Civil Services Preparatory School – CSPs

Mock Exam CSS 2022

Accountancy and Auditing paper-I
PART-I (MCQS) MAXIMUM MARKS =20
PART-I(MCQS): MAXIMUM 30 MINUTES
PART-II MAXIMUM MARKS =80
NOTE: (i) First attempt PART-I (MCQ) on separate Answer Sheet which shall be taken back after 30
minutes.
(ii) Overwriting/cutting of the options/answers will not be given credit.

PART-I
1. A company's beginning inventory was overstated by $3,000, now ending inventory is understated
by $2,000. If purchases were properly reported, then earnings before taxes will be:

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A) overstated by $5,000. C) understated by $1,000.
B) understated by $5,000. D) overstated by $1,000.

2. Slovac Company purchased a machine that has an estimated useful life of eight years for $7,500.
Its salvage value is estimated at $500. What is the depreciation expense for the second year, assuming
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Slovac uses the double-declining balance method of depreciation?
A) $1,438. C) $1,406.
B) $1,875. D) $3,750.

3. Which of the following statements about inventory is most accurate?

Generally accepted accounting principles
A) (GAAP) requires the use of higher of cost or
market value for inventory.
LIFO will provide the most useful estimate
of inventory value and FIFO will provide the
B)
most useful estimate of the cost of goods
sold.
C
First in first out (FIFO) accounting, in times
C) of falling prices, will tend to overstate
reported profit margins.
In periods of rising prices, when converting
the income statement from last in first out
D) (LIFO) to first in first out (FIFO), net
income will rise if there is no LIFO
liquidation during the period.

4. A last in, first out (LIFO) liquidation in an environment of rising prices will NOT do which of the
following?
A) Increase gross income. C) Reduce inventory value.
D) Increase cost of goods sold (COGS).
B) Increase taxable income.
5. Formika Company recently purchased Palmer Inc. for $5 million. The sum of the individual assets
for Palmer Inc. was determined to be $4.5 million, so Formika recorded the $500,000 difference as
goodwill on the asset side of its balance sheet. Which of the following describes the proper accounting
treatment for goodwill?
Amortize goodwill over the lesser of its useful life Deplete goodwill on a per unit basis as it is used
A) C)
or 40 years. in the company’s operations.
Compare the carrying value of goodwill to its fair Compare the carrying value of goodwill to its fair
market value on an annual basis and adjust market value on an annual basis and report an
B) D)
owner’s equity if the carrying value is less than impairment charge on the income statement if the
fair market value. carrying value is greater than fair market value.

6. Ironman Nutrition has traditionally followed a conservative policy of expensing most costs.

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However, the new CFO is an advocate of capitalization. During a meeting with company executives
he explains that compared to expensing, capitalization is least likely to result in:
A) higher net cash flows. C) lower debt to equity ratio.
B) lower income variability. D) greater initial return on assets.

7. If a company is focusing on achieving the highest return on assets (ROA) and return on equity
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(ROE) possible, which type of depreciation method should be used?
A) Straight Line. C) Sum of year's digits.
B) Accelerated depreciation. D) Double declining balance.

8. Which of the following would be subject to depletion?

A) Mineral rights. C) Patent.
B) Goodwill. D) Trademarks.

9. When comparing capitalizing versus expensing costs which of the following statements is most
accurate?
A) Expensing costs creates B) Capitalizing costs creates C) Capitalizing costs creates
lower cash flows from higher cash flows from lower cash flows from
operations and lower cash operations and lower cash operations and higher cash
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flows from investing. flows from investing. flows from investing
.10. Which of the following statements regarding capitalizing versus expensing costs is least
accurate?
A) Capitalization results in B) Total cash flow is higher C) Cash flow from investing
higher profitability initially. with capitalization than is higher with expensing than
expensing. with capitalization.
11) Allocating an intangible asset’s cost to the income statement over time is known as
A) depreciation. B depletion. C) amortization
12) Intangible assets with finite useful lives are:
A) amortized over their actual B) not amortized, but are C) amortized over their
lives. tested for impairment at least expected useful lives.
annually.
13) Under U.S. GAAP, an asset is impaired when:
A) the firm can no longer fully B) accumulated depreciation C) the present value of future
recover the carrying amount of plus salvage value exceeds cash flows exceeds the
the asset. acquisition costs. carrying amount of the asset.
14) An impairment write-down is least likely to decrease a company's:
A) debt-to-equity ratio. B) assets. C)future depreciation expense
15) Interest Expense shown on Income Statement related to bond is based on
A) Current market rate C) Coupon Payment

