Accountancy: CUET Mock Test - 6 - CUET MCQ

Contributions received by a non-profit organisation are typically shown as revenue in the statement of activities.

• This classification helps in understanding the funds available for the organisation's operational costs.
• Such contributions are considered income, which supports the entity's programmes and services.
• Unlike capital, which is used for long-term investments, revenue reflects the ongoing financial health of the organisation.

The correct answer is Employee stock option scheme.

Key Points

Employees' Stock Option Plan

• Under this plan, the company provides employees with an option to take shares at a future date.
• ​It is a grant to an employee giving the right to buy a certain number of shares in the company's stock for a set price.
• These shares are purchased by employees at price below market price, or in other words, at discounted price.
• It motivates the employee to be committed to the company for the long term.
• The employees have to wait for a certain time period which is known as the vesting period to claim the benefits.

Additional Information

Stock Appreciation Right

• It refers to the right to be paid compensation equivalent to an increase in the company's common stock price over a base or the value of appreciation of the equity shares currently being traded on the public market.

Employee Stock Purchase Plan

• It allows an employee to purchase company stock at a discounted price.

Premium price options:

• A premium priced option plan is a great way to incentivise key employees.
• Under a premium priced option plan, a company issues the right to purchase shares
  • at a future point in time
  • at a specified exercise price
  • subject to vesting conditions

Key PointsGearing ratio

• it is the ratio between fixed income bearing funds and equity shareholders' funds.
• Gearing ratio are calculated to find out leverage in the company i.e. how much debt and how much equity is employed in the company and in which proportion.
• It is useful for risk assessment by the management of the company.
• Gearing ratio is related to equity and debt proportion of the firm.

Important Points

Gearing Ratio =

• Short term funds: These are the funds the repayment of which will be done within 1 year.
• Long term funds: These are the funds which will be repaid after 1 year or more.
• Shareholder's Fund: Shareholders' funds refer to the amount of equity in a company, which belongs to the shareholders. It is also called net worth.
• Bank overdraft is a short-term financing option for drawing money in excess of the bank balance.

The correct answer is ​A, B, C, D.

Key Points A common-size income statement expresses each line item as a percentage of net sales. Here's the breakdown of the ratios in the correct sequence:

• A. Gross profit margin: Gross profit margin is calculated by dividing gross profit by net sales and represents the percentage of revenue left after deducting the cost of goods sold. It is typically presented as one of the first ratios on a common-size income statement, hence it appears at the top.
• B. Operating profit margin: Operating profit margin is calculated by dividing operating profit by net sales. It indicates the profitability of the company's core operations before considering interest and taxes. It appears after the gross profit margin.
• C. Net profit margin: Net profit margin is calculated by dividing net income by net sales. It represents the percentage of revenue that remains as profit after accounting for all expenses, including taxes and interest. It appears after the operating profit margin.
• D. Earnings per share: Earnings per share (EPS) represents the portion of the company's profit allocated to each outstanding share of common stock. It is not a ratio that directly appears on a common-size income statement, as it relates to the number of shares outstanding rather than the percentage of revenue.

Therefore, the correct sequence is A (Gross profit margin), B (Operating profit margin), C (Net profit margin), and D (Earnings per share), making option B the correct answer.

The correct answer is by way of subtracting/deducting from Tournament Fund.

Key Points

• Subtracting/deducting from Tournament Fund:
  • When expenses are incurred on tournament activities, these are directly related to the specific fund set up for the tournament, hence deducted from the Tournament Fund.
  • This method ensures that the fund reflects the net balance after accounting for the expenses specifically incurred for the tournament purposes.
  • Recording expenses in this manner helps in accurately tracking the usage of the fund allocated for tournament activities.

Additional Information

• On the debit side of Income and Expenditure Account:
  • While expenses are typically recorded on the debit side of the Income and Expenditure Account, this approach is generalized for all expenses and does not specifically address how expenses related to a designated fund are treated.
• On the credit side of Income and Expenditure Account:
  • The credit side of the Income and Expenditure Account is used to record incomes, not expenses, making this option incorrect for the treatment of tournament expenses.
• By way of adding to the Tournament Fund:
  • Adding expenses to the Tournament Fund would inaccurately increase the fund balance, contrary to the actual decrease due to expenses, hence this approach is incorrect.

