the opening stock for August)
• Total Sales: Rs. 18,10,000
• Selling price is 125% of the purchase price.

Calculations:

• Determine the Purchase Price of Goods Sold from the Selling Price: Purchase Price = Total Sales/1.25
  
• Use the Inventory Formula: Cost of Goods Sold = Opening Stock + Purchases − Closing Stock
  Let P represent the purchases during July.
  14,48,000 = 4,34,400 + P − 4,60,800
  P = 14,48,000 + 4,60,800 − 4,34,400 = Rs.14,74,400

The stock purchased during July 2006 is Rs. 14,74,400, which corresponds to Option B: Rs. 14,74,400.

Given Data:

• Beginning Stock of Raw Materials (1st January): Rs. 17,400
• Ending Stock of Raw Materials (31st December): Rs. 18,100
• Purchase of Raw Materials: Rs. 91,900

Calculation:

• Formula for Cost of Raw Materials Consumed: Cost of Raw Materials Consumed = Opening Stock + Purchases − Closing Stock
• Applying the Values: Cost of Raw Materials Consumed = 17,400 + 91,900 − 18,100
  Cost of Raw Materials Consumed = 109,300 − 18,100 = Rs.91,200

The cost of raw materials consumed, issued, and used is Rs. 91,200, which corresponds to Option B: Rs. 91,200.

Given Data:

• Stock of Raw Materials (1st January): Rs. 17,400
• Stock of Raw Materials (31st December): Rs. 18,100
• Stock of Work-in-progress (1st January): Rs. 11,200
• Stock of Work-in-progress (31st December): Rs. 11,400
• Stock of Finished Goods (1st January): Rs. 41,500
• Stock of Finished Goods (31st December): Rs. 40,700
• Manufacturing Overhead Expenses: Rs. 61,100
• Manufacturing Wages: Rs. 40,400
• Purchase of Raw Materials: Rs. 91,900

Calculations:

• Calculate Total Raw Material Consumed: Total Raw Material Consumed = Opening Stock of Raw Materials + Purchases − Closing Stock of Raw Materials
  Total Raw Material Consumed = 17,400 + 91,900 − 18,100 = Rs.91,200
• Calculate Total Work-in-Progress: Total Work-in-Progress = Opening Work-in-Progress − Closing Work-in-Progress
  Total Work-in-Progress = 11,200 − 11,400 = −Rs.200
• Calculate Total Cost of Manufacturing: Total Manufacturing Cost = Total Raw Material Consumed + Manufacturing Wages + Manufacturing Overhead Expenses + Total Work-in-Progress
  Total Manufacturing Cost = 91,200 + 40,400 + 61,100 − 200 = Rs.1,92,500

The manufacturing cost of finished goods produced is Rs. 1,92,500, which corresponds to Option D: Rs. 1,92,500.

Given Data:

• Stock of Raw Materials (1st January): Rs. 17,400
• Stock of Raw Materials (31st December): Rs. 18,100
• Stock of Work-in-Progress (1st January): Rs. 11,200
• Stock of Work-in-Progress (31st December): Rs. 11,400
• Stock of Finished Goods (1st January): Rs. 41,500
• Stock of Finished Goods (31st December): Rs. 40,700
• Manufacturing Overhead Expenses: Rs. 61,100
• Manufacturing Wages: Rs. 40,400
• Purchase of Raw Materials: Rs. 91,900

Calculations:

• Calculate Total Raw Material Consumed: Raw Material Consumed = Opening Stock of Raw Materials + Purchases − Closing Stock of Raw Materials
  Raw Material Consumed = 17,400 + 91,900 − 18,100 = Rs.91,200
• Calculate Total Cost of Goods Manufactured: Total Cost of Goods Manufactured = Raw Material Consumed + Manufacturing Wages + Manufacturing Overhead + Work-in-Progress (Start) − Work-in-Progress (End)
  Total Cost of Goods Manufactured = 91,200 + 40,400 + 61,100 + 11,200 − 11,400 = Rs.1,92,500
• Calculate the Cost of Finished Goods Sold: Cost of Finished Goods Sold = Total Cost of Goods Manufactured + Opening Stock of Finished Goods − Closing Stock of Finished Goods
  Cost of Finished Goods Sold = 1,92,500 + 41,500 − 40,700 = Rs.1,93,300

The manufacturing cost of finished goods sold was Rs. 1,93,300, which corresponds to Option D: Rs. 1,93,300.

The "cost of goods manufactured" includes all the costs directly associated with the production of goods within a manufacturing entity.
This encompasses:

• Direct Labor: The cost of wages and other benefits for employees who are directly involved in the manufacturing process.
• Direct Materials: The cost of raw materials that are an integral part of the finished product and whose costs are traceable directly to the product.
• Manufacturing Overheads: These are costs related to the production process but are not directly traceable to specific units of product. Overheads include costs like factory rent, depreciation of manufacturing equipment, factory utilities, and salaries of factory supervisors.

Options A and B are incorrect as they mention only one component of the total manufacturing costs.

Option D is incorrect because sales and administrative expenses are not included in the cost of goods manufactured; these expenses are part of the operating expenses that are considered separately in the profit and loss account.