Financial Statements 2 Test 2

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Financial Statements 2 Test 2

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Weekly Quiz Competition

Question 1
1 / -0

Match the following
List I
(1) Debt-equity ratio
(2) Debt ratio
(3) Times-Interest earned ratio
(4) Extent of financial leverage
List- II
(a) $$\cfrac { Total\quad debt }{ Total\quad assets } $$
(b) $$\cfrac { \\ Debt }{ Equity } $$
(c) $$\cfrac { percent\quad change\quad in\quad earnings\quad after\quad taxes }{ percent\quad change\quad in\quad earnings\quad before\quad interest\quad aned\quad taxes } $$
(d) $$\cfrac { Earnings\quad before\quad interest\quad and\quad taxes }{ Annual\quad interest\quad charges } $$

A
1-a; 2-c; 3-d; 4-b

B
1-b; 2-a; 3-d; 4-c

C
1-a; 2-b; 3-c; 4-d

D
1-d; 2-b; 3-c; 4-a
Question 2
1 / -0

Reserve for doubtful debts appearing in the trial balance should be _______________.

A
Credited to P & L A/c

B
Shown in liability side in balance sheet

C
Reduced from related asset in the balance sheet

D
Both A and C

Solution

Reserve for doubtful debt is created on conservatism concept. Conservatism concept assumes that all the anticipated losses should be recorded in books of account to know the true profitability.
Adjustment for Reserve for doubtful debts is to be done while preparing the profit & loss account.
If the reserve is appearing in trial balance, that means an adjustment entry has already been passed in books of account. This has to be shown in credit side of profit & loss account and will appear in liability side of balance sheet.
Question 3
1 / -0

A Company purchased 8% bonds at a cost of Rs. 12,00,000(face value Rs. 10,00,000) on January 1, 2003. Half yearly interest is payable on this investment on June 30 and December 31st each year. The company closes its accounts on 31-3-2003. The amount of accrued interest shown in profit and loss account for the year ended is?

A
Rs. 40,000

B
Rs. 60,000

C
Rs. 20,000

D
Rs. 80,000

Solution

Amount of accrued interest = Face value * Rate/100 * 3/12
= 1000000 * 8/100 * 3/12
= Rs 20000
Question 4
1 / -0

Under varying $${k}_{e}$$ theory __________________.

A
$${K}_{e}$$ varies at different levels of debt

B
$${K}_{e}$$ varies at different levels of credit

C
$${D}_{m}$$ varies at different levels of debt

D
$${K}_{o}$$ varies at different levels of debt

Solution

First Stage: Increasing Value In the first stage the cost of equity (ke) either remains constant or rises slightly with increase in debt. At this stage, the increase in cost of equity is less than the advantage in cost due to lower cost of debt than equity.
Question 5
1 / -0

Financial capital is also referred to ______________.

A
Money capital

B
Current assets

C
Fluid

D
Long term debt

Solution

Financial capital is the money used to help pay for the acquisition of plants, equipment, and other items needed to build products or offer services. Hence, it can be referred to money capital.
Question 6
1 / -0

The amount of prepaid expense is ________ from the total of the particular expense.

A
added

B
deducted

C
neutralized

D
None of the Above

Solution

There are several items of expense which are paid in advance in the normal course of business operations. At the end of the accounting period, it is found that the benefits of such expense are not yet been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense, is carried forward to the next year and is termed as prepaid expenses. The necessary adjustment in respect of prepaid expenses is:
Prepaid expense A/c Dr.
To Concerned expense A/c
The effect of the above adjustment entry is that the amount of prepaid part is deducted from the total of the particular expense, and the new account of prepaid expense is shown on the liabilities side of the balance sheet.
Question 7
1 / -0

Final Accounts should represent ___________ view.

A
True & fair

B
Correct

C
True

D
Right & error less

Solution

The Companies Act requires that every balance sheet of a company should give a true and fair view of the state of affairs of the company as at the end of the financial year and every profit and loss of a company should give a true and fair view of the profit or loss of the company for the financial year.
Question 8
1 / -0

Expenses which are paid in advance is termed as _____.

