FIN621 Solved MCQs from current Final term papers 2010
Solved by Asim Mukhratar
(MBA 4TH BANKING & FINANCE from Biztek University)
ABC Company has Rs. 120,000 cash, Rs. 50,000 as accounts receivables, Rs. 10,000 as allowance for doubtful accounts, Rs. 30,000 as work in progress inventory, Rs. 45,000 as finished goods, Rs. 40,000 land purchased in the current year. Calculate the value of current assets.
۩ Rs. 275,000
۩ Rs. 285000
۩ Rs. 235,000
۩ Rs. 210,000
(120,000+50000,-10,000+30,000+45,000) = 235,000 land r fix assets
Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity ratio?
۩ 2%
۩ 7%
۩ 6%
۩ 3%
Since the debt-to-total assets ratio is.4, then equity-to-total assets ratio is.6. The ratio of debt to equity is then .4/.6 or .667 (66.7%).
A firm has beginning accounts receivables of Rs. 375,000, and ending accounts receivables of Rs. 400,000. The sales were Rs. 2,500,000 including cash sales of Rs. 600,000. Calculate the accounts receivable turnover ratio of the company.
0.76
6.45
4.75
4.90
(agv ac rec 375,000 + 400,000 / 2 ) 387,500
Crdt sale (2,500,000-600,000) = 1,900,000
Turnover ratio = 1,900,000/387,500 = 4.90
If the prepaid rent account before adjustment at the end of the month has a debit balance of Rs. 1,600, representing a payment made on the first day of the month, and if the monthly rent was Rs.800, the amount of prepaid rent that would appear on the balance sheet at the end of the month, after adjustment, is:
۩ Rs. 1,600
۩ Rs. 400
۩ Rs. 800 1600-800 = 800
۩ Rs. 2,400
A company has interest expense of Rs. 35,000, its accrued liabilities increased by Rs. 7,000. What will be the cash payments for the interest?
Rs. 28,000
Rs. 42,000
Rs. 30,000
Rs. 18,000
(35,000+7000) =42,000
A company has the following currents assets: Cash Rs. 30,000; marketable securities Rs. 20,000; accounts receivable Rs. 20,000, inventory Rs. 15,000; prepaid expenses Rs. 10,000; the total current liabilities were Rs. 55,400. Calculate the quick ratio of the company.
1.71
1.44
1.26
1.53
(30,000+20,000+20,000+10,000) =80,000/55,400 = 1.44
The situation, where the amount of current assets is exactly equal to current liabilities, is found when current ratio is:
2 : 1
2.3 : 1
3 : 2
1 : 1
Current ratio = current assets/ current liabilities
100/100 = 1
Assume that a company total paid in capital of Rs. 57,160,000, Preferred shares Rs. 12,000,000 and commons tock Rs. 14,000,000. Calculate the amount of total legal capital of the company.
Rs. 26,000,000
Rs. 2000,000
Rs. 45,160,000
Rs. 43,160,000
(14,000,000+12,000,000) =26,000,000
Suppose that a company has cash sales of Rs. 50 million, total expenses of Rs. 35 million, and net income of Rs.15 million. If accounts receivable decreased by Rs. 12 million, how much cash did the company receive from the customers?
Rs. 62 million
Rs. 50 million
Rs. 38 million (doubted)
Rs. 15 million
A company has a cost of goods sold of Rs. 530,000; the beginning inventory is Rs. 120,000, and ending inventory is Rs. 180,000. Calculate the number of days to sell the inventory. (Round the figures to the nearest whole)
83 days
125 days
104 days
100 days
Which of the following is NOT among the five main kinds of current assets?
۩ Cash and equivalents
۩ Deferred income
۩ Accounts receivable
۩ Prepaid expenses
Investing activities include all of the following EXCEPT:
۩ Payment of debt
۩ Collection of loans
۩ Making of loans
۩ Sale of available for sale and held to maturity securities
When merchandise is purchased in a periodic inventory system, its cost is debited to ________ account.
۩ Inventory
۩ Inventory expense
۩ Purchases
۩ Cost of goods sold
The indirect method shows the reconciliation from net income to operating cash flows. Select the adjustment that is subtracted during the reconciliation.