The correct answer is Outflow Investing activity ₹(2,50,000)

Key Points

• Outflow Investing activity ₹(2,50,000):
  • When machinery is acquired for ₹5,00,000 with 50% paid by cheque, the cash outflow under the cash flow statement is ₹2,50,000.
  • This transaction is classified under investing activities because it involves the purchase of a fixed asset, which is a long-term investment in the business.
  • The remaining 50% of the cost not paid immediately but through executing a bond indicates a financing activity for the unpaid portion but does not impact the cash flow statement immediately as a cash outflow.

Additional Information

• Inflow operating activity ₹2,50,000:
  • This option is incorrect because the acquisition of machinery is not an operating activity. Operating activities involve the cash flows directly related to the primary revenue-generating activities of the entity.
• Outflow Investing activity ₹(5,00,000):
  • This option incorrectly states the entire purchase amount as a cash outflow, disregarding the part of the purchase financed through a bond, which does not result in an immediate cash outflow.
• Inflow Investing activity ₹(5,00,000):
  • This option is incorrect as it suggests an inflow of cash for an investing activity, which contradicts the nature of the transaction being an acquisition (an outflow).

The correct answer is ₹2,00,000 paid to creditors.

Key Points

• ₹2,00,000 paid to creditors:
  • Paying off creditors does not affect the debt equity ratio as it involves settling current liabilities rather than altering the company's debt or equity financing structure.
  • This transaction reduces the company's liabilities without affecting its total debt or equity, thus maintaining the existing debt equity ratio.

Additional Information

• Purchase of machinery by taking bank loan:
  • This transaction increases both the company's debt (bank loan) and its assets (machinery), but since the ratio of debt to equity changes, it does affect the debt equity ratio.
• Conversion of debentures into equity shares:
  • Converting debentures into equity shares directly affects the debt equity ratio by reducing debt and increasing equity.
• Sale of furniture:
  • The sale of an asset, even at a profit, primarily affects the asset side of the balance sheet and does not directly alter the debt or equity amounts, but the cash received could indirectly affect the ratio if used to pay down debt or distributed to shareholders.

The balance sheet provides a snapshot of a company's financial position, showing assets, liabilities, and equity at a specific moment.

Assets on the balance sheet are classified into current and non-current categories, based on how quickly they are expected to be converted into cash.

Shareholders' equity represents the ownership interest in the company, indicating the value of the shareholders' stake after all liabilities are subtracted from assets.

The balance sheet is key to evaluating the company's financial stability and liquidity, helping users understand its ability to meet obligations.

Revenue is reported in the Statement of Profit and Loss, not in the balance sheet, which focuses on assets, liabilities, and equity.

The primary goal of financial statement analysis is to predict future conditions by analyzing the firm's past and current financial data.

Interpretation refers to explaining the meaning and significance of the financial data analyzed, helping stakeholders understand its relevance.

Financial statement analysis involves simplifying and interpreting data, not gathering raw data, which is typically handled by accountants.

Financial statement analysis focuses on evaluating the operational efficiency and profitability of a company.

Financial statement analysis is the method used to evaluate a firm's financial health by examining its financial statements.

A) Realisation Account: The Realisation Account is used during dissolution to record the realization of assets, payment of liabilities, and expenses. At the end, any remaining balance (assets minus liabilities) is transferred to partners’ capital accounts. Description (I) fits this role: "Account used to transfer the remaining assets and liabilities when the firm is dissolved."
B) Transfer of liabilities: In dissolution, liabilities are not "transferred" to another entity but are settled. However, in the context of the Realisation Account, liabilities are brought into the account by crediting them (as they are obligations). Description (II) states "Transferred to the credit of Realisation Account," which aligns with this accounting treatment.
C) Payment of creditors: Creditors are paid from the proceeds of asset sales during dissolution. If those proceeds are insufficient, partners may need to contribute from their capital accounts. Description (III) states: "Creditors are paid from the sale of assets and if necessary, the partners' capital accounts," which is an exact match.
D) Realisation Expenses: These are expenses incurred during dissolution (e.g., legal or administrative costs) and are debited to the Realisation Account as they reduce the net realizable amount. Description (IV) states: "Expenses incurred during the dissolution process, typically debited to the Realisation Account," which is a perfect fit.

