Test: Accounting & Financial Management of Banking - 2 - Bank Exams MCQ

If a company reports a decrease in cash flow from operating activities and an increase in cash flow from investing activities, it can be inferred that the company's fund flow has shifted from its core operations to its investments. This could mean that the company is generating less cash from its day-to-day business operations and is instead generating more cash from its investments, such as the sale of long-term assets or the receipt of investment income.

Adjustment Entries Relating to Income and Expenditure

• Some of the expenses may have been incurred but not paid. For example, salary for the month of March has been incurred during the month but will be paid in April. For this, adjusting entries will be passed in the ledger by debit to charges (salary) account and credit to 'Salary payable' account.
• Some of the expenses may have been paid in advance but not incurred. If a payment has been made in advance i.e. it does not pertain to the accounting period in question, it is not treated as an expense, and the person who received the amount is treated as a debtor.
• Some incomes may have accrued but not received. For example, interest accrued on a fixed deposit with the bank which will be paid by the bank on maturity along with the principal. For accounting this interest income, credit 'interest income' account and debit 'interest receivable' account.
• Some incomes may have been received but not accrued. If an income has been received but not accrued, it should not be accounted for. For example, advance payment of rent by a tenant. This should not be taken into account. Therefore, 'Rent Received' account should be debited and 'Advance Rent Received' account should be credited.

Hence option (c) is correct

UNITS OF PRODUCTION METHOD

Accounting Standards in India (AS-10 and Ind AS-16) recognize 3 methods of calculating depreciation. These are the Straight line method, Diminishing Balance method and the Units of Production method.

This method is a usage based method. The depreciation amount is not based on passage of time but actual use of the asset. This method is suited to those assets which depreciate in proportion to their use rather than having a useful life measured in number of years. In this method, the useful life is measured in terms of production output or number of units which an asset is capable of producing during its lifetime. This method gives a very accurate measure of the depreciation but suffers from the drawback of the need to maintain elaborate records.

Hence the correct answer is Option (c).

Interest is chargeable at a rate not exceeding 12 % per annum on calls in advance and 10 % per annum on calls in arrears according to Table F.
Calls in arrears refer to the total unpaid amount on shares
Calls in advance refer to the total money received which is not yet called up by the company.

Password Protection

• Users should not share their passwords with anyone including colleagues and IT staff. Users should also not ask others (including customers and colleagues) for their passwords. All passwords are to be treated as sensitive, confidential information. If the password needs to be shared under unavoidable circumstances, care should be taken to change it at the next log in by the owner of the password.
• Users should ensure that nobody is watching when they are entering password into the system. Users should also not watch when others are entering passwords in their system.
• User should not keep a written copy (in paper or electronic form) of their password in an easily locatable place. If the password needs to be written down, ensure that these are stored securely and are masked or scrambled (e.g. by changing one or more characters of the password).
• Users should change their password regularly. While some applications will enforce password change and complexity on users automatically, it may not be feasible to enforce it for all accounts and for all applications. Users must change their passwords under any of the following circumstances:
• At least once in thirty days
• As enforced by system (applications and operating system)
• If password has been shared with someone else
• As soon as possible, after a password has been compromised or after you suspect that a password has been compromised. (e) Users who have been authorised to use the smart cards or private keys should safeguard them carefully as compromising the same could have wide ramifications.

Hence option (a) is correct.

The Financial statements of Banking Companies need to be signed by the manager or the principal officer of the company and all the directors when there are less than 3 directors in the banking company and at least 3 Directors when there are more than 3 directors. The financial statements and auditors' reports of the bank need to be submitted to RBI within 3 months from the end of the period to which it refers. The period may be further extended by 3 months by RBI Approval.

A computerized accounting system is that accounting information system that helps in processing the financial transactions and events as per GAAP(generally accepted accounting principles) and leads to the generation of reports as per the requirements of the users.

Hence option b is correct.