۩ Non-cash revenues (revenues earned but payment not yet received) reported on the income statement
۩ A decrease in Accounts Receivable or another non-cash current asset
۩ Revenues earned and received in cash.
۩ Non-cash expenses (expenses incurred but not paid) reported on the income statement-one example is amortization expense.
Which of the following is NOT an example of deferred item?
۩ Depreciation
۩ Accounts payable
۩ Unearned revenue
۩ Prepaid insurance
Which of the following is NOT true about the net income?
۩ It is a calculated figure and represents actual cash
۩ It can be distributed among holders of common stock as a dividend
۩ It can be held by the firm as retained earnings
۩ It is obtained by subtracting expenses from the revenues
Which of the following statements about a periodic inventory system is TRUE?
۩ Companies determine cost of goods sold only at the end of the accounting period
۩ Companies continuously maintain detailed records of the cost of each inventory purchases
۩ The periodic system provides better control over inventories than a perpetual system
۩ The increased use of computerized systems has increased the use of the periodic system
Which of the following transactions would increase the net cash flow from operating activities?
۩ The collection of an account receivable from a customer
۩ The issuance of capital stock for cash at a price above par
۩ The purchase of a delivery truck by issuing a note payable
۩ The sale of equipment for cash at a gain
Balance Sheet and Accounting Cycle are based on which of the following?
۩ Adjusting entries
۩ Closing entries
۩ Financial position
۩ Accounting Equation
Audit opinions can NOT be classified as which of the following?
۩ Adverse opinion
۩ Unqualified opinion
۩ Qualified opinion
۩ Disagreement of opinion
The audit is NOT a necessary requirement for which of the following companies?
۩ Listed companies
۩ Corporations
۩ Sole proprietorship
۩ Partnerships
Which of the follwing business owner is personally liable for its debts?
۩ Corporations
۩ Sole proprietorship
۩ General partnership
۩ Limited liability company
The rules of GAAP are applicable to all types of companies EXCEPT:
۩ Sole proprietorship
۩ Corporations
۩ Partnerships
۩ None of the given option
Which of the following is NOT an advantage of a Sole proprietorship?
۩ Easy to form and wind up
۩ Direct motivation
۩ Better control
۩ Limited liability
Which of the following is NOT a part of the shareholder’s equity?
۩ Paid in capital
۩ Additional paid in capital
۩ Net income
۩ Retained earnings
Which of the following is a type of preferred stock that entitles the holder to a fixed dividend and, in addition, to the right to get any surplus profits after payment of agreed levels of dividends to holders of common stock?
۩ In arrears preferred shares
۩ Call able preferred shares
۩ Cumulative preferred shares
۩ Participating preferred shares
What will be the effect of purchases of its own shares by the business on the book value of the business?
۩ Increase the total book value
۩ Decrease total book value
۩ No effect on the total book value
۩ May or may not change
What will be the affect of dividends paid on the book value of a company?
No effect on book value
Increase in book value
Decrease in book value
Depends upon the situation
The amount of current assets that varies with seasonal requirements is referred to as which of the following?
Permanent Working Capital
Net Working Capital
Temporary Working Capital
Gross Working Capital
Which of the following is NOT true about the accounts receivable turnover ratio?
It provides insight into the quality of the firm’s receivables
This ratio is calculated by dividing the receivables to annual credit sales
This ratio tells the number of time accounts receivables have been turned over in a month
The higher the ratio, the better is for company
What will be the effect on the day’s sales in accounts receivables of a company if it uses a natural business year?
Accounts receivables will be understated
Accounts receivables will be understated for service firms
Accounts receivables will be overstated
Accounts receivables will be have no effect
Which of the following is NOT a goal of analysis of financial statement?
Assess the past performance
Asses the current financial position
Predict the future performance of the company
Asses the working of management in the future
Which of the following is the percentage change if a negative amount appears in the base year?
· Misleading
· Positive
· Can not be computed
· Negative
Page 125 Percentage change cannot be computed for negative amount or zero amount in base
year.