A) Capital Account: This represents each partner’s contribution or stake in the firm. Matches (I) "Account representing the contribution of each partner to the firm."
B) Profit on Realisation: This is the gain when assets are sold above their book value during dissolution. Matches (II) "The gain resulting from the sale of assets in excess of their book value."
C) Dissolution Expenses: Costs like legal or administrative fees incurred during winding up. Matches (III) "Costs incurred for winding up the firm, including administrative and legal fees."
D) Partner’s Loan Account: This reflects a loan given by a partner to the firm, settled separately during dissolution. Matches (IV) "Amount a partner lends to the firm, which must be settled during dissolution."

A) Transfer of Assets: During dissolution, all assets are transferred to the Realisation Account at their book value. Matches (II) "All assets are transferred at their book value to the Realisation Account."
B) Payment to Partners: After settling liabilities, the remaining balance is distributed to partners. Matches (I) "After liabilities are settled, the remaining balance is paid to the partners."
C) Settlement of Unrecorded Liabilities: These are liabilities not in the books, paid from available funds during dissolution. Matches (III) "Liabilities not previously recorded are paid from available funds."
D) Transfer of Profits or Losses: Profits or losses from realisation are transferred to partners’ capital accounts. Matches (IV) "Profits or losses from the dissolution process are transferred to the partners' capital accounts."

A) Creditors: Typically settled during dissolution, but (I) "Amount paid as a discount" doesn’t align logically (discounts are rare). No perfect match.
B) Dissolution Expenses: Costs incurred while closing the firm. Matches (II) "Costs incurred while closing down the firm."
C) Unrecorded Assets: Assets not in the books, realised during dissolution. Matches (III) "Assets not previously documented in the firm’s books."
D) Partner's Capital Account: Shows each partner’s share after liabilities are paid. Matches (IV) "Account showing the share of each partner after liabilities are paid."

Legacy is the amount received by a non-profit organisation when a person has mentioned about transferring his property value to such organisation on his or her death. Hence, on death of that person, his property will be taken by the non-profit organisation.

A charitable organisation is typically non-profit oriented. These organisations focus on serving the community rather than making profits.

• Purpose: They aim to address social issues, provide relief, and support various causes.
• Funding: Primarily rely on donations, grants, and volunteers.
• Tax Status: Often receive tax-exempt status due to their non-profit nature.

In contrast, an audit firm, corporation, and insurance company are profit-driven, focusing on generating income for their stakeholders.

Non-profit organisations typically prepare financial documents to keep track of their finances. However, they do not prepare the same documents as for-profit businesses. Here's a brief overview:

• Balance Sheet: Non-profits prepare this to show their financial position at a specific date.
• Income and Expenditure Account: This helps track the surplus or deficit for the year.
• Receipt and Payment Account: A summary of cash received and paid over the year.
• Income Statement: This is usually not prepared by non-profits, as they focus on tracking income and expenditures instead.

An annuity is a fixed annual payment made to a person, often for the duration of their lifetime. It is commonly used as a retirement income solution.

• Provides regular income, usually yearly.
• Continues until the named beneficiary's death.
• Often purchased or set up for retirement financial stability.

An advance receipt of subscription from a member of a non-profit organisation is considered a liability. Here's why:

• The organisation receives money in advance, creating an obligation to provide services or benefits in the future.
• This unearned revenue is recorded as a liability until the services are delivered.
• Once the services are provided, the liability is reduced and revenue is recognised.

Life Membership Fees is a capital receipt and is added to the Capital Fund on the liabilities side of the Balance Sheet.

• It is not considered as income because it involves a one-time payment.
• The member receives services for life without further payments.

Some organisations provide its members an option to pay a lump sum amount to become members for the whole life. The members opting for the life membership are not required to pay a periodic subscription. As this is received only once it is transferred to the Capital fund Account in Balance Sheet. As cash is received, the cash account is debited and it is a liability, so capital/ General fund is credited.

Because accrual basis means recording items in advance. As it already include prepaid rent, outstanding salary etc.

In the normal course of business, some of the expenses may be paid in advance. However, the organization may not receive the benefits from these expenses by the end of the current accounting year. We call these expenses as prepaid expenses. We treat them as current assets.

Sometimes in the normal course of business, an enterprise may have some expenses relating to which the payment is due at the end of the year. We know these expenses as Outstanding Expenses.

Wages, salary, rent, interest on the loan, etc. are examples of such expenses that may remain due at the end of the accounting year.