• Profit and loss account of a banking company is prepared in vertical form. Form B of the 3rd schedule of the banking regulation act 1949 is to be used for preparing the P&L account.
• Interest on all sort of advances, discount on bills, income on investment, interest on balance with RBI etc are shown under schedule 13
• Commission, exchange and brokerage, profit on sale of investment, profit on revaluation of investment, profit and exchange transaction, income by the way of dividend from subsidiary et cetera are shown in schedule 14
• Interest on deposit interest on borrowings are shown under schedule 15
• Salaries and wages of staff render rates and taxes printing and stationery advertisement depreciation on banks property directors' fee auditors fee law charge postage or shown under schedule 16

Cash flow from investing activities (CFI) is one of the sections on the cash flow statement that reports how much cash has been generated or spent from various investment- related activities in a specific period. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Purchase of assets represents cash outflow and sale of assets represents cash inflow. In the above case, cash flow from investing activities is calculated as follows:
[Less: Purchase of machinery= (Rs 8,00,000)
Less: Purchase of investments(in shares) = (Rs5,00,000)
Add: Sale of machinery=Rs 77,000 (87,000-10,000)
Cash flow from investing activities= (12,23,000)]

The three types of Ledgers are:-

• Wages, sales, purchases, electricity, travel, advertising, rent, insurance, repairs, receivables, payables, and non-current assets are all recorded in the General or nominal ledger. Although cash and bank accounts are legally part of this ledger, they are frequently kept in a separate book due to the volume of cash and bank transactions.
• The Payables ledger (sometimes known as the creditors' ledger or the purchase ledger) is a record of all payments made to creditors. Although the overall amount owing to suppliers is noted in the general ledger, the specifics of what is owed to whom are documented here as well. Each supplier has his or her account. The payables balance in the general ledger should match the total of the amounts owed in this ledger.
• The Receivables ledger (also known as the debtors' ledger or the sales ledger) is a book that keeps track of money owed to you. The overall amount owed by customers is recorded in the general ledger, but the specifics of what is owed from whom are also noted here. Each credit consumer has his or her account. The total of the sums owing in this ledger should match the main ledger's receivables balance.

Thus, the correct option is (a)

Statement of Cost is a memorandum statement which is not made according to the double entry system. It is a statement which is made for calculating total cost, per unit cost and budget cost of product. Cost Accounting classifies, costs records, presents, and interprets it in a significant manner which is used by internal management for cost control and decision-making. It provides the cost details for each cost object i. e. product, process, job, operation, contracts, etc by preparing cost statements as and when required by using historical and predetermined costs.

[Total cost = Material cost + Labour cost + Manufacturing overheads + Fixed/non-manufacturing overheads
= ₹125,000 + ₹60,000 + ₹25,000 + (15% of ₹125,000)
= ₹125,000 + ₹60,000 + ₹25,000 + ₹18,750
= ₹228,750
Cost of one chair = Total cost / Number of chairs
= ₹228,750 / 150
= ₹1,525]

Depreciation on straight line method= (Original Cost- Scrap Value)/ No of years
Depreciation on first machine will be = (45,000-5000)/10
= 4000 per year.
Depreciation on second machine will be = (25,000-2500)/15
= 1500 per year.
Total depreciation = (4000+1500)
= 5500
Thus, the correct option is (b)

GAAP stands for generally accepted accounting principles which are the generally accepted standard for financial reporting in the United State. IFRS stands for international financial reporting standard, which are a set of internationally accepted accounting standards used by most of the world's country.

The key differences between gap and I FRS include

• GAAP is a framework based on legal authority while IFRS is based on a principle based approach.
• GAAP is more detailed and perspective while IFRS s more high level and flexible
• GAAP requires more disclosure while IFRS require fewer disclosure
• GAAP is more focused on the historical cost of the asset while I FRS allow for more flexible in the valuation of asset

