CA Inter P1 · Chapter 2
Presentation and Disclosures Based Accounting Standards MCQs with Answers
12 multiple-choice questions on Presentation and Disclosures Based Accounting Standards for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
AS 1 identifies three major considerations that govern the selection and application of accounting policies. Which of the following is NOT one of them?
- A) Consistency
- B) Materiality
- C) Substance over form
- D) Prudence
Show answer & explanation
Answer: A) Consistency
AS 1 lists prudence, substance over form and materiality as the major considerations governing the selection and application of accounting policies. Consistency is one of the fundamental accounting assumptions, not one of these considerations.
Question 2
Case: Kaveri Pumps Ltd, a manufacturing company, paid interest of ₹6,40,000 on its term loans during the year. Under AS 3, Cash Flow Statements, this payment should be classified as a cash flow from:
- A) Investing activities
- B) Financing activities
- C) Operating activities or financing activities at the option of the company
- D) Operating activities
Show answer & explanation
Answer: B) Financing activities
AS 3 requires interest paid by an enterprise other than a financial enterprise to be classified as a financing activity, because it is a cost of obtaining financial resources. Only in the case of a financial enterprise is interest paid classified as an operating activity. AS 3 does not give a free choice for non-financial enterprises.
Question 3
Case: Extracts for Nandi Agro Ltd for the year are: net profit before tax ₹8,40,000; depreciation ₹1,20,000; profit on sale of machinery ₹30,000; increase in trade receivables ₹75,000; decrease in inventories ₹40,000; increase in trade payables ₹25,000; income tax paid ₹2,10,000. Using the indirect method under AS 3, the net cash from operating activities is:
- A) ₹7,70,000
- B) ₹9,20,000
- C) ₹7,10,000
- D) ₹7,30,000
Show answer & explanation
Answer: C) ₹7,10,000
Start with profit before tax 8,40,000, add back depreciation 1,20,000 and deduct the non-operating profit on sale of machinery 30,000 = 9,30,000. Working capital: less increase in receivables 75,000, add decrease in inventories 40,000, add increase in payables 25,000 = 9,20,000. Less income tax paid 2,10,000 gives ₹7,10,000.
Question 4
Case: Pragati Tools Ltd (not a financial enterprise) had the following cash flows during the year: purchase of machinery ₹5,00,000; sale proceeds of long-term investments ₹1,80,000 (carrying amount ₹1,50,000); interest received on investments ₹40,000; dividend received ₹25,000. Net cash flow from investing activities under AS 3 is:
- A) Outflow of ₹2,55,000
- B) Outflow of ₹2,85,000
- C) Outflow of ₹2,95,000
- D) Outflow of ₹3,20,000
Show answer & explanation
Answer: A) Outflow of ₹2,55,000
For a non-financial enterprise, interest and dividends received are classified as investing activities under AS 3. Investing cash flow = -5,00,000 + 1,80,000 + 40,000 + 25,000 = -2,55,000. The full sale proceeds (not the carrying amount) are the cash inflow.
Question 5
Case: Tejas Industries Ltd has five business segments, all revenue being from external customers: Segment P: revenue ₹4,20,000; result profit ₹80,000; segment assets ₹5,00,000 Segment Q: revenue ₹3,10,000; result profit ₹60,000; segment assets ₹3,00,000 Segment R: revenue ₹90,000; result loss ₹40,000; segment assets ₹80,000 Segment S: revenue ₹70,000; result profit ₹6,000; segment assets ₹60,000 Segment T: revenue ₹60,000; result profit ₹4,000; segment assets ₹1,10,000 Applying the 10% thresholds of AS 17, which segments are reportable?
- A) P, Q, R and T
- B) P and Q only
- C) P, Q and R only
- D) P, Q, R, S and T
Show answer & explanation
Answer: A) P, Q, R and T
Total revenue is 9,50,000, so the revenue threshold is 95,000: only P and Q pass. For results, the greater of total profits (1,50,000) and total losses (40,000) is 1,50,000, so the threshold is 15,000; R's loss of 40,000 qualifies. Total assets are 10,50,000, so the threshold is 1,05,000; T's assets of 1,10,000 qualify. S fails all three tests. The reportable segments P, Q, R and T cover 92.6% of external revenue, which exceeds 75%, so no further segment needs to be added.
Question 6
Which of the following parties would NOT, by itself, be treated as a related party of Ashoka Plastics Ltd under AS 18?
- A) An associate of Ashoka Plastics Ltd
- B) A single major customer on whom the company is economically dependent
- C) The managing director of Ashoka Plastics Ltd
- D) A company that holds 60% of the voting power of Ashoka Plastics Ltd
Show answer & explanation
Answer: B) A single major customer on whom the company is economically dependent
AS 18 specifically states that a single customer, supplier, franchisor, distributor or general agent with whom an enterprise transacts a significant volume of business is not a related party merely because of the resulting economic dependence. A holding company, an associate and key management personnel such as the managing director are related parties.
