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IC 26 Unlocked & Compressed

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IC 26 Unlocked & Compressed

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‘REAL FEEL’ TIMED EXAM

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

‘REAL FEEL’ TIMED EXAM

Please complete this test in 2 hours to test your preparation.

Question1 Which of these is the correct accounting entry to record 'Provisions for Doubtful Debts' ?
(a) Provision for doubtful debts account - Dr ; Profit and Loss A/c - Cr
(b) Debtors account - Dr ; Profit and Loss A/c - Cr
(c) Profit and Loss A/c - Dr ; Debtors account - Cr
(d) Profit and Loss A/c - Dr ; Provision for doubtful debts account - Cr
(e) Bad Debt A/c - Dr ; Profit and Loss A/c - Cr

Correct Answer Provision for doubtful debts account - Dr ; Profit and Loss A/c - Cr
Answer Explanation

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question2 Compute the NAV of a mutual fund based on the given details:
- Current market price of all holding Rs 930 crores
- Liabilities of the fund Rs 130 crores
- Number of fund units outstanding 30 crores
- Profit for the year Rs 24 crores
(a) Rs. 26.66
(b) Rs. 31.56
(c) Rs. 24.76
(d) Rs. 19.84
(e) Rs. 33.66

Correct Answer Rs. 26.66

Answer Explanation We calculate the NAV of a mutual fund by dividing the total net assets by the total number
of units issued. To get the total net assets of a fund, subtract any liabilities from the current
value of the mutual fund’s assets and then divide the figure by the total number of units
outstanding. The resulting figure is the NAV of the mutual fund.

So, the mathematical formula for NAV is: Assets – Debits / Number of outstanding units =
Net asset value (NAV)

Current market price of holding Rs 930 crores - Fund liabilities Rs 130 crores/ Number of
fund units outstanding 30 crores:
930 – 130 / 30 = 26.66 i.e., NAV of the Mutual Fund = Rs. 26.66

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question3 To what does IFRS 4 applies to?

1. Financial assets within scope of IAS 39
2. Insurance contract issued by an entity issue
3. Reinsurance contract held by an entity
(a) All 1, 2 and 3
(b) 1 and 3 only
(c) 1 and 2 only
(d) 2 and 3 only
(e) Only 2

Correct Answer 2 and 3 only

Answer Explanation IFRS 4 is an International Financial Reporting Standard (IFRS) issued by the 'International
Accounting Standards Board' providing guidance for the accounting of insurance contracts.
IFRS 4 applies to Insurance contract that an entity issues & Reinsurance contract that an
entity holds. It is not applicable for financial assets within scope of IAS 39.

Question4 Transactions between ______ can result in the flow of funds. 1. Fixed Assets and Current
Liabilities 2. Current Assets and Fixed Assets 3. Current Assets and Long-term liabilities and
capital
(a) Only 1
(b) Only 2
(c) Only 3
(d) All 1, 2 and 3
(e) Both 2 and 3

Correct Answer Only 3

Answer Explanation The sources & application of funds i.e. where the Working Capital comes and where it is
utilized causes flow of funds. Transaction between Current assets and long-term liabilities
and capital may cause the flow of funds

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question5 What would be the right treatment of unrealized gains or losses which arise due to changes
in the fair value of listed equity and derivatives instruments in the financial statements of a
Life Insurance Company?
1. Deferred under the head miscellaneous expenses
2. Recognized in profit or loss
3. Transferred to equity under the head ‘Fair Value Change Account’
(a) Only 1
(b) Only 2
(c) Only 3
(d) Only 1 and 2
(e) Only 2 and 3

Correct Answer Only 3

Answer Explanation In the financial statements of a life insurance company, unrealized gains / losses arising
due to changes in the fair value of listed equity and derivatives instruments shall be
transferred to equity under the head ‘Fair Value Change Account’.

Question6 Life insurance companies have to prepare the CASH FLOW statement using the ________ .
(a) Direct method
(b) Indirect method
(c) Standard method
(d) Accrual method
(e) Proportional method

Correct Answer Direct method

Answer Explanation Cash flow Statement is additional information to user of financial statement in additional
to Balance Sheet, Profit & Loss Account and Revenue Accounts.
Under this statement, the cash flow from operating, investing and financing activities are
recorded. All life insurance companies (whether listed or unlisted) have to prepare cash
flow statement using Direct Method called Receipt and Payment Account by using AS 3
(Receipt and Payment Account). In Direct Method, gross receipts & payments are disclosed.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question7 In which way is Salary calculated while calculating House Rent Allowance?
(a) Basic Salary + bonus + leave encashment
(b) Basic Salary + bonus + Uniform allowance
(c) Basic Salary + bonus + conveyance
(d) Basic Salary + bonus + Rent paid
(e) Basic Salary + bonus +dearness allowance

Correct Answer Basic Salary + bonus +dearness allowance

Answer Explanation HRA calculation is done on the basis of the salary. For the purpose of computing House
Rent Allowance, Basic + Bonus + Dearness Allowance are taken into consideration (Under
section 10(13A) of the IT Act.) It cannot exceed 50% of the basic salary.

Question8 To whom is the Funds Flow analysis of primary importance?

1. Financial management
2. Personnel management
3. Auditing

(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 1

Answer Explanation A statement of change in financial position refers to fund flow statement. It analyses the
flow of funds during the period. It is a statement which shows the sources & application of
funds i.e., from where the working capital comes & its utilisation.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question9 The amount collected by the insurance company is kept in which account till the time the
underwriter takes a decision regarding acceptance or rejection of the risk?
(a) Special premium A/c
(b) First premium A/c
(c) Policy deposit A/c
(d) Proposal deposit A/c
(e) Short remittance A/c

Correct Answer Proposal deposit A/c

Answer Explanation The amount deposited by an insurance agent cannot be appropriated towards premium
account by insurance companies. Till the underwriter takes a decision regarding acceptance
or rejection of the risk, the amount collected by the insurance company is kept in ‘Proposal
Deposit Account/ Suspense Account’. After acceptance, the premium is credited to
premium account.

Question10 Which is the incorrect option from the below mentioned pairs with regards to the
accounting process?
(a) Identifying the transactions - Collecting data source
(b) Analyzing the transactions - Posting to ledger accounts
(c) Summarizing and reporting transactions - Preparing the trial balance
(d) Recording monetary transactions - Preparing the balance sheet
(e) Recording monetary transactions - Preparing the primary books of account

Correct Answer Recording monetary transactions - Preparing the balance sheet

Answer Explanation Accounting is the process of recording & reporting of financial transactions. Under
accounting process, ‘Recording monetary transactions – Preparing balance sheet’ is
incorrect’. The correct option would be preparing either be ‘Journal or Cash book’

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question11 Sub-standard asset is the one which has been classified as Non-Performing Asset for a
period of more than _____ .
(a) 6 months
(b) 12 months
(c) 18 months
(d) 24 months
(e) 36 months

Correct Answer 12 months

Answer Explanation Classification of assets is done on the basis of the ability of the borrower to repay, value &
reliability. Sub-standard asset is the one which has been classified as non-performing asset
for a period exceeding 12 months.

Question12 _______ is not a component of the financial statements of an insurance company.

(a) Receipts and payments A/c
(b) Statement of changes in Equity
(c) Balance Sheet
(d) Revenue A/c
(e) Profit and Loss A/c

Correct Answer Statement of changes in Equity

Answer Explanation Statement of changes in equity is not a component of financial statements. Rests of the
components are essentially part of any financial statement.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question13 Which is the INCORRECT statement in relation to 'Accounting Equation'?

(a) If a transaction is debited in one account then it is credited in another account
(b) Sum total of all debit amounts and all credit amounts are equal
(c) Total assets are equal to total liabilities in the Balance Sheet
(d) Liabilities will have a debit balance
(e) The net result of all incomes and expenses is considered as profit and is added to capital

Correct Answer Liabilities will have a debit balance

Answer Explanation According to accounting equation: Assets = Capital + Liability i.e. Dr = Cr
Liabilities therefore are considered to have credit balance and not debit balance.
Liabilities, revenues and sales, gains, owner equity and stockholders' equity accounts
normally have credit balances.

Question14 _______ expenses are included in the expenses of management for an insurance company.
1. Medical fees 2. Depreciation 3. Remuneration to the auditor
(a) Only 1 and 3
(b) Only 2 and 3
(c) Only 3
(d) Only 2
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation Expenses of management is an important part of revenue account for any insurance
company which includes all charges wherever incurred whether directly or indirectly. It
includes: Auditor’s remuneration, Medical fees and Depreciation.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question15 The purpose of a budget is to ________.

1. Establishing strategic options
2. Finalizing long term objectives
3. Planning operations 4. Motivating the management
(a) Statements 1 and 2
(b) Statements 3 and 4
(c) Statements 1 and 3
(d) All 1, 2, 3 and 4
(e) Only 2

Correct Answer Statements 3 and 4

Answer Explanation Budget is a basic instrument of planning involving calculations of facts & figures for
financial outcome in the future. Its objectives are manifold including motivating
management and planning operations

Question16 Identify the INCORRECT statement with respect to a Sales Budget - 1. It is expressed in
quantitative terms as well as monetary terms 2. Volume of sales demand and price of the
product influence the sales budget 3. Sales budget is the foundation of all functional
budgets
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 3
(e) Both 2 and 3

Correct Answer Only 3

Answer Explanation Sales budget is influenced by the sales demand and price of the product & is expressed in
quantitative terms as well as monetary terms. It is not the foundation of all functional
budgets.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question17 In which of these statements a POSTING error has been made?

(a) The ledger balance of ‘bad debts’ of Rs 2000 was carried forward by Neeta wrongly as Rs
3000 to the trial balance
(b) Rohit is an accountant with XYZ Insurance Company. When he made an entry in the ledger,
the amount was wrongly entered as Rs 1000 instead of the correct amount of Rs 2000.
(c) Bharat had to make an entry in the debit side of a journal, but instead made an entry on
the credit side of the journal
(d) Manoj sold goods of Rs 5000, Rs 8000 and Rs 2000 to three clients. These amounts were
entered correctly in the sales day book. However, when Manoj totaled the monthly sales,
he came to Rs 10000 instead of Rs 15000
(e) Ashish sold goods of Rs 5000, Rs 8000 and Rs 2000 to three clients. These amounts were
entered correctly in the sales day book. However, when Ashish totaled the monthly sales,
he came to Rs 20000 instead of Rs 15000

Correct Answer Rohit is an accountant with XYZ Insurance Company. When he made an entry in the ledger,
the amount was wrongly entered as Rs 1000 instead of the correct amount of Rs 2000.

Answer Explanation Posting error occurs while posting a transaction from the books of prime entry to the
ledgers. This can be -
1. Posting with wrong amount
2. Omission to post either Credit or Debit entry
3. Posting to wrong side of correct ledger

Rohit entering Rs. 1000 instead of Rs. 2000 is a classic example of posting error. The error
occurred while posting a transaction from books of prime entry to the ledger. The most
common form of posting the wrong amount is a transposition error.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question18 For a life insurance company, on what basis is the Catastrophe Reserve maintained?
(a) 5% of premium collected
(b) 10% of premium collected
(c) 12.5% of premium collected
(d) 20% of premium collected
(e) As per IRDA, no such reserve needs to be maintained

Correct Answer As per IRDA, no such reserve needs to be maintained

Answer Explanation When an insurance company experiences significant losses from a catastrophe, the
company can draw upon these segregated funds to maintain financial strength. The reserve
does not provide a measurement or quantification of the maximum amount a catastrophic
event may cost an insurance company or the insurance industry. IRDA has mandated life
insurance companies to reinsure with domestic reinsurers, a percentage of sums assured,
on each policy.

Question19 The layering stage of money laundering consists of ______ .

(a) Separation of proceeds from the source
(b) Provision of apparent legitimacy to the funds
(c) Physical disposal of cash
(d) Withdrawing clean money from the system
(e) Concealing the origin of the funds

Correct Answer Separation of proceeds from the source

Answer Explanation Under money laundering, the launderer engages in a series of conversion or movement of
funds to ‘Separation of proceeds from the source’.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question20 The ' Error of Principle' is committed at which stage of an accounting transaction?
(a) Posting stage
(b) Balancing stage
(c) Pre-recording stage
(d) Preparation of the trial balance
(e) Recording stage

Correct Answer Recording stage

Answer Explanation When a person violates the generally accepted accounting principle, it amounts to error of
principle. This is committed at the recording stage where wrong account head is debited
and credited simultaneously, although with a right amount.

Question21 How is the CURRENT RATIO derived?

(a) Current assets / Quick liabilities
(b) Current liabilities / Current assets
(c) Quick assets / Quick liabilities
(d) Quick assets / Current assets
(e) Current assets / Current liabilities

Correct Answer Current assets / Current liabilities

Answer Explanation Current ratio indicates whether the current assets would be able to generate sufficient
cash to pay off the current liabilities as and when they fall due.
The ratio is derived as: Current assets / Current liabilities. It gives an idea of the efficiency
of a company’s operating cycle or its ability to turn its products into cash.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question22 Select which of the given statements hold true for a life insurance company?
1. The acquisition cost for acquiring new business will be expensed in the period in which
they are incurred
2. Segment reporting is applicable to all insurance companies
3. The Cash flow statement has to be prepared only under indirect method

(a) Only 1 and 2 are correct

(b) Only 2 and 3 are correct
(c) All 1, 2 and 3 are correct
(d) Only 1 is correct
(e) Only 3 is correct

Correct Answer Only 1 and 2 are correct

Under this system segment reporting is applicable to all insurance companies. The segment
reporting refers to income, expenses, investing & financing activities of an insurer.

Also, the acquisition cost for acquiring new business will be expensed in the period in
which they are incurred.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question23 ________ is/are the purpose of budgetary control.

1. Its a tool for decision making
2. Its a tool to monitor business performance
3. Its used to forecast the income and expenditure and thus profitability
(a) Only 3
(b) All 1, 2 and 3
(c) Both 1 and 2
(d) Only 1
(e) Both 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation Budgetary control is a means of monitoring revenue & cost thereby exercising control by
developing budgets & comparing budgeted figures with actual results. Thus, the budgetary
control has the purpose to forecast of income and expenditure and thereby profitability,
instrument for decision making & means to monitor business performance.

Question24 Which benefit is not available in a health insurance policy?

(a) Domiciliary treatment benefit
(b) Major surgical benefit
(c) Death benefit
(d) Fund value maturity
(e) Hospital cash benefit

Correct Answer Fund value maturity

Answer Explanation In the health insurance policy, fund value on maturity in not available as there is no fund
created or opted from the premium charged/payable. Rest of the benefits are all part of
the health insurance policy.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question25 The process of creating a formal plan and translating goals into a quantitative format called
______ .
(a) Variance analysis
(b) Budgeting
(c) Process costing
(d) Forecasting
(e) Job costing

Correct Answer Budgeting

Answer Explanation Budgeting is a process. This means budgeting is a number of activities performed in order
to prepare a budget. A budget is a quantitative plan used as a tool for deciding which
activities will be chosen for a future time period. It is thus a process of creating a formal
plan and translating goals into a quantitative format.

Question26 Unit Linked Insurance Plans are those plans in which the insurance companies ________ .
(a) pays a lump sum amount on the death of the life assured during the policy period
(b) pays the life assured the sum assured and the accumulated bonuses at the end of the
tenure of the plan
(c) pay the life assured the fund value on maturity of the plan as per the NAV of the fund
(d) return back the premiums with accumulated interest to the life assured at the end of the
tenure of the plan
(e) makes lump sum payments at specified time intervals during the plan to life assured

Correct Answer pay the life assured the fund value on maturity of the plan as per the NAV of the fund
Answer Explanation Unit Linked Insurance Plans - ULIPs contains both investment & insurance. Under these
insurance plans the insurance companies pay the life assured the fund value on maturity of
the plan on maturity NAV of sum only is paid.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question27 Overall Expense ratio is _____ .

(a) Its the ratio of Commission expense to Total management expenses
(b) Its the ratio of Operation expenses to Total premium income
(c) Its the ratio of Operating expenses to Total management expenses
(d) Its the ratio of Total expenses of management to Total premium income
(e) Its the ratio of Total management expense to Commission expense

Correct Answer Its the ratio of Total expenses of management to Total premium income
Answer Explanation Overall expense ratio indicates the overall operational efficiency of the unit. It is derived
dividing total expenses of management to total premium income.

Question28 Which are / is not a part of the 'performance budget' prepared by an insurance company ?
1. Finance budget 2. Production budget 3. Customer service budget
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 2

Answer Explanation Performance budget can be divided into four main parts i.e. Customer service budget,
Finance budget, Growth budget & Capital budget. Production budget has nothing to do
with performance budget. Since there is no production involved in insurance companies’
activities, there is no need for a production budget.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question29 Most of the errors can be highlighted by preparing a trail balance. Which of the below
mentioned errors CANNOT be highlighted?
(a) Commission
(b) Casting
(c) Posting
(d) Wrong carry over to trial balance
(e) Transposition

Correct Answer Commission

Answer Explanation Even if the totals of debits & credits are equal, it doesn’t ensure correctness of accounting.
Certain errors don’t create difference in a trial balance. Error of commission is basically a
clerical error which involves recording of transaction to the wrong account or wrong
amount. It would not affect the trial balance.

Question30 The due date for filing quarterly statements of TDS through Form 24Q for the quarter
ending 30th September is _____ .
(a) 15th April
(b) 15th January
(c) 15th October
(d) 31st December
(e) 31st March

Correct Answer 15th October

Answer Explanation Timeline for filing quarterly statements of TDS through Form 24Q is 15th of the next
month.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question31 In the KYC (Know Your Customer) process which of the given statements hold true ?
1. KYC has to be done only at the time of entering into an insurance contract
2. Those clients who do not wish to reveal their identity are exempt from KYC process
3. Information about the customers can also be collected from agents
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2 are correct
(e) Both 2 and 3 are correct

Correct Answer Only 1

Answer Explanation Knowing a customer is a basic need of insurance companies & they must reasonable efforts
to determine the true identity of customers. KYC is the process through which it is done. It
is essentially to be done at the time of entering into an insurance contract for both new
customers as well as for existing customers.

Question32 Why does a lender to the company (external user) needs the financial statements of the
company?
(a) To know only the liquidity and profitability of the company
(b) To know the leverage and liquidity of the company
(c) To know only the profitability of the company
(d) To know only the leverage and profitability of the company
(e) To know the liquidity, leverage and profitability of the company

Correct Answer To know the liquidity, leverage and profitability of the company
Answer Explanation Financial statements aid decision making and must be user friendly to various entities. The
lender, who is basically an external user, needs financial statements to know liquidity,
leverage and profitability of the company.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question33 Which accounting records is used to check the arithmetical accuracy of ledger posting?
(a) Profit and Loss Account
(b) Balance sheet
(c) Trail Balance
(d) Control accounts
(e) Journal entry

Correct Answer Trail Balance

Answer Explanation The trial balance helps the accountant to check the arithmetic accuracy of the accounting
after the preparation of ledger accounts. It helps to locate the errors & provide a basis of
preparing the financial statements.

Question34 As per the guidelines for the appointment of statutory auditors of Insurance Company in
the IRDAI circular of 2005, the audit can be conducted by a ____ and this entity should be
in continuous practice for a period of ____ or more.
(a) Firm, 3 years
(b) Firm, 5 years
(c) Firm, 15 years
(d) Company, 5 years
(e) Company, 10 years

Correct Answer Firm, 15 years

Answer Explanation As per the guidelines for the appointment of statutory auditors of Insurance Company in
the IRDAI circular of 2005, the audit can be conducted by a firm and this firm should be in
continuous practice for a period of 15 years or more.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question35 ___________ is/are Participating Policies.

1. Endowment plans 2. Annuity plans 3. Children’s deferred insurance
(a) Both 1 and 3
(b) Both 1 and 2
(c) Both 2 and 3
(d) Only 1
(e) Only 2

Correct Answer Both 1 and 3

Answer Explanation The majority of life insurance plans are either ‘with profit’ or ‘without profit’. With profit
policies are also known as ‘participating policies’ which participate in profits till a claim
arises.
Children’s deferred insurance and Endowment plans are the examples of participating
policies. Annuity plans do not participate in the profits of the insurer.

Question36 _____ is a correct PAN number.

(a) AEYPR555R
(b) AEYPR5555R
(c) AER5555R
(d) AEYP5555R
(e) AEYPR5555RT

Correct Answer AEYPR5555R

Answer Explanation Permanent account number (PAN) is a 10-digit alphanumeric number. The first five
characters are letters from the English alphabet, the next four characters are numbers and
the last character is also a letter. First three characters selection is random. The fourth
character of the PAN always represents the status of the holder i.e. ‘P’ stands for ‘Person’.
The fifth character represents the PAN holder's Surname e.g. If the surname is say
Banerjee, then the fifth character of the PAN will be 'B'. The last digit is just the check digit
assigned randomly by the IT department. It doesn't refer to anything in particular. It is
same as the first three alphabet of the pan card. The four numeric characters are
sequential number running from 0001 to 9999.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question37 A retail shop owner consumed goods worth Rs 800 from inventory. The normal selling price
of the goods is Rs 900. What is the correct entry in the books of accounts?
(a) Debit drawings account for Rs 800 - Credit Purchase Account for Rs 800
(b) Debit Inventory account for Rs 800 - Credit Purchase Account for Rs 800
(c) Debit drawings account for Rs 900 - Credit Sales Account for Rs 900
(d) Debit drawings account for Rs 800 - Credit Sales Account for Rs 900
(e) Debit Sales account for Rs 900 - Credit Drawings Account for Rs 900

Correct Answer Debit drawings account for Rs 800 - Credit Purchase Account for Rs 800
Answer Explanation All accounting transactions are recorded by giving two accounting effects i.e. debit &
credit. For the grocery shop, the correct entry in the books of accounts would be ‘Debit
drawings account for Rs 800 and Credit Purchase Account for Rs 800'.

Question38 Which of the below listed human resource accounting model involves determining the
value of human resources as the present value of estimated future earnings of employees
(in the form of wages, salaries etc.) discounted by the rate of return on investment (cost of
capital).
(a) Elliots Model
(b) Flamholtz Model
(c) Likert’s Model
(d) Lev and Schwartz Model
(e) Hekimian and Jones Model

Correct Answer Lev and Schwartz Model

Answer Explanation The Lev and Schwartz model states that the human resource of a co is the summation of
value of all the Net present value (NPV) of expenditure on employees. The human capital
embodied in a person of age R is the present value of his earning from employment

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question39 When two parties agree to exchange one type of interest rate cash flow for another, this is
known as _____ .
(a) Hedge forwards
(b) Interest forwards
(c) Interest rate swaps
(d) Call interest swaps
(e) Put interest swaps

Correct Answer Interest rate swaps

Answer Explanation Sometimes companies do not raise money by issuing shares/ Bonds. They prefer private
placement route where they are not be required to spend large marketing expenses like;
An agreement under which two parties agree to exchange one type of interest rate cash
flow for another is known as Interest rate swaps.

Question40 The annual value of a self-occupied property is calculated based on ________ (as per
Income Tax Act)
(a) It is considered as NIL
(b) on actual amount paid to acquire property
(c) the actual current market value
(d) the value as per municipal valuation
(e) the value as per indexation

Correct Answer It is considered as NIL

Answer Explanation Section 22 to 27 of the IT Act deals with income under the head ‘Income from House
Property’.
Annual value of property calculated for self-occupied property, is considered to be NIL.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question41 On the liability side of the Balance Sheet, the proposed dividend is shown under the head
______ .
(a) Loans
(b) Trade payables
(c) Provisions
(d) Profits
(e) Reserve and Surplus

Correct Answer Provisions

Answer Explanation When a dividend is declared, the total value is deducted from the company's retained
earnings and transferred to a temporary liability sub-account called dividends payable. This
means the company owes its shareholders money, but has not yet paid. When the dividend
is eventually distributed, this liability is wiped clean and the company's cash sub-account is
reduced by the same amount. As the proposed dividend is yet to be approved by the
shareholders of the Company, board of Directors it has to be shown as ‘Provisions’ for
proposed Dividend

Question42 Identify the correct statement(s) with respect to a journal.

1. The credits are recorded on the left side and debits on the right side in a journal
2. In a journal, the transactions are recorded in a chronological order
3. Journalisation is basically a process of converting transactions into a debit/credit format
(a) Only 1
(b) Both 1 and 2
(c) Both 2 and 3
(d) Only 3
(e) All 1, 2 and 3

Correct Answer Both 2 and 3

Answer Explanation Journal is a book of prime entry where journalisation is the process of converting
transactions and events into a debit/credit format and transactions are recorded in the
journal in a chronological order.
In the journal, credits are recorded on the right side and debits on the left side.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question43 The following details are for a new business started by Mr. Zampa.
Cash Sales Rs 25000;
Cash collected from Debtors Rs 90000;
Bad debts Rs 2000;
Debtors at year end Rs 7000.
What is the total sale during the year?
(a) Rs 124000
(b) Rs 122000
(c) Rs 115000
(d) Rs 120000
(e) Rs 113000

Correct Answer Rs 120000

Answer Explanation A total sale during the year is calculated as:

(Cash sales) + (Cash collected from debtors) + (Debtors at the year-end) – (Bad debts)

The total sales during the year thus would be: 25000 + 90000 + 7000 – 2000 = 120000

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question44 Describe an Endowment Insurance Plan.

(a) In an Endowment Insurance Plan, the insurance companies pay the life assured the fund
value on maturity of the plan and also the sum assured
(b) In an Endowment Insurance Plan, the insurance company makes lump sum payments at
specific time intervals during the plan to life assured
(c) In an Endowment Insurance Plan, the insurance companies pay back the premiums to the
life assured at the end of the tenure with interest.
(d) In an Endowment Insurance Plan, insurance company pays a lump sum amount on the
death of the life assured during the policy period
(e) In an Endowment Insurance Plan, the insurance company pays the life assured the
promised sum assured and accumulated bonuses, if any, at the end of the tenure of plan

Correct Answer In an Endowment Insurance Plan, the insurance company pays the life assured the
promised sum assured and accumulated bonuses, if any, at the end of the tenure of plan

These are insurance plans in which the life assured the promised sum assured and
accumulated bonuses, if any, at the end of the tenure of plan.

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Question45 The advance deposit is a minimum amount that has to be paid by the proposer along with
the ______ .
(a) Proposal form
(b) Single premium
(c) Renewal premium
(d) Salary saving scheme premium
(e) First installment premium

Correct Answer Proposal form

Answer Explanation Advance deposit is a minimum amount that needs to be paid by the proposer along with
the first installment premium. It is collected by the agent along with the proposal form.

Question46 A payment was made by cheque for Rs. 400 for insurance. This was mistakenly credited to
Insurance Account and Debited to Cash book. Which of these entries will be needed to
correct it in the ledger accounts?
(a) Dr Insurance A/c 800, Cr Cashbook 800
(b) Dr Cashbook 400, Cr Insurance A/c 400
(c) Dr Insurance A/c 400, Cr Cashbook 400
(d) Dr Insurance A/c 800, Cr Suspense A/c 800
(e) Dr Insurance A/c 400, Cr Suspense A/c 400

Correct Answer Dr Insurance A/c 800, Cr Cashbook 800

Answer Explanation A reverse entry will have to be passed with the double amount to correct the error and
validate the amount.

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Question47 With the help of ________ , one can prepare the Bank Reconciliation Statement.
(a) Bank column of cash book and cash column of bank book
(b) Bank column of cash book and bank statement
(c) Cash column of cash book and bank statement
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Bank column of cash book and bank statement

Answer Explanation A bank reconciliation statement is prepared to reconcile any difference that may exist
between the cash book & the pass book. It is done by; Bank column of cash book and bank
statement.