A
Prepaid expense

B
Outstanding expense

C
Unpaid expense

D
None of the above

Solution

There are several items of expense which are paid in advance in normal course of business operations. At the end of the accounting year, it is found that the benefits of such expenses have not been fully received; a portion of its benefit would be received in the next accounting year. This portion of expense, is carried forward to the next year and is termed as prepaid expenses. The necessary adjustment in respect of prepaid expenses is made by recording the following entry:
Prepaid Expense A/c Dr.
To Concerned Expense A/c
The effect of the above adjustment entry is that amount of prepaid part is deducted from the total of the particular expense, and the prepaid account is shown on the assets side of the balance sheet.
Question 9
1 / -0

Discuss the effect of the following transaction:
Ms. Pooja earns Rs. 2,000 per month. Her salary account is debited by Rs. 30,000 at the end of the year.

A
Rs. 6,000 is the outstanding expense

B
Rs. 30,000 is asset

C
Rs. 6,000 is the prepaid expense

D
Rs. 30,000 is liabilities

Solution

The necessary adjustment in respect of prepaid expenses is made by recording the following entry:
Prepaid expense A/c Dr.
To Concerned expense A/c
The effect of the above adjustment entry is that the amount of prepaid part is deducted from the total of the particular expense, and the new account of prepaid expense is shown on the assets side of the balance sheet.

Ms. Pooja earns Rs. 2,000 per month. Her salary account is debited by Rs. 30,000 at the end of the year. This implies that Pooja has over payment of Rs. 6,000 in his salary account. Hence, correct expense on account of salary during the current period will be Rs. 24,000 instead of Rs. 30,000.
Rs. 24,000 is to be shown as expense on account of salary in profit and loss account and recognize a current asset of Rs. 6,000 as an advance salary.
It will be termed as prepaid expense.
Question 10
1 / -0

_________ are adjusted at the time of preparing financial statements.

A
Depreciation on fixed assets

B
Interest on capital

C
Closing stock

D
All of the above

Solution

According to accrual concept of accounting, the profit or loss for an accounting year is not based on the revenues realised in cash and the expenses paid in cash during the year because there may be some receipts of income and payments of expenses during the current year which may partially relate to the previous year or the next year. There are certain items which are not recorded on day-to-day basis such as depreciation on fixed assets, interest on capital, etc. These are adjusted at the time of preparing financial statements. The purpose of making various adjustments is to ensure that the final accounts reveal the true profit or loss and the true financial position of the business. The items which usually need adjustments are:
1. Closing stock
2. Outstanding expenses
3. Prepaid/Unprepaid expenses
4. Accrued income
5. Income received in advance
6. Depreciation
7. Bad debts
8. Provision for doubtful debts
9. Provision for discount on debtors
10. Manager's commisssion
11. Interest on capitral

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Financial Statements 2 Test 2

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Financial Statements 2 Test 2

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Question 1

1-a; 2-c; 3-d; 4-b

1-b; 2-a; 3-d; 4-c

1-a; 2-b; 3-c; 4-d

1-d; 2-b; 3-c; 4-a

Question 2

Credited to P & L A/c

Shown in liability side in balance sheet

Reduced from related asset in the balance sheet

Both A and C

Solution

Question 3

Rs. 40,000

Rs. 60,000

Rs. 20,000

Rs. 80,000

Solution

Question 4

$${K}_{e}$$ varies at different levels of debt

$${K}_{e}$$ varies at different levels of credit

$${D}_{m}$$ varies at different levels of debt

$${K}_{o}$$ varies at different levels of debt

Solution

Question 5

Money capital

Current assets

Fluid

Long term debt

Solution

Question 6

added

deducted

neutralized

None of the Above

Solution

Question 7

True & fair

Correct

True

Right & error less

Solution

Question 8

Prepaid expense

Outstanding expense

Unpaid expense

None of the above

Solution

Question 9

Rs. 6,000 is the outstanding expense

Rs. 30,000 is asset

Rs. 6,000 is the prepaid expense

Rs. 30,000 is liabilities

Solution

Question 10

Depreciation on fixed assets

Interest on capital

Closing stock

All of the above

Solution

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