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B) Market rate at issuance D) Unamortized Discount
16) When a firm records a lease as a capital lease:
A) Its working capital increases. C) Its debt-to-asset ratio increases.
B) Its current ratio decreases. D) Its financial leverage ratio decreases
17) In a given period, the firm's beginning gross investment is 4,000 and ending gross investment
is 12,000. The accumulated depreciation at the beginning was 800 and the ending balance in this
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account was 900. The firm uses straight-line depreciation. The average age of the firm's assets at the
end of the period is ________.
A) 5 years C) 9 years
B) 13.3 years D) 15 years
18) Compared to conventional bon, a convertible bond will have
A) Lower Interest Cost B) Higher Interest Cost C) Both have Equal Cost
19) A perpetual Debt will be treated as
A) Equity C) Have characteristics of characteristic to treat as Equity
B) Debt both so decide based on the or Debt
20) A change in accounting method
A) Change in accounting B) Change in accounting
estimate principle C) Not allowed in US GAAP
C
 Civil Services Preparatory School – CSPs
Mock Exam CSS 2022
Accountancy and Auditing paper-I
TIME ALLOWED: THREE HOURS PART-I (MCQS) MAXIMUM MARKS =20
PART-I(MCQS): MAXIMUM 30 MINUTES PART-II MAXIMUM MARKS =80
NOTE (i) Part-II is to be attempted on the separate Answer Book.
(ii) Attempt FOUR Questions from PART-II, selecting TWO questions from EACH SECTION. ALL Questions
carry EQUAL marks
(iii) All the parts (if any) of each Question must be attempted at one place instead of at different places.
(iv) Candidate must write Q. No. in the Answer Book in accordance with Q. No. in the Q. Paper.
(v) No Page/Space be left blank between the answers. All the blank pages of Answer Book must be crossed.
(vi) Extra attempt of any question or any part of the attempted question will not be considered.
(vii) Use of calculator is allowed.
PART-II

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SECTION-A
Q1: Celebrity Company closes its accounts and prepares financial statements at the end of each
calendar year; the following adjusted trial balance was prepared at December 31 of the most recent
year.
Trial Balance
December 31, 2013
SP Heads Debits Credits
Sundry debtors 16000
Sundry creditors 22600
Administration and general expenses 31500
Bad debts 1200
Motor vehicle 120000
Accumulated depreciation motor vehicle 27000
Printing and stationery 8600
Advertisement 6000
Insurance 2000
Postage and telephone 1800
Salaries 86000
Vehicle expenses 13400
Rent and taxes 21000
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Utilities expenses 42000
Share capital 123600
Purchases 311000
Sales 541000
Stock on 1-1-2013 40200
Cash and bank balances 13500

741200 741200
Additional information:
1. Rs. 2100 was payable for repair of motor vehicle
2. A provision for bad debts is to be created to the extent of 2.5%
3. Depreciation is charged on motor vehicle under WDV @ 20%
4. Stock on December 31st, 2013 was Rs 48,600 (NRV was Rs. 45,000)
Required:
I. Pass the adjusting entires
II. Prepare adjusted trail balance
III. Profit and loss statement and statement of financial position as at December 31st, 2013
Q2: Ali and Bashir are chartered accountants and have been working as Managing Director
(MD) and Chief Financial Officer (CFO) in a listed company. In a recent meeting of the Board,
the directors have decided to expand the business within six months by opening 20 retail outlets.
This expansion would require financing of Rs. 300 million which may be arranged through bank
loan.
The following information has been extracted from latest draft financial statements of the