Question48 ________ expenses are included in the expenses of management for an insurance
company.
1. Depreciation 2. Medical fees 3. Remuneration to the auditor
(a) Only 2
(b) Only 3
(c) All 1, 2 and 3
(d) Only 1 and 2
(e) Only 1 and 3

Correct Answer All 1, 2 and 3

Answer Explanation Expenses of management form an important part of the revenue account for an insurance
company. All the above expenses are included in an insurance company.

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Question49 Accounting Standard 5 (AS 5) should be applied in presenting profit and loss from - 1.
Ordinary Activities 2. Prior period items 3. Extraordinary items
(a) Both 1 and 3
(b) Both 2 and 3
(c) Both 1 and 2
(d) Only 1
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation AS 5 is applied in presenting profit or loss from ordinary activities, extraordinary items &
prior period items. They pertain to the activities of an entity for calculating net profit or
loss for the period & enhance the comparability of financial statement of an enterprise.

Question50 ______ the current ratio, the better it is as it gives an idea of the company's ability to pay
back its current liabilities.
(a) Higher
(b) Lower
(c) Weaker
(d) Equal to 1
(e) Less than 1

Correct Answer Higher

Answer Explanation A firm having a very high Current Ratio indicates that it will generate sufficient cash to pay
off the current liabilities. It is an indicator of the firm’s high operating efficiency. The
current ratio mainly gives an idea of the company’s ability to pay back its current liabilities.
Higher the ratio, better it is.

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Question51 In relation to Life Insurance covers, what is Gross Premium known as ?

(a) Mega Premium
(b) Cover premium
(c) Core premium
(d) Pure premium
(e) Office premium

Correct Answer Office premium

Answer Explanation In life insurance covers the gross premium is also known as ‘Office premium’. It is
communicated to the policyholder after loading the expenses to the ‘Pure premium’

Question52 Which of these options is NOT a feature of whole life insurance policy ?
1. In a whole life insurance policy on the death of the life assured
2. A whole life insurance policy is a good provision for old age
3. In a whole life insurance policy the element of protection for dependents is the
important element
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 2 and 3
(e) All 1, 2 and 3

Correct Answer Only 2

Answer Explanation Whole life insurance policy is the purest form of permanent contract. Under this plan, the
sum assured is payable only on death of the life assured it offers protection for dependents
which is its dominating element.
It doesn’t provide any provision of old age.

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Question53 _______ would be found in a CASH BUDGET.

(a) Capital expenditure for buying machine
(b) Dividends payable
(c) Accrued expenses
(d) Depreciation
(e) Provision for catastrophe reserve

Correct Answer Dividends payable

Answer Explanation Generation of cash fund & its utilisation are the main domains of cash budget. It depicts
inflows & outflows of an organization. It is most important budget for the management
which is prepared after all financial budgets are ready.

Question54 _________ is/are Money Market instruments. 1. Collateralized Borrowing and Lending
Obligations 2. Treasury bills 3. G Sec
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Both 1 and 2

Answer Explanation Money market securities are the instruments with maturity of not more than one year.
Insurance companies are required to invest their funds in various instruments like
‘Treasury bills by RBI and Collateralized Borrowing and Lending Obligations (CBLO)’.

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Question55 Mr. Ashutosh's accounts for the year to 31 March 2017 show a loss of Rs. 14720. When he
prepared the accounts, he had included an accrual of Rs 15100 and a prepayment of Rs
7540. What is Mr. Ashutosh's profit or loss for the year to 31 March 2017 after the
adjustment of the accrual and the prepayment?
(a) Loss of Rs. 18760
(b) Loss of Rs. 21630
(c) Loss of Rs. 22280
(d) Profit of Rs. 15840
(e) Profit of Rs. 23950

Correct Answer Loss of Rs. 22280

Answer Explanation An accrual always relates to an expense, the accrual therefore means an extra expense,
which will reduce the profit.
A prepayment reduces the expense, which means more profit.
So, the correct profit is: - 14720 (loss) - 15100 (accrual) + 7540 (pre-payment) = - 22280
Since it is negative, means a loss of Rs. 22280.

Question56 From the options listed below, which accounting standards are not applicable to General
Insurance companies?
1. Accounting for investments
2. Accounting for borrowing costs
3. Accounting for Government grants
(a) Only 1
(b) Only 2
(c) Only 3
(d) Only 1 and 3
(e) All 1, 2 and 3

Correct Answer
Only 1
Answer Explanation The Institute of Chartered Accountants of India has set up an Accounting Standard Board to
formulate Accounting Standards. For insurance companies, compliance with accounting
standards issued by ICAI is mandatory. However, Accounting for investments is mandatory
for all companies other than general insurance companies.

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Question57 If a transaction is settled with cash rather than by bank cheque, this is known as ______ of
money laundering.
(a) Positioning stage
(b) Integration stage
(c) Layering stage
(d) Convergence stage
(e) Placement stage

Correct Answer Placement stage

Answer Explanation This is generally the 1st stage of money laundering wherein the launderer inserts the
illegitimate money into legitimate financial institution through various means like through
purchase of art, jewellery etc. & by depositing cash in the bank.

Question58 What will be the result of reconciliation of overcasting on the receipts side of the cash
book?
(a) It will lead to decrease in the pass book balance
(b) It will lead to increase in the pass book balance
(c) It will lead to decrease in the cash book balance
(d) It will lead to increase in the cash book balance
(e) There will no effect

Correct Answer It will lead to decrease in the cash book balance

Answer Explanation The term casting means adding up which affects the agreement of trial balance. This error
may be an error of overcasting or undercasting. Overcasting means summing the total to
more than what they are. Accordingly, reconciliation of overcasting on the receipts side of
the cash book, results in decrease in the cash book balance.
For e.g. -The cash receipts were say Rs 10000 but it was overcasted and recorded as say Rs
11000. So, when it will be reconciled, the cash balance will decrease.

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Question59 The formula for calculating Average first premium per thousand sum assured is ____ .
(a) (Total FYP / Total SA ) * 1000
(b) (Total FYP / Total SA ) * 100
(c) (Total FP / Total SA ) * 1000
(d) (Total FP / Total SA ) * 10
(e) (Total SA / Total FP ) * 1000

Correct Answer (Total FP / Total SA ) * 1000

Answer Explanation Average first premium per 1000 Sum Assured =
Total First Premium (Only First installment) (Individual Business-Ordinary and SSS) / Sum
assured under Individual Business X 1000
These calculations fall under critical financial ratios which helps to recognize the financial
strengths & weaknesses of the insurers & doing the ratio analysis for 2 or more than 2
years

Question60 As per the KYC requirements, when a policy is sold online by internet sales, the documents
should be collected for premiums exceeding one lakh rupees within ____ days of issue of
the policy.
(a) 7
(b) 10
(c) 15
(d) 30
(e) 45

Correct Answer 15
Answer Explanation As per the KYC requirements, when a policy is sold online by internet sales, the documents
should be collected for premiums exceeding one lakh rupees within 15 days of issue of the
policy. This applies to in case of no face-to-face business including tele calling.

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Question61 As per the Indian accounting standards, AS1 - Disclosure of Accounting Policies is _______ .
(a) Mandatory for companies having a net worth of Rs 50 crores plus
(b) Mandatory only for insurance companies
(c) Mandatory for all companies
(d) Mandatory only for private companies in India
(e) Mandatory only for listed companies

Correct Answer Mandatory for all companies

Answer Explanation AS1 – Disclosure of Accounting Policies is mandatory for all companies.

Question62 Which one of these is a book of PRIME ENTRY?

(a) Profit and Loss book
(b) Purchase journal
(c) Employee attendance record
(d) Cheque register
(e) Bank reconciliation statement

Correct Answer Purchase journal

Answer Explanation Journal is a book of prime entry wherein accounting transactions are recorded. It contains
a chronological record of transactions.

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Question63 Ms. Sharma wants to calculate her profit at the end of the year. Which is the right equation
for it?
(a) Closing Net Assets + Drawings + Capital introduced + Opening Assets
(b) Closing Net Assets - Drawings + Capital introduced + Opening Assets
(c) Closing Net Assets + Drawings - Capital introduced - Opening Assets
(d) Closing Net Assets - Drawings - Capital introduced - Opening Assets
(e) Closing Net Assets - Drawings + Capital introduced - Opening Assets

Correct Answer Closing Net Assets + Drawings - Capital introduced - Opening Assets
Answer Explanation To determine the profit at the year end, the Closing Net Assets + Drawings must be greater
than Capital introduced – Opening Assets. Mrs. Sharma therefore, has to look at the 3rd
equation to calculate her profit at the year end.

Question64 Which method of recording accounting entries is followed by insurance companies with
reference to claim payments?
(a) Grossing of claims method
(b) Surrender value method
(c) Deferral method
(d) Accrual method
(e) Netting of claims method

Correct Answer Netting of claims method

Answer Explanation Under ‘Netting of claims method’, as soon as a claim arises, the total payable amount less
all deductions i.e., policy loan, interest on policy loan, due premium etc. is treated as
outstanding claim.

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Question65 ______ is the minimum lock-in period for Unit Linked Insurance plan in India.
(a) 2 years
(b) 3 years
(c) 5 years
(d) 6.5 years
(e) 7 years

Correct Answer 5 years

Answer Explanation ULIP’s contains both investment & insurance. The minimum lock-in period for Unit Linked
Insurance plan in India is 5 years.

Question66 Locate which out of the following is an Error of Omission?

(a) Goods sold to Mr. A for Rs 5000 were recorded in the sales day book correctly buy were not
recorded in Mr. A's receivable account. At the same goods purchased from Mr. B for Rs 5000
were recorded in the purchase day book but not recorded in Mr. B's payables account
(b) KKK Ltd. sold goods to Mak for Rs 1200 and recorded this in the sales day book. However
instead of debiting the amount to Mak’s account, it was debited to Harrys account
(c) XYZ Ltd. sold goods to Mak for Rs 6300 but omitted to record the transaction in both the
sales day book and the debtor’s ledger
(d) PQR Corp purchased a motor cycle for Rs 1 lakh and the payment was made by cheque. The
purchases A/c was debited instead of the asset A/c
(e) A sale to Mr. Q for Rs 1200 is recorded as Rs 2100 in the Mr. Q receivable account and Rs
1200 in the sales account

Correct Answer XYZ Ltd. sold goods to Mak for Rs 6300 but omitted to record the transaction in both the
sales day book and the debtor’s ledger
Answer Explanation Under error of omission, a transaction is completely omitted in the financial records. Since
transaction is completely omitted (neither credit nor debit is recorded), there cannot be
difference in the trial balance.

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Question67 What is Inflation Accounting?

(a) Its an accounting system that doesn’t adjusts values for changes in selling power
(b) Its an accounting system that adjusts values for changes in purchasing power
(c) Its an accounting system that doesn’t adjusts values for changes in purchasing power
(d) Its an accounting system that adjusts values for changes in selling power as well as
purchasing power
(e) Its an accounting system that adjusts values for changes in selling power

Correct Answer Its an accounting system that adjusts values for changes in purchasing power
Answer Explanation Inflation accounting is an accounting system that adjusts values for changes in purchasing
power. It is an attempt to account for price level changes and adjust the financial
statement accordingly.

Question68 As per AS 5, which of these will be considered as an error?

1. Mathematical mistakes 2. Changes in the methods of depreciation 3. Misinterpretation
of facts
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 3
(e) Both 2 and 3

Correct Answer Both 1 and 3

Answer Explanation According to AS 5, errors in the preparation of the financial statements of one or more
prior periods may be discovered in the current period. Errors may occur as a result of
mathematical mistakes, mistakes in applying accounting policies, misinterpretation of
facts, or oversight.

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Question69 If the outstanding claim payments remains unpaid for a period of five years for a life
insurance company, how is this treated?
(a) Prospective change is made in the claims paid figure so as to reduce expenses
(b) It is removed from the books and transferred to Investor Protection A/c
(c) It is written back to Revenue account
(d) Retrospective change is made in the claim paid figures
(e) It is removed from books and transferred to IRDAI A/c

Correct Answer It is written back to Revenue account

Answer Explanation Outstanding claim payments which remain unpaid for a period of 5 years for a life
insurance company are ‘Written back to Revenue account’. The claims written back are
treated as income

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Question70 The following are the details of the Current Assets of a company:
Cash available Rs. 22000,
Marketable Securities Rs. 15000,
Inventory Rs. 9000,
Accounts receivable Rs. 16000,
Prepaid Expenses - Rs. 5000
The total Current Liabilities were Rs. 32000.
What is the Quick Ratio of the company?

(a) 1.81
(b) 1.53
(c) 1.97
(d) 1.06
(e) 1.22

Correct Answer 1.81

Answer Explanation Liquidity means the ability to convert any asset to cash within a short time for pay out of
short-term liabilities. There are two ratios to highlight business liquidity; Current Ratio &
Quick Ratio/ Acid Test Ratio. The ratios illustrate how the companies’ liquid current assets
can cover its current liabilities. It excludes stocks or inventory. Generally Quick Ratio of 1:1
& Current Ratio of 2:1 are considered reasonable. Quick Ratio is calculated by the following
formula:

Quick ratio= Quick Assets (= Current Assets excluding Inventory)

Quick Liabilities (= Current Liabilities – Bank overdraft)

Cash Rs 22000 + Marketable securities Rs 15000 + Accounts receivable Rs 16000 + Prepaid

Expenses Rs 5000 / Current Liabilities Rs 32000

58000/ 32000 = 1.81

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Question71 ________ expenses will be recorded in a Cash Paid book.

1. Commission paid to agents 2. Management expenses 3. Survival benefits
(a) Both 1 and 2
(b) Only 3
(c) Both 2 and 3
(d) Only 1
(e) All 1 , 2 and 3

Correct Answer Both 1 and 2

Answer Explanation At the branch office level on an insurance company, two cash paid books have to be
maintained i.e. Cash Paid Book & Cask Outgo Book. Under Cash Paid Book, there would be
recording of management expenses & commission to the agents.

Question72 With respect to ledgers in the accounting process, which of the following statement(s)
is/are true ?
1. Ledgers are also known as books of final entry
2. Ledger is the main basis of preparing the final accounts
3. The debit balance and credit balance of a ledger account is always same at any given
point
(a) Only 1
(b) Only 2
(c) Only 1 and 3
(d) Only 2 and 3
(e) Only 1 and 2

Correct Answer Only 1 and 2

Answer Explanation Ledger is a book containing accounts. Ledger is the basis of preparing the final accounts
and ledgers are known as books of final entry. It stores information related to an individual
element of the financial statements.

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Question73 The Pradhan Mantri Jeevan Jyoti Bima Yojana has which of the following feature(s) - 1. The
Risk coverage is Rs. 2 lakhs in case of death 2. The maximum entry age in this scheme is 50
years 3. A Person even without a bank account can apply for this scheme
(a) All 1,2 and 3
(b) Only 1
(c) Both 2 and 3
(d) Both 1 and 2
(e) Both 1 and 3

Correct Answer Both 1 and 2

Answer Explanation Under Pradhan Mantri Jeevan Jyoti Bima Yojana, the maximum entry age under the
scheme is 50 years and risk coverage is Rs. 2 lakhs in case of death. It’s a low premium
insurance scheme for the residents of India having a bank account.

Question74 A company purchases a machine for Rs 68000 and this has a life of 8 years. At the end of 8
years its residual value is estimated to be Rs 3000. Using straight line depreciation, how
much depreciation is shown in the accounts solely for the first two years of this period?
(a) Rs. 17000
(b) Rs. 15500
(c) Rs. 17650
(d) Rs. 15750
(e) Rs. 16250

Correct Answer Rs. 16250

Answer Explanation The formula Straight Line Depreciation is -
Cost of the asset – Estimated residual value / Estimated life of the asset.
68000 - 3000 / 8 = Rs 8125 Depreciation for each year
So, depreciation for 2 years = 8125 x 2 = Rs.16250

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Question75 The funds flow statement is considered an important tool for ____ .
1. Financial analysis 2. Performance analysis 3. Cost control
(a) Only 1
(b) Only 2
(c) Only 3
(d) Only 1 and 2
(e) All 1, 2 and 3

Correct Answer Only 1 and 2

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Question76 Locate which of the given below statements fall under the 'UNDERCASTING' error?
(a) Mr. A was supposed to make an entry on the debit side of the ledger but ended up making
an entry on the credit side of the correct ledger account
(b) Mr. B sold goods to 3 different customers of Rs 2000, Rs 4000 and Rs 6000 respectively. He
entered these 3 amounts correctly in the sales day book but when he totaled the months
sale, he came to Rs 11000 instead of Rs 12000.
(c) Mrs. C sold goods to 3 different customers of Rs 2000, Rs 4000 and Rs 6000 respectively.
She entered these 3 amounts correctly in the sales day book but when she totaled the
months sale, he came to Rs 13000 instead of Rs 12000.
(d) Mr. D is as an accountant with Megacity Insurance Company. While making an entry in the
ledger, the amount was wrongly entered as Rs 7000 instead of the correct amount of Rs
17000.
(e) There were bad debts of Rs. 9000. Mrs. E carried forward this amount wrongly as Rs 19000
to the trial balance

Correct Answer Mr. B sold goods to 3 different customers of Rs 2000, Rs 4000 and Rs 6000 respectively. He
entered these 3 amounts correctly in the sales day book but when he totaled the months
sale, he came to Rs 11000 instead of Rs 12000.

Option 2 is thus an example of ‘undercasting'.

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Question77 _______ can be allowed as deductions from the income of an employee under Section 80D.
(a) Mediclaim premium paid for self only
(b) Mediclaim premium paid for mother-in-law only
(c) Mediclaim premium paid for spouse only
(d) Mediclaim premium paid for self and spouse
(e) Mediclaim premium paid for self, spouse and mother-in-law

Correct Answer Mediclaim premium paid for self and spouse

Answer Explanation Mediclaim insurance premium paid for self & Mediclaim insurance premium paid for
spouse are allowed as deductions from the income of an employee under Section 80D.
Mediclaim insurance premium paid for mother-in-law are not included.

Question78 In Annuity Plans, the insurance company makes lump sum payments at some specified
time intervals during the plan to the life assured. What are these amounts known as?
(a) Premium payments
(b) Maturity claim
(c) Sum assured
(d) Survival benefits
(e) Maturity amount

Correct Answer Sum assured

Answer Explanation The specified lump sum payments at specified time intervals during the plan to the life
assured is known as sum insured. It is paid in installments over a selected period of years.
The sum insured payable on claim being utilized as purchase price.

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Question79 As per the IRDAI circular issued in 2005 gives guidelines for the appointment of statutory
auditors of Insurance Company, which of the following statements are true?
1. The auditor has to be in continuous practice for a period of 15 years or more
2. Insurance companies can only be audited by a firm
3. The two partners should have been in continuous practice as partners for a minimum
period of 10 years
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2 only
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation The IRDAI circular issued in 2005 gives guidelines for the appointment of statutory auditors
of Insurance Company. Accordingly, to be eligible to become an auditor of an insurance
company, it is mandated that: The insurance company can only be audited by a firm, the
auditor should have been in continuous practice for a period of 15 years or more and two
partners should have been in continuous practice as partners for a minimum period of 10
years.

Question80 The ideal way for a company to meet its foreign exchange requirement for capital and
revenue expenditure is through __________ .
(a) External commercial borrowing
(b) IPO
(c) Issue of Debentures
(d) G Sec
(e) Private placement

Correct Answer External commercial borrowing

Answer Explanation To run a business, every enterprise requires money. To augment Foreign Exchange Reserve
and to meet foreign exchange requirement for capital expenditure and revenue
expenditure, External commercial borrowing is permitted. These are generally dated loan
for 3 to 5 years. Such deals are called swap deals.

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Question81 With respect to Endowment Policy, which of these statement(s) is/are NOT TRUE ?
1. When the policy becomes a claim the payment of premium stops
2. No fixed period for the insurance cover
3. The sum insured is paid on death or maturity whichever is earlier

(a) Only 1
(b) Only 2
(c) Only 3
(d) Only 1 and 2
(e) Only 2 and 3

Correct Answer Only 2

Answer Explanation Endowment policy gives an insurance cover that serves as a savings scheme as well as gives
financial protection. This would be the most ideal insurance that serves as a savings
scheme as well as gives financial protection to his family against his premature death. The
assured can choose the policy period of his choice. Typical maturities are ten, fifteen or
twenty years up to a certain age limit.

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Question82 One of the main disadvantages of Whole Life Insurance is that premiums have to be paid
even in the old age when the capacity to pay is lessened due to limitation of income. How
have the insurance companies overcome this issue?
(a) By limiting the maximum number of premiums payable till age 75
(b) By limiting the maximum number of premiums that are payable either till age 75 or till 35
annual premiums are paid whichever is later
(c) By limiting the maximum number of premiums that are payable till age 80
(d) By limiting the maximum number of premiums that are payable either till age 80 or till 35
annual premiums are paid whichever is later
(e) By limiting the maximum number of premiums that are payable till 35 annual premiums
are paid

Correct Answer By limiting the maximum number of premiums that are payable either till age 80 or till 35
annual premiums are paid whichever is later
Answer Explanation Whole life insurance has the disadvantage that premiums continue in old age when the
liability to pay them may be lessened by limitation of income. To overcome this problem,
the LIC Limits the maximum numbers of premiums that are payable either till age 80 or till
35 annual premiums are paid whichever is later.

Question83 Mutual funds which invest major portion of their money in Government Securities (G Secs)
like Treasury Bills and / or Long Dated securities are known as _____ .
(a) Balanced schemes
(b) Gilt schemes
(c) Money market schemes
(d) Debt schemes
(e) Open ended schemes

Correct Answer Gilt schemes

Answer Explanation To cater the requirements of various group of people, Mutual fund houses floats different
schemes. Gilt schemes invest major portion of their money in Govt. Securities (G-Secs) like
treasury bills and / or Long Dated securities.
Gilts are securities issued by the central government and are said to carry sovereign or
minimal risk. Funds which invest in these are called Gilt Funds.

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Question84 The period which an insurance company gives its customers within which they can get back
to the insurer with any queries regarding their life insurance policy is known as _______ .
(a) Free look confirmation period
(b) Free look period
(c) Free look decision period
(d) Free look cancellation period
(e) Free look approval period

Correct Answer Free look period

Answer Explanation If a person is not satisfied with the terms of his life insurance policy, he can raise questions
and/or return the policy within 15 days from the receipt of policy document. This is known
as Free Look period.

Question85 ______ BONUS is added to the sum assured and paid at the time of claim. 1. Cash bonuses
2. Reversionary bonuses 3. Bonuses in reduction of premiums
(a) Only 1
(b) Only 2
(c) Only 3
(d) Only 1 and 2
(e) Only 2 and 3

Correct Answer Only 2

Answer Explanation The bonus that is added to the sum assured and paid at the time of claim is called
Reversionary bonus. Once a policy becomes paid-up, it is not entitled to future bonuses.
These bonuses declared regularly and paid at the end (at the time of claim) are called
reversionary bonuses. They are declared as a percentage rate, which applies to the sum
assured of the policy, in respect of the basic policy benefit.

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Question86 Who normally issues G Sec?

1. The Central Government 2. The State Government 3. Public Limited Companies
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) All 1, 2 and 3

Correct Answer Both 1 and 2

Answer Explanation Government Securities are generally called G Sec. They are issued by Central & State
Governments to fulfill their financial requirements. They carry lowest risk with lesser rate
of interest compared with Corporate Bonds.

Question87 Identify the CORRECT statement(s) for a Unit Linked Pension Plan?
1. The policy holder's are paid guaranteed maturity value
2. Hospitalization benefits are provided in this plan
3. These cannot be surrendered
(a) All 1, 2 and 3 are correct
(b) Only 1 and 2 are correct
(c) Only 1 and 3 are correct
(d) Only 2 and 3 are correct
(e) Only 3 is correct

Correct Answer Only 1 and 3 are correct

Answer Explanation Since PENSION plans is socially oriented plan, under Unit Linked Pension plan, plans cannot
be surrendered and the policy holders are paid guaranteed maturity value.

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Question88 The Net Premium are also known as _______ , in life insurance covers.
(a) Discounted premium
(b) Pure premium
(c) Core premium
(d) Add on premium
(e) Cover premium

Correct Answer Pure premium

Answer Explanation In life insurance covers, net premium is also known as ‘pure premium’. It includes mortality
charges and interest. Net premium covers only probable losses. When the premium is
loaded to cover the expenses, it is called ‘office premium’.

Question89 Identify the CORRECT statement(s) respect to Term life insurance policies –
1. Provides death protection and varies with interest rates
2. Provides death benefit equal to the face amount of the policy if the insured dies during
the policy period
3. Provides death protection and savings accumulation
(a) Only 1 and 2
(b) All 1, 2 and 3
(c) Only 1
(d) Only 2
(e) Only 3

Correct Answer Only 2

Answer Explanation Term life insurance policies do not have any saving element nor they vary with interest
rates. They provide a lumpsum amount (policy amount) only in case of death during the
policy period.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question90 Gopal had purchased life insurance policy 10 years back. Under the policy, his premium
amount had remained the same over the years and will also not change in future. Which
type of premium is being charged by the insurance company?
(a) Level premium
(b) Net premium
(c) Increasing premium
(d) Gross premium
(e) Decreasing premium

Correct Answer Level premium

Answer Explanation Level premium is being charged by the insurance company.

Question91 ______ are shown as Assets in the Balance Sheet pf an insurance company.
(a) Survival benefits
(b) Loan against policies
(c) Premium amount
(d) Claim payments
(e) None of the above

Correct Answer Loan against policies

Answer Explanation Loan given against policies are to be received back and are the assets of the insurance
company.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question92 As per Insurance Act 1938, a maximum of how many statutory audits can be conducted by
one audit firm for a certain life insurance company?
(a) Not more than 1 statutory audit
(b) Not more than 2 statutory audits
(c) Not more than 3 statutory audits
(d) Not more than 4 statutory audits
(e) Not more than 5 statutory audits

Correct Answer Not more than 2 statutory audits

Answer Explanation

Question93 An ULIP growth fund will invest majority of its funds in ______ .
(a) Gilt edged securities
(b) Government securities
(c) Commercial paper
(d) Equities
(e) 50% Equity and 50% Debt

Correct Answer Equities

Answer Explanation Equities / Shares have one of the best growth potentials for long term investors. So ULIPs
seeking growth will invest majority of its funds in equities.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question94 The Cash Flow statement is useful ____ to management and ____ to investors and
creditors.
(a) Externally; Internally
(b) Internally; Externally
(c) for a short period; for a long period
(d) for a long period; for a short period
(e) None of the above

Correct Answer Internally; Externally

Answer Explanation Cash flow statement is useful internally to management to assess the liquidity of the
business and externally to investors to generate positive cash flows in future to pay its
liabilities.

Question95 _____ is a periodical payment made, in exchange for purchase money (capital payment),
for the remainder of the life time of a named life or for a specific period, irrespective of the
duration of the human life.
(a) Premium
(b) Claim
(c) Annuity
(d) Insurance
(e) Re-insurance

Correct Answer Annuity

Answer Explanation An Annuity is a periodical payment made, in exchange for purchase money (capital
payment), for the remainder of the life time of a named life or for a specific period,
irrespective of the duration of the human life.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question96 In case of ULIPs, which of the following will not be accepted by the insurance companies
for premium?
(a) Pay order
(b) Cash
(c) Outstation cheques
(d) Demand Drafts
(e) Local cheques

Correct Answer Outstation cheques

Answer Explanation Outstation cheques will not be accepted by the insurance companies for premium.

Question97 Claim payments that remain outstanding for more than 5 years are ____ .
(a) credited to bank account
(b) written back to revenue accounts
(c) debited to outstanding maturity claims amount
(d) treated as expense and written back to expense account
(e) None of the above

Correct Answer written back to revenue accounts

Answer Explanation Claim payments that remain outstanding for more than 5 years are written back to revenue
accounts.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question98 _____ is also known as Pure Premium.

(a) Net Premium
(b) Office Premium
(c) Level Premium
(d) Gross Premium
(e) Value Premium

Correct Answer Net Premium

Answer Explanation Net Premium is also known as Pure Premium.