Question 7
Case: Shivalik Foods Ltd earned a profit after tax of ₹30,00,000 for the year ended 31 March 20X2. Dividend on its cumulative preference shares for the year is ₹3,00,000. It had 5,00,000 equity shares outstanding on 1 April 20X1 and issued 2,00,000 further equity shares for cash at full market price on 1 October 20X1. Basic EPS under AS 20 is:
- A) ₹5.40
- B) ₹5.00
- C) ₹3.86
- D) ₹4.50
Show answer & explanation
Answer: D) ₹4.50
Earnings for equity shareholders = 30,00,000 - 3,00,000 = 27,00,000; preference dividend on cumulative shares is deducted whether or not declared. Weighted shares = 5,00,000 + 2,00,000 x 6/12 = 6,00,000. Basic EPS = 27,00,000 / 6,00,000 = ₹4.50.
Question 8
Case: Aravali Steels Ltd reported earnings of ₹15,00,000 for the year ended 31 March 20X1 on 4,00,000 equity shares. On 1 January 20X2 it made a bonus issue of 1 share for every 4 held. When presenting comparatives in the financial statements for the year ended 31 March 20X2, the restated basic EPS for 20X0-X1 is:
- A) ₹3.53
- B) ₹4.69
- C) ₹3.75
- D) ₹3.00
Show answer & explanation
Answer: D) ₹3.00
A bonus issue changes the number of shares without any change in resources, so under AS 20 it is treated as if it occurred at the beginning of the earliest period presented. Adjusted shares = 4,00,000 x 5/4 = 5,00,000. Restated EPS = 15,00,000 / 5,00,000 = ₹3.00. No time-weighting is applied to bonus shares.
Question 9
Case: Kalinga Cement Ltd had 8,00,000 equity shares outstanding on 1 April. On 1 July it made a rights issue of 1 share for every 4 held at ₹60 per share; the fair value of a share immediately before the exercise of rights was ₹100. Profit for the year ended 31 March is ₹45,00,000. Basic EPS for the year under AS 20 (rounded to two decimals) is:
- A) ₹4.74
- B) ₹5.62
- C) ₹4.65
- D) ₹4.50
Show answer & explanation
Answer: C) ₹4.65
Theoretical ex-rights fair value = (4 x 100 + 1 x 60) / 5 = ₹92.00. Adjustment factor = 100 / 92.00 = 1.0870. Weighted shares = 8,00,000 x 1.0870 x 3/12 + 10,00,000 x 9/12 = 9,67,391 (approximately). EPS = 45,00,000 / 9,67,391 = ₹4.65.
Question 10
Under AS 24, Discontinuing Operations, the 'initial disclosure event' is the occurrence of which of the following, whichever is earlier?
- A) Commencement of physical dismantling of the operation, or the final cessation of its revenue
- B) Receipt of the first sale instalment, or the end of the reporting period in which the plan was conceived
- C) The board first discussing the idea of discontinuance, or the auditor qualifying the report
- D) Entering into a binding sale agreement for substantially all the assets of the operation, or the board approving a detailed formal plan and announcing it
Show answer & explanation
Answer: D) Entering into a binding sale agreement for substantially all the assets of the operation, or the board approving a detailed formal plan and announcing it
AS 24 defines the initial disclosure event as the earlier of (a) the enterprise entering into a binding sale agreement for substantially all the assets attributable to the discontinuing operation, and (b) the board of directors (or similar body) both approving a detailed, formal plan for the discontinuance and making an announcement of the plan. Informal discussions or later physical events do not trigger the disclosures.
Question 11
Case: Ganga Retail Ltd prepares quarterly interim financial reports under AS 25. It expects to earn ₹40,00,000 for the year, evenly at ₹10,00,000 per quarter. Tax is levied at 20% on the first ₹10,00,000 of annual income and 30% on the balance. The income tax expense to be recognised in the first quarter is:
- A) ₹2,75,000
- B) ₹2,50,000
- C) ₹2,00,000
- D) ₹3,00,000
Show answer & explanation
Answer: A) ₹2,75,000
AS 25 requires interim income tax to be measured using the weighted average annual effective tax rate expected for the full year. Expected annual tax = 10,00,000 x 20% + 30,00,000 x 30% = 11,00,000; effective rate = 11,00,000 / 40,00,000 = 27.5%. Q1 tax = 10,00,000 x 27.5% = ₹2,75,000. Applying the 20% slab to Q1 alone would understate tax because annual income will cross into the 30% slab.
Question 12
Case: Neel Cosmetics Ltd incurs a large advertising campaign cost in the first quarter, although the benefits are expected through the year. In its interim financial report prepared under AS 25, the cost should be:
- A) Recognised as an expense in the first quarter when incurred, since deferral would not be appropriate at the financial year end
- B) Spread equally over the four quarters
- C) Shown as an asset in the interim balance sheet until year end
- D) Deferred and recognised in the quarter in which the related sales peak
Show answer & explanation
Answer: A) Recognised as an expense in the first quarter when incurred, since deferral would not be appropriate at the financial year end
AS 25 requires costs incurred unevenly during the year to be anticipated or deferred for interim reporting only if it would be appropriate to anticipate or defer that type of cost at the end of the financial year. Advertising costs cannot be deferred at year end, so they are expensed in the interim period in which they are incurred.