Paper 5: Financial Accounting (True/False)
1. All these items of revenue nature which received during the period of accounts, are only shown in the Income and Expenditure Account. False
2. When the capitalization of profits method is used then the value of goodwill on the basis of future maintainable profits is more than that of on the basis of super profits. False
3. In case of transfer from Creditors Ledger to Debtors Ledger, the Debtors Ledger Adjustment Account should be debited. False
4. Unrecoupable short-workings should be charged to Profit and Loss Account. True
5. In the Stock and Debtors Method of accounting, balance of Branch Stock Account shows either Gross Profit or Gross Loss. True
6. Receipt & Payment Account only records the revenue nature of receipts and expenses. False
7. Sales Book records both cash and credit sales. False
8. Normal loss of goods sent on consignment is shown in Consignment Account. False
9. In case of trading concern, cost of goods sold and cost of sales are same. False
10. In Proprietorship business, Income-tax payable is shown as a liability in Balance Sheet. False
11. While posting an opening entry in the ledger, in case of an Account having debit balance, in ‘Particulars’ column the words to Balance b/f are written on debit side.
12. Depreciation Accounting is the process of allocation and not valuation.
13. Finished goods are normally valued at cost or Net Realisable Value whichever is lower.
14. The relation between Consignee and Consignor is that of Agent and principal.
15. The relationship between Co- venturers is that of Co-owners.
16. Memorandum joint venture account is prepared to find out amount due from co-venture. False
17. Receipts and Payments Account is prepared by adopting cash principle of accounting. True
18. As per AS-9 revenue from interest should be recognized on the time proportion basis. True
19. Bad debts recovered is credited to debtor's personal account. False
20. New-partner pays premium for goodwill, which will be shared by old partners in their new profit sharing ratio. False
21. One of the objectives achieved by providing depreciation is saving cash resources for future replacement of assets. True
22. Royalty account is a real account in nature. False
23. As per AS-7 expenses recognized in the period in which the work to which expenses relate is performed. True
24. Expenses incurred by branch out of petty cash balance are debited to branch account by the head office. False
25. In absence of partnership deed the profit or loss should be distributed among partners in their capital ratio. False
26. Hire purchase stock represents the installments from Hire Purchase Debtors not yet due. True. Hire purchase stock represents the installments receivable from hire purchase debtors but yet due Example : Total Installments for 11 months × 2,000 p.m out of which current month due but not received HP Debtors Current Month Not Due- H.P Stock A/c Installment Due but not received ` 2,000 10 × ` 2,000 = ` 20,000
27. Gaining Ratio is applicable at the time of retirement of a partner. False. There may be Gaining Ratio of an old partner even at the time of admission of a partner.
28. AS 4 deals with prior period adjustments. False. AS -4 deals with Contingencies and Event Occurring after the Balance Sheet Date
29. Issue of Sweat Equity shares is a non-cash transaction. True. Sweat Equity Shares are Equity Shares issued to employees as a non cash incentive.
30. For buy back of shares, a company has to open a Current Account with the Bank. True. For buy back of shares, a company has to open a Current Account with the Bank.
31. As per AS 28 recoverable amount of an asset is lower of Net selling price and Value in use. False. As per AS 28 recoverable amount of an asset is higher of net selling price and Value in use.
32. The hire purchaser can record the asset at its hire purchase price. False. The hire purchaser can record the asset at Cash Price. Cash Price = Payment on the date of signing of contract + (Balance along with the interest in equal installments × Annuity factor).
33. Depreciation is charged on “Wasting Assets”. False. Depreciation is not charged on Wasting Assets. Depreciation is charged on all assets except the following :
(a) Forests, Plantation
(b) Wasting Assets, Minerals and Natural Gas
(c) Expenditure on research and development
(d) Goodwill
(e) Live stock – Cattle, animal Husbandry
34. Income and Expenditure Account is prepared by adopting accrual principle of accounting. True. Income and Expenditure Account which is prepared for the particular period is used to quantify the surplus (excess income over expenditure) or deficit (excess of expenditure over income ) for the particular period.
35. Depreciation is an item of Expenditure. True. Depreciation is a measure of wearing out, consumption or other loss of value of a depreciable assets arising from use passage of time. Depreciation is nothing but distribution of total cost of assets over its useful life.
36. Short workings is the amount by which the minimum rent falls short of the actual royalty. False. Shortworkings is the amount by which the minimum rent exceeds the actual royalty.
37. The debit balance in the Profit & Loss A/c is treated as surplus. False. Debit balance in the Profit and Loss A/c is treated as loss.