Question99 Which of the following entries will be recorded in the CASH PAID book?
(a) Survival benefits
(b) Loans
(c) Management Expenses
(d) Surrenders
(e) All of the above

Correct Answer Management Expenses

Answer Explanation The Management Expenses will be recorded in the Cash Paid book.

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Question100 Which of these is an asset? 1. Expenses accrued 2. Expenses prepaid 3. Income accrued 4.
Income prepaid
(a) Only 1
(b) Only 3
(c) Both 1 and 2
(d) Both 2 and 3
(e) Both 3 and 4

Correct Answer Both 2 and 3

Answer Explanation Prepaid expenses and Accrued income are assets.

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PRACTICE TEST - 1

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PRACTICE TEST - 1

Question1 Usually for the budget period, the time chosen is -

(a) A period of 5 years
(b) The accounting period of the company
(c) Minimum 30 days
(d) 6 months
(e) 3 months

Correct Answer The accounting period of the company

Answer Explanation Usually, the time chosen for the budget period is the accounting period of the organization
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which usually is drawn for a year.

Question2 What does the individual replacement cost of cost based models for human resource
accounting refers to ?
(a) It refers to the cost that would have to be incurred to replace an individual by substitute
who can provide the different set of services as that of the individual being replaced
(b) It refers to the cost that would have to be incurred to replace a group who can provide the
same set of services as that of the individual being replaced
(c) It refers to the cost that would have to be incurred to replace a group by substitute who
can provide different set of services as that of the individual being replaced
(d) It refers to the cost that would have to be incurred to replace an individual by substitute
who can provide the same set of services as that of the individual being replaced
(e) It refers to the cost that would have to be incurred to replace a group by substitute who
can provide the same set of services as that of the individual being replaced

Correct Answer It refers to the cost that would have to be incurred to replace an individual by substitute
who can provide the same set of services as that of the individual being replaced
Answer Explanation The individual replacement cost of cost-based models for human resource accounting
refers to the cost that would have to be incurred to replace an individual by substitute who
can provide the same set of services as that of the individual being replaced.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question3 As per IRDA, an insurance company shall clearly segregate the functions and operations of :
1. Front office 2. Mid office 3. Back office
(a) 1 and 2
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 3
(e) There is no need of segregation

Correct Answer 1, 2 and 3

Answer Explanation
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As per IRDA mandate, the insurer shall clearly segregate the functions and operations of
front, mid and back office. This is to ensure proper internal control of investment functions
and operations.

Question4 Which is the most appropriate definition of tax ?

(a) A levy charged by the Government on a product, income or activity
(b) A levy charged by the Government only on products and activities
(c) A levy charged by the Government only on income
(d) A levy charged by the Government only on a product and income
(e) A levy charged by the Government only on an activity

Correct Answer A levy charged by the Government on a product, income or activity

Answer Explanation There are two types of tax i.e. Direct Tax & Indirect Tax. However, the most appropriate
definition of tax being levy charged by the Government on a product, income or activity.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question5 What is the statement called when the 'total figure in a statement is equal to 100% of each
factor of percentage ?
(a) Tallied statement
(b) Complete sized statement
(c) Horizontal statement
(d) Common size statement
(e) Zero sized statement

Correct Answer Common size statement

Answer Explanation This pdf will expire in 3 months.
When ‘total figure’ in a statement is equal to 100% of each factor of percentage, such
statement is called a Common Size Statement. Under this statement, percentages are used
in order to show the connection between different parts to the total in a single statement.

Question6 With respect to accounting process, which of the below options will be associated with
‘analyzing transactions’?
(a) Preparing trial balance
(b) Collecting data source
(c) Preparing balance sheet
(d) Preparing primary books of account
(e) Posting to ledger accounts

Correct Answer Posting to ledger accounts

Answer Explanation Accounting is the process of recording & reporting of financial transactions. Under
accounting process, posting to ledger accounts would be associated with ‘analyzing
transactions’.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question7 _______ are objectives of budgetary control. 1. Forecasting the capital expenditure of the
company 2. Planning and control of income and expenditure of a company 3. Planning and
control the expenses related to research & development
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Both 1 and 3
(e) All 1, 2 and 3

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Correct Answer All 1, 2 and 3
Answer Explanation

Question8 The due date for filing quarterly statements of TDS through Form 24Q for the quarter
ending 30th September is _______ .
(a) 31st March
(b) 31st December
(c) 15th April
(d) 15th January
(e) 15th October

Correct Answer 15th October

Answer Explanation Timeline for filing quarterly statements of TDS through Form 24Q is 15th of the next
month.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question9 How will this transaction affect the accounting equation –:

Mr. A borrowed a sum of Rs 25000 from Mr. B for business purpose?
(a) Increase in asset and decrease in capital
(b) Decrease in asset and decrease in liability
(c) Decrease in asset and decrease in liability
(d) Increase in asset and increase in liability
(e) Increase in asset and decrease in liability

Correct Answer This pdf will expire in 3 months.

Increase in asset and increase in liability
Answer Explanation Increase in Asset and increase in Liability because the borrowed sum increases the assets of
the business and at the same time it increases the liability to the extent of borrowings.

Question10 Which of the following is a Real Account?

(a) State Bank of India
(b) LLyod Insurers
(c) Capital
(d) Cash
(e) Drawings

Correct Answer Cash

Answer Explanation There are three types of accounts i.e. Personal, Real and Nominal accounts. Under real
account, cash, bank balance and furniture & fixtures are considered. Hence none of the
above except cash is a real account.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question11 Which of the below options show the assets arranged in correct descending order of
liquidity ?
(a) Machinery, Goodwill, Cash in hand, Sundry debtors
(b) Cash in hand, Sundry debtors, Machinery, Goodwill
(c) Cash in hand, Sundry debtors, Goodwill, Machinery
(d) Goodwill, Cash in hand, Sundry debtors, Machinery
(e) Sundry debtors, Cash in hand, Machinery, Goodwill

Correct Answer Cash in hand, Sundry debtors, Machinery, Goodwill

Answer Explanation Assets can be presented in the balance sheet in the order of liquidity & in the order of
permanence. The descending order of liquidity would be: Cash in hand, Sundry Debtors,
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Furniture and Goodwill. The liquidity refers to the degree of ease with which they can be
converted in to cash.

Question12 ______ is NOT a feature of Salary Saving Scheme (SSS) premium. 1. The instances of policy
lapses are low as premiums are paid by the employer 2. This scheme covers a large number
of individuals as a group 3. In this scheme, the employee reminds the employer for
deducting premium from his salary every month, after which the employer can charge his
salary
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) All 1, 2 and 3

Correct Answer Only 3

Answer Explanation Under Salary Saving Scheme (SSS), as the premiums are paid by employer, chances of
policy lapses are low & it covers a large number of individuals as a group. It is incorrect that
employee has to remind the employer for deducting premium from his salary every month,
after which the employer can charge his salary. It covers a large number of individuals as a
group.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question13 With respect to 'Actuarial Valuation Liability' for life policies - which of the following
statement(s) is/are correct?
1. The Actuarial valuation is to be done every quarter
2. The estimation of liability against life policies shall be determined by Appointed Actuary
i.e., Chief Actuary of the insurer
3. The premium received by an insurer is to be considered as its income

(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

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Correct Answer Only 2

Answer Explanation Part I of the accounting principle for preparation of financial statements regarding actuarial
valuation liability for life policies requires that ‘The estimation of liability against life
policies shall be determined by Appointed Actuary (Chief Actuary) of the insurer. Actuarial
valuation is to be done every year. The premium received is liabilities against policies.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question14 Following are the important figures for Minta Ltd for the year ended 31 Dec 2017:
Opening inventory - Rs 3,00,000, Purchases - Rs 10,00,000, Closing inventory - Rs 1,00,000
The gross margin is 40%. Calculate the sales revenue for the year.
(a) Rs 2400000
(b) Rs 1800000
(c) Rs 2000000
(d) Rs 2800000
(e) Rs 3200000

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Correct Answer Rs 2000000

Answer Explanation Cost of goods sold = Opening inventory + Purchases - Closing inventory
= 300000 + 1000000 - 100000 = 1200000
The gross margin is 40% of sales.
So: Sales Less 40% of sales = 1200000 (Cost of goods sold)
Let Sales be X
So (X - 0.4 X) = 1200000
0.6* X = 1200000 (* 1-.04 = 0.6)
X = 1200000 / 0.6 = 20,00,000
(Reverse check: 40% of 20,00,000 = 8,00,000 i.e., the profit
Sales - Profit = Cost of goods sold
20,00,000 - 8,00,000 = 12,00,000 which tallies)

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question15 As per which accounting principle is the depreciation expense charged each year to the
profit and loss account ?
(a) Going concern
(b) Matching
(c) Relevance
(d) Completeness
(e) Consistency

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Correct Answer Matching

Answer Explanation The matching principle requires that the expenses be recognized in the year in which
revenue is recognized. If the revenue from an asset is going to be earned over a number of
years then its cost should also be allocated over the same number of years.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question16 What will the nominee/legal heir get in case of death of the policy holder of a unit linked
policy when the cover is in full force ?
(a) The nominee / legal heir will get the fund value of the unit held in policy holder’s unit
account as at the date of issuing the liability
(b) The nominee / legal heir will get the fund value of the unit held in policy holder’s unit
account as at the date of booking the liability
(c) The nominee / legal heir will get the sum assured under the policy
(d) The nominee / legal heir will get the higher of sum assured or the fund value of the unit
held in policy holder’s unit account as at the date of booking the liability
(e) The nominee / legal heir will get the lower of sum assured or fund value of the unit held in
policy holder’s unit account as at the date of booking the liability

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Correct Answer The nominee / legal heir will get the higher of sum assured or the fund value of the unit
held in policy holder’s unit account as at the date of booking the liability

Answer Explanation Under a unit linked policy, in case of death of the policy holder when the cover is in full
force, the nominee/legal heir shall be eligible to get higher of sum assured or the fund
value of the unit held in policy holder’s unit account as at the date of booking the liability.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question17 Which of these errors cannot be highlighted while preparing a Trial Balance ?
(a) Posting
(b) Casting
(c) Commission
(d) Wrong carry over to trail balance
(e) Transposition

Correct Answer Commission

Answer Explanation Except ‘Commission’, all the above stated errors can be highlighted by preparing a trial
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balance.
An error of Commission occurs when an incorrect value is recorded during posting. For
example, if purchase of goods for Rs. 10,000 is entered as Rs.1000 in the journal or in the
ledger, such error is called errors of commission.

Question18 Which department helps to determine how much labour is needed to produce one unit of
output ?
(a) HR department
(b) Production department
(c) Sales department
(d) Time and motion study department
(e) Marketing department

Correct Answer Time and motion study department

Answer Explanation The time and motion study department helps to determine how much labour is needed to
produce one unit of output. It’s a part of work expense and labour budget & contains
various other expenses apart from labour like: Fixed, Variable & Semi-variable expenses.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question19 Everest Finance Ltd. had insured the business of Mr. Peter and got 50% of his risk insured
from ABC Ltd. In this case, ABC Ltd. is _______ .
(a) Underwriter
(b) Policy holder
(c) Reinsurer
(d) Direct Insurance Company
(e) Insured

Correct Answer Reinsurer

Answer Explanation Everest Finance Ltd. in the example is a direct insurance company having insured the
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business of Mr. Peter. As Everest Finance Ltd. has got 50% of his risk insured from ABC Ltd.,
ABC Ltd. would be the reinsurers as reinsurance is insurance of the insurers or transfer of
risk from one insurance company to another is called reinsurance.

Question20 _______ is an agreement between two or more parties to exchange sets of cash flows over
a period in the future.
(a) Arbitrage
(b) Hedging
(c) SWAPS
(d) Future contract
(e) Forward contract

Correct Answer Forward contract

Answer Explanation Agreement between two or more parties to exchange sets of cash flows over a period in
the future is known as forward contract. The contract specifies the price & the quantity of
an asset to be delivered in future.
(Future contracts are expected on a recognized exchange and the buyer and sellers are not
known to each other)

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question21 With respect to sound budgetary system which of the following is a must requirement -
(a) The objectives should be qualitative in description
(b) A budget, once its finalized should not be changed
(c) The period of the budget should not be quantifiable
(d) The objectives to be achieved must be determined and should be in respect of growth and
profitability
(e) Only the executive class should be consulted while making budget

Correct Answer The objectives to be achieved must be determined and should be in respect of growth and
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profitability
Answer Explanation Budgetary control system is a means of monitoring revenue & cost to exercise control in an
entity. It does it by developing budgets & comparing figures. Certain important
requirement includes: Objectives to be achieved must be determined and should be in
respect of growth and profitability.

Question22 The most apt way to define Asset Liability Management for an organization means to have
sufficient ________ against its ______ .
(a) Long term assets, Short term liabilities
(b) Short term assets, long term liabilities
(c) Long term liabilities, long term assets
(d) Short term liabilities, Long term assets
(e) Long term assets, Long term liabilities

Correct Answer Long term assets, Long term liabilities

Answer Explanation Asset liability management (ALM) for an organization means to have sufficient Long term
assets, Long term liabilities. ALM is one of the most important techniques of life insurers.
Their contracts are long term in nature i.e. they have long term liabilities. They must have
therefore long term assets to pay out its liabilities.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question23 Determine which of the following are the type of benefits received under a Whole Life
Insurance plan -
(a) Under a Whole Life Insurance plan, the insurance company makes specified lump sum
payments at specified time intervals during the plan to the life assured
(b) Under a Whole Life Insurance plan, the insurance company pays a lump sum amount on
the death of the life assured or on maturity whichever is later during the policy period
(c) Under a Whole Life Insurance plan, the insurance company pays the life assured the
promised sum assured and the accumulated bonuses on the death of the assured
(d) Under a Whole Life Insurance plan, the insurance companies return back the premiums to
the life assured at the end of the tenure of the plan along with the interest
(e) Under a Whole Life Insurance plan, the insurance companies pay the life assured the fund
value on the maturity of the plan and the sum assured

This pdf will expire in 3 months.

Correct Answer Under a Whole Life Insurance plan, the insurance company pays a lump sum amount on
the death of the life assured or on maturity whichever is later during the policy period

Answer Explanation Whole life insurance policy which is guaranteed to remain in force for the insured's entire
lifetime, provided required premiums are paid, or to the maturity date. The insured party
normally pays premiums either until death, till the age of 80 yrs. or 35 annual premiums.

PRACTICE TEST - 1

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Question24 Given the case of an insurance company, if the company does not disclose any matters
which are not required to be disclosed by the Insurance Act 1938, still the financial
statements of the company shall be treated as not disclosing a true and fair view of the
state of affairs of the company. Share your opinion by selecting the most appropriate
option.
(a) The statement is completely correct
(b) The statement is partially wrong
(c) The statement is completely wrong
(d) If an insurance company does not disclose any matters which are not required to be
disclosed by the Insurance Act 1938, the company shall be imposed with penalty
(e) As per section 129 of the Companies Act 2013, if an insurance company does not disclose
any matters which are not required to be disclosed by the Insurance Act 1938, the financial
statements of the company shall not be treated as not disclosing a true and fair view of the
state of affairs

This pdf will expire in 3 months.

Correct Answer As per section 129 of the Companies Act 2013, if an insurance company does not disclose
any matters which are not required to be disclosed by the Insurance Act 1938, the financial
statements of the company shall not be treated as not disclosing a true and fair view of the
state of affairs

Answer Explanation In case of an insurance company, if the company does not disclose any matters which are
not required to be disclosed by the Insurance Act, 1938, still the financial statements of the
company shall be treated as not disclosing a true and fair view of the state of affairs of the
company, the financial statements shall not be treated as not disclosing a true and fair
view of the state of affairs of the company.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question25 From the options below, the most commonly used financial ratio in the life insurance
industry is - -
(a) Interest cover
(b) Quick ratio
(c) Distribution yield
(d) Fixed to worth
(e) Cost of postage, telegram and M O commission per in-force policy

Correct Answer
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Cost of postage, telegram and M O commission per in-force policy
Answer Explanation The financial ratio that is used more often in the life insurance industry is cost of postage,
telegram and M O commission per in-force policy.

Question26 Among those listed the below, which is a direct expense of unit linked plan ?
(a) Management fees
(b) Incentive payment to other marketing officials
(c) Training expenses
(d) Receipt stamps
(e) Repairs and maintenance

Correct Answer Incentive payment to other marketing officials

Answer Explanation Expenses of management under ULIP are divided under two heads i.e., Direct expenses &
Indirect expenses. There are various direct expenses which are paid incurred on unit linked
insurance. One of the direct expenses includes incentive payment to other marketing
officials who help in procurement of business.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question27 Which is true with respect to Term life insurance policies - 1. Provides death benefit equal
to the face amount of the policy if the insured dies during the policy period 2. Provides
death protection and varies with interest rates 3. Provides death protection and savings
accumulation
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

This pdf will expire in 3 months.

Correct Answer Only 1
Answer Explanation Term life insurance policies do not have any saving element nor they vary with interest
rates. They provide a lumpsum amount (policy amount) only in case of death during the
policy period.

Question28 Which if the given formulae computes Net Value Added (NVA)? (Where S= Sales Revenue,
B = Bought in cost of materials, Dep = Annual Depreciation charges)
(a) NVA = S + B + Dep
(b) NVA = S - B + Dep
(c) NVA = S - B - Dep
(d) NVA = S + B
(e) NVA = S + B - Dep

Correct Answer NVA = S - B - Dep

Answer Explanation Net Value Added is defined as Gross Value Added less Deprecation.

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question29 Which books are used for reconciliation, classification and posting to control accounts?
(a) Reconciled Cash and Bank Book
(b) IBNR book
(c) Deposit adjustment book
(d) Claims books
(e) Daily entry journal

Correct Answer
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Deposit adjustment book
Answer Explanation Insurers have to maintain two types of books i.e., Statutory Books & Subsidiary Books.
Under subsidiary book, for reconciliation, classification and posting to control accounts,
Deposit Adjustment book is used by the insurers.

Question30 In ULIPs, where does a growth fund invests majority of its fund in ?
(a) Gilt Securities
(b) Derivatives
(c) Equities
(d) Tax saving funds
(e) Mutual Funds

Correct Answer Equities

Answer Explanation

PRACTICE TEST - 1

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question31 With respect to annuity plans how much is the maximum lump sum amount that can be
withdrawn before the start of regular annuity payments ?
(a) 100% of the accumulated fund
(b) 1/2 of the accumulated fund
(c) 1/4th of the accumulated fund
(d) 1/3rd of the accumulated fund
(e) 2/3rd of the accumulated fund

Correct Answer This pdf will expire in 3 months.

1/3rd of the accumulated fund
Answer Explanation It is under unit linked pension plan that at the time of maturity, NAV of the outstanding
units are converted in to crops for the purchase of annuity for payment can be made out of
corps. However, 1/3rd of the accumulated fund can be withdrawn before the start of
regular annuity payments.

Question32 The amount which is payable at fixed periodic intervals is called ______ .
(a) Premature redemptions
(b) Survival benefits
(c) Annuity payments
(d) Maturity claims
(e) Surrender value payments

Correct Answer Survival benefits

Answer Explanation Claims are policy benefits which are payable as per terms of the policy contract. There are
various mode of payment under life insurance policies & the survival benefit is payable at
fixed periodic intervals under Anticipated Endowment Assurance & Money Back Policies.

PRACTICE TEST - 1

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Question33 If a person buys a Single Premium whole life policy, it means he/she ________ .
(a) makes a premium payment for a limited number of years and then receives a pension in
post that for whole life
(b) makes the same premium payment each year
(c) pays the entire premium in lump sum when the policy is issued and is covered for his
whole life
(d) makes a premium payment for a limited number of years and is then covered for his whole
life
(e) makes a premium payment each year for whole life and is then covered for his whole life

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Correct Answer pays the entire premium in lump sum when the policy is issued and is covered for his
whole life
Answer Explanation Whole life insurance plan with limited premium, include single premium insurance. Under
this option, the person pays the entire premium in lump sum when the policy is issued and
is covered for his whole life.

Question34 The Government charges a levy on a product, income or activity and this is known as
________ .
(a) GST
(b) VAT
(c) Cess
(d) Tax
(e) Commission

Correct Answer Tax

Answer Explanation Tax has been defined as a levy charged by the Government on a product, income or
activity.

PRACTICE TEST - 1

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Question35 State your opinion: The AS15 Employee Benefits does not apply to those retirement
benefits for which the employer’s obligations cannot be reasonably estimated.
(a) Yes, agree
(b) No, Disagree
(c) It depends on the company's MOU and AOA
(d) It depends on the type of retirement benefit obligation
(e) It depends on the materiality of the obligation

Correct Answer It depends on the type of retirement benefit obligation

Answer Explanation This pdf will expire in 3 months.
AS 15 Employee Benefits does not apply to those retirement benefits for which the
employer’s obligations cannot be reasonably estimated would depend upon the type of
retirement benefit obligation.

Question36 In terms of valuation of investments of a life insurance company, _______ would be

measured at fair value ?
(a) Derivatives
(b) Redeemable preference shares
(c) Listed equity shares
(d) Only 3
(e) Both 1 and 3

Correct Answer Both 1 and 3

Answer Explanation As per Part I of IRDAI (preparation of financial statements), valuation of investments of a
life insurance company in respect to Listed equity shares and Derivatives, would be
measured at fair value.

PRACTICE TEST - 1

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Question37 At _______ stage in money laundering the money is received from illegal sources, usually in
cash and is introduced into the financial system.
(a) Placement
(b) Conversion
(c) Layering
(d) Both Layering and Conversion
(e) Integration

Correct Answer This pdf will expire in 3 months.

Placement
Answer Explanation Money laundering process can be broadly divided into three stages & under the placement
stage, the money received from illegal sources, usually in cash is introduced into the
financial system through purchase of art, jewellery or a series of monitoring instruments
like cheques, DD’s etc.

Question38 On what is the Production Budget dependent on - 1. Cash budget 2. Purchase budget 3.
Sale budget
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Both 2 and 3

Answer Explanation The Production budget is prepared only after the sales budget. It specifies the quantity
needed for the production. The exercise is done keeping the required units during the
budget period. The most important aspect of this budget is the inventories. There should
not be any excess or shortfall in the inventories.

PRACTICE TEST - 1

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Question39 What of activity is - Cash payments made to and behalf of employees ?

(a) Its a social activity
(b) Its a financing activity
(c) Its an investing activity
(d) Its an operating activity
(e) Its an ordinary activity

Correct Answer This pdf will expire in 3 months.

Its a financing activity
Answer Explanation Cash payment to the employees is a financing activity which is usually a short-term
financing with a return option of with or without interest.

Question40 Mr. Singh aged 40, wishes to have an insurance that acts as a savings scheme as well as
gives financial protection to his family against his premature death. Which plan will you
recommend ?
(a) Jeevan Anand
(b) Endowment policy
(c) Whole life policy
(d) Term insurance policy
(e) Money back policy

Correct Answer Endowment policy

PRACTICE TEST - 1

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Question41 Which is the best way for a company to meet the foreign exchange requirement for capital
expenditure and revenue expenditure?
(a) Issue of Non-Convertible Debentures
(b) Private placement
(c) IPO
(d) G Sec
(e) External commercial borrowing

Correct Answer External commercial borrowing

Answer Explanation This pdf will expire in 3 months.
To run a business, every enterprise requires money. To augment Foreign Exchange Reserve
and to meet foreign exchange requirement for capital expenditure and revenue
expenditure, External commercial borrowing is permitted. These are generally dated for 3
to 5 years. Such deals are called swap deals.

Question42 Which is the financial ratio that is used more often in the life insurance industry ?
(a) Fixed to worth
(b) Quick ratio
(c) Percentage of renewal commission (individual) to Renewal Premium (individual)
(d) Distribution yield
(e) Interest cover

Correct Answer Percentage of renewal commission (individual) to Renewal Premium (individual)

Answer Explanation Ratios plays an important role in life insurance to help assessing performance, whether
wrong accounting is done & knowing the areas to probe further. Percentage of renewal
commission (individual) to Renewal Premium (individual) should be around 5% & higher
percentage indicates excess provision made in the current year than the previous year.

PRACTICE TEST - 1

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Question43 Which model of human resource accounting capitalizes only training and development
costs which have been incurred and ignores the future expected cost to be incurred for
their maintenance.
(a) Flamholtz Model
(b) Lev and Schwartz Model
(c) Hekimian and Jones model
(d) Replacement Cost Model
(e) Capitalization and historical cost Model

Correct Answer This pdf will expire in 3 months.

Capitalization and historical cost Model
Answer Explanation Capitalization and historical cost model of human resource accounting capitalizes only
training and development costs incurred and ignores the future expected cost to be
incurred for their maintenance. Generally, this is not a favorable model with the industry
since it distorts the value of highly skilled human resources.

Question44 Which Option would you generally use if you want to buy an asset ?
(a) Arbitrage
(b) Short
(c) Call
(d) Put
(e) Hedge

Correct Answer Call

Answer Explanation A call option is an agreement that gives an investor the right, but not the obligation, to buy
a stock, bond, commodity or other instrument at a specified price within a specified time
period.

PRACTICE TEST - 1

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Question45 The two prime functions of Banks include _______ .

(a) Opening branches , giving Loans
(b) Investment, speculation
(c) Deposit collection, investments
(d) Giving loans, investment
(e) Collecting deposit, giving loans

Correct Answer Collecting deposit, giving loans

Answer Explanation This pdf will expire in 3 months.
Banks primarily collect deposits through various accounts and deposits & give loans to
individuals & corporates for varied purposes. In addition, banks also sell third party
products like insurance & mutual funds.

Question46 The key feature(s) of moneyback policy include - 1. Only death benefits, no cash benefits 2.
There is no loan which can be granted in this policy 3. Loan can be taken against this policy
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 2

Answer Explanation The features of the money back policies are that no loan is granted under the plan as the
sum insured is paid in suitable installments. The lump sum benefits are paid at periodic
installments.

PRACTICE TEST - 1

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Question47 What is the document called which describes the terms of the contract of the insurance ?
(a) Memorandum of Understanding
(b) Insurance
(c) Policy
(d) Insurable interest
(e) Premium

Correct Answer Policy

Answer Explanation The document which lays down the terms of the contract of the insurance is called the
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policy. It is issued on the basis of proposal form, premium paid by the proposer which is
accepted by the insurer & has been accepted by the proposer.

Question48 The primary aim of Accounting is to:

1. Prepare the P/L account and the Balance Sheet
2. Prepare Ledger accounts for all transactions
3. Provide financial information to users of such information
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 1 and 3

Correct Answer Only 3

Answer Explanation The main aim of accounting is to provide financial information to users of such
information. Other options i.e. To maintain ledger accounts for every transaction and to
prepare Balance Sheet etc. are the processes of accounting.

PRACTICE TEST - 1

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Question49 Which of these options is a direct expense of Unit Linked plans ?

(a) Expenses on training of staff and agents
(b) Policy expenses
(c) Stamps used on Receipts
(d) Fees paid to auditors
(e) Repairs and maintenance

Correct Answer Policy expenses

Answer Explanation Expenses of management under ULIP are divided under two heads i.e. Direct expenses &
Indirect expenses. There are various direct expenses which are paid incurred on unit linked
insurance. Policy expenses are direct expenses which includes policy stamps on policy
bond. This pdf will expire in 3 months.
Question50 The following budget has been estimated by Company ABC Ltd for an activity level of
20,000 units - Material Rs 2000 Direct Labour Rs 8500 Fixed expenses Rs 11000 Given the
above facts what would be the total cost for a level of activity of 30000 units ?
(a) Rs. 32250
(b) Rs. 26750
(c) Rs. 23440
(d) Rs. 41980
(e) Rs. 37410

Correct Answer Rs. 26750

Answer Explanation Variable cost = Material + Labour = 2000 + 8500 = 10500
Hence 1-unit variable cost is 10500 / 20000 = .525
Variable Cost of 30000 units would be 30000 X .525 = 15750
Adding fixed expenses 11000 would be the total cost. 15750 + 11000 = 26750
Answer Rs. 26750 would be the total cost for a level of activity of 30000 units.