When calculating the gross profit percentages, which of the following is used as the base year for each year?
Net sales
Net income (not sure)
Gross profit
Cost of goods sold
Which of the following performance measures would be of most direct interest to shareholders?
Return on net assets
Gross profit margin
Debt ratio
Dividend yield
Answer by marina
Company A makes an operating profit margin of 5 % on sales of Rs. 2.5 million. Company B has sales that are 20% higher than Company A and achieves an operating profit margin of 3.5%. Which company makes the highest operating profit?
Company B
Company A (answer by marina)
Both make the same operating profit
Not possible to calculate
Which of the following statement best describes the operating profit margin?
It shows what portion of profits are being distributed to shareholders
It shows what return is being made on assets employed in the business
It shows how well a company is controlling its costs, including overheads
It shows how efficiently a company is turning profits into cash
Answer by marina
Page 144: A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin".
The total legal capital of the company consists of which of the following?
Only common stocks issued
Only preferred stocks issued
Common stocks and preferred stocks Answer by marina
Common stocks and retained earnings
Page 149: Total legal capital = 12,000,000 (preferred) +14,000,000 (common)
Which one of the following statement indicates the Inventory turnover ratio?
How quickly company prepared its inventory
How quickly company converts its inventory into cash
How quickly company purchases its inventory
How quickly company sells its inventory
It shows how quickly inventory is sold and is determined by Inventory Turnover Ratio
Operating cycle belongs to which group of ratios?
Leverage ratios
Liquidity ratios
Profitability ratios
Activity ratios
The period of time required to convert inventory into cash is known as which of the following?
Operating cycle
Accounting cycle
Cash conversion cycle
None of the above
Page 43: assets capable of being converted into cash within one year or operating
cycle, whichever is longer. Operating cycle is the time required to purchase or manufacture inventory, sell the product and collect cash i.e.
What will be effect of purchase of inventory on open account on quick ratio of the company?
Increase
Decrease
No effect
Can not be found from the given information
Answer by marina
What will be the effect of conversion of a portion of bonds payable into common stock on the interest coverage ratio of the company?
Increase
Decrease
No effect
Can not be found from the given information
Answer by marina
What will be the effect on the current ratio of the company, if company purchased factory supplies on open account?
Increase
Decrease
No effect
Can not be found from the given information
Which of the following is NOT an example of liquid assets?
Cash
Accounts receivable
Marketable securities
Prepaid expenses
Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries.
Arch Co. has a note payable to its bank. An adjusting entry is likely to be required on Arch's books at the end of every month that the loan is outstanding to record which of the following?
Amount of interest paid during the month
Amount of total interest to be paid when the note is paid off
Amount of principal payable at the maturity date of the note
Accrued interest expense for the month
To measure the business income, life of a business is divided into which of the following?
Divided into specific points in time
Divided into irregular cycles
Divided into discrete accounting periods
Considered to be a continuous cycle
Posting is performed by transferring information from:
Source documents to the journal
Ledger to the journal
Ledger to trial balance
Journal to the ledger
Higher Inventory Turnover Ratio means all of the following EXCEPT:
How efficient the inventory management of the firm is?
How quickly inventory is sold?
How fast number of times the company sells it inventory during the year?
How quickly company converts its account receivables into cash?
This portion solved by Marina Khan
Which one of the following is NOT a type of adjusting entries?
۩ Entries to record accrued revenues
۩ Entries to record accrued expenses
۩ Entries to distribute un-earned revenue
۩ Entries to record revenues page 29
Which one of the following statements is TRUE regarding distributions to stockholders?
۩ The payment of dividends is not directly related to the profits of a given period
۩ Shareholders can individually decide on their distributions
۩ To receive a corporate dividend, stock must be owned on the date of declaration
۩ Corporate dividends reduce contributed capital and therefore, stockholders’ equity
Cash flow relating to investing activities does NOT present the cash effects of which of the following?
۩ Plant assets
۩ Intangible assets
۩ Investments
۩ Debt financing
Office supplies are purchased on account. The company uses a perpetual inventory system. What is the correct journal entry for this purchase of office supplies?
