Management Accounting- Revisionary Question Bank

Q.1 Sources of funds for an enterprise are reflected:

a. On the income side of profit and loss account
b. On the expense side of profit and loss account
c. On the asset side of the balance sheet
d. On the liability side of the balance sheet ( Answer)
Required
Select the correct answer from the options given above.
Q.2 A purchased a car for Rs.5,00,000, making a down payment of Rs.1,00,000 and signing a Rs.4,00,000
bill payable due in 3 months. As a result of this transaction—
a. Total assets increased by Rs.5,00,000.
b. Total liabilities increased by Rs.4,00,000.
c. Total assets increased by Rs.4,00,000.
d. Total assets increased by Rs.4,00,000 with corresponding increase in liabilities by
Rs.4,00,000. ( Answer)
Required
Select the correct answer from the options given above.
Q.3 Fixed assets are held in the business for the purpose of
a. Resale
b. Conversion into cash
c. Earning revenue ( Answer)
d. None of the above
Required
Select the correct answer from the options given above.
Q.4 Which of the following is not a component of shareholders’ equity?
a. Common stock
b. Capital reserves
c. Long-term debt ( Answer)
d. Retained earnings
Q.5 Globe Enterprises follows the written down value method of depreciating machinery year after year
due to
a. Comparability
b. Convenience
c. Consistency ( Answer)
d. All of the above
Required
Select the correct answer from the options given above.
Q.6 A purchased goods for Rs.15,00,000 and sold 4/5th of the goods for Rs.18,00,000 and met
expenses amounting to Rs.2,50,000 during the year 2009. He counted net profit as Rs.3,50,000.
Which of the accounting concepts was followed by him?
a. Entity
b. Periodicity
c. Matching ( Answer)
d. Conservatism
Required
Select the correct answer from the options given above.
Q. 7 A businessman purchased goods for Rs.25,00,000 and sold 80% of such goods during the accounting
year ended March 31, 2010. The market value of the remaining goods was Rs.4,00,000. He valued the
closing stock at cost. He violated the concept of
a. Money measurement
b. Conservatism ( Answer)
c. Cost
 d. Periodicity
Required
Select the correct answer from the options given above.
Q. 8 The determination of expenses for an accounting period is based on the principle of
a. Objectivity
b. Materiality
c. Matching ( Answer)
d. Periodicity

Q .9 The manager of a company who did not have proper accounting knowledge prepared the following
balance sheet. He has wrongly classified the items under assets, liabilities, and owners’ equity.

Required
Prepare the correct balance sheet.
Ans: Correct Balance Sheet.

Owners’ Equity and Rs. Assets Rs.

Liabilities

Share capital 10,00,000 Land and building 7,00,000

Retained earnings 5,00,000 Equipment 9,00,000

Long-term loan 4,00,000 Accounts receivable 3,00,000

Accounts payable 2,00,000 Cash 2,00,000

21,00,000 21,00,000

Q. 10 Financial statement analysis can be performed in a variety of ways. The following statements
relate to two of these ways: horizontal and vertical analysis.
a. Horizontal analysis should not include more than two years of data.
b. Only the balance sheet should be subjected to horizontal analysis.
c. A special type of horizontal analysis called trend analysis is useful for identifying patterns over
long periods.
d. Vertical analysis controls for differences in company size, whereas horizontal analysis does
not.
e. Common-size financial statements are statements for companies of approximately the same
size and in the same industry.
f. Liquidity is a measure of a company's ability to meet its immediate financial obligations.
Required
 Indicate whether each of the preceding statements is true or false.