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company:
Rs. in ‘000
Sales 1,700
Gross profit 545
Tax expense 23
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Profit after tax 40
Total assets 2,500
Non-current assets 900
Inventories 850
Trade receivables 600
Share capital 800
Reserves 152
Long term debt @ 9% 750
Following additional information is also available:
1. 80% of the sales are on credit.
2. Opening inventory was Rs. 100 million.
3. 40% of current liabilities comprise of trade payables.
MD has advised the CFO to arrange the loan from MN Bank. He has also informed that the
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President of the bank is his good friend and the loan can be arranged on a fast track basis at a mark-
up of 15% per annum, subject to the following conditions:
1. current ratio and quick ratio should be at least 2:1 and 1:1 respectively;
2. gearing ratio should not exceed 40%; and
3. Interest cover should be at least 3.
CFO is not comfortable with this deal as the mark-up offered by the bank is much higher than the
rate on the existing loan and it is difficult for the company to meet the gearing requirements of the
bank. However, MD has asked him to make certain changes in the draft financial statements before
submission to the bank; which according to the CFO are not in accordance with the IFRSs.
Required: (a) Compute liquidity, working capital and debt ratios of the company.
(b) What Are The Major Constraints On Relevant And Reliable Financial Statements?
Q3: Computation of Depreciation Expense
Limestone Construction purchased a concrete mixer on July 15, 2011. Company officials
revealed the following information regarding this asset and its acquisition:
Purchase price . . . . . . . . . . . . $210,000
Residual value . . . . . . . . ... .. $20,000
Estimated useful life . . . . . . . 9 years
Estimated service hours . . .. . 50,000
Estimated production in units . .375,000
The concrete mixer was operated by construction crews in 2011 for a total of 6,500 hours, and it
produced 49,500 yards of concrete. It is company policy to take a half-year’s depreciation on all
assets for which it used the straight-line or double-declining-balance depreciation method in the
year of purchase.
Calculate the resulting depreciation expense for 2011 under each of the following methods, and
specify which method allows the greatest depreciation expense.
1. Double-declining-balance

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2. Productive-output
3. Straight-line

SECTION-B
Q4: Octa Electronics produces and markets a single product. Presently, the product is
manufactured in a plant that relies heavily on direct labour force. Last year, the company sold
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5,000 units with the following results:

Rupees
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000
Required:
a. Compute the break-even point in rupees and the margin of safety.
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b. What would be the contribution margin ratio and the break-even point in number of units if
variable cost increases by Rs. 600 per unit? Also compute the selling price per unit if the
company wishes to maintain the contribution margin ratio achieved during the previous year.

c. The company is also considering the acquisition of a new automated plant. This would result
in the reduction of variable costs by 50% of the amount computed in (b) above whereas the
fixed expenses will increase by 100%. If the new plant is acquired, how many units will have
to be sold next year to earn net income of Rs. 3,150,000.
Q5: A company’s Department 2 costs for June were:
Cost from Department 1 Rs.16320
Cost added in Department 2:
Materials Rs.43,415
Labor 56,100
Factory overhead (FOH) 58,575
The quantity schedule shows 12,000 units were received during the month from Department 1;
7,000 units were transferred to finished goods; and 5,000 units in process at the end of June were
50% complete as to materials cost and 25% complete as to conversion cost.

Required: Prepare Cost of production report.

Q6: Following information are related to Al-Tabak limited.

Opening stock nil

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Production (units) 15,000

Sales (units) 10,000

Sales price per unit Rs.20

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Unit cost:

Direct Material Rs.8

Direct labor 4

Variable production overhead 2

Variable sales overhead 2

Fixed costs for the month:

Production costs Rs.40,000

Administration costs 15,000

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Sales and distribution costs 25,000

Required: Using marginal costing and direct costing calculate the profit. Also compute the value
of stock.
Q7: The cordless phone manufacturing division of a consumer electronics company uses
activity-based accounting. For simplicity, assume that its accountants have identified only the
following three activities and related cost drivers for manufacturing overhead:
ACTIVITY COST DRIVER
Materials handling direct materials cost
Engineering Engineering change orders
Power Kilowatt hours

Three types of cordless phones are produced: SA2, SA5, and SA9. Direct costs and cost-driver
activity for each product for a recent month are:
SA2 SA5 SA9
Direct materials cost Rs.25,000 Rs.50,000 Rs.125,000
Direct labour cost Rs.4,000 Rs.1,000 Rs.3,000
Kilowatt hours 50,000 200,000 150,000

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Engineering change orders 13 5 2

Manufacturing overhead for the month was;

Materials handling Rs. 8,000
Engineering 20,000
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Power 16,000
Total manufacturing overhead Rs.44, 000

Required:
a. Compute the manufacturing overhead allocated to each product with the activity-based
accounting system.
b. Suppose all manufacturing overhead costs have been allocated to products in proportion to
their direct labour costs. Compute the manufacturing overhead allocated to each product.

c. In which product costs—those in requirement 1 or those in requirement 2—do you have

the most confidence? Why?
C