PRACTICE TEST - 1

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PRACTICE TEST 2

Question1 Which of these items appear in a company’s statement of cash flows?

1. Issue of bonus shares
2. Repayment of loans
3. Issue of Rights shares
4. Proposed dividends

(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 2,3 and 4
(d) 1 and 4
(e) 2 and 3

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Correct Answer 2,3 and 4

Answer Explanation Cash flow Statement is additional information to user of financial statement in additional
to balance sheet, Profit & Loss Account and Revenue Accounts. Under this statement, the
cash flow from operating, investing and financing activities are recorded. Bonus issue of
shares do not involve any cash flow, the remaining items would appear in the company’s
statement of cash flows statements.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question2 Out of the following mediclaim expenses, which will be allowed as deductions from income
of an Employee under section 80D?
1. Mediclaim premium paid for self
2. Mediclaim premium paid for wife
3. Mediclaim premium paid for mother-in-law

(a) Only 1 will be allowed

(b) Only 2 will be allowed
(c) Only 1 and 2 will be allowed
(d) All 1, 2 and 3 will be allowed
(e) None will be allowed

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Correct Answer Only 1 and 2 will be allowed

Answer Explanation Mediclaim insurance premium paid for self, spouse and children are allowed as deduction
from the income of the employee (up to certain limits).
Mediclaim insurance premium paid for mother-in-law or father-in-law are not included.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question3 Sometimes subsequent premiums are not sufficient to cover the required installments for a
life insurance policy, then the amounts are credited to which account?
(a) Long remittance account
(b) Short remittance account
(c) Policy deposit account
(d) Proposal deposit account
(e) First year premium account

Correct Answer Policy deposit account

Answer Explanation Accounting entries in case of subsequent premiums are insufficient to cover the required
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installments -
When subsequent premiums are insufficient to cover the required installments or paid
without interest then the amounts are credited to ‘Policy Deposit Account’.

Question4 Which of the below listed model involves determining the value of human resources as the
present value of estimated future earnings of employees (in the form of wages, salaries
etc.) discounted by the rate of return on investment.
(a) Black Scholes model
(b) Economic value model
(c) Discounted wages and salaries approach model
(d) Replacement cost model
(e) Opportunity cost model

Correct Answer Discounted wages and salaries approach model

Answer Explanation Discounted wages and salaries approach model was conceived by Lev and Schwartz in
1971. This model involves determining the value of human resources as the present value
of estimated future earnings of employees (in the form of wages, salaries etc.) discounted
by the rate of return on investment (cost of capital).

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question5 With respect to Endowment Policy, which of these statement(s) is/are TRUE?
1. The Sum Assured is payable at the end of fixed time or at death if it occurs earlier
2. NAV of outstanding units paid at the time of maturity
3. Two lives simultaneously insured
4. Ideal combination of investment and life insurance
(a) 1 and 4
(b) 1 and 2
(c) 1, 2 and 3
(d) 1, 3 and 4
(e) 1, 2, 3 and 4

Correct Answer This pdf will expire in 3 months.

1, 3 and 4
Answer Explanation Endowment policy is an ideal combination of investment and life insurance, two lives can
be simultaneously insured & the sum assured is payable at the end of fixed time or at
death if it occurs earlier. Since it is not a ULIP plan, there is no NAV.

Question6 What type of error has been committed by Anil when he had to make entry on the debit
side of ledger, but instead ended up making an entry on the credit side of the correct
ledger account?
(a) Posting on the wrong side of the current account
(b) Omission error
(c) Undercasting error
(d) Overcasting error
(e) Principle error

Correct Answer Principle error

Answer Explanation Anil had to make an entry on the debit side of ledger, but instead ended up making an
entry on the credit side of the correct ledger account. This error would fall under Principle
error.

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Question7 What is Advance deposit?

(a) It is a minimum amount that needs to be paid by the proposer along with the Single
premium
(b) It is a minimum amount that needs to be paid by the proposer along with the Renewal
premium
(c) It is a minimum amount that needs to be paid by the proposer along with the Proposal
form
(d) It is a minimum amount that needs to be paid by the proposer along with the Salary saving
scheme premium
(e) It is a minimum amount that needs to be paid by the proposer along with the First
installment premium

This pdf will expire in 3 months.

Correct Answer It is a minimum amount that needs to be paid by the proposer along with the First
installment premium
Answer Explanation Advance deposit is a minimum amount that needs to be paid by the proposer along with
the first installment premium. It is collected by the agent along with the proposal form.

Question8 When the accounting is done for loan against insurance policies, the policy loan ledger
sheets are prepared ________ .
(a) for each portfolio
(b) for each loan
(c) on a monthly basis
(d) on a six-monthly basis
(e) on a yearly basis

Correct Answer for each loan

Answer Explanation When the accounting is done for loan against insurance policies, the policy loan ledger
sheets are prepared for each loan & would contain the amount of loan disbursed, interest
due and paid and policy loan repayments.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question9 Renewal commission should be provided on the outstanding premiums at ____ for a life
insurance company.
(a) 2%
(b) 5%
(c) 7.5%
(d) 10%
(e) 12.5%

Correct Answer 5%
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Answer Explanation

Question10 The formula for calculating Quick Ratio is -

(a) Current assets + Equity / Current liabilities + Liabilities
(b) Current assets / Current liabilities
(c) Current assets - cash / Current liabilities
(d) Current assets - Stock / Current liabilities - Bank overdraft
(e) (Cash and bank balances + Current investment) / Current liabilities

Correct Answer Current assets - Stock / Current liabilities - Bank overdraft

Answer Explanation Quick ratio illustrates how the company’s liquid current assets can cover its
current liabilities. Since stocks or inventory are the least liquid of the current assets,
they are excluded.

Quick ratio = Quick assets (Current assets - Inventory) / Quick liabilities (Current liabilities -
Bank overdraft)

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question11 With respect to CLAIM PAYMENTS, insurance companies follow _______ for recording
accounting entries.
(a) Deferral method
(b) Accrual method
(c) FIFO method
(d) Netting of claims method
(e) Grossing of claim method

Correct Answer Netting of claims method

Answer Explanation Under ‘Netting of claims method’, as soon as a claim arises, the total payable amount less
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all deductions i.e. policy loan, interest on policy loan, due premium etc. is treated as
outstanding claim.

Question12 How should the acquisition costs be treated in the financial statements of a life insurance
company?
1. It should be expensed in the period in which paid
2. It should be expensed in the period in which incurred
3. It can be deferred till maximum of 10 years
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 3
(e) Both 1 and 2

Correct Answer Only 2

Answer Explanation Under statutory accounting, all acquisition costs are 100 percent earned and expensed at
inception of the policy, creating an immediate reduction in surplus. Thus, acquisition costs
have to be expensed in the period in which incurred.

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Question13 The purpose of special instruction register maintained at branch offices of insurance
companies is to _______ .
1. note the special requests as received from customers
2. calculate the commissions accurately
3. note important information regarding stoppage of commission
(a) Only 1 is correct
(b) Only 2 is correct
(c) Only 3 is correct
(d) Both 1 and 2 are correct
(e) Both 1 and 3 are correct

Correct Answer
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Only 3 is correct
Answer Explanation Special instruction register maintained at branch offices of insurance companies to note
down important information regarding stoppage of commission.

Question14 Which are the basic principles of cash management which insurers need to follow to
determine the solvency margin?
1. Profitability 2. Liquidity 3. Safety
(a) Both 1 and 2
(b) Both 1 and 3
(c) Both 2 and 3
(d) Only 3
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation In order to determine the solvency margin, insurers need to follow some basic principles of
cash management called Safety/Profitability/Liquidity (SPL)

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question15 With respect to a Term Insurance policy, which of the following statement(s) is/are
INCORRECT?
1. The policy term can be for a maximum 10 years
2. Term insurance provides protection only for a specific period of time
3. When the insured dies during the policy term, no benefit is payable to him / her
4. In case the insured lives beyond the policy term he had selected, no benefit is payable to
him / her
(a) 1 and 3 are INCORRECT
(b) 2 and 4 are INCORRECT
(c) 3 and 4 are INCORRECT
(d) 1, 2 and 3 are INCORRECT
(e) All 1, 2 ,3 and 4 are INCORRECT

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Correct Answer 1 and 3 are INCORRECT

Answer Explanation Term insurance is the oldest form of insurance plan. The sum insured is payable only if the
insured dies during the policy term & the policy term can be from few months to a number
of years even exceeding 10 years. Thus, the policy term cannot exceed 10 years and if the
insured dies during the policy term, no benefit is payable to him, are wrong.

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Question16 Areas in which different accounting policies can be adopted include - 1. Valuation of
investments 2. Reserve creation for unexpired risks 3. Provision of depreciation
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Both 2 and 3
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation
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As per AS 6, the areas wherein different accounting policies can be adopted may be
followed by different companies include all of the above i.e., Providing depreciation i.e.,
methods of depreciation, amortization, Creation of reserve for unexpired risk, revenue
recognition and Valuation of investments.

Question17 Monu has decided to apply for an insurance policy under the Micro insurance plans. What
are the minimum and maximum term for life insurance under this plan ?
(a) Minimum 5 years and maximum 15 years
(b) Minimum 5 years and maximum 10 years
(c) Minimum 3 years and maximum 5 years
(d) Minimum 3 years and maximum 10 years
(e) Minimum 2 years and maximum 8 years

Correct Answer Minimum 5 years and maximum 15 years

Answer Explanation

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question18 When is an asset classified as a non-performing asset ?

(a) If the interest installment and / or installment of principal remain overdue for 30 days
(b) If the interest installment and / or installment of principal remain overdue for 60 days
(c) If the interest installment and / or installment of principal remain overdue for 90 days
(d) If the interest installment and / or installment of principal remain overdue for 180 days
(e) If the interest installment and / or installment of principal remain overdue for 365 days

Correct Answer If the interest installment and / or installment of principal remain overdue for 90 days
Answer Explanation This pdf will expire in 3 months.
An asset is classified as a non-performing asset (NPA) if the interest and / or installment
and / or installment of principal remain overdue for more than 90 days (i.e. one quarter).

Question19 Which of the below mentioned ratio, if abnormally high, will mean that the company's
solvency is in danger especially if it accompanied by low profitability.
(a) PE Ratio
(b) Debt service coverage
(c) Return on capital invested
(d) Turnover
(e) Debt: Equity

Correct Answer Debt : Equity

Answer Explanation The debt equity ratio is the indicator of the proportion of debt fund in relation to equity. If
the ratio is high, which means the company has big debts and it has to pay lots of interest
on these debts. If the company has low profits, then it will find it very difficult to pay the
interest and principal and may become insolvent.

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Question20 What type of error is this - 'Goods returned by Meeta worth Rs 4000 not entered' ?
(a) Compounding
(b) Omission
(c) Commission
(d) Prime entry
(e) Casting

Correct Answer This pdf will expire in 3 months.

Omission
Answer Explanation Goods returned by Meeta worth Rs 4000 not entered would amount to omission error.

Question21 From the listed options below which factor affects the Gross Value Added - 1. CSR activities
2. Extra ordinary income 3. Advertising spend
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 2 and 3
(e) All 1, 2 and 3

Correct Answer Only 2

Answer Explanation Practically GVA includes direct income, extra ordinary income, investment income in
addition to sales revenue. GVA is thus arrived at by deducting the cost of all materials &
services from outside suppliers from the sales revenue.

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Question22 Among the below listed statements all are true with regards to Capital Receipts except –
1. Regular revenue income 2. Irregular revenue income 3. Long term benefits
(a) Both 1 and 3
(b) Both 2 and 3
(c) Only 1
(d) Only 2
(e) Only 3

Correct Answer Both 1 and 3

Answer Explanation Capital items are of two types i.e. Capital expenditure & Capital receipt. When an item of
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capital expenditure is sold, the receipt generated is known as capital receipt. The capital
receipt decreases the value of non-current asset. Therefore, capital receipt is not a regular
business income.

Question23 The prime difference between a fixed budget and a flexible budget is ________
(a) A flexible budget is devised for a range of activities but a fixed budget is devised for only
one level of activity
(b) A fixed budget includes only fixed costs and a flexible budget includes only variable costs
(c) A fixed budget is devised for only a part of the budget period but a flexible budget is for the
entire budget period
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer A flexible budget is devised for a range of activities but a fixed budget is devised for only
one level of activity
Answer Explanation Flexible budget is prepared when it is difficult to forecast the future or it is difficult to make
a firm decision. It is prepared keeping in view that there could be circumstances which are
beyond the control of the management. It is devised for a range of activities.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question24 Select from the given options which perfectly fits the description of the layering stage of
money laundering ?
(a) Hiding the origin of funds
(b) Removing clean money from the system
(c) Provision of apparent legitimacy to the funds
(d) Actual physical disposal of cash
(e) Separation of proceeds from their source

Correct Answer Separation of proceeds from their source

Answer Explanation This pdf will expire in 3 months.
Money laundering process can be broadly divided into three stages & under the layering
stage, the separation of proceeds from their source or origin i.e. criminal activities are
defined.

Question25 What is the main function of investment committee (as per the guidelines issued by IRDA)?
(a) Approving the investment policy
(b) To observer and check the investment activities of all insurance companies
(c) To ensure that investment of insurance companies earn good interest / profits so that good
returns and bonus can be given to policy holders
(d) To do the accounting for all investments
(e) To take decisions on investments with respect to the exposure and prudential norms and
investment criteria laid down by IRDA

Correct Answer To take decisions on investments with respect to the exposure and prudential norms and
investment criteria laid down by IRDA
Answer Explanation As per guidelines issued by IRDA, main function of investment committee is to take
decisions regarding investments keeping in view the exposure norms / prudential norms
and investment criteria laid down by IRDA. Their decisions shall be recorded & be open for
inspection by officers of the authority.

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Question26 What percent of total value outstanding remaining sub-standard is required to be made as
a general provision?
(a) 1%
(b) 5%
(c) 10%
(d) 20%
(e) 30%

Correct Answer 10%

Answer Explanation Sub-standard asset is an asset which has been classified as non-performing asset (NPA) for
a period of not exceeding 12 months. As per IRDAI guidelines, general provision of 10% of
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total value outstanding remaining sub-standard is required to be made.

Question27 Rohit eats some sweets of Welcome Sweets Co. and falls ill. He is hospitalised and all the
tests indicate that he has suffered food poisoning due to the sweets. Rohit plans to take
legal action against Welcome Sweets for claiming the hospital bills etc. The lawyers of
Welcome Sweets have informed that its certain that the case will be lost by them. So
Welcome Sweets decides to put an additional legal expense in the financial statements, to
cover the potential cost of losing the legal case. This is the application of -
(a) Accrual Concept
(b) Prudence Concept
(c) Claim Safety Concept
(d) Consistency concept
(e) Going concern assumption

Correct Answer Prudence Concept

Answer Explanation Prudence concept implies that ‘Profit should not be over-stated but all anticipated losses
should be recognized’. It refers to the situation where all anticipated losses should be
recognized & recorded immediately. The profits however should be recognized & recorded
in the books of accounts only on realization.

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Question28 Select the correct match for the given transaction with the source document : --
Transaction of 'Purchase of Goods'
(a) Entity’s sales invoice
(b) Debit note raised by the customer and credit note raised by the entity accepting the return
(c) Debit note raised by the entity and credit note issued by the seller accepting the return
(d) Receipts issued by the entity for cash sales
(e) Supplier's Invoice

Correct Answer This pdf will expire in 3 months.

Supplier's Invoice
Answer Explanation The accounting process requires some kind of proof or data source for any transactions of
an entity. The source document relevant to the transaction: Purchase of Goods is Supplier’s
invoice.

Question29 ________ is a mutual fund scheme in which an investor can purchase or sell units at any
time at the current net asset value (NAV).
(a) ELSS Scheme
(b) Gilt scheme
(c) Open ended scheme
(d) Close ended scheme
(e) Balanced scheme

Correct Answer Open ended scheme

Answer Explanation A mutual fund is a collective investment scheme where the returns earned are shared with
the investors. The mutual fund scheme in which an investor can purchase units from or sell
units to the fund house at any time at the prevailing net asset value (NAV) is ‘Open ended
scheme’.

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Question30 In Life Insurance business, the investments in Government Securities as per IRDAI
Investment regulations should be ________ .
(a) not less than 10% of fund
(b) not less than 15% of fund
(c) not less than 25% of fund
(d) not less than 40% of fund
(e) not less than 50% of fund

Correct Answer This pdf will expire in 3 months.

not less than 25% of fund
Answer Explanation As per Life insurance business (Regulation 4), investments in Government Securities as per
IRDAI Investment regulations, cannot be less than 25% of fund.

Question31 With respect to KYC norms which of the given below statements holds true -
(a) Policy beneficiary has to be anonymous
(b) Contracts can be anonymous
(c) The KYC norms are for new customers only
(d) Contracts cannot be anonymous
(e) Policy Beneficiary is not subject to KYC norms

Correct Answer Contracts cannot be anonymous

Answer Explanation To rule out illegitimate and bad customers, KYC is important. KYC norms make it
mandatory that the contracts should not be anonymous & it must also satisfy the legal
requirements.

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Question32 In case of a General Insurance company, the debt securities and redeemable preference
shares share be considered to be __________ .
(a) held at cost
(b) held to maturity
(c) at amortized cost
(d) at fair value
(e) held at sale value

Correct Answer This pdf will expire in 3 months.

held to maturity
Answer Explanation Debt securities including government securities and redeemable preference shares for a
general insurance company shall be considered to be held to maturity securities & shall be
measured at historical cost subject to amortization.

Question33 It is ________ for insurance companies to comply with the accounting standards as issued
by ICAI.
(a) Obligatory
(b) Preferred
(c) Mandatory
(d) Recommended
(e) Not necessary

Correct Answer Mandatory

Answer Explanation The Institute of Chartered Accountants of India (ICAI) has set up an Accounting Standard
Board to formulate Accounting Standards. For insurance companies, compliance with
accounting standards issued by ICAI is mandatory.

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Question34 The focus of Capital Structure ratios is primarily on the _____ position of the business.
(a) Long term capital appreciation
(b) Long term solvency
(c) Short term solvency
(d) Long term debt
(e) Short term debt

Correct Answer This pdf will expire in 3 months.

Long term solvency
Answer Explanation Capital structure ratios normally focus on the long-term solvency position of the business &
one of the important ratios among this is Debt – Equity Ratio.
It is calculated as: Debt Equity Ratio = Total Liabilities / Shareholders Equity.

Question35 While identifying 'geographical segments' the factors that should be considered include -
(a) The nature of the processes relating to production
(b) The nature of the products / services
(c) The procedures used to distribute the products or provide the services
(d) Exchange control regulations
(e) The class of customers for the products or services

Correct Answer Exchange control regulations

Answer Explanation Accounting Standard 17 refers to segment reporting. It has divided standard in to two
segments i.e., Business Segment & Geographical Segment. Under geographical segment,
factors that should be considered in identifying geographical segments include ‘Exchange
control regulations’.

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Question36 The primary purpose of collecting KYC information is –

1. To find out good as well as bad customers
2. As per legal requirement and also for good customer relationship
3. To investigate the customers
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer
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Only 2
Answer Explanation KYC norms makes it mandatory that the contracts should not be anonymous & it must also
satisfy the legal requirements for better customer relationship.

Question37 Which of the given schemes invest a major portion of their money in fixed income
securities like fixed deposits, bonds, debentures, etc.
(a) ELSS Tax Saving Schemes
(b) Money Market Schemes
(c) Balance Schemes
(d) Debt Schemes
(e) Gilt Schemes

Correct Answer Debt Schemes

Answer Explanation Under the mutual fund, the investors’ money is utilized in money market instruments as
notified by the SEBI. The returns earned are shared with the investors according to the
scheme. Debt schemes invest a major portion of their money in fixed income securities like
bonds, debentures, fixed deposits etc.

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Question38 The policyholder has the right to apply for loan against his insurance policy in Loan Against
Policy (LAP). The loan amount in such cases depends upon :
(a) Policy holders age
(b) The surrender value of the policy
(c) Whether the insurance provider is Govt. owned or Private
(d) Duration of the policy
(e) All of the above

Correct Answer The surrender value of the policy

Answer Explanation In Loan against policy (LAP), policyholder can apply for loan against his insurance policy.
This pdf will expire in 3 months.
The loan amount depends upon the Surrender value of policy.
Surrender value is the value which is the amount payable to the policy holder should he
decide to discontinue the policy and encash the same.

Question39 Which of the following deduction(s) is/are allowed as per section 80G of the Income Tax
act ?
1. Payments for life insurance premiums
2. Donations which are made to approved institutions
3. Deductions for interest which is paid on the loan taken for Higher Education
(a) Only option 1
(b) Only option 2
(c) Only option 3
(d) Both options 1 and 2
(e) Both options 2 and 3

Correct Answer Only option 2

Answer Explanation Under Chapter VI of the IT Act, the provisions for deductions from income are explained.
Section 80G of Income tax allows deduction with respect to ‘Donations made to approved
institutions’

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Question40 The 'Gross Value Added' is affected by –

1. Annual corporate tax
2. Corporate Social Responsibility activities
3. Spending on advertisement
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) All 1, 2 and 3

Correct Answer Only 1

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Answer Explanation GVA is arrived at by deducting the cost of all materials & services from outside suppliers
from the sales revenue. Annual corporate tax is an important element which effects the
GVA calculations.

Question41 From the given below options identify which mutual fund schemes invest their money in a
mix of equities and debt instruments -
(a) Equity Linked Saving Schemes (ELSS)
(b) Gilt Schemes
(c) Open ended schemes
(d) Tax saving schemes
(e) Balanced schemes

Correct Answer Balanced schemes

Answer Explanation Balanced schemes of mutual fund schemes invest a major portion of their money in a mix
of equities and debt instruments.

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Question42 A person wishes to settle a transaction with cash rather than by bank cheque. In terms of
money laundering this can be can be classified as the stage of -
(a) Placement
(b) Layering
(c) Siphoning
(d) Integration
(e) Black transaction

Correct Answer This pdf will expire in 3 months.

Placement
Answer Explanation This is generally the 1st stage of money laundering wherein the launderer inserts the
illegitimate money into legitimate financial institution through various means like through
purchase of art, jewellery etc. & by depositing cash in the bank.

Question43 In order to prepare the bank reconciliation statement, we can take the help of –
1. Bank column of cash book and cash column of bank book 2. Bank column of cash book
and bank statement 3. Cash column of cash book and bank statement
(a) Only statement 1
(b) Only statement 2
(c) Only statement 3
(d) Both statement 1 and 3
(e) Both statement 1 and 2

Correct Answer Only statement 2

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Question44 Based on AS 3 cash flow statement, which of the given activities can be categorized under
an operating activity? 1. Claim receipts from reinsurers 2. Loan to companies and its
repayments 3. Repayment of policy loan from policy holders
(a) Only statement 2 is correct
(b) Only statements 2 and 3 are correct
(c) Only statements 1 and 3 are correct
(d) Only statements 1 and 2 are correct
(e) All statements are correct

Correct Answer
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Only statements 1 and 3 are correct
Answer Explanation Cash flow Statement is additional information to user of financial statement in additional
to balance sheet, Profit & Loss Account and Revenue Accounts. Under this statement, the
cash flow from operating activity includes: Claim receipts from reinsurers & Repayment of
policy loan from policy holders.

Question45 'Depreciation amount in case of revaluation of assets' - This disclosure is found in ______ .
(a) Balance Sheet
(b) Master report
(c) AOA
(d) P & L A/c and notes to accounts
(e) Form 26AS

Correct Answer P & L A/c and notes to accounts

Answer Explanation As per disclosure requirements (Accounting Standard 6 dealing with depreciation &
Depreciable Assets), depreciation amount in case of revaluation of assets has to be
disclosed under P & L A/c and notes to accounts.

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Question46 The Average first premium per thousand sum assured can be computed as ______ .
(a) (Total FP / Total SA ) * 1000
(b) (Total FYP / Total SA ) * 1000
(c) (Total FP / Total SA ) * 10
(d) (Total SA / Total FP ) * 1000
(e) (Total FYP / Total SA ) * 100

Correct Answer (Total FP / Total SA ) * 1000

Answer Explanation This pdf will expire in 3 months.
Average first premium per 1000 Sum Assured =
Total First Premium (Only First installment) (Individual Business-Ordinary and SSS) / Sum
assured under Individual Business X 1000

Question47 Which guidelines prevent the anti-social elements from sending funds through illegal
channels for use against public interest ?
(a) Anti-black money guidelines
(b) Anti-money laundering guidelines
(c) Underwriting guidelines
(d) Insurance guidelines
(e) Investment guidelines

Correct Answer Anti-money laundering guidelines

Answer Explanation Anti-money laundering guidelines prevent the anti-social elements from routing funds
through illegal channels for use against public interest. The Prevention of Money
Laundering Act (PMLA) guidelines were introduced on 1st July 2005.

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Question48 From the enlisted options identify a valid statement in relation to KYC norms -
(a) No KYC norms are required for the beneficiary of a policy
(b) Contracts should be anonymous
(c) The beneficiary of a policy can be anonymous
(d) The KYC norms are compulsory for new customers only
(e) Correct and effective measure have to be taken in order to obtain mandatory details for
accurate identification of new customers

Correct Answer This pdf will expire in 3 months.

Correct and effective measure have to be taken in order to obtain mandatory details for
accurate identification of new customers
Answer Explanation To rule out illegitimate and bad customers, KYC is important. KYC norms make it
mandatory that the contracts should not be anonymous & it must also satisfy the legal
requirements.

Question49 Given the case that a firm XYZ Ltd. has very high Current Ratio. What does the situation
indicate?
(a) XYZ Ltd. has a high operating efficiency
(b) XYZ Ltd. has a low operating efficiency
(c) XYZ Ltd. is inefficient in fund management for optimum returns
(d) XYZ Ltd. is able to discharge all its obligations effectively
(e) XYZ. Ltd is performing much better than the competitors

Correct Answer XYZ Ltd. has a high operating efficiency

Answer Explanation A firm having a very high Current Ratio indicates that it will generate sufficient cash to pay
off the current liabilities. It is an indicator of the firms high operating efficiency.

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Question50 Identify from the given facts which holds true with respect to Unit Linked Insurance Plans -
1. The risk of market fluctuations and its effect on NAV of the fund is borne by the Insurer
2. ULIPs are generally for longer terms with a lock in period of 3 to 5 years
3. On maturity, NAV of outstanding units are paid and in case of death, sum assured is paid
in addition to NAV of outstanding units

(a) Both 1 and 2 are correct

(b) Both 2 and 3 are correct
(c) All 1, 2 and 3 are correct
(d) Only 1 is correct
(e) Only 3 is correct

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Correct Answer Both 2 and 3 are correct

Answer Explanation Unit Linked Insurance Plans are for a longer duration with a lock in period of around 5
years and at the time of maturity, NAV of outstanding units are paid and in case of death,
sum assured is paid in addition to NAV of outstanding units. Insurer does not carry the risk
of market fluctuations in NAV of the fund

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PRACTICE TEST 3

Question1 In which money laundering stage does the following transactions take place?
1. Several bank-to-bank transfers
2. Wire transfers between different accounts in different names in different countries
3. Making deposits and withdrawals of various amount of money in the accounts
(a) Placement
(b) Security
(c) Integration
(d) Layering
(e) Small company transfer

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Correct Answer Layering
Answer Explanation

Question2 As per Insurance Act,1938 all insurance companies should conduct which of the following
audits? 1. Statutory Audit 2. Internal Audit 3. Concurrent Audit
(a) Only 1 and 2
(b) Only 1 and 3
(c) Only 2 and 3
(d) All 1, 2 and 3
(e) Only 1

Correct Answer All 1, 2 and 3

Answer Explanation

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Question3 Which life insurance policy pays when the insured dies and also pays if the insured
survives?
(a) Endowment insurance plan
(b) Money back policy.
(c) Term insurance plan
(d) Annuity.
(e) Whole life insurance plan.