Ans:

a. False
b. False
c. True
d. True
e. False
f. True

Q. 11 Financial statements of two competing companies report the following data (amounts in millions):
Company A Company B
Sales Rs.2,25,000 Rs.1,35,000
Accounts receivable, January 1 1,50,000 97,500
Accounts receivable, December 31 75,000 30,000
Required
Compute the accounts receivable turnover for each company.
Ans 11:
Company A: Rs.2,25,000 ÷ [(1,50,000 + 75,000) ÷ 2] = 2
Company B: Rs.1,35,000 ÷ [(97,500 + 30,000) ÷ 2] = 2.118
Q.12 A company has the following financial statement data (in millions):
Accounts payable Rs.60,000
Notes payable 1,56,000
Capital stock 2,00,000
Retained earnings 7,00,000
Required
Compute the debt-to-equity ratio for the company.
Ans: 12 (60,000 + 1,56,000) ÷ (2,00,000 + 7,00,000) = .24 to 1

Q. 13 Annual reports of Kellogg's and Quaker Oats reveal the following for a recent year (amounts in
millions):
Kellogg's Quaker Oats
Sales Rs.1,89,650 Rs.1,83,550
Accounts receivable, January 1 10,950 25,250
Accounts receivable, December 31 13,750 26,850
Required
A. Compute the accounts receivable turnover for each company.
B. Compute the average number of days that accounts receivable are outstanding for each
company.
C. Which of these two companies is managing its accounts receivable more efficiently?

Ans 13:
Accounts receivable turnover = Net credit sales ÷ Average accounts receivable
Average number of days in accounts receivable = 365 ÷ Accounts receivable turnover
 Kellogg’s = U Rs.1,89,650 U = 15.4 times per year
(Rs.10,950 + Rs.13,750)/2

Quaker Oats = U Rs.1,83,550 = 7.0 times per year

U

(Rs.25,250 + Rs.26,850)/2

Kellogg’s = U 365 U = 23.7 days

15.4

Quaker Oats = 365 = 52.1 days

7

Kellogg’s collects its accounts receivable more quickly than Quaker Oats. However,
Quaker Oats may have more liberal credit and collection policies than Kellogg’s in an
effort to stimulate sales. It is difficult to conclude which company manages their
receivables more effectively without additional information.

Q.14 Canopy Corporation rents out tents for large parties thrown for such things as graduations,
weddings, and birthdays. Part of Canopy's financial statements for last year is as follows:

Required
What is Canopy Corporation's debt-to-equity ratio?
Ans 14:
Debt-to-equity = Total liabilities ÷ Total stockholders’ equity
Debt-to-equity = (Rs.30,00,000 + Rs.10,00,000) ÷ (Rs.1,25,00,000 + Rs.50,00,000) = 0.23
Q.15 Recent annual reports of two beverage companies reveal the following financial information (in
millions):
Company 1 Company 2
Revenues Rs.4,16,900 Rs.6,50,350
Interest expense 9,950 17,250
Net income 52,250 38,100
Average total assets 4,01,400 5,03,950

Required
A. Calculate the rate of return on assets for each company.
B. Break the rate of return on assets into return on sales and total asset turnover.
C. Comment on the relative profitability of the two companies.
Ans: 15
A. ROA = Net income + Interest expense (net of tax)
Average total assets

Company 1:
ROA = Rs.52,250 + Rs.9,950(1 – 0.34) = 14.7%
Rs.4,01,400

Company 2:
ROA = Rs.38,100 + Rs.17,250(1 – 0.34) = 9.8%
Rs.5,03,950

B. ROA = Profit × Asset turnover

ROA = Net income × Sales

Sales Average total assets

Company 1:
ROA = Rs.58,817 × Rs.4,16,900
Rs.4,16,900 Rs.4,01,400

= 14.1% × 1.04 = 14.7%

Company 2:
ROA = Rs.49,485 × Rs6,50,350
Rs.6,50,350 Rs.5,03,950

= 7.6% × 1.29 = 9.8%

C. Company 1 was the most profitable in the year analyzed. It had a significantly
higher profit margin than Company 2. However, although its margin was higher,
Company 1 had lower asset turnover.
Q. 16 The following data show five items from the financial statements of three companies for a
recent year (amounts in millions):
Company A Company B Company C
Revenues Rs.4,41,200 Rs.4,50,000 Rs.5,87,100
Income before interest and related taxes1 30,750 52,150 30,550
Net income to common shareholders2 23,850 48,700 25,150
Average during the Year
Total assets 4,53,650 3,41,650 3,58,150
Common shareholders' equity 1,45,750 1,74,700 1,44,400

Required
A. Compute the rate of return on assets for each company. Separate the rate of return on assets into the
return on sales and the asset turnover ratio.
B. The three companies are an airline, a pharmaceutical company, and a retail department store. Which
of the companies are most likely to correspond to A, B, and C, respectively? What clues did you use in
reaching your conclusions?