Interest earned - schedule 13

The flexible budgeted profit is calculated based on the flexible budget, which is prepared for 25,000 units.
[The data for the flexible budget is as follows:
Sales revenue = 25,000 units* Rs 50 = Rs 12,50,000
Variable costs = 25,000 units* Rs 40= Rs 10,00,000
Fixed costs = Rs 2,00,000
Total costs = Rs fixed cost + variable costs = 10,00,000 + 2,00,000 =Rs 12,00,000
Flexible budgeted profit = Sales revenue - Total costs = 12,50,000 - 12,00,000 = Rs 50,000]

Break-Even Analysis
Break-even analysis is a generally used method to study the CVP analysis. This technique can be explained in two ways:

• In narrow sense it is concerned with computing the break-even point. At this point of production level and sales there will be no profit and loss i.e. total cost is equal to total sales revenue.
• In broad sense this technique is used to determine the possible profit/loss at any given level of production or sales.

Hence the correct answer is Option (c).

A back-office in banks is an area where essential functions are carried out. The objective of a back office at a bank is to provide the financial infrastructure that enables the rest of the bank to run and prosper.
Statement I is correct because it is the function of back office
Statement II is wrong. They are the utility functions performed by banks.
Utility Functions of bank are :

• Issuing letters of credit, traveller's cheque, etc.
• Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers.
• Providing customers with facilities of foreign exchange dealings
• Underwriting of shares and debentures
• Dealing in foreign exchanges
• Social Welfare programmes
• Project reports
• Standing guarantee on behalf of its customers, etc.

The company typically demands the entire face value of the bond all at once. There is a strong likelihood that some of the debenture-holders will refuse to pay the instalment amount when required by the company if it is collected in installments, such as through the Debenture Application, Debenture Allotment, and Debentures Calls accounts. The term "calls in arrears" refers to such unpaid calls (installments). According to section 122 of the Companies Act of 1956, debentures are a contract with a company to take up and pay for any debentures of the company that may be enforced by a decree for specific performance. Therefore, under the provisions of the Companies Act of 1956, debentures cannot be forfeited by the company. Only legal action in court may be taken by the company to realise calls on debentures that are in arrears, and interest on such calls may be charged following the prospectus. However, it cannot forfeit the Debentures.

Clubbing of minor's income is dealt with in [Section 64(1A) ] of Income-tax Act
(i) All income of a minor is to be included in the income of his or her parent, However, the income derived by the minor from manual work or any activity involving minor skill, talent or specialised knowledge will not be included in the income of his parent.
(ii) The income of the minor will be included in the income of that parent, whose total income, excluding the minor's income, is greater.
(iii) Once the clubbing of the minor's income is done with that of one parent, it will continue to be clubbed with that parent only in the coming years.
(iv) Where the marriage of the parents does not subsist, the income of the minor will be includible in the income of that parent who maintains the minor child in the relevant previous year.
(v) Income of a minor child suffering from any disability shall be assessed in the hands of the child and not the parent.
(vi) Income of a minor married daughter is also assessable under the clubbing provision.

Balance as per Cash Book(Dr.) = 7200
Add: Cheques issued, but not presented for payment (4000-2800) = 1200
Direct deposit by a customer in the bank account, = 3500
Less: Cheques sent for bank collection, but not credited by bank (4000-2100) =1900
Debit side of the Cash book overcast by= 200.
Balance as per pass book (Cr.) = 9800
Thus, the correct option is (d)

If an expenditure is made not for the purpose of bringing into existence any capital asset or advantage of enduring nature but for running the business or working it with a view to produce the profits is revenue expenditure. Stock in trade and 1,500 paid for servicing the company's car including Rs 500 paid for change of oil are examples of it.

Capital expenditure is generally restricted to expenditures that add fixed asset units or that have the effect of increasing the capacity, efficiency, life span, or economy of operation of an existing fixed asset. Overhaul expenses of Rs 10,000 spent on second hand machinery purchased and 18,000 spent for construction of temporary huts, which were necessary for construction of the cinema house and were demolished when the cinema house was ready.