38. Goodwill is an estimation of the earning power of the capital employed by an entity. True. Goodwill refers to the reputation of a business enterprise which it acquires by its record of successful operations and customers’ satisfaction. It is an unidentifiable attribute of a business which enables it to earn more than normal profits to induce the entrepreneurs to remain in business and it is an estimation of earning power of capital employed by an entity.
39. Land is a depreciable asset. False
40. Selling Commission is apportioned among departments in the ratio of Sales of each department. True
41. Depreciation is a non-cash expense. True
42. The concept of deferred revenue expenditure is not relevant in the asset-liability measurement approach. The Statement is True. The asset-liability measurement approach focuses on recognition of assets and liabilities, and, therefore, the question of fictitious assets does not arise.
43. Depreciation is charged on Wasting Assets. The Statement is False. Accounting Standard 6 is not applicable on wasting Assets.
44. Stock of fire bricks in a furnace should be included in inventory. The Statement is False. It should be included in W.I.P.
45. Equity share holders are deemed owners of a company because their claim is residual in nature. The Statement is True. Assets of a firm are jointly owned by all financiers (e.g., suppliers of equity capital and debt capital). However, the law gives the ownership to providers of equity capital because investment in equity capital is exposed to business risks and consequently the claim of equity shareholders is residual.
46. Board of directors of a company is not permitted to change accounting policy unless such a change is required by law or by a new accounting standard. The Statement is False. Board of directors is allowed to change the accounting policy provided that it can establish that the new accounting policy will improve the presentation of financial statements.
47. An enterprise, which provides courier service, should recognize the service charges as revenue immediately on billing. The Statement is False. Revenue should be recognized upon delivery of the package.
48. For buy back of shares, a company has to open a Current bank account. The Statement is False. A company has to open an escrow account.
49. Each department is charged with a share of the common expenses which is apportioned equally. The Statement is False. It is apportioned on a suitable basis.
50. Stock and debtors system is generally used when the goods are sent to the branch at cost price. The Statement is False. This system is generally used when the goods are sent to the branch at an invoice price.
51. When a fixed asset is acquired in exchange for another asset, the cost of the asset acquired should be recorded at replacement cost. The Statement is False. It should be recorded at fair value.
52. Royalties revenue should be recognized on an accrual basis. The Statement is False. It should be recognized on an accrual basis in accordance with the terms of the relevant agreement.
53. Cost-plus contract is a contract in which price is agreed upon in advance but subject to change in future. The Statement is False. The price is not agreed upon in advance.
54. The purchase price, transport and handling cost, tax and import duties are all examples of cost of purchase, cost of conversion and other costs. The Statement is False. These are examples of cost of purchase.
55. The hire purchaser can record the asset at its hire purchase price. The Statement is False. It can be record at its cash down price.
56. Upon death of a partner, when a memorandum revaluation account is prepared, assets and liabilities appear in the balance sheet at revalued figure. The Statement is False. Upon death of a partner, when a memorandum revaluation account is prepared, assets and liabilities appear in the balance sheet at old figure.
57. If the unrecorded liabilities are taken over by the new firm, it is transferred to partners capital account. The Statement is False. It is transferred to realization account along with other liabilities.
58. Reserve for unexpired risk is applicable for Banking companies. False
59. Excess of hire-purchase price over cash price is known as penalty imposed on hire purchaser by the vendor. False — The excess price is known as loading.
60. One of the objectives achieved by providing depreciation is saving cash resources for future replacement of assets. True - The amount of depreciation is accumulated in a separate fund called sinking fund.
61. As per concept of conservatism, the Accountant should provide for all possible losses but should not anticipate profit. True - The basic accounting priciple of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported.
62. Wages incurred by departmental workers of a factory in installing a new machinery is a revenue expenditure. False - The wages are part of installation cost and should be capitalised with value of machinery.
63. Original cost minus scrap value is the depreciable value of asset. True
64. Royalty is a Revenue Expenditure to Lessor. False
65. According to AS-2 Inventories are held for sale in normal course of business. True
66. Income and Expenditure Account is prepared by adopting accrual principle of accounting. True
67. Advance payment of Tax is shown in the Liabilities side of Balance Sheet. False
68. Bank reconciliation statement is prepared to arrive at the bank balance. False
69. Deferred revenue expenditure is current year's revenue expenditure to be paid in the later years. False
70. Reducing balance method for depreciation is followed to have a uniform charge for depreciation and repairs and maintenance together. True
71. Reserve for Discount on Creditors has a credit balance. False
72. A promissory note can be made payable to the bearer. False
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