Ans: 16

A.
ROA = Net income + Interest exp. (net of taxes) × Revenue
Revenues Assets

ROA (Company A) = Rs.30,750 × Rs.4,41,200

Rs.4,41,200 Rs.4,53,650

= 6.97% × 0.97 = 6.76%

ROA (Company B) = Rs.52,150 × Rs.4,50,000

Rs.4,50,000 Rs.3,41,650

= 11.6% × 1.32 = 15.31%

ROA (Company C) = Rs.30,550 × Rs.5,87,100

Rs.5,87,100 Rs.3,58,150

= 5.20% × 1.639 = 8.52%

Company A is most likely the airline. It has a large amount of assets and a small rate of return. Airlines
are the most capital intensive of the three industries represented. Company B is most likely the
pharmaceutical company. Pharmaceutical companies generally generate high margins on sales of their
products. Company C is most likely the retail department store, a competitive business characterized by
low margins and high turnover.

Q 17: Avantronics is a manufacturer of electronic components and accessories, with total assets of
Rs.1,00,00,00,000. Selected financial ratios for Avantronics and the industry averages for firms of similar
size are as follows:

Avantronics
Industry Average
2008 2009 2010
Current ratio 2.09 2.27 2.51 2.24
Quick ratio 1.15 1.12 1.19 1.22
Inventory turnover 2.40 2.18 2.02 3.50
Profit margin 0.14 0.15 0.17 0.11
Debt-to-equity ratio 0.24 0.37 0.44 0.35

Avantronics is being reviewed by several entities whose interests vary, and the company's financial
ratios are a part of the data being considered. Each of the following parties must recommend an action
based on its evaluation of Avantronics’ financial position.
MidCoastal Bank. The bank is processing Avantronics’ application for a new five-year term note.
MidCoastal has been the banker for Avantronics for several years but must reevaluate the company's
financial position for each major transaction.
Ozawa Company. Ozawa is a new supplier to Avantronics and must decide on the appropriate credit
terms to extend to the company.
Drucker & Denon. A brokerage firm specializing in the stock of electronics firms that are sold over the
counter, Drucker & Denon must decide whether it will include Avantronics in a new fund being
established for sale to Drucker & Denon's clients.
Working Capital Management Committee. This is a committee of Avantronics’ management personnel
chaired by the chief operating officer. The committee is responsible for periodically reviewing the
company's working capital position, comparing actual data against budgets, and recommending changes
in strategy as needed.
Required
A. Describe the analytical use of each of the five ratios presented in the chart.
B. For each of the four entities described, identify the financial ratios, from those ratios presented, that
would be most valuable as a basis for its decision regarding Avantronics.
C. Discuss what the financial ratios presented in the question reveal about Avantronics. Support your
answer by citing specific ratio levels and trends as well as the interrelationships among these ratios.
Ans:17
The current ratio measures overall short-term liquidity and is an indicator of the short-term debt
paying ability of the firm. The quick ratio is also a measure of short-term liquidity. However, it is
a measure of more immediate liquidity and is an indicator of the ability of a firm to pay current
debts from cash or near cash assets. Inventory turnover measures the number of times a firm
sells its average inventory during the year. A low turnover may indicate excessive inventory
accumulation or obsolete inventory. Profit margin is a measure of the income generated per
dollar of sales. Taken together with turnover, it can be a good measure of overall profitability.
The debt to equity ratio compares the amount of resources provided by creditors to the
resources provided by stockholders. Thus, it measures the extent of leverage in a company’s
financial structure and is used as a measure of risk.
7BU Mid Coastal Bank : Current and quick ratios as well as debt-to-equity
U

8B Ozawa Company : Current ratio, quick ratio, and inventory turnover

U U

Drucker and Denon : Profit margin and turnover (ROA)

U U

Working Capital Management Committee : Current ratio, quick ratio, and inventory
U U

turnover

Avantronics’ current and quick ratios have been improving over time and are
9B

currently near or above industry averages. However, one must look at the total
picture when analyzing the company’s liquidity and working capital management.
A relatively large amount of money could be tied up in current assets (including
inventory). This is confirmed by the deteriorating inventory turnover ratio.