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Correct Answer Endowment insurance plan
Answer Explanation

Question4 Which is the first stage of money laundering process?

(a) Speculation
(b) Conversion
(c) Placement
(d) Integration
(e) Layering

Correct Answer Placement

Answer Explanation There are three main stages of money laundering - Placement, layering and integration.
Placement - This is the movement of cash from its source.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question5 In reference to a bank reconciliation statement, which of the following statement(s) is / are
CORRECT ?
1. Bank reconciliation statement is not a part of double entry system
2. Bank reconciliation statement is sent by bank to those customers who do not maintain a
minimum balance
3. Bank reconciliation statement is prepared by the bank and sent to its account holders
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 1 and 3

Correct Answer
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Only 1
Answer Explanation Bank reconciliation statement is not a part of the double entry system. It is done to
reconcile the debit / credit entries from the bank statement from that of the books of
accounts of the company i.e. difference between cash book & passbook.

Question6 Which of these is/are Fund Management Expenses ?

1. Advertisement expenses for ULIPs
2. Policy stamp expense on policy bond
3. Expenses made for purchase and sale of securities
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 3

Answer Explanation Fund management expenses include expenditure incurred by insurer at the time of
management of investment funds such as sale and purchase of securities etc.

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Question7 Where should an investor invest if he is looking to take moderate risk and get moderate
returns?
(a) In Bluechip Equity funds
(b) In Debt Funds
(c) In ELSS Funds
(d) In Balanced Funds
(e) In Money market funds

Correct Answer In Balanced Funds

Answer Explanation This pdf will expire in 3 months.
Balanced Funds invests both in Equity (for faster capital appreciation) and Debt (for safety
and regular returns). They are geared towards investors who are looking for a mix of safety
and modest capital appreciation.

Question8 Within how many days should the insurance companies report the suspicious transactions
to Financial Intelligence Unit ?
(a) 2 days
(b) 7 days
(c) 15 days
(d) 30 days
(e) 45 days

Correct Answer 7 days

Answer Explanation Indian Government has set up a ‘Financial Intelligence Unit’ to track possible money
laundering attempt. Insurance companies should report the suspicious transactions to
Financial Intelligence Unit within 7 working days of identification in the prescribed format.

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Question9 Which risk is caused due to wide many factors with respect to securities like recession,
natural calamities, structural changes in the economy etc.?
(a) Default risk
(b) Market risk
(c) Liquidity risk
(d) Capital risk
(e) Concentration risk

Correct Answer Market risk

Answer Explanation Market risk is the possibility of an investor experiencing losses due to factors that affect
the overall performance of the financial markets in which he or she is involved. Market
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risk, also called "systematic risk," cannot be eliminated through diversification, though it
can be hedged against.
Sources of market risk include recessions, political turmoil, changes in interest rates,
natural disasters and terrorist attacks

Question10 For a Whole Life Policy, which of these statements are INCORRECT ?
1. There is no saving element
2. The maximum policy term is 10 years
3. Interest is also payable on the premium
(a) Only 2
(b) Only 1
(c) Both 1 and 2
(d) Both 2 and 3
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation All of the above statements are incorrect about the whole life policies. There is no interest
payment, the policy term is till the age of 80 or for 35 annual premium payment and there
is a saving element.

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Question11 With respect to investments in Government securities by an insurance company, which of

the given options is NOT as per investment regulations issued by IRDA ?
(a) Life insurers shall invest not exceeding 35% of its surplus / investible sum in specified
approved investments and other investments
(b) Life insurers shall invest not exceeding 15% of its surplus / investible sum in housing and
infrastructure.
(c) Life insurers shall invest not less than 25% of its surplus / investible sum in Government
securities
(d) Life insurers shall invest not less than 50% of its surplus / investible sum in Government
securities
(e) Life insurers shall invest not less than 50% of its surplus / investible sum in Government
securities or other approved securities (including above 25%)

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Correct Answer Life insurers shall invest not less than 50% of its surplus / investible sum in Government
securities
Answer Explanation Every life insurer shall invest not less than 50% of its surplus / investible sum in
Government securities, is not as per investment regulations issued by IRDA. The correct
guidelines are -

-Every life insurer shall invest not less than 25% of its surplus / investible sum in
Government securities

-Every life insurer shall invest not less than 50% of its surplus / investible sum in
Government securities or other approved securities (including above 25%).

- Every life insurer shall invest not exceeding 35% of its surplus / investible sum in specified
approved investments and other investments.

- Every life insurer shall invest not exceeding 15% of its surplus / investible sum in housing
and infrastructure.

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Question12 An insurance company bought office space for Rs 40 lacs. What is the correct reason to
classify it as capital expenditure?
(a) This expenditure is incurred to maintain the existing capacity of an asset so that it can do
its daily work
(b) This expenditure is a part of regular income
(c) This expenditure will result in long lasting benefits for the insurance company
(d) This expenditure is from an income which is earned from activities that are not ordinary
activities of an entity
(e) This cannot be classified as capital expenditure

Correct Answer This expenditure will result in long lasting benefits for the insurance company
Answer Explanation This pdf will expire in 3 months.
It’s a capital expenditure whose benefit is expected to last longer than one accounting
period. It is thus as capital expenditure.

Question13 Surendra Co. a chartered accountancy firm has completed five-year tenure as a joint
auditor of ABC Life Insurance Company. What is the cooling period before which they
cannot accept statutory audit responsibilities of ABC life insurance?
(a) 1 year
(b) 2 years
(c) 3 years
(d) 4 years
(e) 5 years

Correct Answer 2 years

Answer Explanation The cooling period for a CA firm who has completed five-year tenure as a joint auditor of
Life Insurance Company is 2 years. The firm may accept statutory audit responsibilities of
any other insurance company subject to compliance of maximum two statutory audits.

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Question14 The IFRS version of the Accounting Standards in India are notified by the _____.
(a) AMFI
(b) SEBI
(c) Ministry of Corporate Affairs
(d) Reserve Bank of India
(e) Accounting Standards Board of ICAI

Correct Answer Ministry of Corporate Affairs

Answer Explanation The accounting standards in India, based on the IFRS version are notified by the Ministry of
Corporate Affairs. All insurance companies are required to apply IFRS (International
Financial Reporting Standards) w.e.f 1st April 2015.
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Question15 With respect to appointment of concurrent auditor of a life insurance company, which of
the following statement(s) is / are correct?
1. A Concurrent auditor can be the internal auditor of the company but not the statutory
auditor
2. A Concurrent auditor should be a Chartered Accountant
3. A Concurrent auditor performs the investment audit
(a) Both 1 and 2
(b) Both 2 and 3
(c) Both 1 and 3
(d) All 1, 2 and 3
(e) Only 2

Correct Answer Both 2 and 3

Answer Explanation Concurrent auditor of a life insurance company should be a Chartered Accountant and he
will do investment audit also. However, the concurrent auditor cannot be the internal
auditor of the company or the statutory auditor.

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Question16 In a life insurance company, what does a fall in the conservation ratio signify ?
(a) A lot of policies have been issued under long term plans
(b) The management expenses are very high
(c) There is lapse of new business
(d) High lapses
(e) A lot of policies have been issued in the quarterly or half yearly mode

Correct Answer There is lapse of new business

Answer Explanation If Conservation Ratio is showing a downward trend in a life insurance company, it indicates
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lapse of new business. Preferably the CR should be near 100%.
(Lapse - The cancellation of a policy due to non-payment of the premium due)

Question17 There were bad debts of Rs 1000 in the ledger. Mr. Rohit carried forward this to the Trial
Balance as Rs 2000. Which error has been made by Mr. Rohit ?
(a) Omission Error
(b) Overcasting error
(c) Transposition error
(d) Principle error
(e) Posting error

Correct Answer Posting error

Answer Explanation Posting Error occurs when -
- Posting with wrong amount
- Omission to post either credit or debit entry
- Posting to wrong side of correct ledger

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Question18 Based on the given figures compute the Production Budget: Sales 58000 units, opening
inventory 7600 units, closing inventory 9200 units
(a) 58000
(b) 56400
(c) 59600
(d) 49700
(e) 48100

Correct Answer 59600

Answer Explanation Production budget = Sales + Closing inventory - Opening inventory
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= 58000 + 9200 -7600
= 59600

Question19 The Principal Compliance Officer (PCO) appointed by the insurance companies should be
_____.
(a) Junior to Head (Audit/Compliance) and Chief Risk Officer
(b) Senior to Head (Audit/Compliance) and Chief Risk Officer
(c) Junior to Head (Audit/Compliance) and Junior Chief Risk Officer
(d) Senior to Head (Audit/Compliance) and Junior Chief Risk Officer
(e) Senior to Head (Audit/Compliance) and Junior Chief Financial Officer

Correct Answer Senior to Head (Audit/Compliance) and Chief Risk Officer

Answer Explanation The Principal Compliance Officer (PCO) appointed by the insurance companies should be:
Senior to Head (Audit/Compliance) and Chief Risk Officer. His name should be
communicated to IRDAI & FIU immediately on appointment.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question20 When a Trail Balance is prepared, which of the following mistakes will be disclosed?
1. Cheque of Rs 630 from Ravi entered in Ravi’s account as Rs 360
2. Credit sales of Rs 5500 entered in both double entry accounts as Rs 550
3. Purchase of Rs 950 was omitted entirely from the books 4. Selling expenses debited to
the sales account
(a) Both 1 and 2
(b) Both 2 and 3
(c) Both 3 and 4
(d) Both 2 and 4
(e) Only 2

Correct Answer Both 1 and 2

Answer Explanation This pdf will expire in 3 months.
The error pertaining to cheque of Rs 630 from Ravi entered in Ravi’s account as Rs 360 and
credit sales of Rs 5500 entered in both double entry accounts as Rs 550, would be disclosed
by the preparation of a trial balance.

Question21 Select from the given options advantage(s) of single premium –

1. There is no problem of making premium payments every year
2. There are no surrender charges
3. The costs are prohibitive
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) All 1, 2 and 3

Correct Answer Only 1

Answer Explanation Under single premium life policies, the premium can be agreed to include single payment
insurance. When the premium ceases, the policy becomes fully paid up. There is no need to
worry about funds every year by the policy holder under the above policy.

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Question22 Enlist which of the following is/are Limitations of ration analysis –

1. The character of the financial ratios can be changed by window dressing
2. Ratios does not highlight wrong accounting
3. Ratios increases routine checking
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 1

Answer Explanation Ratio analysis is based entirely on the data found in business firms' financial statements. If
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the financial statements for a company are not quite as good as they should be and a
company would like better numbers to show up in an annual report, the company may use
window dressing to manipulate the data in the financial statements. Window dressing thus
can change the character of financial ratios.

Question23 What would be the right treatment of unrealized gains or losses which arise due to changes
in the fair value of listed equity and derivatives instruments in the financial statements of a
Life Insurance Company?
1. Posted under the head miscellaneous expenses
2. Transferred to equity under the head ‘Fair Value Change Account’
3. Recognized in profit or loss
(a) Only 1
(b) Only 2
(c) Only 3
(d) 1 or 2
(e) 1 or 3

Correct Answer Only 2

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Question24 The right formula for determining assets is -

(a) Assets = Capital - Liabilities
(b) Assets = Liabilities / Capital
(c) Assets = Liabilities X Capital
(d) Assets = Capital + Liabilities
(e) Assets = Liabilities - Capital / 100

Correct Answer
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Assets = Capital + Liabilities
Answer Explanation The fundamental relationship between the assets, liabilities & capital is the accounting
equation. According to this equation Assets = Liabilities + Capital.

Question25 A levy charged on _________ by the government is considered as Tax.

1. Products and Services 2. Income 3. Activities
(a) 1 and 2
(b) 1 and 3
(c) 2 and 3
(d) Only 2
(e) All 1,2 and 3

Correct Answer All 1,2 and 3

Answer Explanation Tax is a levy charged by the government on Income, Products & Activities through direct
and indirect tax. It is levied directly on personal & corporate income along with price of
goods & services.

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Question26 If the transaction is - 'Return of Purchased goods' - what is the source document relevant to
this transaction?
(a) The Debit note raised by the customer and Credit note raised by the entity accepting the
return
(b) The Debit note raised by the entity and credit note issued by the seller accepting the return
(c) Sales invoice of the entity
(d) The receipts issued by the company for cash sales
(e) Invoice of the supplier

Correct Answer This pdf will expire in 3 months.

The Debit note raised by the entity and credit note issued by the seller accepting the return
Answer Explanation The accounting process requires some kind of proof or data source for any transactions of
an entity. The source document relevant to the transaction i.e. return of purchased goods
is debit note raised by the entity and credit note issued by the seller accepting the return.
There are various processes of accounting & this is the 1st step of the process.

Question27 An insurer carrying on general insurance business has to comply with the provisions of
Schedule _____ for preparing its financial statements.
(a) A
(b) B
(c) C
(d) D
(e) E

Correct Answer B
Answer Explanation As per IRDAI (Preparation of financial statements and auditor’s report of insurance
companies) Regulation 2002, an insurer carrying on general insurance business shall
comply with the provisions of Schedule B to prepare its financial statements.

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Question28 During May 2016, Satish sold goods to three different customers of Rs 5000, Rs 7000 and Rs
10000 respectively. He entered the three amounts correctly in the sales day book.
However, while totaling the monthly sales, he came to Rs 21000 instead of Rs 22000. The
error committed by Satish is _______
(a) Financial error
(b) Overcasting error
(c) Undercasting error
(d) Posting error
(e) Transposition error

Correct Answer Undercasting error

Answer Explanation This pdf will expire in 3 months.
The term casting means adding up which affects the agreement of trial balance. This error
may be an error of overcasting or undercasting. Overcasting means summing the total to
more than what they are against under casting means summing the total to less than what
they are. In this example, Satish under casted the sales day book by Rs. 1000

Question29 What are equity funds?

(a) Equity funds are funds which invest a major portion of the money in Government
securities, Corporate bonds, Fixed deposits etc.
(b) Equity funds are funds which invest a major portion of the money in equity and equity
related instruments
(c) Equity funds are funds which invest a major portion of the money in a mix of equity and
debt instruments.
(d) Equity funds are funds which invest in equity shares only
(e) Equity funds are funds which invest mainly in instruments such as Treasury bills,
Commercial Paper etc.

Correct Answer Equity funds are funds which invest a major portion of the money in equity and equity
related instruments
Answer Explanation Equity funds invests a major portion of the money in equity and equity related
instruments.

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Question30 When the budget of a branch office is planned, the long term plan is for ___ year(s) and
short term plan is for ____ year(s) for the performance budget.
(a) 5, 1
(b) 3, 1
(c) 1, 2
(d) 4,1
(e) 5, 2

Correct Answer 3, 1
Answer Explanation This pdf will expire in 3 months.
Planning means looking in advance. It needs to be long term as-well-as short-term plan.
While planning for budgeting, the preparation of the profile of the Branch office is a long-
term plan of 3 years and short-term plan of 1 year only for the performance budget.

Question31 From those listed below which are / is not a part of the 'performance budget' prepared by
an insurance company?
1. Production budget 2. Customer service budget 3. Finance budget
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 1

Answer Explanation Since there is no production involved in insurance companies’ activities, there is no need
for a production budget.
The performance budget prepared by an insurance company includes Growth budget,
Customer service budget, Finance budget and Capital budget.

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Question32 ABC Ltd. has changed its method of valuation of inventories from Weighted average
method to First-in, First-out method (FIFO). This change should be accounted for by ABC
Ltd. as ________.
(a) a correction of an error and account for it retrospectively
(b) a change in estimate and account for it prospectively
(c) a change in accounting policy and account for it retrospectively
(d) a prior period item and account for it retrospectively
(e) a change in accounting policy and account for it prospectively

Correct Answer
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a change in accounting policy and account for it prospectively
Answer Explanation Changing method of valuation of inventories from weighted average method to first-in,
first-out method (FIFO). ABC Ltd. would account for this change as a change in accounting
policy and account for it prospectively.

Question33 Identify the feature of whole life insurance plan?

(a) The Sum Assured is payable on death or maturity
(b) The premiums are payable for the lifetime of the life insured
(c) There is no protection for dependents
(d) The premiums have to be paid only for the first 3 years
(e) Its an excellent security for old age

Correct Answer The premiums are payable for the lifetime of the life insured
Answer Explanation Whole life insurance plans is the purest form of permanent contract. It is the cheapest form
of protection where the premiums are payable throughout the lifetime of the life insured.
It provides larger amount of life cover than any other permanent type of life insurance.

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Question34 In the course of preparation of Trial Balance which of the listed errors CANNOT be
highlighted?
(a) Wrong carry over to the trial balance
(b) Casting
(c) Omission
(d) Posting
(e) Transposition

Correct Answer Omission

Answer Explanation This pdf will expire in 3 months.
From the point of view of corrections, errors are classified under two groups i.e. errors can
be highlighted by preparing a trial balance and errors cannot be highlighted by preparing a
trial balance. The error which cannot be highlighted by preparing a trial balance is error of
Omission.
(Error of Omission - transaction that is not recorded)

Question35 Cash flow arising from financing activities includes which of the following â€“
(a) Amount received as repayment of policy loan from policy holders
(b) Premium received from policy holders
(c) Income generated through policy holders as other income
(d) Cash proceeds and payment of borrowing
(e) Claim amount received from reinsurers

Correct Answer Cash proceeds and payment of borrowing

Answer Explanation Cash flow Statement is additional information to user of financial statement in additional
to balance sheet, Profit & Loss Account and Revenue Accounts. The cash flow from
financing activities includes cash proceeds and payment of borrowing.

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Question36 In Varun’s books what accounting entry will be passed on 10th February 2017, when loans
are advanced by him on 10th February 2017 to buy securities on 4th March 2017?
(a) Varun’s Loan A/c Cr To. Bank A/c Dr
(b) Loan A/c Dr Loan A/c Dr To Varun’s Bank Cr
(c) Securities A/c Cr To. Varun’s Loan A/c Dr
(d) Securities A/c Cr To. Varun’s Bank A/c Dr
(e) Varun’s Loan A/c Cr To. Securities A/c Dr

Correct Answer
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Varun’s Loan A/c Cr To. Securities A/c Dr
Answer Explanation According to the accounting principle, debit what comes in and credit what goes out.
Accordingly, Varun’s loan account would be credited & the securities account would be
debited.

Question37 Who monitors the actual performance of a budget?

(a) Chairman / Managing Director
(b) Chief Financial Officer (CFO)
(c) Budgetary controller
(d) Regulators like SEBI , IRDA etc.
(e) Chief Executive Officer (CEO)

Correct Answer Budgetary controller

Answer Explanation Budgetary control system is a means of monitoring revenue & cost to exercise control in an
entity. It does it by developing budgets & comparing figures. Budgetary controller is
appointed for control like that of a management accountant. It compares the budgetary
performance for any shortfall or losses.

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Question38 In which of the given cases will result in claim payment being exclusively made from fund
unit under a Unit linked policy ?
1. In cases where sum assured is higher than fund value
2. In cases where fund value is higher than sum assured
3. In cases where there is excess of sum assured over the fund value of units as on date of
booking liability
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 3
(e) Both 2 and 3

Correct Answer Only 2

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Answer Explanation Under a Unit linked policy, when fund value is higher than sum assured, the claim payment
would be exclusively made from fund unit.
No liability will be payable from the Non-Unit Fund.

Question39 Which of the following is a life insurance policy that is designed primarily to provide a living
benefit and secondarily to provide life insurance protection?
(a) Super annuation policy
(b) Money back policy
(c) Whole life policy
(d) Endowment policy
(e) Term insurance policy

Correct Answer Endowment policy

Answer Explanation Endowment policy gives an insurance cover as well as gives financial protection. This would
be the most ideal insurance that serves as a savings scheme as well as gives financial
protection to his family against his premature death. This plan is ideal for a person with
family. The policy provides a living benefit and secondarily to provide life insurance
protection.

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Question40 Which of these can be categorized as internal users for an organization?

(a) The Debtors
(b) The Shareholders
(c) The Investors
(d) The people related to the organization
(e) The Customers

Correct Answer The people related to the organization

Answer Explanation This pdf will expire in 3 months.
Financial statements aid decision making. These financial statements can be divided into
two types i.e. Internal Users & External Users. People related to the organization can be
categorized under internal users for an organization.

Question41 As per guidelines for appointment of statutory auditors of insurance companies, maximum
ceiling limit for an audit firm with regards to engaging in the statutory audit of insurance
companies is __________ .
(a) Maximum 1 company
(b) Maximum 2 companies
(c) Not more than 1 life insurance company and no limit of non-life
(d) Maximum 3 companies with a ceiling of 2 non-insurance
(e) Maximum 3 companies with a ceiling of 2 life insurance

Correct Answer Maximum 2 companies

Answer Explanation As per revised guidelines for appointment of statutory auditors of insurance companies,
maximum ceiling limit for an audit firm with regards to engaging in the statutory audit of
insurance companies is maximum 2 companies.

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Question42 __________ involves movement of cash.

(a) Bonus Issue
(b) Rights Issue
(c) Depreciation by Straight line method
(d) Depreciation by Reducing balance method
(e) Both 1 and 2

Correct Answer Rights Issue

Answer Explanation The right issue is offering shares to its existing shareholders at a predetermined price which
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is generally less than the market price. The shareholder has to subscribe for them against
payment.
Under bonus issue and depreciation, there is no movement of cash involved. These are
just book entries.

Question43 As per the principle of _______ in cash management, an entity should be able to convert
any asset to cash within a short period of time for payout of claims to policy holders as and
when due.
(a) flexibity
(b) emergency
(c) safety
(d) liquidity
(e) profitability

Correct Answer liquidity

Answer Explanation Liquidity principle ensures the ability to convert any asset to cash within a short time for
pay out of short-term liabilities i.e. for payout of claims to policy holders as and when due.

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Question44 Which of the given schemes invest a major portion of their money in Government
Securities like Treasury Bills and Long dated securities?
(a) ELSS schemes
(b) Debt schemes
(c) Gilt schemes
(d) Money market schemes
(e) Balanced schemes

Correct Answer Gilt schemes

Answer Explanation Under the mutual fund, the investors’ money is utilized in money market instruments as
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notified by the SEBI. The returns earned are shared with the investors according to the
scheme. Gilt schemes invest a major portion of their money in Government Securities (G
Secs) like Treasury Bills and / or Long Dated Securities.

Question45 Which of the given below Functional Ratio is used most commonly in the life insurance
industry?
(a) Fixed to worth
(b) Cost of telephone charges per force policy percentage of Surplus Fund to total premium
(c) Interest cover
(d) Distribution yield
(e) Quick ratio

Correct Answer Cost of telephone charges per force policy percentage of Surplus Fund to total premium
Answer Explanation In order to be competent & perform to the optimum level, the insurance industry applies
financial management concepts. The functional ratio that is used more often in the life
insurance industry is cost of telephone charges per force policy percentage of Surplus Fund
to total premium.

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Question46 The main advantage of a VA statement is ________ .

(a) VA statement helps in promoting greater accountability
(b) VA statement provides a good measure of the size and importance of a company
(c) VA statement increases transparency
(d) VA statement helps identify gap in compliance's
(e) VA statement helps to identify problem areas in growth

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Correct Answer VA statement provides a good measure of the size and importance of a company

Answer Explanation The statement prepared for a specified period by showing the sources of sales and value
added is known as Value Added statement. VA provides a very good measure of the size
and importance of a company. It’s a part of financial statement which gives value to
financial reporting.

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Question47 Which of the below statements correctly explains Annuity Insurance Plan?
(a) Annuity Insurance Plan are insurance plans in which the life assured is allowed to make a
lump sum withdrawal of 1/3 of the accumulated fund and the remaining 2/3 of the amount
of the accumulated fund is invested by the insurance company and regular annuity
payments are made to the life assured from it.
(b) Annuity Insurance Plan are insurance plans in which the insurance company pays the life
assured the promised sum assured and the accumulated bonuses (if any) at the end of the
tenure of the plan
(c) Annuity Insurance Plan are insurance plans in which the insurance companies pay the life
assured the fund value on the maturity of the plan and the sum assured
(d) Annuity Insurance Plan are insurance plans in which the insurance company pays a lump
sum amount on the death of the life assured during the policy period
(e) None of the above

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Correct Answer Annuity Insurance Plan are insurance plans in which the life assured is allowed to make a
lump sum withdrawal of 1/3 of the accumulated fund and the remaining 2/3 of the amount
of the accumulated fund is invested by the insurance company and regular annuity
payments are made to the life assured from it.

Answer Explanation It is under unit linked pension plan that at the time of maturity, NAV of the outstanding
units are converted in to corpus for the purchase of annuity for payment can be made out
of corpus. However, 1/3rd of the accumulated fund can be withdrawn before the start of
regular annuity payments. Remaining 2/3 of the amount of the accumulated fund is
invested by the insurance company and regular annuity payments are made to the life
assured from it.

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Question48 A young software engineer Mr. Vikram currently has moderate salary but with time has the
potential to get higher salary in upcoming years. Which of the below listed insurance plans
would you suggest for his needs ?
(a) Term Plan with principal return
(b) Money back plan
(c) Whole life insurance plan
(d) Pure Endowment Plan
(e) Convertible whole life insurance plan

Correct Answer Convertible whole life insurance plan

Answer Explanation
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Convertible whole life insurance plan is essentially a whole life insurance with an option to
convert after 5 yrs. of commencement, into endowment insurance effective from
inception.
This plan suits Vikram with a modest income for the time being but with good prospects of
higher income in the coming years

Question49 Which of the following are an indirect expense of unit linked plans -
(a) Incentives to agents
(b) Incentives to marketing staff
(c) Policy expenses
(d) Medical expenses
(e) Printing and Stationary

Correct Answer Printing and Stationary

Answer Explanation Expenses of management under ULIP are divided under two heads i.e. Direct expenses &
Indirect expenses. Indirect expenses are expenses which includes printing and stationary.
These expenses have to be incurred as whole which cannot be allocated on ULIP directly.

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Question50 Mention the phase / period when acquisition costs is expensed?

(a) At the end of each financial year
(b) At the start of each financial year
(c) At the beginning of each financial mid-year
(d) At the end of each financial quarter
(e) In the period in which they are incurred

Correct Answer This pdf will expire in 3 months.

In the period in which they are incurred
Answer Explanation As per the accounting principles for preparation of financial statements, the acquisition
costs shall be expressed in the period in which they are incurred. Example – Commission to
agents, policy stamps etc.

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PRACTICE TEST 4

Question1 A company purchases a machine for Rs 50000 and this has a life of 10 years. At the end of
10 years this machine can be sold off at appx. Rs 5000. Using straight line depreciation,
how much depreciation is shown in the accounts solely for the first two years of this
period?
(a) 5000
(b) 9000
(c) 4500
(d) 7500
(e) 10000

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Correct Answer 9000

Answer Explanation The formula Straight Line Depreciation is -
Cost of the asset – Estimated residual value / Estimated life of the asset.
50000 - 5000 / 10 = Rs 4500 Depreciation for each year
So, depreciation for 2 years = 4500 x 2 = 9000

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Question2 One of the below options is an example of ‘Posting on the wrong side of the correct
account’. Select the right one.
(a) The ledger balance of ‘bad debts’ of Rs 2000 was carried forward by Neeta wrongly as Rs
3000 to the trial balance
(b) Ashish sold goods of Rs 5000, Rs 8000 and Rs 2000 to three clients. These amounts were
entered correctly in the sales day book. However, when Ashish totaled the monthly sales,
he came to Rs 20000 instead of Rs 15000
(c) Manoj sold goods of Rs 5000, Rs 8000 and Rs 2000 to three clients. These amounts were
entered correctly in the sales day book. However, when Manoj totaled the monthly sales,
he came to Rs 10000 instead of Rs 15000
(d) Bharat had to make an entry in the debit side of ledger, but instead made an entry on the
credit side of the correct ledger account
(e) Rohit is an accountant with XYZ Insurance Company. When he made an entry in the ledger,
the amount was wrongly entered as Rs 1000 instead of the correct amount of Rs 2000.

