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Default [Winter] 2011: Accounting for Financial Services

ISQ Examination (Winter-2011)
Accounting for Financial Services – Stage-II

Multiple Choice Questions
Number of Questions: 30
Marks: 45
Allotted Time: 60 minutes
Constructed Response Questions
Number of Questions: 08
Marks: 55
Allotted Time: 120 minutes

Q.31 Following data pertains to the Yakjehti Bank. Identify which of the following transactions shall be classified as Operating, Investing and Financing activities.

Q.32 The following data pertains to company A:
Acquisition cost of asset - Rs.60,000
Salvage value - Rs. 5,000
Useful life - 5 years
Cash flow per year - Rs.10,000
Accumulated depreciation - Rs. 6,000
Expected output of machine - 20,000 units

Use the above data to answer the following:
A. Calculate the first year’s depreciation expense based on straight line method (SLM) and double declining method (DDM)?
B. Compared to reported equity using Double declining method, if the company A had used straight line method to calculate the depreciation expense, the equity would have been lower same or higher in initial years? Justify your answer.
C. What will be the effects on cash flow statement in each method? Justify your answer.

Q.33 Return on equity is one of the measures of profitability commonly used to evaluate the return generated on investors’ investments. Following data pertains to Aquarius Manufacturing Co.

A. Calculate the return on equity for FY2007 and FY 2008 using the above data?
B. Has the company’s Return on Equity (ROE%) changed i.e. decreased or increased or remained constant in FY 2008 against previous year?
C. What are the factors that gave rise to that change? Briefly justify your answer.

Q.34 A) Describe how trial balance is prepared. Ex plain its importance.
Q.34 B) Briefly state Adjusted Trial Balance and it
s purpose.

Q.35 On 1 October 2009 M/s Jami Solutions entered into an agreement to lease a generator that had an estimated life of 10 years. The lease period is for four years with annual rentals of Rs. 5,000 payable in advance from 1 October 2009. The generator is expected to have a nil residual value at the end of its life. It has a fair value of Rs. 50,000 at the inception of the lease.
A. Identify the type of lease.
B. Show journal entries to record lease transaction and related depreciation expense.
C. How should the lease be accounted for in the income statement and Balance Sheet of M/s Jami Solution for the year end on 31 March 2010?

Q.36 With reference to the quality of financial statements, define the following concepts.
A. Reliability
B. Relevance
C. Prudence
D. Materiality
E. Accounting period

Q.37 Osaka manufactu

ring uses general journal to record its day to day business transactions. Osaka recently purchased a production plant to meet the increasing demand of the product. Sequence of the transactions relating to the plant is given below A. On 1 January 2010, purchased a plant for cash Rs. 1,000,000.
B. On 3 December 2010, recorded depreciation expense using straight line method with 10 years of useful life and zero salvage value estimated after ten years.
C. On 1 January 2011, sold the plant for Rs. 1,000,000 cash.
Question: Create the general journal entries using the above sequence of transactions.

Q.38 Suppose you are working as a credit analyst in You Bank. Your manager has asked you to prepare a comparative analysis of the business performance of two similar businesses, M/s Yarn Expert and M/s Cotton Cares to decide further credit line. The financial accounts of the two firms are as under:

Additional information:
  • Number of shares of M/s Yarn Experts and M/s Cotton Cares is 1,000 and 3,000 respectively.
  • Market price of shares of M/s Yarn Experts is Rs. 35 and of M/s Cotton Cares is Rs. 18
  • Dividend paid by M/s Yarn Experts is Rs. 6 and by M/s Cotton Cares is Rs. 5.2
Compute the following:

A. Prepare an analysis of liquidity, using any 3 of the following ratios – current ratio, quick ratio, Average days sales collected, average days inventory zconverted.
B. Prepare an analysis of profitability using any 4 of the ratios from gross profit margin, net profit margin, asset turnover, returns on asset, returns on equity, earning per share.
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