۩ Debit - Purchases; Credit - Cash
۩ Debit - Merchandise Inventory; Credit - Cost of Goods Sold
۩ Debit - Office Supplies; Credit - Accounts Payable
۩ Debit - Merchandise Inventory; Credit - Accounts Payable
Which of the following is NOT true about the specific identification method?
۩ It requires a very detailed physical count
۩ This method allows management to easily manipulate ending inventory cost
۩ This method is very hard to use on interchangeable goods
۩ This results in an overstated inventory account during the period of inflation
If sales revenues are Rs. 400,000, cost of goods sold is Rs. 310,000, and operating expenses are Rs. 60,000, what is the gross profit?
۩ Rs. 30,000
۩ Rs. 90,000
۩ Rs. 340,000
۩ Rs. 400,000
G.P= SALES – C.O.G.S = 400000-310000= 90,000
Which of the following statements best describes the nature of depreciation?
۩ Regular reduction of asset value to correspond to the decline in market value as the asset ages
۩ A process of correlating the book value of an asset with its gradual decline in physical efficiency
۩ Allocation of the cost in a manner that will ensure that plant and equipment items are not carried on the balance sheet at amounts in excess of net realizable value
۩ Allocation of the cost of a plant asset to the periods in which benefits are received
Warner Corporation reported net income in excess of its net cash flow from operations. A possible explanation of this difference is:
۩ Depreciation expense
۩ Non operating gains
۩ A decrease in income tax rates
۩ A decrease in accounts receivable over the period
In a statement of cash flows, the acquisition of land by issuing capital stock:
۩ Is not shown at all, since no cash was received or disbursed
۩ Is shown as an investing activity
۩ Is shown as a financing activity
۩ Is shown in a supplementary schedule as a non-cash investing and financing transaction
Examples of cash flows from investing activities are: Cash payments and receipts from acquisition and disposal of other than long term assets e.g.
Shares, debentures, TFC, long term loans given etc.
Which of the following opinions state that the financial statements do not present fairly the financial position, results of operations etc, in conformity with GAAP?
۩ Unqualified opinion
۩ Qualified opinion
۩ adverse opinion
۩ Disclaimer of opinion
Which one of the following is NOT a limitation of financial statements?
۩ They always present past
۩ They always present the monetary terms
۩ They help in assessment of future profitability
۩ They give no information about management and employee relations
Which of the follwing business owner is personally liable for its debts?
۩ Corporations
۩ Sole proprietorship
۩ General partnership
۩ Limited liability company
Which of the following characteristics is NOT generally regarded as right of common shareholders?
۩ Preemptive right
۩ Voting rights
۩ Preference in liquidation
۩ Transferability of shares
Preferred stockholders have no voting rights. Preferred shares are callable or redeemable at higher price by the company issuing these.
What would be the journal entry to record the issue of 1,000 shares of Rs. 1 par-value common stock, which is issued for Rs. 4 per share?
۩ Debit Cash 4,000; Credit Common Stock 4,000
۩ Debit Cash 4,000; Credit Common Stock, 1,000, Credit Paid-in-Capital in Excess of Par 3,000
۩ Debit Cash 4,000; Credit Common Stock, 1,000, Credit Retained Earnings 3,000
۩ Debit Cash 4,000, Debit Paid-in-Capital in Excess of Par 3,000; Credit Common Stock 4,000
Suppose that an investor buys shares for Rs. 15per share from a company whose stock's par value is stated at Rs. 10 per share, then what will be the value of paid in capital for each share sold?
۩ Rs. 25
۩ Rs. 5
۩ Rs. 20
۩ Rs. 30
In the vertical analysis of income statement, all the accounts are expressed as a percentage of which of the following?
۩ Net sales
۩ Gross sales
۩ Net income
۩ Total expenses
When using vertical analysis, the analyst calculates each item on a single financial statement as a
percentage of a total.. The total used by the analyst on the income statement is net sales revenue,
The changes in the financial statement items from a base year to following years are often expressed as which of the following?
۩ Trend percentages
۩ Component percentages
۩ Common percentages
۩ Both trend and component percentages
Trend percentages/ Horizontal Analysis/ Index Analysis: This analysis considers changes in
items of financial statement from a base year to the following years to show the direction of change.This is also called horizontal analysis.