Thus, the correct option is (d)

A firewall is a network security device that monitors incoming and outgoing network traffic and permits or blocks data packets based on a set of security rules.
The number of viruses is increasing Daily which might corrupt the system data, and may lead to the loss of data to any unauthorized persons. It can be prevented through:

• Installing anti-virus programs.
• Installing a firewall in order to restrict access to user data by hackers
• Multiple backup options.

Statement I is incorrect, accounting principles are not static, they are bound to change with the passage of time in response to the change in business practices, government policies and needs of the users of accounting information.

Statement II is correct, Incomes receivable must be added in revenues and incomes received in advance must be deducted from revenues. It is an important consideration for the matching concept. Matching costs with revenues, revenues should be recognised and then costs incurred for generating revenue should be recognized. It is very important for correct determination of net profit. All costs which are applicable to revenue of the period should be charged against that revenue.

Thus, the correct option is (d)

The correct match is as follows-

Hence, the correct answer is option (d).

Both financial accounting and cost accounting are concerned with systematic recording and presentation of financial data.

• Financial accounting reveals profits and losses of the business as a whole during a particular period, while cost accounting shows, by analysis and localisation, the unit costs and profits and losses of different product lines.
• Financial accounting aims at safeguarding the interests of the business and its proprietors and others connected with it. This is done by providing suitable information to various parties, such as shareholders or partners, present or prospective creditors etc. Cost accounting on the other hand, renders information for the guidance of the management for proper planning, operation, control and decision making.

Hence, option (b) is the correct answer.

Hedging approach: according to the hedging approach the permanent working capital requirements should be financed by long term funds while the temporary or seasonal working capital requirement should be financially out of short term funds or current liability. According to this approach, the expected life of an asset is matched with the period of source of finance with which the asset is financed. In other words, the life of an asset should match with the maturity of the source of finance. That is why it is also known as matching approach and self liquidating approach

The key difference between a trial balance and a balance sheet is one of scope. A balance sheet records not only the closing balances of accounts within a company but also the assets, liabilities, and equity of the company. It is usually released to the public, rather than just being used internally, and requires the signature of an auditor to be regarded as trustworthy. A trial balance is a less formal document. There are no special conventions about how trial balances should be prepared, and they may be completed as often as a company needs them. A trial balance is often used as a tool to keep track of a company's finances throughout the year, whereas a balance sheet is a legal statement of the financial position of a company at the end of a financial year.
Thus, the correct option is (b)

FEATURES OF MARGINAL COSTING
Marginal costing is distinct from other costing techniques. Its unique features can be summarised as under:

• Marginal costing involves both cost recording and cost reporting.
• Under marginal costing, total costs are segregated into the fixed cost and the variable costs. Some costs which have features of both fixed and variable costs, are segregated as semi-variable costs.
• Only the average variable cost of a unit is considered as its value.
• Fixed costs are not taken into account for calculating the product cost and are charged to revenue of the period in which they are incurred.
• Marginal contribution of a product or department is taken into account for calculating its profitability.

Hence the correct answer is Option (a).

Share Capital

For each class of share capital (different classes of preference shares to be treated separately):

• the number and amount of shares authorised;
• the number of shares issued, subscribed and fully paid, and subscribed but not fully paid;
• par value per share;
• a reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period;
• the rights, preferences and restrictions attaching to each class of shares including restrictions on the distribution of dividends and the repayment of capital;
• shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate;
• shares in the company held by each shareholder holding more than 5 per cent shares specifying the number of shares held;
• shares reserved for issue under options and contracts/commitments for the sale of shares/ disinvestment, including the terms and amounts;
• for the period of five years immediately preceding the date as at which the Balance Sheet is prepared:
  • Aggregate number and class of shares allotted as fully paid-up pursuant to contract(s) without payment being received in cash.
  • Aggregate number and class of shares allotted as fully paid-up by way of bonus shares.
  • Aggregate number and class of shares bought back.
• terms of any securities convertible into equity/preference shares issued along with the earliest date of conversion in descending order starting from the farthest such date;
• calls unpaid (showing aggregate value of calls unpaid by directors and officers);
• forfeited shares (amount originally paid-up).

Hence option (d) is correct