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Correct Answer Bharat had to make an entry in the debit side of ledger, but instead made an entry on the
credit side of the correct ledger account
Answer Explanation ‘Posting on the wrong side of the correct account’ occurs in various circumstances which
includes posting on the wrong side of the correct ledger as is the case above.

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Question3 Which type of error has been committed when the following entry is passed - Machinery
purchased for Rs 10000 has been entered in 'Purchase Book’.
(a) Posting
(b) Commission
(c) Casting
(d) Omission
(e) Principle

Correct Answer Principle

Answer Explanation This pdf will expire in 3 months.
The purchase of machinery for Rs 10000 has been entered in purchase book as opposed to
the ASSET Account. Thus, the company’s profit and assets will be reported with Rs. 10,000
deficits. This is called error of principle resulting from the violation of generally accepted
accounting principles.

Question4 According to American Accounting Association, Human Resource Accounting is the process
of ______ and ______ data about human resources and communicating this information to
interested parties.
(a) Identifying and Measuring
(b) Analyzing and Measuring
(c) Gathering and Analyzing
(d) Analyzing and Identifying
(e) Identifying and Accounting

Correct Answer Identifying and Measuring

Answer Explanation According to American Accounting Association, HRA is “the process of identifying and
measuring data about human resources and communicating this information to interested
parties”. HRA is similar in principle to the financial accounting, that is, just as financial
accounting reflects the costs of assets such as building and machinery, HRA shows human
resources as capital not as expenses.

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Question5 With respect to a Term Insurance Policy - which of the below statement(s) is / are
INCORRECT?
1. The term of the policy can be a maximum of 10 years
2. Interest is payable on the premium
3. In case the insured lives beyond the policy term, no benefit is payable to him /her
4. In case the insured dies during the policy term, no benefit is payable to him /her
(a) Only statement 3 is incorrect
(b) Only statement 4 is incorrect
(c) Statements 1,3 and 4 are incorrect
(d) Statements 1,2 and 4 are incorrect
(e) Statements 1,2 and 3 are incorrect

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Correct Answer Statements 1,2 and 4 are incorrect

Answer Explanation The only correct option under the circumstances stated above is that if the insured lives
beyond the policy term he has selected, no benefit is payable to him. Rest all the
statements are wrong/ incorrect.

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Question6 When a person wants to apply for a loan against his life insurance policy, the status of the policy
is reviewed by the insurance company with respect to ______ .
1. What is the age of the policy holder
2. Whether the policy is in force
3. Whether there is sufficient surrender value
(a) Only 1 and 2
(b) Only 2 and 3
(c) Only 1
(d) Only 2
(e) Only 3

Correct Answer Only 2 and 3

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Answer When a request for loan against insurance policy is received, the status of the policy is reviewed
Explanation by insurance company to ascertain that -
1. The policy is in force
2. That there is sufficient surrender value

Question7 What is the minimum amount of advance tax payable on or before 15 June by a company
assesse?
(a) 5%
(b) 10%
(c) 15%
(d) 25%
(e) 30%

Correct Answer 15%

Answer Explanation In India the minimum amount of advance tax payable on or before 15 June by a company
assesse is kept as 15%.

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Question8 For what duration are Career Agents given training and paid stipends?
(a) 6 months
(b) 1 year
(c) 18 months
(d) 2 years
(e) 3 years

Correct Answer 2 years

Answer Explanation Under the insurance regulations, the duration for which Career Agents are given training
and paid stipend is for the first 2 years. They are also allowed to retain the commission due
to them. They are full time agents.
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Question9 With respect to ledgers in the accounting process, which of the following statement(s) is /
are true?
1. Ledgers are also known as books of final entry
2. Ledger is the main basis of preparing the final accounts
3. The debit balance and credit balance of a ledger account is always same at any given
point
(a) Only 1 and 2
(b) Only 2 and 3
(c) Only 1 and 3
(d) Only 1
(e) Only 2

Correct Answer Only 1 and 2

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Question10 In one instance, the cost of goods purchased by cash was wrongly debited to sales account
and credited to cash book. The rectification entry that needs to be passed is ____________
(a) Dr Purchase Account, Cr Suspense Account
(b) Dr Purchase Account, Cr Sales Account
(c) Dr Cash book, Cr Sales Account
(d) Dr Purchase Account, Cr Cash book
(e) Dr Bank Account, Cr Cash Account

Correct Answer
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Dr Purchase Account, Cr Sales Account
Answer Explanation The cost of goods purchased by cash was wrongly debited to sales account and credited to
cash book, would be rectified by; Dr Purchase Account, Cr Sales Account.

Question11 What is over all expense ratio?

(a) Its the ratio of Total expenses of management to Total premium income
(b) Its the ratio of Operating expenses to Total management expenses
(c) Its the ratio of Commission expense to Total management expenses
(d) Its the ratio of Total management expense to Commission expense
(e) Its the ratio of Operation expenses to Total premium income

Correct Answer Its the ratio of Total expenses of management to Total premium income
Answer Explanation Overall expense ratio is the ratio of ‘Total expenses of management to total premium
income’. It indicates overall operational efficiency of the unit.

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Question12 Gratuity shall be payable to an employee on termination of employment after he has

rendered continuous service for not less than ___ years.
(a) 2
(b) 3
(c) 4
(d) 5
(e) 7.5

Correct Answer 5
Answer Explanation This pdf will expire in 3 months.
Under Section 4 of Gratuity Act 1972, payment of gratuity is mandatory. Gratuity shall be
payable to an employee on termination of employment after he has rendered continuous
service for not less than 5 years. The termination can be due to: Superannuation,
Retirement or Resignation and on death or disablement due to accident or disease.

Question13 In the sales book there was a totaling mistake of Rs. 1200. What type of error has been
committed ?
(a) Principle
(b) Posting
(c) Omission
(d) Commission
(e) Casting

Correct Answer Casting

Answer Explanation When the sales book has an arithmetical totaling error of Rs 1200, it would be called
casting error.

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Question14 The source document to record a purchase from supplier is ________ .

(a) Remittance note
(b) Purchase invoice
(c) Debit note
(d) Receipt
(e) Purchase order

Correct Answer Purchase invoice

Answer Explanation The source document to record a purchase from supplier would be Purchase invoice i.e. the
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Suppliers Invoice.

Question15 With respect to 'Bank Reconciliation Statement' - which of the following statement(s) is /
are correct ?
1. It shows the reasons for difference in Cash Book and Pass Book balances
2. It is basically a part of Cash Book
3. It is basically a part of Bank Book
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 1 and 3

Correct Answer Only 1

Answer Explanation Bank reconciliation statement is a statement which shows the causes of difference
between the cash book and the pass book balance.

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Question16 What is the method of pricing known in which shares are issued through auction and the
companies fix a minimum bid price and investors have to bid on or above the bid price ?
(a) IPO
(b) Tender option
(c) Fixed price option
(d) Offer for sale
(e) Book building process

Correct Answer Offer for sale

Answer Explanation Under ‘Offer for sale’ of pricing a share issue, shares are issued through auction and the
companies fix a minimum bid price and investors have to bid on or above the bid
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price. Offer for sale is generally adopted by PSU insurers. Retail investors are given a
discount of 5 to 10% to encourage their participation.

Question17 A club in Delhi has given the following data - 1. On Jan 1, 2019 , the members owed Rs 80
for subscriptions for 2018 and subscriptions paid in 2018 for 2019 amounted to Rs 30 2.
During 2019 a total of Rs 400 cash was received for subscriptions 3. On 31 Dec 2019 Rs 30
was still owing for subscriptions of 2019 and amount paid in advance for 2020 were Rs 15
What would be the correct amount to be included as subscriptions income for 2019?
(a) Rs 425
(b) Rs 365
(c) Rs 540
(d) Rs 295
(e) Rs 450

Correct Answer Rs 365

Answer Explanation Received during the year 400
Received last year for 2019 +30
Pending for 2019. + 30
Received for 2020. - 15
Received in 2019 for 2018 - 80
Total for 2019. 365

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Question18 Which is the correct formula to calculate GROSS PREMIUM ?

(a) Mortality charges + Management expenses
(b) Mortality charges - Management expenses
(c) Net premium + Expenses - Liquid assets
(d) Net premium + Expenses
(e) Net premium - Expenses

Correct Answer Net premium + Expenses

Answer Explanation Gross premium is also known as office premium. This is the amount the policy holder has
to pay. Calculation is done by loading expenses in the net premium.
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Question19 As per section 129 (2) of the Companies Act 2013, at every annual general meeting of a
company held under Sec 96 of the Act, the Board of Directors of the company shall - 1.
Declare interim dividend 2. Give a vote of thanks to the directors who have retired during
the year 3. Lay before this meeting financial statements for the financial year
(a) Both 1 and 2
(b) Both 1 and 3
(c) Both 2 and 3
(d) Only 1
(e) All 1, 2 and 3

Correct Answer Both 2 and 3

Answer Explanation Under section 129 (2) of the Companies Act 2013, at every annual general meeting of a
company held under Sec 96 of the Act, the Board of Directors of the company shall lay
before such meeting financial statements for the financial year & give vote of thanks to the
directors retired during the year. Declaration of interim dividend is not done at the AGM.

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Question20 Rupa works for XYZ Ltd. and draws a salary of Rs 10 lacs per year. A house is provided for
her which has been leased by XYZ Ltd at a rent of Rs 1,20,000 per year. Calculate the value
of taxable perquisite.
(a) Rs. 1,20,000
(b) Rs. 1,50,000
(c) Rs. 1,00,000
(d) Rs. 2,40,000
(e) Rs. 12000

Correct Answer Rs. 1,20,000

Answer Explanation This pdf will expire in 3 months.
The value of taxable perquisite is calculated for the leased property is according to either
of the two options i.e. Actual amount of rent paid/payable the employee or 15% of the
annual salary whichever is lower is reduced by the rent if any, paid by the employee.
Actual rent paid is Rs. 120000 & 15% of the salary comes to 150000. Thus, the value of
taxable perquisite would be lower of the two ie.Rs. 120000.

Question21 Which is the most common feature of single premium whole life policies ?
(a) A single payment needs to be made per year
(b) No loan facility available on such policy
(c) The cash value is available only on maturity
(d) Transaction costs are high in such policies
(e) The policy is paid up in full

Correct Answer The policy is paid up in full

Answer Explanation Under Single premium whole life policies, the premium can be agreed to include single
payment insurance. When the premium ceases, the policy becomes fully paid up.

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Question22 Select which among the given options is a correct PAN number
(a) AEYP6343R
(b) AEYPR633R
(c) AEYPR6343RT
(d) AEYPR6343R
(e) AER6343R

Correct Answer
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AEYPR6343R
Answer Explanation The PAN structure is as follows: AAAPL1234C: First five characters are letters, next four
numerals, and last character letter. The first three letters are sequence of alphabets from
AAA to ZZZ. The fourth character informs about the type of holder of the card.

Question23 Which type of expenditure need to be incurred to enhance the earning capacity of an asset
for it to work much longer and efficiently?
(a) Depreciation expenditure
(b) Direct expenditure
(c) Revenue expenditure
(d) Indirect expenditure
(e) Capital expenditure

Correct Answer Capital expenditure

Answer Explanation Capital items are of two types i.e. Capital expenditure & Capital receipt. The Capital
expenditure improves the earning capacity of an asset. Such expenditure renders an asset
to work more efficiently or the asset lasts longer for more than one accounting period.

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Question24 In accordance with AS 1 Disclosure of accounting policies, which among the below options
are fundamental accounting assumptions ?
1. Relevance 2. Going concern 3. Accrual
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Both 2 and 3

Answer Explanation AS 1 Disclosure of accounting policies refers to the specific accounting principles &
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methods of applying them in the preparation of financial statements. The Going concern &
Accrual concepts are the fundamental accounting assumptions.

Question25 In accordance to the KYC process which of the given statements hold true ? 1. Those clients
who do not wish to reveal their identity are exempt from KYC process 2. Information about
the customers satisfaction can also be collected from agents 3. KYC has to be done only at
the time of entering into an insurance contract
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Only statement 3 is correct
(d) Both statements 1 and 2 are correct
(e) Both statements 2 and 3 are correct

Correct Answer Only statement 3 is correct

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Question26 The mandatory account that every life insurance company has to prepare includes _____ .
1. Reinsurance Account 2. Surplus Reserve Account 3. Receipt and Payment Account
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer This pdf will expire in 3 months.

Only 3
Answer Explanation As per IRDAI (Preparation of financial statements & auditor’s report of insurance
companies), every life insurance company has to prepare some accounts. The account
includes the ‘Receipt and Payment account’.

Question27 Which of the below is a feature of a Close Ended fund? 1. Fixed NAV 2. Fixed Rate of Return
3. Fixed fund size
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 3

Answer Explanation In a close ended fund, no new subscriptions are allowed after the NFO. It is traded on a
stock exchange and the units which were issued during the NFO are bought and sold. So
the fund size remain the same.

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Question28 From the list below select only the expenses of management -
(a) Payments of claim
(b) Reinsurance charges
(c) Payment of taxes
(d) Expenses on travelling
(e) Annuity consideration

Correct Answer Expenses on travelling

Answer Explanation This pdf will expire in 3 months.
Expenses of management is an important part of revenue account for any insurance
company. None of the above is the expenses of management except travelling expenses as
per Insurance Act 1938.

Question29 A company XYZ brought plant and equipment costing Rs 2,00,000 on 1 Jan 2005. It was
decided to be depreciated at 20% annually on straight line basis and compounded up to the
point of sale. It was sold on 30 June 2008 for Rs 40,000. In the year of sale, the profit of the
company will be _______ due to this sale.
(a) Increased by Rs 20000
(b) Decreased by Rs 20000
(c) Increased by Rs 17500
(d) Decreased by Rs 17500
(e) Decreased by Rs 30000

Correct Answer Decreased by Rs 20000

Answer Explanation The equipment was used for 3.5 years. Depreciation for 3.5 yrs. is 70% (20% per year X 3.5
years)
So remaining value of asset is 30% x 200000 = 60,000
Since it was sold for 40000, there is a loss of Rs 20000. ( 60000 - 40000)
This the net profit of the company will be lower by Rs 20000 that year due to this sale

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Question30 An insurance company has prepared the annual audited financial statements for the year
ending 31 March 2016. These should be submitted to the IRDA latest by ________ .
(a) 1 May 2016
(b) 31 July 2016
(c) 30 June 2016
(d) 30 Sep 2016
(e) 31 Dec 2016

Correct Answer This pdf will expire in 3 months.

30 Sep 2016
Answer Explanation IRDAI has mandated that insurers should prepare its accounts on quarterly basis in
addition to annual accounts. The annual accounts for the period ending 31st March 2016,
the same must be submitted by 30th Sept 2016.

Question31 Based on the definition of ‘salary’ provided under the Income Tax Act, 1961, salary includes
- 1. Gratuity 2. Wages 3. Income from rent
(a) Only Gratuity
(b) Only Wages
(c) Only Income from rent
(d) Both Gratuity and Wages
(e) All the three above

Correct Answer Both Gratuity and Wages

Answer Explanation Salary is a remuneration received by an individual for the services rendered as per
contract. It includes wages & gratuity but not rent income.

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Question32 With respect to valuation of Equity Securities and Derivatives that are traded in markets
select the statement which is NOT TRUE ?
(a) The securities will have to be measured at book value as on the balance sheet date
(b) The securities will have to be measured at fair value as on the balance sheet date
(c) An insurer will assess on the balance sheet date if any impairment of listed equity security
/ derivative instruments has occurred
(d) For calculation of fair value, the lowest price at which it was last quoted closing price of the
stock exchanges where the securities are listed shall be taken
(e) The unrealised profits / losses due to changes in the fair value of listed equity shares and
derivatives shall be taken to equity under the head ‘Fair Value Change Account’

Correct Answer The securities will have to be measured at book value as on the balance sheet date
Answer Explanation This pdf will expire in 3 months.
With respect to valuation of Equity Securities and Derivative instruments that are traded in
active markets, it is incorrect to measure the Equity Securities and Derivative instruments
at book value as at the balance sheet date. It would give a wrong picture on the valuation
of the assets as book value is historically & generally much lower than the present / actual
value.

Question33 While auditing Mehta and Mehta Ltd., an error was discovered in paying extra wages of an
employee. Mehta and Mehta Ltd. received cash from the employee for the amount of
overpayment. Determine which give entries for Mehta and Mehta Ltd. records this
transaction ?
(a) Dr Wage payable , Cr wages expense
(b) Dr Wage expense, Cr cash
(c) Dr Bank A/c , Cr wage payable
(d) Dr Cash , Cr wage expense
(e) Dr Wage expense, Cr wages payable

Correct Answer Dr Cash , Cr wage expense

Answer Explanation Overpayment means Extra amount was debited to Wage Payable Account & extra cash was
paid i.e. Cash account was credited by extra payment. Now rectification would be done by;
Dr Cash, Cr Wage expense.

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Question34 With respect to valuation of real estate investment property select which of the following
is CORRECT -
(a) Value of investment property shall be taken at the current cost
(b) The basis of revaluation should be adhoc in nature
(c) Profit or loss on sale of investment shall exclude accumulated changes in the carrying
amount previously taken in equity under the heading Revaluation Reserve
(d) Without direction from IRDAI, no bonus can be distributed to policy holders out of
revaluation reserve
(e) Bonus may be given to policy holders out of Revaluation Reserve

Correct Answer This pdf will expire in 3 months.

Without direction from IRDAI, no bonus can be distributed to policy holders out of
revaluation reserve
Answer Explanation As per the accounting principles for preparation of financial statements with regards to
valuation of real estate investment property, no bonus can be distributed to policy holders
out of revaluation reserve without direction from IRDAI.

Question35 Select from the given options which charges levied by a life insurance company are taxed
under the service tax?
1. The policy administration charges 2. ULIP administration charges 3. Mortality rates
(a) Only 2
(b) Both 1 and 3
(c) Both 1 and 2
(d) Both 2 and 3
(e) All 1, 2 and 3

Correct Answer Both 1 and 2

Answer Explanation W.E.F 1.4.2011, ULIP has been brought under the net of service tax. Accordingly, the
Administration charges under ULIP and Policy allocation charges would come under the
preview of service tax.

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Question36 Among those listed below which of the following statement are/is true.
(a) Credit will be given for annual average of the income tax paid by the deduction at source
during such period
(b) The tax on profits from life insurance business is taxed at a rate of 10%
(c) Profits from life insurance business have to be computed along with profits relating to any
other business
(d) Both 1 and 3
(e) Both 1 and 2

Correct Answer Credit will be given for annual average of the income tax paid by the deduction at source
during such period
Answer Explanation This pdf will expire in 3 months.
Part A of First Schedule to I. Tax Act 19991 states about adjustment of tax paid by
deduction at source. According to provisions of this part of the Act, credit shall be given for
annual average of the income tax paid by the deduction at source during such period from
interest on securities or otherwise.

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Question37 A company bought an equipment for Rs 25000 on 1st Jan 2014. The expected life of this
equipment is 5 years the residual value is determined at Rs 3500. If depreciation is charged
at 30% on Reducing Balance method, what will be the carrying amount of this equipment
at the end of two years ?
(a) Rs. 8950
(b) Rs. 13500
(c) Rs. 16320
(d) Rs. 12250
(e) Rs. 9575

Correct Answer
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Rs. 12250
Answer Explanation The depreciation charges under reducing balance method keeps on reducing every year &
the balance is the carrying amount.
In the above example - 1st yr. dep. of 30% on cost Rs. 25000 would be 7500 & the carrying
amount would be Rs. 17500 (25000 - 7500). 2nd year cost would be Rs. 17500 & applying
30% dep. would be Rs. 5250 and the carrying amount would be 17500 – 5250 = 12250. The
carrying amount at the end of 2nd yr. would be Rs. 12250.

Question38 Select which of the given options can be selected as a money market instrument ?
(a) Collateralised Borrowing and Lending Obligations
(b) Treasury bill
(c) G Sec
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Both 1 and 2

Answer Explanation Insurance companies cannot immediately invest their surplus funds into stock markets or
lend it to companies. Therefore, in the short term they invest their money in money
market instrument like Treasury bill and Collateralised Borrowing and Lending Obligations.

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Question39 Which of the following budgets gives summary of all the functional budgets and the
projected profit and loss account ?
(a) Financial Budget
(b) Capital budget
(c) Fixed budget
(d) Master budget
(e) Variable budget

Correct Answer Master budget

Answer Explanation This pdf will expire in 3 months.
Budgetary control system is a means of monitoring revenue & cost to exercise control in an
entity. It does it by developing budgets & comparing figures. There are individual budgets
to cater the various requirements of an organization but the master budget gives summary
of all the functional budgets and the projected profit and loss account with steps to achieve
all the goals.

Question40 In insurance accounting terminology, CASTING means ______ .

(a) Placing in the right accounting head
(b) Rounding up
(c) Adding up
(d) Transposing
(e) Hiding

Correct Answer Adding up

Answer Explanation The term ‘casting’ means adding up. It may be over or under casting denoting the error of
arithmetically adding up more than what they are or less than what they are.

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Question41 Based on the entries in the Receipts and Payments account, the amount of salaries paid
appears as Rs 258000. The outstanding salaries at the beginning of the year were Rs 35000
and at the end of the year was Rs 36500. The amount of salaries to be shown under the
head of income and expenditure account is ______ .
(a) Rs. 259500
(b) Rs. 256500
(c) Rs. 258000
(d) Rs. 329500
(e) Rs. 275800

Correct Answer
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Rs. 256500
Answer Explanation The salary paid is to be added by the outstanding at the beginning of the year and the
outstanding salary at the end of the year has to be deducted for the amount to be shown
under income & expenditure account.
258000 + 35000 – 36500 = 256500

Question42 The purpose of a budget is to _______ .

1. Motivating the management 2. Finalizing long term objectives 3. Planning operations 4.
Establishing strategic options
(a) Only statement 1
(b) Statements 1 and 2
(c) Statements 1 and 3
(d) Statements 2 and 3
(e) Statements 3 and 4

Correct Answer Statements 1 and 3

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Question43 Mehta Trading purchases majority of its goods on credit with a list price of Rs 25000. Owing
to the long trading history the supplier gives a trade discount of 10% and also offers a cash
discount of 5% for payment within 30 days. What is the amount Mehta Trading will debit
to his purchase account?
(a) Rs. 24060
(b) Rs. 23550
(c) Rs. 22700
(d) Rs. 21375
(e) Rs. 20650

Correct Answer
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Rs. 21375
Answer Explanation List price 25000 – 10% Trade discount 2500 = 22500. Discounted price 22500 – 5% Cash
discount 1125 = Rs. 21375 will be debited to the purchase account of Mehta Trading.
25000 - 2500 = 22500
22500 - 1125 = 21375

Question44 With respect to Balanced Fund which of the following is true -

(a) It invests mostly in stocks of companies which have a balanced view
(b) It invests mostly in Treasury bonds
(c) This fund is for investors who want to take moderate risk
(d) This fund maintains surplus cash
(e) It invests mostly in Government securities

Correct Answer This fund is for investors who want to take moderate risk
Answer Explanation Balanced fund includes both equity and debt schemes, generally with 50-75 per cent in
equity and the rest in debt. It is designed for those investors who are willing to take
moderate risks.

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Question45 Which journal entry would you pass to record the accounting for year end stock of policy
stamps ?
(a) Stock A/c To Other outstanding expenses A/c
(b) Stamps on hand (Policy Stamps) A/c To Policy Stamps A/c
(c) Policy Stamps A/c To Other outstanding expenses A/c
(d) Policy Stamps A/c To cash A/c
(e) Other outstanding expenses A/c To Policy Stamps A/c

Correct Answer This pdf will expire in 3 months.

Stamps on hand (Policy Stamps) A/c To Policy Stamps A/c
Answer Explanation The correct journal entry for accounting for year-end stock of policy stamps is: Stamps on
hand (Policy Stamps) A/c To Policy Stamps A/c.

Question46 With a net income of Rs 500000, Mercury Ltd had paid income taxes of Rs 50000 and had
incurred interest expenses of Rs 19000. Given this information calculate the Debt service
coverage ratio of Mercury ltd.
(a) 29.94
(b) 15.77
(c) 20.52
(d) 11.69
(e) 32.18

Correct Answer 29.94

Answer Explanation Debt Service Coverage Ratio (DSCR) depicts the firm’s ability to pay off the interest & the
installments of the loan. It is calculated by the formula;
DSCR=Earnings before interest and Tax (EBIT)/ Interest
Income 500000+Tax 50000+ Interest 19000 / Interest 19000
569000 / 19000 = 29.94

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question47 The most commonly used financial ratio in the life insurance industry is -
(a) Percentage of SSS Sum Assured to total Sum Assured
(b) Liquid Ratio
(c) Distribution yield
(d) Quick ratio
(e) Fixed to worth

Correct Answer Percentage of SSS Sum Assured to total Sum Assured

Answer Explanation In order to be competent & perform to the optimum level, the insurance industry applies
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financial management concepts. The financial ratio that is used more often in the life
insurance industry is percentage of SSS Sum Assured to total Sum Assured (individual).

Question48 Private players in India like as Manapuram finance, Sundaram Finance, Shriram Transport
etc. issue bonds to small investors in the retail market. What is the minimum
denominations for the issue of these bonds ?
(a) Rs. 10
(b) Rs. 100
(c) Rs. 1000
(d) Rs. 500
(e) Rs. 1 Lakh

Correct Answer Rs. 1000

Answer Explanation At times in the retail market, issuers such as Manapuram finance, Sundaram Finance,
Shriram Transport etc. issue bonds to small investors. The minimum denomination for the
issue of these bonds is Rs. 1000.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question49 How does LIC provides for Depreciation ?

(a) Sum of digits method
(b) Reducing balance method
(c) Straight line method
(d) Both 1 and 3
(e) Both 1 and 2

Correct Answer Straight line method

Answer Explanation As per accounting practice adopted by LIC, depreciation is provided under Straight line
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method on Gross Block Value of Assets. Depreciation on furniture, office equipment &
vehicles etc. is written off the asset.

Question50 In cases where the premium is due but whose grace period is not expired, this is provided as
________
(a) Expired premium
(b) Outstanding premium
(c) Grace premium
(d) Incurred premium
(e) Lapsed premium

Correct Answer Outstanding premium

Answer The accounting entries are recorded on cash basis & no entry is passed to record the premiums
Explanation which are due. Premium due whose grace period is not expired and this is provided as
outstanding premium.

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WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

PRACTICE TEST 5
Question1 As per AS 5, which of these will be considered as an error?
1. Changes in the methods of depreciation
2. Mathematical mistakes
3. Misinterpretation of facts
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Both 2 and 3

Answer This pdf will expire in 3 months.
Answer According to AS 5, errors in the preparation of the financial statements of one or more prior
Explanation periods may be discovered in the current period. Errors may occur as a result of mathematical
mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight.

Question2 A 50-year-old person took a whole life insurance policy. For this said policy upto what age
will he have to pay the premium?
(a) Maximum till he turns 85 years or death whichever is earlier
(b) Maximum till he turns 80 years or death whichever is earlier
(c) Maximum till he turns 80 years
(d) Maximum till he turns 75 years
(e) Maximum till he turns 65 years

Correct Answer Maximum till he turns 85 years or death whichever is earlier

Answer Explanation LIC limits the maximum number of premiums that are payable either till the age of 80 or till
35 annual premiums are paid whichever is later.
So, a person who is of 50 years can pay premiums for 35 more years i.e. till 85 years of his
age.