Their inventory turnover is very poor. The amount of inventory on hand may help the current
ratio, but also shows poor or ineffective inventory management, which may result eventually in
obsolete inventory.
The company’s profitability is very good. The profit margin has been increasing and is greater
than the industry average. However, this is tempered by the lower than average inventory
turnover. Overall return on assets declined slightly from 2007 to 2008, although it increased
again in 2009.
The company’s debt-to-equity ratio has grown in the last three years indicating that a much
larger amount of its assets are debt financed than the industry average.
Q.18 Following are the income statements for Martha's Miscellaneous for 2009 and 2010.

Required
Complete the comparative income statement by computing dollar change (Rs. change) and percentage
change (% change).
 Ans: 18

Martha's Miscellaneous
Comparative Statements of Income and Retained Earnings

U2009U 2008
U U Rs. change
U U % change
U U

Sales revenue Rs.3,50,00,000 Rs.32,50,000 Rs. 25,00,000 7.7%

Cost of goods sold U2,50,00,000 U U 2,27,50,000 U U 22,50,000 U 9.9%
Gross profit Rs.1,00,00,000 Rs.97,50,000 Rs. 2,50,000 2.6%
Payroll expense 25,00,000 21,12,500 3,87,500 18.3%
Insurance expense 15,00,000 14,50,000 50,000 3.4%
Rent expense 9,00,000 9,00,000 0 0.0%
Depreciation U 17,50,000
U U 7,50,000
U U 10,00,000 U 133.3%
Total expenses Rs.66,50,000
U U Rs.52,12,500
U Rs. 14,37,500
U 27.6%
Operating income Rs. 33,50,000 Rs. 45,37,500 Rs.(11,87,500) (26.2%)
Interest expense (3,50,000) (2,50,000) 1,00,000 40.0%
Gain on vehicle sale 12,50,000 0 12,50,000
Loss on sale of securities (12,50,000) 0 (12,50,000)
Interest revenue U 37,50,000
U U 25,00,000 U U 12,50,000 50.0%
Net income before interest Rs.67,50,000 Rs.67,87,500 Rs. (37,500) (0.6%)
and taxes
Tax U 20,00,000U U 20,12,500 U (12,500) U (0.6%)
Net income Rs. 47,50,000 Rs. 47,75,000 Rs. (25,000) (0.5%)
Dividends U 19,00,000U U 19,00,000 U

To Retained earnings Rs. 28,50,000 Rs. 28,75,000

Retained earnings: 1/1 U96,75,000 U68,00,000
Retained earnings: 12/31 Rs.1,25,25,000 Rs.96,75,000

Q. 19 The 2010 financial statements for the Griffin Company are as follows:
Required
Compute the following ratios for the Griffin Company for the year ending December 31, 2010:
A. Profit margin ratio (before interest and taxes)
B. Total asset turnover
C. Rate of return on total assets
D. Rate of return on common stockholders’ equity
E. Earnings per share of stock
F. Inventory turnover
G. Current ratio
H. Quick ratio
I. Accounts receivable turnover
J. Debt-to-equity ratio
K. Times interest earned

Ans 19
Profit margin ratio = Net income + Interest exp.(net of tax)
U

Sales

= Rs. 35,00,000 + Rs.4,50,000(1 – 0.50) = 17.7%

U U

Rs.2,10,00,000

0BU Sales = U U Rs.2,10,00,000 = 1.02 U

Average Total Assets (Rs.2,15,00,000 + Rs.1,96,00,000)/2

ROA = Net income + Interest expense(net of tax)