Question No: 18 ( M a r k s: 1 )
Which of the following indicates the relative size of each item included in a total?
۩ Trend percentages
۩ Component percentages
۩ Common percentages
۩ Both trend and component percentages
Component percentages/ Vertical Analysis/ Common- Size Analysis: This type of analysis
indicates the relative size of each item in the Financial Statements as a percentage of the total of that Statement i.e. Total Assets or total Liabilities & Shareholders equity in Balance Sheet and Sales in Income Statement.
If a firm has Rs. 100 in inventories, a current ratio equal to 1.2, and a quick ratio equal to 1.1, what is the firm's Net Working Capital?
۩ Rs. 0
۩ Rs. 100
۩ Rs. 200
۩ Rs. 1,000
A company can improve (lower) its debt-to-total asset ratio by doing which of the following?
۩ Borrow more
۩ Shift short-term to long-term debt
۩ Shift long-term to short-term debt
۩ Sell common stock
REF
Earnings per share, return on sales, and return on equity are all examples of which of the following?
۩ Leverage ratios
۩ Liquidity ratios
۩ Turnover ratios
۩ Profitability ratios
Which of the following could account for a company's gross profit ratio increasing from one period to the next?
۩ An increase in the cost of sales which has not been accompanied by an increase in the selling price of goods sold
۩ An increase in the selling price of goods sold which has not been accompanied by an increase in the cost of sales
۩ A change in the mix of goods sold so that lower profit margin goods take a greater proportion of total sales
۩ A change in stock valuation method at the year end which leads to a decrease in the closing stock figure
Which of the following is MOST likely to offer you the highest rate of return together with the highest risk?
۩ Cash in a building society deposit account
۩ Preference shares
۩ Ordinary shares
۩ Government bonds
Assume that a company total paid in capital of Rs. 57,160,000, Preferred shares Rs. 12,000,000 and commons tock Rs. 14,000,000. Calculate the amount of total legal capital of the company.
۩ Rs. 26,000,000
۩ Rs. 2000,000
۩ Rs. 45,160,000
۩ Rs. 43,160,000
ABC Company has cumulative preferred stock and three years of dividends are owed. Using the following information, calculate the book value per share of the preferred stock.
| 9% preferred stock, Rs. 100 par, 300 shares authorized and issued | Rs. 3,000 |
| Call price | Rs. 109 |
| Retained Earnings | Rs. 28,000 |
۩ Rs. 109
۩ Rs. 202
۩ Rs. 211
۩ Rs. 118
Which one of the following statement indicates the Inventory turnover ratio?
۩ How quickly company prepared its inventory
۩ How quickly company converts its inventory into cash
۩ How quickly company purchases its inventory
۩ How quickly company sells its inventory
Operating cycle belongs to which group of ratios?
۩ Leverage ratios
۩ Liquidity ratios
۩ Profitability ratios
۩ Activity ratios
Which of the following is the ideal position of debt ratio?
۩ 30%
۩ 60%
۩ 50%
۩ 45%
What will be effect of purchase of inventory on open account on quick ratio of the company?
۩ Increase
۩ Decrease
۩ No effect
۩ Can not be found from the given information
What will be the effect on the inventory turnover ratio of the company, if it changed from FIFO to LIFO during the period of inflation?
۩ Increase
۩ Decrease
۩ No effect
۩ Can not be found from the given information
What will be the effect on the EPS of the company, if it paid stock dividend on common stock?
۩ Increase
۩ Decrease
۩ No effect
۩ Can not be found from the given information
Which of the following is essential to conduct business activity, particularly in times of adversity?
۩ Profitability
۩ Liquidity
۩ Stability
۩ Solvency
Failure to record the receipt of a utility bill for services already received will result in which of the following?
۩ An overstatement of assets
۩ An overstatement of liabilities
۩ An overstatement of equity
۩ An understatement of assets
Which of the following would be the proper journal entry to record Rs. 1,000 of Dividends paid by ABC Corporation?