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Question3 The correct entry for recording the sale of machinery for a profit is ______ .
(a) Machinery account Dr, Cash account Dr, Profit & Loss account Cr
(b) Machinery account Dr, Loss on sale of machinery account Dr, Depreciation account Cr
(c) Depreciation account Dr, Profit & Loss account Dr, Loss on sale of machinery account Cr
(d) Bank Account Dr, Loss on sale of machinery account Dr, Machinery account Cr
(e) Machinery account Dr, Profit & Loss account Dr, Depreciation account Cr

Correct Answer
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Machinery account Dr, Cash account Dr, Profit & Loss account Cr
Answer Explanation

Question4 Up to what amount is the reimbursement of medical expense actually incurred by the
employee in aggregate during each financial year is tax free ?
(a) Maximum of Rs 3000
(b) Maximum of Rs 5000
(c) Maximum of Rs 10000
(d) Maximum of Rs 15000
(e) Maximum of Rs 20000

Correct Answer Maximum of Rs 15000

Answer Explanation Provisions for medical facilities u/s 17 (2) provides reimbursement of medical expense
actually incurred by the employee up to a maximum of Rs 15000 in aggregate during each
financial year is tax free.

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Question5 What will be the effect on Balance Sheet of the following transaction?
The proprietor pays the outstanding business rent of Rs 6500 from his own pocket.
(a) Both liabilities and assets remain unchanged
(b) Liabilities are increased while assets are decreased
(c) Assets are increased while liabilities are decreased
(d) Both liabilities and assets are increased.
(e) Both liabilities and assets are decreased

Correct Answer
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Both liabilities and assets remain unchanged
Answer Explanation Both liabilities and assets remain unchanged because liability of rent is replaced by liability
of owner. Assets remains unaffected.

Question6 What is Net Premium also known as ?

(a) Cover premium
(b) Add on premium
(c) Core premium
(d) Pure premium
(e) Discounted premium

Correct Answer Pure premium

Answer Explanation In life insurance covers, net premium is also known as pure premium. It includes mortality
charges and interest.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question7 From the below options, which one is 'Application of Funds’?

1. Income from investments 2. Funds from operations 3. Funds lost in operations
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3
The Source and Application of Funds Statement shows the total
sources of new funds raised between Balance Sheet dates and the
total uses of those funds in the same period. One of the ways in
which Application of Funds originate from is 'Losses to be met by the
company’.
Correct Answer Only 3
Answer Explanation The Source and Application of Funds Statement shows the total sources of new funds
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raised between Balance Sheet dates and the total uses of those funds in the same period.
One of the ways in which Application of Funds originate from is 'Losses to be met by the
company’.
In the above options - Funds lost in operation is the only application of fund

Question8 Which primary books of accounts is/are used for reconciliation, classification and posting
to control accounts?
1. Premium cash book 2. Register of claims 3. Deposit cash book
(a) Both 1 and 2
(b) Both 1 and 3
(c) Both 2 and 3
(d) Only 2
(e) Only 3

Correct Answer Both 1 and 3

Answer Explanation Insurance companies have to maintain two types of books i.e. Statutory & Subsidiary book.
Under subsidiary book the insurer for the purpose of reconciliation, classification and
posting to control accounts have to use the Deposit cash book and Premium cash book as
primary books of accounts.

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Question9 Which of these amounts collected by an insurance company will be recorded in the '
Deposit Adjustment Book ‘?
1. Amounts received towards new policy
2. Amounts received towards the existing policy
3. Amount received towards renewal premium from policy holder
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) All 1, 2 and 3

Correct Answer Only 3

Answer Explanation This pdf will expire in 3 months.
Amount received towards renewal premium from policy holder including interest payment
has to be recorded in the 'Deposit adjustment book' on a daily basis.

Question10 According to the Companies Act 2013, the books of accounts of a company are to kept at
________ .
(a) Corporate office
(b) Head office
(c) Registered office
(d) All branch offices
(e) State capital offices

Correct Answer Registered office

Answer Explanation As per section of the Companies Act, 2013, all books of account and other papers of a
company are required to be kept at the registered office of the company. However, a
company may keep all or any of the books of account and other relevant papers at such
other place in India as the Board of Directors may decide. In such a case, the company shall
file with the Registrar of Companies, a notice in writing giving the full address of that
decided place within 7 day of such decision taken by the Board.

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Question11 The carrying value of a machine is Rs 90000. It is revalued at Rs 98000. On the previous
revaluation, its value was decreased by Rs 7000. Show the accounting adjustments for the
revaluation.
(a) Credit Profit or Loss Rs 1000, Credit Revaluation Reserve Rs 7000
(b) Credit Profit or Loss Rs 7000, Debit Revaluation Reserve Rs 1000
(c) Credit Profit or Loss Rs 8000, Credit Revaluation Reserve Rs 1000
(d) Debit Profit or Loss Rs 1000, Credit Revaluation Reserve Rs 7000
(e) Credit Profit or Loss Rs 7000, Credit Revaluation Reserve Rs 1000
Earlier Credit Revaluation Reserve was debited by 7000 the same need
to be reversed by Crediting Revaluation Reserve – Rs 7000. Therefore,
Profit or Loss – Credited by Rs 1000 (8000-7000). Thus, Credit Profit
or Loss – Rs 1000, Credit Revaluation Reserve – Rs 7000 is the right
answer.
Correct Answer Credit Profit or Loss Rs 1000, Credit Revaluation Reserve Rs 7000
Answer Explanation This pdf will expire in 3 months.
Earlier Credit Revaluation Reserve was debited by 7000 the same need to be reversed by
Crediting Revaluation Reserve – Rs 7000. Therefore, Profit or Loss – Credited by Rs 1000
(8000-7000). Thus, Credit Profit or Loss – Rs 1000, Credit Revaluation Reserve – Rs 7000 is
the right answer.

Question12 The solvency of an insurance company is determined by _______.

1. It has adequate capital as security
2. It has adequate reserves to meet obligations
3. The Financial strength of the company
(a) Only 2
(b) Both 1 and 2
(c) Both 2 and 3
(d) Both 1 and 3
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation Solvency of an insurance company relates to the payment of claims. It directly depends
upon financial strength of the company & whether it has sufficient reserve to meet
obligations together with enough capital as security.

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Question13 The Pradhan Mantri Jeevan Jyoti Bima Yojana has the following feature(s) - 1. The Risk
coverage is Rs. 2 lakhs in case of death 2. The maximum entry age in this scheme is 50 years
3. A Person even without a bank account can apply for this scheme
(a) Both 1 and 2
(b) Both 1 and 3
(c) Both 2 and 3
(d) Only 1
(e) All 1,2 and 3

Correct Answer This pdf will expire in 3 months.

Both 1 and 2
Answer Explanation Pradhan Mantri Jeevan Jyoti Bima Yojana is for the persons having a bank account between
the age group of 18 to 50 yrs. & the risk coverage is Rs. 2 lakhs. The premium would be
auto-debited from the bank account. The annual premium is Rs. 330 per year.

Question14 ______ benefit is not available in a health insurance policy.

(a) Hospital cash benefit
(b) Fund value maturity
(c) Death benefit
(d) Major surgical benefit
(e) Domiciliary treatment benefit

Correct Answer Fund value maturity

Answer Explanation The health insurance plan is different from mediclaim. The plan payment is linked to the
sum insured irrespective of the expenditure incurred by the policy holder. The plan covers
all of the above benefits except fund value maturity.

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Question15 Which type of bonus is added to the sum assured and paid at the time of claim?
1. Reversionary bonuses 2. Cash bonuses 3. Bonuses in reduction of premiums
(a) Only 1
(b) Only 2
(c) Only 3
(d) Only 1 and 2
(e) All 1, 2 and 3

Correct Answer This pdf will expire in 3 months.

Only 1
Answer Explanation The bonus that is added to the sum assured and paid at the time of claim is called
Reversionary bonus.

Question16 With respect to investment in housing and infrastructure as per IRDAI Investment
regulations for life insurance business, which of the following is true?
(a) Not less than 10% of the fund
(b) Not less than 15% of the fund
(c) Not less than 25% of the fund
(d) Not less than 30% of the fund
(e) Not less than 35% of the fund

Correct Answer Not less than 15% of the fund

Answer Explanation As per Life insurance business (Regulation 4), investments in housing and infrastructure as
per IRDAI Investment regulations, cannot be less than 15% of fund under Regulation 3 (a).

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Question17 The prime features of unit linked pension plan is _______

(a) To provide short term benefit after maturity
(b) To provide short term benefit after policy inception
(c) To provide a single large payment on maturity
(d) To provide long term benefit (annuity) after maturity (deferred profit) of policy
(e) To provide attractive surrender value

Correct Answer To provide long term benefit (annuity) after maturity (deferred profit) of policy
Answer Explanation This pdf will expire in 3 months.
The Unit linked pension plans are totally different from other policies in term of their
features & claims payment. Even they are different from other unit link policies. Under the
Unit linked pension plans, insurance companies provide long term benefit (annuity) after
maturity (deferred profit) of policy.

Question18 Consider a hypothetical case that Mr. Ashish is the manager of ABC insurance company,
drawing a salary of Rs. 860500 per annum. With a rent-free accommodation being provided
to Mr Ashish, what is the valuation of the perquisite?
(a) Rs. 172100
(b) Rs. 86050
(c) Rs. 15000
(d) Rs. 129075
(e) Rs. 142850

Correct Answer Rs. 129075

Answer Explanation As per Rule 3 of IT Rule revised by CBDT, Non-monetary valuation of perquisites for house
on rent is to be valued at 15% of the salary (population exceeding 25 lakhs). Therefore, the
value of the perquisite would be - 860500 X 15% = 129075

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Question19 Pick from the list below a feature of whole life insurance plan?
(a) In a whole life insurance plan, the premiums need to be paid only for the first few years
(b) In a whole life insurance plan, there is no protection for dependents
(c) Whole life insurance plan is an excellent security for old age
(d) In a whole life insurance plan, the element of protection for dependents is the dominating
element
(e) In a whole life insurance plan, the sum assured is payable on death or maturity of a policy

Correct Answer In a whole life insurance plan, the element of protection for dependents is the dominating
element
Answer Explanation This pdf will expire in 3 months.
Whole life insurance plan is the purest form of permanent contract.
It is the cheapest form of protection where the element of protection for dependents is the
dominating element. It provides larger amount of life cover than any other type of life
insurance.

Question20 Under a 'Netting of Claims' method which of the items can be netted for while accounting
for claims payment?
1. Premiums due 2. Policy Loan 3. Interest on Policy Loan
(a) Only 1
(b) Only 2
(c) Only 3
(d) Only 2 and 3
(e) All 1,2 and 3

Correct Answer All 1,2 and 3

Answer Explanation As soon as a claim arises, the total amount payable less all deductions i.e., Policy loans,
Interest on policy loans & Premiums due is treated as outstanding claim. This is known as
netting of claims method.

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Question21 _________ can result in complete failure as well as delay in payments.

(a) Arbitrage Risk
(b) Market Risk
(c) Capital Risk
(d) Credit Risk
(e) Liquidity Risk

Correct Answer This pdf will expire in 3 months.

Credit Risk
Answer Explanation A credit risk is the risk of default on a debt that may arise from a borrower failing to make
required payments. In the first resort, the risk is that of the lender and includes lost
principal and interest, disruption to cash flows, and increased collection costs.
Credit risk can result in both complete failure as well as delay in payments.

Question22 Under Jeevan Akshay Policy the minimum entry age for enrollment is _____ years.
(a) 21
(b) 30
(c) 50
(d) 65
(e) 61

Correct Answer 50
Answer Explanation This is an immediate annuity policy in return of a purchase price i.e. lump sum
consideration.
Jeevan Akshay policy is issued only to persons aged 50 years and above.

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Question23 Based on the given figures compute the Production Budget: Sales 65700 units, opening
inventory 18400 units, closing inventory 21777 units
(a) 62323
(b) 105877
(c) 69077
(d) 54717
(e) 74697

Correct Answer 69077

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Answer Explanation Production budget = Sales + Closing inventory - Opening inventory
65700 + 21777 - 18400
= 69077

Question24 In order to avoid MARKET RISKS, what can the life insurer do to?
(a) Separate the insurance portion from the investment products
(b) Reshuffle any assets where shrinkage is seen
(c) Insurer must recover assets from debtors as and when due
(d) Obtain the credit ratings for those companies where it decides to invest
(e) Spreading of investment over different asset classes

Correct Answer Reshuffle any assets where shrinkage is seen

Answer Explanation Here the key word is 'Market Risks'. So the insurer must estimate the portfolio to avoid
market risk and should reshuffle any assets where he sees any shrinkage in the asset.

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Question25 While preparing the Trial Balance, which of the listed errors can be highlighted?
(a) Calculation
(b) Posting
(c) Principle
(d) Omission
(e) Commission

This pdf will expire in 3 months.

Correct Answer Posting

Answer Explanation From the point of view of corrections, errors are classified under two groups i.e. errors can
be highlighted by preparing a trial balance and errors cannot be highlighted by preparing a
trial balance. The errors which can be highlighted by preparing a trial balance are posting
errors.

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Question26 As per IRDA - The insurer shall clearly segregate all the functions and operations of front,
mid and back office. Of the listed below options, which one clearly shows segregation of
responsibilities of front, mid and back office so as to ensure proper internal control of
investment function and operations in accordance with the mandate by IRDA ?
(a) Front office- Investment decisions of all types are taken. Mid office- Assessment of Risk of
investment decision is done. Back office- The accounts of investment are kept.
(b) Front office -The accounts of investment are kept. Mid office -Assessment of Risk of
investment decision is done. Back office- Investment decisions of all types are taken.
(c) Front office. Assessment of Risk of investment decision is done and informs front office risk
associated with investment decision. Mid office- Investment decisions of all types are
taken. Back office- The accounts of investment are kept.
(d) Front office- Investment decisions of all types are taken. Mid office- The accounts of
investment are kept. Back office- Assessment of Risk of investment decision is done.
(e) Front office- Assessment of Risk of investment decision is done. Mid office- The accounts of
investment are kept. Back office- Investment decisions of all types are taken.

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Correct Answer Front office- Investment decisions of all types are taken. Mid office -Assessment of Risk of
investment decision is done. Back office -The accounts of investment are kept.

Answer Explanation IRDA has mandated that the insurer shall clearly segregate the functions and operations of
front, mid and back office.
Front Office - Its the Operation Department where all type of investment decisions are
taken
Mid Office - Lots of research is done here by which risk assessment of investment decisions
is done
Back Office - Here accounts of investments are kept in addition to regular accounts

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Question27 If many transactions are done to remove the trace of money, which stage of money
laundering is being referred to?
1. Placement 2. Layering 3. Integration
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer
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Only 2
Answer Explanation Layering is the 2nd stage of money laundering & is done by making deposits and
withdrawals to continually vary the amount of money in the accounts.
It is done instead of straight transfer from one point to another. A complex series of
transfers are made in this method of money laundering to remove trace of money.

Question28 Overcasting error can be best defined as -

(a) Summing up the totals to more than what they are
(b) Rounding up the totals to highest number
(c) Failure to round off the totals
(d) Summing up the totals to less than what they are
(e) Rounding up the totals to lowest number

Correct Answer Summing up the totals to more than what they are
Answer Explanation There could be certain errors which may be trial balance. These could be accidentally or
intentionally. One of them is casting error. It may be undercasting or overcasting.
Overcasting refers to summing totals to more than what they are. Reverse of it would be
undercasting.

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Question29 When the proceeds of _______ is handled, it results in money laundering.

(a) Money received by way of corruption
(b) Tax Evasion
(c) Smuggling
(d) Only 2 and 3
(e) All 1,2 and 3

Correct Answer This pdf will expire in 3 months.

All 1,2 and 3
Answer Explanation Money laundering occurs only when anyone is handling the proceeds of Tax evasion,
Corruption and Smuggling. It’s an act of changing the appearance of money coming from
Tax evasion, Corruption and Smuggling, from black to white.

Question30 The third step in accounting process is ________ .

(a) Preparing the Profit and Loss A/c
(b) Summarizing / reporting transactions
(c) Posting to ledger accounts
(d) Preparing primary books of account
(e) Collecting data source

Correct Answer Posting to ledger accounts

Answer Explanation Accounting is the process of recording & reporting of the financial transactions. It is
performed in a systematic way at the end of each period. It summarizes the financial
statements. The third first step in accounting process is Posting to ledger accounts.

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Question31 Accounting Standard 5 (AS 5) should be applied in presenting profit and loss from
________.
(a) Prior period items
(b) Ordinary activities
(c) Extraordinary items
(d) All of the above
(e) None of the above

Correct Answer All of the above

Answer Explanation This pdf will expire in 3 months.
AS 5 should be applied in presenting profit and loss from Ordinary activities, Extraordinary
items and Prior period items. They pertain to the activities of an entity for calculating net
profit or loss for the period & enhances the comparability of financial statement of an
enterprise.

Question32 An insurance agent sold a policy and collected an advance deposit of Rs 1000 towards a life
insurance policy. However, while issuing the policy, the insurance company calculated the
premium amount as Rs 990. Suggest how this should be accounted?
(a) Pay Rs 10 back to the customer by cheque
(b) Pay Rs 10 back to the customer by cash
(c) Credit Rs 10 to Short Remittance A/c
(d) Debit Rs 10 to Short Remittance A/c
(e) Debit Re 1 to Short Remittance A/c and refund Rs 9 to the customer

Correct Answer Credit Rs 10 to Short Remittance A/c

Answer Explanation An insurance agent collects the advance deposit from the proposer which must be equal to
the 1st installment of premium. However, there may be instances where the premium is
collected in excess or there is a short collection.
In case where the premium is collected in excess & up to Rs. 10, it is credited to the Short
Remittance A/c. In excess of Rs. 10, it is refunded to the proposer.

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Question33 The first step in accounting process is ______ .

(a) Collecting data source
(b) Posting to ledger accounts
(c) Summarizing / reporting of transactions
(d) Preparing the primary books of accounts
(e) Fudging accounts

Correct Answer Collecting data source

Answer Explanation This pdf will expire in 3 months.
Accounting is the process of recording & reporting of the financial transactions. It is
performed in a systematic way at the end of each period. It summarizes the financial
statements. The first step in accounting process is collecting data source.

Question34 Identify which of the below listed activities are necessary in a budget:
1. Evaluation of the performance 2. Communication 3. Remedial action
(a) Only 2
(b) Only 3
(c) Both 1 and 2
(d) All 1,2 and 3
(e) Both 1 and 3

Correct Answer All 1,2 and 3

Answer Explanation All the above three activities are necessary for a budget of an organization. It requires
performance evaluation based on the figures presented in a budget & act as a medium of
communication between various levels of management.
Finally, if actual business conditions differ, it should take remedial measures enabling it to
be modeled into a new budget with necessary changes.

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Question35 Based on IAS 17 which segments will be considered reportable if a company has three
segments A, B and C which account for 50%, 20% and 8% of the total revenue respectively.
(a) Only A
(b) Only B
(c) Only C
(d) All A, B and C
(e) Only A and B

Correct Answer Only A and B

Answer Explanation The reportable segment refers to the segments responsible for revenue, profit & loss and
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value of assets. For revenue, the internal or external revenue (combined) should be greater
than 10%.

Question36 Select which of the given statements hold true for a life insurance company?
1. The acquisition cost for acquiring new business will be expensed in the period in which
they are incurred 2. The Cash flow statement has to be prepared only under indirect
method 3. Segment reporting is applicable to all insurance companies
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Only statement 3 is correct
(d) Only statements 1 and 2 are correct
(e) Only statements 1 and 3 are correct

Correct Answer Only statements 1 and 3 are correct

Answer Explanation An additional statement in addition to balance sheet, profit & loss account and revenue
account is called Cash Flow statement. This relates to inflow & outflow of cash & cash
equivalent from operating, investing & financing activities. Under this system segment
reporting is applicable to all insurance companies. The segment reporting refers to income,
expenses, investing & financing activities of an insurer. Also, the acquisition cost for
acquiring new business will be expensed in the period in which they are incurred

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Question37 While recording a transaction the cost of goods purchased by cash was wrongly debited to
sales account and credited to cash book. The rectification entry that needs to be passed is
__________
(a) Dr Purchase Account, Cr Sales Account
(b) Dr Bank Account, Cr Cash Account
(c) Dr Purchase Account, Cr Suspense Account
(d) Dr Cash book, Cr Sales Account
(e) Dr Purchase Account, Cr Cash book

Question38 Cash outflow arising from operating activities includes which of the following?
(a) Sale of properties which have been in possession for long period
(b) Payments made to policy holders such as maturity claim
(c) Payment to buy debentures
(d) Payment to buy warrants, shares etc.
(e) Loans given to companies

Correct Answer Payments made to policy holders such as maturity claim

Answer Explanation Cash flow Statement is additional information to user of financial statement in additional
to balance sheet, Profit & Loss Account and Revenue Accounts. Under this cash outflow
from operating activities includes payment to policy holders such as maturity claim is
exhibited.

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Question39 While drawing the statement of cash flow, which of the following will be included under
the head of financing activities?
1. The bonus paid to policy holders
2. Repayment of borrowings
3. Issue of share capital
4. Money received from sale of investments
(a) Only 4
(b) Both 1 and 3
(c) Both 2 and 4
(d) Both 2 and 3
(e) Both 1 and 4

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Correct Answer Both 2 and 3

Answer Explanation Cash flow Statement is additional information to user of financial statement in additional
to balance sheet, Profit & Loss Account and Revenue Accounts. Under the head financing
activities in a statement of cash flow would include; Issue of share capital and Repayment
of borrowings.

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Question40 The right definition of Liability ratio is :

(a) The ability to convert any asset to cash within a short time for pay out of short-term
liabilities
(b) The ability to convert any asset to cash within a short time for pay out of long-term
liabilities
(c) The ability to convert any cash to asset within a long time for pay out of short-term
liabilities
(d) The ability to convert any cash to asset within a short time for pay out of long-term
liabilities
(e) The ability to convert any cash to asset within a short time for pay out of short-term
liabilities

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Correct Answer The ability to convert any asset to cash within a short time for pay out of short-term
liabilities
Answer Explanation A ratio is the arithmetical relation between two figures. It shows the inter relation
between a number of items of financial information. Liability ratio means the ability to
convert any asset to cash within a short time for pay out of short-term liabilities.

Question41 What are those mutual funds known as which invest major portion of their money in
Government Securities (G Secs) like Treasury Bills and / or Long Dated securities ?
(a) Money market schemes
(b) Open ended schemes
(c) Balanced schemes
(d) Debt schemes
(e) Gilt schemes

Correct Answer Gilt schemes

Answer Explanation Gilts are securities issued by the central government and are said to carry sovereign or
minimal risk.
Funds which invests in these are called Gilt Funds.

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Question42 In a balance sheet, what refers to everything the entity owes to the owners / shareholders
and this includes the initial capital contributed by the owners and the profits generated by
the business.
(a) Equity
(b) Stake
(c) Gross Product
(d) Liabilities
(e) Assets

Correct Answer This pdf will expire in 3 months.

Equity
Answer Explanation Financial condition/ position of an organization is referred to by the figures as to what it
owes vs. what it owns at any point of time. It is demonstrated by a balance sheet.
In a balance sheet equity refers to everything the entity owns to the owners / shareholders
including the initial capital contributed by the owners and the profits generated by the
business.

Question43 The 'Gross Value Added' (GVA) is affected by _____ .

(a) Corporate Social Responsibility (CSR) Activities
(b) The interest which is payable for the year
(c) Money spent on advertising
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer The interest which is payable for the year

Answer Explanation GVA is arrived at by deducting the cost of all materials & services from outside suppliers
from the sales revenue. Interest payable for the year is an important element which effects
the GVA calculations.

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Question44 The most often used financial ratio in the life insurance industry include -
(a) Interest cover
(b) Quick ratio
(c) Distribution yield
(d) Over all expense ratio
(e) Fixed to worth

Correct Answer This pdf will expire in 3 months.

Over all expense ratio
Answer Explanation Overall expense ratio indicates the overall operational efficiency of the unit. It indicates
lapse of business, increase in deposits and excess provision of expenses or higher
management expenses.

Question45 From the books listed below which is both a Journal and Ledger ?
(a) General Ledger
(b) Sales day book
(c) Bills payable book
(d) Cash book
(e) Journal

Correct Answer Cash book

Answer Explanation Cash book is a book of prime entry and is also a part of ledger system. A cash book records
all cash transactions, whatever may be their nature.

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Question46 An accountant committed an error of commission by incorrectly taking the account to the
wrong side. The stage at which the error had been committed at the _____ .
(a) initial stage
(b) posting stage
(c) pre-recording stage
(d) recording stage
(e) preparation of trial balance

Correct Answer posting stage

Answer Explanation Posting Error: This error occurs while posting a transaction from the books of prime entry
to the ledgers. This can be:
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- Posting the wrong amount
- Omission to post either credit or debit entry
- Posting to wrong side of correct ledger

Question47 A limited liability company Micromix's Trial Balance did not agree. Therefore, a suspense
account was opened for the difference. Investigations revealed the below mentioned
errors. From these errors, which would require an entry to the suspense account as part of
the process of correcting them?
(a) A sale of goods to one of its directors for Rs 7800 was recorded by debiting sales revenue
account and crediting the directors current account
(b) A sum of Rs 21000 paid for plant repairs was correctly treated in the cash book and then
credited to plant and equipment asset account
(c) Cash refund due to customer A was correctly treated in cash book and then credited to the
accounts receivable ledger account of customer B
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Both 2 and 3

Answer Explanation

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Question48 A company was following the Reducing Balance method of depreciation till 2014. However,
in 2015 it shifted to Straight Line method. In this case the company has not followed the
______
(a) Going concern assumption
(b) Prudence assumption
(c) Consistency concept
(d) Substance over form concept
(e) Accrual concept

Correct Answer This pdf will expire in 3 months.

Consistency concept
Answer Explanation Under consistency concept it assumed that Accounting Policies are consistent from one
period to another. Since the ICC Plc did not follow the depreciation method from one
period to another, it has not followed the consistency concept.

Question49 Which of the two are major models of human resource accounting?
(a) Maslow based model and Economic value model
(b) Cost based model and Economic value model
(c) Economic value model and Flamholtz model
(d) Replacement cost model and cost-based model
(e) Cost based model and opportunity cost model

Correct Answer Cost based model and Economic value model

Answer Explanation The cost-based model is simple, easy to understand & satisfy the principle of matching cost
& revenue is considered. Under economic value-based model, the opportunity cost as a
basis of estimating the value no human resources is estimated.

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Question50 The source document to record a purchase from supplier is __________ .

(a) Debit note
(b) Remittance note
(c) Purchase order
(d) Purchase invoice
(e) Receipt

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Correct Answer Purchase invoice

Answer Explanation The source document to record a purchase from supplier would be Purchase invoice i.e. the
Suppliers Invoice.

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MOST IMPORTANT ‘LAST DAY REVISION’ TEST 1

Question1 The allowable shortfall or excess that could be taken to Short remittance account in case of
a Renewal Premium is __________
(a) Rs 100
(b) Re 1
(c) Re 1 or 1% of the Renewal Premiums, whichever is less
(d) Rs 10 or 1% of the Renewal Premiums, whichever is more
(e) Re 1 or 1% of the Renewal Premiums, whichever is more

Correct Answer Re 1 or 1% of the Renewal Premiums, whichever is less

Answer Explanation
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In case of Renewal Premium, the allowable shortfall or excess that could be taken to Short
remittance account is Re 1 or 1% of the Renewal Premiums, whichever is less. If the
premium is in excess of the permissible limit, it is refunded.