U

Average total assets

= Rs. 35,00,000 + Rs.4,50,000(1 – 0.50)

U U =18.1%
Rs.2,05,50,000

1B ROCSE = U Net income _

Average stockholders’ equity

= U Rs.35,00,000 = 32.6% U

(Rs.12,50,000 + Rs.90,00,000)/2
2B EPS = Net income
U U # of shares outstanding

= U Rs.35,00,000 U = Rs.116.50/share
30,000 shares

3BU Cost of goods sold = U U Rs.1,07,00,000 = 2.38

U

4B Average inventory (Rs.55,00,000 + Rs.35,00,000)/2

U Current assets U = Rs. 20,00,000 + Rs.15,00,000 + Rs.55,00,000 Current liabilities

U U

Rs.30,00,000
= 3.0

U Quick assets = U Rs.20,00,000 + Rs.15,00,000

U = 1.17 U

Current liabilities Rs.30,00,000

5BU Net sales = U U Rs.2,10,00,000 = 9.88

U

Average accounts receivable (Rs.15,00,000 + Rs.27,50,000)/2

U Total liabilities = U U Rs.90,00,000 = 0.72 U

6B Stockholders’ equity Rs.1,25,00,000

U Net income + Interest expense + Income taxes U

Interest expense

= Rs. 35,00,000 + Rs.35,00,000 + Rs.4,50,000

U = 16.56 times U

Rs.4,50,000
Q .20 Using the following financial statements for Hans Company, compute the required ratios:
Hans Company Balance Sheet as at 31st March
( Amount in ' Millions')
Assets 2016 2017 2018
Cash 60 90 80
Government Securities 200 30 10
 Accounts & Notes Receivables 450 500 500
Inventories 350 200 250
Prepaid Assets 35 5 30
Total Current Assets 1095 825 870
Property, Plant and Equipment (net) 600 800 1100
total Assets 1695 1625 1970
Liabilities and Shareholders' Equity
Notes Payable 200 210 250
Accounts Payable 160 190 210
Accrued Expenses 40 60 75
total Current Liabilities 400 460 535
Long Term Debt, 6% Interest 150 100 50
Total Liabilities 550 560 585
Shareholders' Equity 445 460 455
Total Liabilities & Shareholders' equity 1695 1625 1970

Statement of Profit & Loass Account for year ended 31st March
Net Sales 2500 2750 3000
Cost of goods sold 1100 1175 1240
Gross Margin 1400 1575 1760
Selleing & adminsitrative expenses 610 675 685
Earning(Loss) before taxes 790 900 1075
Income Taxes@30% 237 270 322.5
Net Income 553 630 752.5

Required
A. What is the rate of return on total assets for 2018?
B. What is the current ratio for 2018?
C. What is the quick (acid-test) ratio for 2018?
D. What is the profit margin for 2017?
E. What is the profit margin for 2018?
F. What is the inventory turnover for 2017?
G. What is the inventory turnover for 2018?
H. What is the rate of return on stockholders equity for 2017?
I. What is the rate of return on stockholders’equity for 2018?
J. What is the debt-to-equity ratio for 2018?

Ans 20
A. Return on Total Assets 25.33% 42.04%
NET INCOME+ INTEREST ( NET OF TAXES) 635.25 755.65
AVERAGE TOTAL ASSETS 2507.5 1797.5
B. CURRENT RATIO 2.74 1.79 1.63
CURRENT ASSETS 1095 825 870
CURRENT LIABILITIES 400 460 535
C. QUICK RATIO 1.78 1.35 1.10
CURRENT ASSETS-INVENTORY-PREPAID EXP 710 620 590
CURRENT LIABILITIES 400 460 535
D. PROFIT MARGIN 23.10% 25.19%
NET INCOME+ INTEREST ( NET OF TAXES) 635.25 755.65
 SALES 2750 3000
E. INVENTORY TURNOVER RATIO 3.14 4.27 5.51
COST OF GOODS SOLD 1100 1175 1240
AVERAGE INVENTORY 350 275 225
F. RETURN ON EQUITY 124.27% 139.23% 164.48%
NET INCOME AVAILABLE TO EQUITY
SHAREHOLDERS' 553 630 752.5
AVERAGE EQUITY SHAREHOLDERS' FUND 445 452.5 457.5
G. DEBT-TO-EQUITY RATIO 1.24 1.22 1.29
TOTAL LIABILITIES 550 560 585
TOTAL STOCKHOLDERS' EQUITY 445 460 455