۩ Debit Dividends 1,000; Credit Cash 1,000
۩ Debit Accounts Payable 1,000; Credit Cash 1,000
۩ Debit Dividends Expense 1,000; Credit Cash 1,000
۩ Debit Dividends Expense 1,000; Credit Service Revenue 1,000
How does the acid test ratio differ from the current ratio?
۩ It is concerned with future cash flows rather than historical cash flows
۩ It does not differ from the current ratio
۩ It excludes the value of stocks
۩ It excludes the trade debtors
Which of the following provides the basis for the trial balance?
۩ Income statement
۩ Statement of cash flow
۩ Ledger
۩ Adjusting entries
Which of the following is NOT normally required for revenue to be recognized according to the revenue principle for accrual basis accounting?
۩ The price is fixed or determinable
۩ Services have been performed
۩ Cash that has already been collected
۩ Evidence of an arrangement for customer payment exists
If monthly financial statements are desired by management then:
۩ Journalizing and posting adjusting entries must be done each month
۩ Journalizing and posting closing entries must be done each month
۩ Monthly financial statements can be prepared from worksheets; adjustments and closing entries need not be entered in the accounting records
۩ Adjusting and closing entries must be entered in the accounting records before preparation of interim financial statements
ABC Company sold a plant asset that originally cost Rs. 50,000 for Rs. 22,000 cash. If the company correctly reports a Rs. 5,000 gain on this sale, the accumulated depreciation on the asset at the date of sale must be:
۩ Rs. 33,000
۩ Rs. 28,000
۩ Rs. 27,000
۩ Rs. 23,000
Which of the following statements is CORRECT regarding depreciation methods?
۩ Accumulated depreciation represents a fund being accumulated fro the replacement of assets
۩ The cost of a machine includes the cost of repairing damage to the machine during the installation process
۩ A company may use different depreciation methods in its financial statements and its income tax returns
۩ The use of an accelerated depreciation method causes an asset to wear out more quickly than does the straight line method
The actions taken by the management to make company appear as strong as possible in its financial statements is termed as which of the following?
۩ Window dressing
۩ Understanding
۩ Comprehensiveness
۩ Materiality
ABC Company selected ‘Abdullah and Ahmad Charted Accountants’ as its auditors / accountancy firm. After audit the auditors stated company’s audit report as:
We have examined the accounts of ABC Company up to the year ended 30th June, 2009, and other record based on these accounts and we got all the information required by us. In our opinion the financial statements and the accounts on which they are based have been prepared in conformity with GAAP and present a true and fair position of the affairs of ABC Company.
What do you think the above case is which type of following audit reports?
۩ Qualified Audit Opinion
۩ Un-qualified Audit Opinion
۩ Adverse Audit Opinion
۩ Disclaimer Audit Opinion
All of the following users are very much concerned with the ratio analysis EXCEPT?
۩ Credit analyst, including banks who want to know the credibility of company
۩ Bond rating companies, who analyze ratios to help ascertain a company’s ability to pay its debts
۩ Customers, who want to know the designs and quality of the products offered
۩ Managers, to analyze, control, and thus improve their working operations
In order to know the percentage of assets financed by creditors, which of the following ratio is calculated?
۩ Debt Ratio
۩ Equity Ratio
۩ Operating credit Ratio
۩ Quick Ratio
The creditors' equity ratio equals total liabilities divided by total assets. This reflects the percentage of assets financed by creditors. In the event of corporate liquidation, creditors are paid before
Which of the following statement is the LEAST LIKELY to be correct?
۩ A firm that has a high degree of business risk is less likely to want to incur financial risk
۩ There exists little or no negotiation with suppliers of capital regarding the financing needs of the firm
۩ Financial ratios are relevant for making internal comparisons
۩ It is important to make external comparisons or financial ratios
A firm that has a high degree of business risk is much more likely to use equity financing because there is no contractual responsibility to make interest payments.
Which of the following is LEAST likely to be presented in Notes to financial statements of a firm?
۩ Significant pending lawsuits
۩ Methods of Cost flow assumptions
۩ A firm’s capital resource needs and liquidity
۩ Sales by region or business segment