Q .21 The following transactions occurred for a company that uses the direct method to prepare its
statement of cash flows:
a. _______ A company buy back its own common stock in the open market .
b. _______ A company issues shares as consideration for building.
c. _______ A six-month bank overdraft taken.
d. _______ Ten-year debentures are issued.
e. _______ collection from debtors.
f. _______ Income taxes are paid.
g. _______ Cash sales are recorded.
h. _______ Cash dividends paid.
i. _______ A creditor is given equity shares in exchange for a long-term note.
j. _______ Purchase of new machinery.
k. _______ Purchase of shares of other company.
l. _______ Interest is paid on a bank loan.
m. _______ salary paid to staff
For each of the above transactions, fill in the blank to indicate whether it would appear in the Operating
Activities section (O), in the Investing Activities section (I), or in the Financing Activities section (F). Put
an (S) in the blank if the transaction does not affect cash but is reported in a supplemental schedule of
noncash activities.

Ans 21:
a. F

b. S

c. F

d. F

e. O

f. O

g. O

h. F
 i. S

j. I

k. I

l. O

m. O

Q .21 Each of the following is an independent situation.

Case 1
Accounts receivable, beginning balance Rs.1,25,00,000
Accounts receivable, ending balance 1,00,00,000
Credit sales for the year 1,37,50,000
Cash sales for the year 80,00,000
Uncollectible accounts written off 67,50,000
Total cash collections for the year ?
Case 2
Inventory, beginning balance Rs. 90,00,000
Inventory, ending balance 77,50,000
Accounts payable, beginning balance 62,50,000
Accounts payable, ending balance 57,50,000
Cost of goods sold 1,37,50,000
Cash payments for inventory (assume that all purchases are on account) ?
Case 3
Prepaid insurance, beginning balance Rs. 13,50,000
Prepaid insurance, ending balance 15,00,000
Insurance expense 12,50,000
Cash paid for new insurance ?
Case 4
Interest payable, beginning balance Rs. 52,50,000
Interest payable, ending balance 62,50,000
Interest expense 1,50,00,000
Cash payments for interest ?
Case 5
Income taxes payable, beginning balance Rs. 27,50,000
Income taxes payable, ending balance 37,50,000
Income tax expense 50,00,000
Cash payments for income taxes ?
Required

Determine the missing amount for each individual case.

Ans: 22
Case 1: Sales revenue (cash and credit sales) Rs.2,17,50,000
Add: Beginning accounts receivable 1,25,00,000
Less: Ending accounts receivable (1,00,00,000)
Less: Accounts written off (67,50,000)
Total cash collections for the year Rs.1,75,00,000

Case 2: Cost of goods sold Rs.1,37,50,000

Add: Beginning accounts payable 62,50,000
Less: Ending accounts payable (57,50,000)
Add: Ending inventory 7,75,00,000
Less: Beginning inventory (90,00,000)
Cash payments for inventory Rs.1,30,00,000

Case 3: Insurance expense Rs. 12,50,000

Less: Beginning prepaid insurance (13,50,000)
Add: Ending prepaid insurance 15,00,000
Cash paid for new insurance Rs. 14,00,000

Case 4: Interest expense Rs.1,50,00,000

Add: Beginning interest payable 52,50,000
Less: Ending interest payable (62,50,000)
Cash payments for interest Rs.1,40,00,000

Case 5: Income tax expense Rs.50,00,000

Add: Beginning income taxes payable 27,50,000
Less: Ending income taxes payable (37,50,000)
Cash payments for income taxes Rs. 40,00,000