Question2 On reviewing Shweta’s bank book, it showed a debit balance of Rs 10000. However, her
bank reconciliation statement shows unpresented cheque (cheques which were issued by
Shwetas but not yet presented) of Rs 5000 and outstanding lodgments paid in by Shweta
amounting to Rs 3000. Given the current facts assess the correct balance according to
Shweta’s bank statement?
(a) Rs. 8000
(b) Rs. 10000
(c) Rs. 11000
(d) Rs. 12000
(e) Rs. 18000

Correct Answer Rs. 12000

Answer Explanation Bank Book Balance: Rs. 10000 Dr.
Add Un-presented cheque: Rs. 5000
Less Outstanding Lodgments: Rs. 3000
Correct Bank Balance: Rs. 12000

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Question3 Select from the below list the sources through which a company in India can access finance
from foreign markets?
(a) Convertible Debentures
(b) Commercial Paper
(c) Repo
(d) GDR
(e) All of the above

Correct Answer GDR

Answer Explanation
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Through Global Depository Receipt (GDR), Indian companies can go abroad & can access
finance from foreign market. They may list their shares on foreign stock exchange.

Question4 Consider a company XYZ Co purchased goods on 10 April 2010 only to make the payment
for the same to the supplier on 6 June 2013. Hence XYZ co became the owner of the goods
on 10 April 2010 even though the payment was made much later. Given the facts the
purchase transaction should be recorded on 10 April 2010 is primarily owing to ________
(a) Sale date concept
(b) Going concern
(c) Consistency concept
(d) Accrual concept
(e) Prudence assumption

Correct Answer Accrual concept

Answer Explanation Revenue & cost are accrued, that is recognized as they are earned or incurred (and not as
money is received or paid) and recorded in the financial statements of the period to which
they relate. The said guidelines are issued by ICAI. Hence the purchase transaction should
be recorded on 10th April 2010 because of accrual concept. An accrual system of
accounting prescribes recording assets when they are controlled.

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Question5 When we divide Quick Assets by Quick Liabilities we get the formula for _______ .
(a) Price Earning (PE) Ratio
(b) Current Ratio
(c) Profitability Ratio
(d) Debt service coverage ratio
(e) Quick ratio

Correct Answer Quick ratio

Answer Explanation
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Quick Ratio = Quick Assets / Quick Liabilities
This ratio illustrates how the companies’ liquid current assets can cover its current
liabilities. It excludes stocks & inventory. Quick ratio of 1:1 is considered reasonable.

Question6 When a fixed asset is revalued in financial statements and there is an increase in its
valuation. the increase is ______ (as per AS 10)
(a) Recognized in Revaluation reserve
(b) Recognized in the Profit & loss A/c
(c) Recognized in Capital reserve
(d) Both 1 and 2
(e) All 1, 2 and 3

Correct Answer Recognized in Revaluation reserve

Answer Explanation According to AS 10, the assets should be of class of asset & not an individual asset & the
increase in revaluation is to be credited in the revaluation reserve & the decrease to be
charged to the P & L A/c.

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Question7 While auditing ABC ltd an error was discovered in paying extra wages of an employee. ABC
Ltd. received cash from the employee for the amount of overpayment. Determine which
give entries for ABC Ltd. records this transaction ?
(a) Dr Bank A/c , Cr wage payable
(b) Dr Wage expense, Cr wages payable
(c) Dr Wage payable , Cr wages expense
(d) Dr Wage expense, Cr cash
(e) Dr Cash , Cr wage expense

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Correct Answer Dr Cash , Cr wage expense

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Question8 Compute the NAV of a mutual fund based on the given details: -
Current market price of all holdings - Rs 300 crores
Liabilities of the fund - Rs 45 crores
Number of fund units outstanding - 10 crores
Profit for the year - Rs 8 crores
(a) Rs. 25.50
(b) Rs. 26.30
(c) Rs 30
(d) Rs 38
(e) Rs 32.80

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Correct Answer Rs. 25.50
Answer Explanation NAV a simple calculation - just take the current market value of the fund's net assets
(securities held by the fund minus any liabilities) and divide by the number of shares
outstanding
Market Value - Liabilities / No. of units
300 - 45 / 10 = 25.50

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Question9 A machine costing Rs 200000 was purchased on 1 Jan 2006. Depreciation was charged on
monthly basis at the rate of 10% per annum using straight line method. It was sold of on 30
June 2011 for Rs 50000. Calculate the accumulated depreciation at the time of disposal?
(a) Rs 95000
(b) Rs 110000
(c) Rs 87500
(d) Rs 125000
(e) Rs 141000

Correct Answer This pdf will expire in 3 months.

Rs 110000
Answer Explanation Yearly depreciation is 10% x 200000 = 20,000. (Although the depreciation is charged
monthly, it is calculated on a yearly basis)
Accumulated depreciation for 5.5 years (1 Jan 2006 to 30 June 2011) would be = 20000 x
5.5 = Rs. 110000.

Question10 What is /are the feature(s) of FREE LOOK CANCELLATION?

1. There are heavy deductions 2. Its quiet a tedious process 3. Its a fairly simple process
(a) Both 1 and 2
(b) Both 1 and 3
(c) Only 1
(d) Only 2
(e) Only 3

Correct Answer Only 3

Answer Explanation Under free look cancellation, the customer has the right to terminate the policy w/out any
further charges. A mere simple transaction as Free look Cancellation is a simple process.
Only mortality & medical charges are charged for this process.

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Question11 PMLA stand for __________ .

(a) Prevention of Money Layering Act
(b) Prevention of Money Laundering Act
(c) Piracy of Money Laundering Act
(d) Preface to Money Laundering Activities
(e) Prevention of Money Laundering Activities

Correct Answer Prevention of Money Laundering Act

Answer Explanation
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Anti-money laundering guidelines prevent the anti-social elements from routing funds
through illegal channels for use against public interest.
The PMLA guidelines were introduced on 1st July 2005. The full form of PMLA is Prevention
of Money Laundering Act.

Question12 Ajay is the proprietor of XYZ ltd. He has deducted tax on the salary paid to his employees
and wants to file quarterly returns with income tax department. What is the last date to
file for the quarter ended 31 Dec 2015 ?
(a) 7th Jan 2016
(b) 15th Jan 2016
(c) 30th Jan 2016
(d) 15 Feb 2016
(e) 28 Feb 2016

Correct Answer 15th Jan 2016

Answer Explanation Timeline for filing quarterly statements of TDS through Form 24Q is 15th of the next month.
(However, for filing quarterly statement for the period ending 31st March is on or before
15th May)

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Question13 Based on the nature of insurance company liabilities, most of the investments will be
categorized as ______ .
(a) based on book value
(b) held to Maturity
(c) available for Sale
(d) fair value by profit or loss
(e) loans and receivable

Correct Answer This pdf will expire in 3 months.

held to Maturity
Answer Explanation Debt securities including government securities and redeemable preference shares for a
general insurance company shall be considered to be ‘Held to Maturity (HTM)’ securities &
shall be measured at historical cost subject to amortization.

Question14 With the objective of reconciliation, classification and posting to control accounts, which
among the following primary books of accounts are used?
1. Premium Cash book 2. Register of claims 3. Register of policies
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 1 and 3

Correct Answer Both 1 and 3

Answer Explanation For the purpose of reconciliation, classification and posting to control accounts, both
register of policies and premium cash books are used.

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Question15 Some deductions are available to salaried employees under 80C, 80CCC and 80CCD. From
the options given below, which one is available?
(a) Donations to a reputable charitable trust
(b) Deduction in respect to medical treatment of a dependent who is a person with disability.
(c) Deduction for interest paid on higher educational loan
(d) Fixed deposit in a scheduled bank if it is more than 5 years
(e) Deduction for medical treatment

Correct Answer This pdf will expire in 3 months.

Fixed deposit in a scheduled bank if it is more than 5 years
Answer Explanation Deduction is available under Sec 80C, 80CCC and 80CCD if fixed deposit is made in
scheduled bank of more than 5 years.

Question16 Select which of the given options will not improve the current ratio ?
(a) Sell some fixed assets in order to reduce accounts payable
(b) Take short term loan to finance purchase of fixed assets
(c) Issue long term loan to purchase inventories
(d) Both 2 and 3
(e) Both 1 and 2

Correct Answer Issue long term loan to purchase inventories

Answer Explanation A ratio is the arithmetical relation between two figures. It shows the inter relation
between a number of items of financial information.

Current Ratio & Acid Test Ratios are the measures of finding liquidity position of an
organization. Higher the ratio, more capable is the company to repay its obligations.
However, issue long term loan to purchase inventories would not improve the current
ratio.

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Question17 Which of the following is a Private Bank?

(a) BOI
(b) CBI
(c) SBI
(d) UBI
(e) HDFC

Correct Answer HDFC

Answer Explanation The banking system in India is classified under various heads like nationalized banks,
private banks, foreign banks, co-operative banks & regional rural banks. HDFC is the largest
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private banks whereas rests of the banks are public sector banks. Under private banks, the
majority of the shareholding is with private individuals or corporate entities.

Question18 ________ mutual funds invest in equity shares of companies and help the investors to get
the benefits of the investment opportunities in the stock market. These funds are
considered to be high-risk high and return investment proposition.
(a) Tax Saving Funds
(b) Equity Funds
(c) Infrastructure Funds
(d) Arbitrage Funds
(e) Index Funds

Correct Answer Equity Funds

Answer Explanation An equity fund is a mutual fund that invests principally in stocks. These funds are
considered to be high-risk high–return investment proposition as equity markets and the
stocks fluctuate as per market conditions, company profits etc.

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Question19 While recording a sales invoice of Rs 7500, the same was recorded as Rs 9500 in the sales
day book and posted to the receivables ledger account as Rs 9500. This error committed by
the accountant is .
(a) Error of Under casting
(b) Error of principle
(c) Error of prime entry
(d) Error of omission to record
(e) Complete revival of entry

Correct Answer Error of prime entry

Answer Explanation Under this type of error, the error is committed while recording the transaction from
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source document to the book of prime entry. This error will not result in any disagreement
in the trial balance.

Question20 There are some practices to be followed for an effective Anti-Money Laundering - AML
programme. Which of the following practices are acceptable?
1. All the records of ongoing transactions which are under scrutiny should be retained until
the case is closed
2. Records should be preserved of transactions reported to FIU for a period of 10 years
3. Records should be maintained in physical format instead of electronic format
(a) Both statements 1 and 2
(b) Both statements 2 and 3
(c) Both statements 1 and 3
(d) Only statement 3
(e) All 1, 2 and 3

Correct Answer Both statements 1 and 2

Answer Explanation In order to implement an effective AML programme, records of transactions reported to
FIU should be retained for a period of 10 years & records of ongoing transactions which are
under scrutiny should be retained until the case is closed.

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Question21 'Casting' in accounting terms means __________

(a) Budgeting
(b) Transposing
(c) Rounding up
(d) Adding up
(e) Compensating

Correct Answer This pdf will expire in 3 months.

Adding up
Answer Explanation The term 'casting' means adding up which affects the agreement of Trial Balance. This error
may be an error of overcasting or undercasting.

Question22 __________ invest money in both stocks and bonds with the objective to benefit from
capital appreciation of stocks and regular income of bonds.
(a) Tax Saving ELSS Funds
(b) Large Cap Funds
(c) Money Market Funds
(d) Sectoral Funds
(e) Balanced Funds

Correct Answer Balanced Funds

Answer Explanation

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Question23 Which books are used for reconciliation, classification and posting to control accounts ?
(a) Cash and Bank book
(b) Premium cash book
(c) IBNR book
(d) Claims book
(e) Daily entry journal

Correct Answer This pdf will expire in 3 months.

Premium cash book
Answer Explanation Insurers have to maintain two types of books i.e. Statutory Books & Subsidiary Books. The
subsidiary books are used for reconciliation, classification and posting to control accounts,
premium cash book is used by the insurers.

Question24 The primary objective of budgetary control is -

(a) To design and control the income and expenditure of a business
(b) To meet all the regulatory norms
(c) To promote the integrity of management
(d) To identify under performers in the business
(e) To make sure that there is no shortfall in income

Correct Answer To design and control the income and expenditure of a business
Answer Explanation Budgetary control system is a means of monitoring revenue & cost to exercise control in an
entity. It does it by developing budgets & comparing figures. It helps in designing and
controlling the income and expenditure of a business.

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Question25 A budget, which is a plan of action, can be expressed in _______ .

(a) Subjective Terms
(b) Monetary Terms
(c) Non - Monetary Terms
(d) Both Monetary Terms and Non - Monetary Terms
(e) Both Monetary Terms and Subjective Terms

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Correct Answer Both Monetary Terms and Subjective Terms
Answer Explanation An instrument of planning is known as budget involving calculations of facts & figures for
projected financial outcome. It is expressed in monetary terms subjectively. It depends
upon various factors & involves comparisons subject to numerous factors.

Question26 While calculating House Rent Allowance, salary is computed as ________

(a) Basic Salary + bonus + conveyance
(b) Basic Salary + bonus +dearness allowance
(c) Basic Salary + bonus + Rent paid
(d) Basic Salary + bonus + leave encashment
(e) Basic Salary + bonus + Uniform allowance

Correct Answer Basic Salary + bonus +dearness allowance

Answer Explanation Under section 10(13A) of the IT Act, for the purpose of computing House Rent Allowance,
salary calculated for the purpose would include Basic + bonus + dearness allowance.

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Question27 Which of the given options depicts the case when the current ratio shows the amount of
current assets as exactly equal to current liabilities?
(a) 2:1
(b) 1:1
(c) 3:5
(d) 1:3
(e) 1:2

Correct Answer 1:1

Answer Explanation The situation where the amount of current assets is exactly equal to current liabilities is
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found when current ratio is 1:1.
Liquidity ratios i.e. Current Ratio & Acid Test Ratios are the measures of finding liquidity
position of an organization. Higher the ratio, more capable is the company to repay its
obligations.

Question28 Identify which of the below listed incomes need to be recorded in the Premium Cash Book?
1. Loan Repayment 2. Renewal premium with X charge 3. Sale of diaries
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Both 2 and 3
(e) All 1, 2 and 3

Correct Answer All 1, 2 and 3

Answer Explanation The main source of income for an insurance company is premium. Apart from the
premium, an insurance company also receives income from repayment of loan interest,
agents license fee, via sale of diaries, calendars etc.
The insurance company has to maintain a record of all such receipts of income in Premium
etc. cash book on a daily basis.

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Question29 Consider a hypothetical company XYZ Ltd. From the year 2016 to 2017 the total assets of
XYZ Ltd increased by Rs. 83 lakhs from Rs. 395 lakhs to Rs. 478 lakhs. What is the
percentage increase?
(a) 20.70%
(b) 21%
(c) 21.85%
(d) 22%
(e) 23.60%

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Correct Answer 21%

Answer Explanation The original assets were 395 lakhs i.e. 100%
This increased to 478 lakhs = ? %
478 x 100 / 395
47800 / 395 = 121 %
So, the rise is 121 - 100 = 21%
OR
Dividing the increase in asset from the cost of the asset gives us the percentage increase.
83 / 395 x 100 = 21.
Therefore, the percentage increase of asset is 21%.

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Question30 While making a Trial Balance, which of the given errors will be discovered?
1. A payment made to a supplier is posted in the wrong personal account
2. An amount entered for a debit entry is double that made for the credit entry
3. A transaction is missed out of the accounts completely
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 2 and 3
(e) Both 1 and 2

Correct Answer This pdf will expire in 3 months.

Only 2
Answer Explanation The trial balance helps the accountant to check the arithmetic accuracy of the accounting
after the preparation of ledger accounts. When an amount entered for a debit entry is
double that made for the credit entry, the trial balance would not match.
Other two errors would not affect the balancing i.e. the trial balance would still match.

Question31 A company is required to deduct tax at source (TDS) on making which of the given
payments?
1. Salaries 2. Interest 3. Dividend
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Only 1

Answer Explanation As per Section 43A of Life Insurance Act, 1956 no deduction of Income Tax shall be made on
any interest or dividend payable to the corporation in respect of any securities or shares
owned by it.

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Question32 Flows of fund may be caused due to transactions between _________ .

1. Fixed Assets and Current Liabilities
2. Fixed Assets and Current Assets
3. Current Assets and Long-term liabilities and capital
(a) Option 1 and 2
(b) Option 1 and 3
(c) Option 2 and 3
(d) Only option 3
(e) All 1,2 and 3

Correct Answer Only option 3

Answer Explanation
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A statement of changes in the financial position is a fund flow statement and transactions
between current assets and long-term liabilities and capital, may cause the flows of fund.

Question33 Which of the following is an important guideline to remember while recording accounting
entry?
(a) The outstanding claims balance amount will be shown as assets
(b) The claim account Codes for Group pensions policies and ordinary policies are the same
(c) Claim payment for ordinary policies is same as ULIP policies
(d) When the liability is created for net amount of claims payable, the heads of Account
credited and debited are same
(e) When the liability is created for net amount of claims payable, the Accounting heads which
are credited are different from those which are debited while making claim

Correct Answer When the liability is created for net amount of claims payable, the Accounting heads which
are credited are different from those which are debited while making claim
Answer Explanation There are two types of accounting entries for claim payments i.e., Creation of liability &
Payment of claims. The important guidelines to remember while recording accounting
entry include: While creating liability for net amount of claims payable, the heads of
account which are credited are different from those which are debited while making claim.

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Question34 Tax is deducted at source on Salary income. In accordance with Income Tax Act 1961, this is
applicable to which of the following assets ?
(a) LIC
(b) Partnership firm
(c) Individual
(d) Body corporate
(e) HUF

Correct Answer This pdf will expire in 3 months.

Individual
Answer Explanation Income Tax Act 1961 provides tax deduction at source on salary income on the estimated
income of the assesse under the head salary. The deduction has to be made at the time of
payment of salary to the individuals.

Question35 Which of those listed below is a power or function of the IRDAI -

(a) Guarantee very good returns on insurance policies
(b) Foster healthy competition in the insurance sector
(c) Detailing the form in which books of accounts shall be maintained by Insurance Companies
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer Detailing the form in which books of accounts shall be maintained by Insurance Companies
Answer Explanation GOI constituted an authority called IRDAI under The IRDAI Act 1999. It states its power and
functions which include specifying the form and manner in which books of accounts shall
be maintained.

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Question36 The most important feature of unit linked pension plan is_______.
(a) It provides one large payment on maturity
(b) It provides a short-term benefit after maturity
(c) It provides a short-term benefit after policy inception
(d) The surrender value is attractive
(e) The Policy holders are paid Guaranteed Maturity Value

Correct Answer The Policy holders are paid Guaranteed Maturity Value
Answer Explanation The Unit linked pension plans are totally different from other policies in term of their
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features & claims payment. Even they are different from other unit link policies.
Under the Unit linked pension plans, insurance companies provide Guaranteed Maturity
Value to the policy holders.

Question37 How is 'Placement' done in money laundering ?

(a) hiring professionals who can do money laundering
(b) purchasing various monetary instruments that are collected and deposited in another
location
(c) making many cash transfers
(d) making many bank transfers
(e) making wire transfers in various names in different accounts in many countries

Correct Answer purchasing various monetary instruments that are collected and deposited in another
location
Answer Explanation Placement is the 1st step of money laundering & is done by purchasing a series of monetary
instruments (DD’s, cheques or money orders) that are collected and deposited into
accounts at another location (s). The launderer inserts the illegitimate money into
legitimate financial institution through such methods.

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Question38 From those listed below cases, under which case will a Single Premium Whole Life
insurance be a good option?
1. Persons who have no heirs
2. A person below the age of 55 and who has a working horizon of 30 years
3. A person with no regular source of income
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

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Correct Answer Both 2 and 3
Answer Explanation Since the premium paying capacity is reduced in old age, it is always advisable to single
premium option. It is even relevant for the people with no regular source of income.

Question39 If there are doubtful assets than depending on the time period for which these assets have
remained doubtful, ______ % of provision of the estimated realisable value of outstanding
should be made.
(a) 10-100%
(b) 20-100%
(c) 40-100%
(d) 50-100%
(e) 70-100%

Correct Answer 20-100%

Answer Explanation

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Question40 Which of the listed options can be associated with 'identifying transactions' with regards to
the accounting process ?
(a) Preparation of the primary books of accounts
(b) Posting of journal entries to Ledger Accounts
(c) Collecting Data Source
(d) Preparation of Balance Sheet
(e) Preparation of Trial Balance

Correct Answer This pdf will expire in 3 months.

Collecting Data Source
Answer Explanation For every transaction of an entity, there has to be some kind of proof or data source. This is
the first step in the accounting process i.e. identifying transactions.

Question41 Paresh is an accountant with a leading firm ABC Corp Ltd. While doing an accounting
transaction he committed an Error of Principle. The stage at which Paresh committed this
error is at the _______ .
(a) preparation of the trial balance
(b) recording stage
(c) pre-recording stage
(d) posting stage
(e) balancing stage

Correct Answer recording stage

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Question42 In money laundering, 'Layering' will consist of _______ .

(a) Gold smuggling
(b) Currency smuggling
(c) Blending of black and white funds
(d) Smurfing
(e) Making many deposits and withdrawals to change the amount of money in the accounts

Correct Answer This pdf will expire in 3 months.

Making many deposits and withdrawals to change the amount of money in the accounts
Answer Explanation Layering is the 2nd stage of money laundering & is done by making deposits and
withdrawals to continually vary the amount of money in the accounts. It is done instead of
straight transfer from one point to another. A complex series of transfers are made in this
method of money laundering.

Question43 Who has the obligation to sell an asset at a predetermined price?

(a) A Call Writer
(b) A Put Writer
(c) A Call Buyer
(d) A Put Buyer
(e) A Put buyer and a Call writer both

Correct Answer A Call Writer

Answer Explanation For the writer (seller) of a call option, it represents an obligation to sell the underlying
security at the strike price if the option is exercised.

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Question44 Select which of the given options is the most important purpose of budgeting?
(a) Correct valuation of the company
(b) Planning, managing and control of an organization’s income and expenditure
(c) Evaluating the non-financial performance of a company
(d) Both 1 and 2
(e) Both 1 and 3

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Correct Answer Planning, managing and control of an organization’s income and expenditure
Answer Explanation Budgetary control system is a means of monitoring revenue & cost to exercise control in an
entity. It does it by developing budgets & comparing figures. The most likely purpose of
budgeting is planning and control of an organization’s income and expenditure.

Question45 As per Life insurance business (Regulation 5), in case of pension and general annuity
business, Govt. securities or other approved securities investments cannot be _____ .
(a) more than 10% of the fund
(b) more than 20% of the fund
(c) more than 30% of the fund
(d) more than 40% of the fund
(e) more than 50% of the fund

Correct Answer more than 40% of the fund

Answer Explanation

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Question46 The formula for calculating Current Ratio is ______ .

(a) Quick assets / Current assets
(b) Current assets / Current liabilities
(c) Current assets / Quick liabilities
(d) Current liabilities / Current assets
(e) Quick assets / Quick liabilities

Correct Answer Current assets / Current liabilities

Answer Explanation The current ratio is a liquidity ratio that measures a company's ability to pay short-term
and long-term obligations. To gauge this ability, the current ratio considers the current
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total assets of a company (both liquid and illiquid) relative to that company’s current total
liabilities. The formula for calculating a company’s current ratio is:
Current Ratio = Current Assets / Current Liabilities

Question47 Select the objectives of commission accounting - 1. To keep accounts for the amounts due
to and recoverable from the agents 2. To submit proper returns to the IT department for
Tax Deducted at Source 3. To calculate the commissions payable to agent
(a) Only 1
(b) Only 1 and 2
(c) All 1, 2 and 3
(d) Only 2 and 3
(e) Only 3

Correct Answer All 1, 2 and 3

Answer Explanation The commission payable can be bifurcated under various heads like; 1st year commission,
bonus commission & renewal commission. The objectives of commission accounting are;
To accurately calculate the commissions payable to agent, To submit proper returns or IT
department for TDS deducted and To maintain accounts both for the amounts due to and
recoverable from the agents.

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Question48 The father of Economics, Adam Smith, has laid down four basic principles of a good
taxation system. Which of the below option is NOT one of them ?
(a) Economical
(b) Equitable
(c) Certainty
(d) Convenience
(e) Profitable

Correct Answer This pdf will expire in 3 months.

Profitable
Answer Explanation Adam Smith the father of economics has laid down certain canon of taxation to build a
good taxation system which includes Certainty, Economical, Equitable & Convenience. The
profit is not a part of his connation.

Question49 Tax Deducted at Source statements has to be filed every ______ by the employer.
(a) month
(b) quarter
(c) six months
(d) year
(e) 15 days

Correct Answer quarter

Answer Explanation

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Question50 Identify the shortcoming of trend analysis -

(a) In trend analysis the selection of base year is non-critical
(b) In trend analysis, if the selected base year is a boom year subsequent year will be years of
downturn
(c) Trend analysis does not account for inflation
(d) Trend analysis combines best of both horizontal and vertical analysis
(e) In trend analysis it is possible to segregate inflationary and real growth

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Correct Answer In trend analysis, if the selected base year is a boom year subsequent year will be years of
downturn
Answer Explanation The trend analysis method is used to evaluate data on various key indicators for five or
more years of any firm which shows the basic change in the nature of business.

However, its shortcoming is that if base year is a boom year subsequent year will be years
of downturn.

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MOST IMPORTANT ‘LAST DAY REVISION’ TEST 2

Question1 The Insurance Regulatory and Development Authority ( Preparation of Financial

Statements and Auditor’s Report of Insurance Companies) Regulations 2002 deals with
disclosures forming part of the financial statements as per which part of its Schedule A ?
(a) Part I
(b) Part II
(c) Part III
(d) Part IV
(e) Part V

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Correct Answer Part II
Answer Explanation Core of accounting excellence is disclosure requirements. Objective of financial statements
cannot be achieved unless reasonable & appropriate disclosures are made at the right
place. Part II of the Schedule A of The Insurance Regulatory and Development Authority
(Preparation of Financial Statements and Auditor’s Report of Insurance Companies)
Regulations 2002 defines the areas where disclosures are to be made.

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Question2 Which of the following option is NOT TRUE with regards to Financial Ratios ?
(a) Inflation does not affect ratios
(b) Ratios are not affected by different accounting practices
(c) Ratios help in highlighting areas that need further investigation
(d) There is no effect of seasonality on ratios in the short term
(e) Whether a ratio is good or not can be easily generalized

Correct Answer This pdf will expire in 3 months.

There is no effect of seasonality on ratios in the short term
Answer Explanation

Question3 The main function of Planning Commission was preparation of _____ year plans.
(a) 2
(b) 5
(c) 7.5
(d) 10
(e) 11

Correct Answer 5
Answer Explanation The Planning Commission was an institution in the Government of India, which formulated
India's Five-Year Plans, among other functions. However, in his first Independence Day
speech in 2014, Prime Minister Narendra Modi announced his intention to dissolve the
Planning Commission. It has since been replaced by a new institution named NITI Aayog.

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Question4 What is the term which describes all the things the company owns to the shareholders
including the initial capital provided by the owners and the profits made by the business ?
(a) Assets
(b) Liabilities
(c) Gross Product
(d) Equity
(e) Stake

Correct Answer Equity

Answer Explanation
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Financial condition/ position of an organization is referred to by the figures as to what it
owes vs. what it owns at any point of time. It is demonstrated by a balance sheet.
In a balance sheet equity refers to everything the entity owns to the owners / shareholders
including the initial capital contributed by the owners and the profits generated by the
business.

Question5 A company wishes to increase the capital employed. Which of these transactions will help
the process - 1. Writing off some big bad debts 2. Buying fixed assets by using bank
overdraft funds 3. Selling goods at profits
(a) Only statement 1
(b) Only statement 2
(c) Only statement 3
(d) Either statements 1 or 2
(e) Either statements 2 or 3

Correct Answer Only statement 2

Answer Explanation Capital transactions are the transactions involving purchase, acquisition, sale or disposal of
assets. Increasing the bank overdraft to purchase a fixed asset will increase the capital
employed by the entity.

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Question6 Which of the following can be categorized under internal users for an organisation -
(a) The employees
(b) The investors
(c) The Customers
(d) The Creditors
(e) The Government

Correct Answer The employees

Answer Explanation
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Financial statements aid decision making. These financial statements can be divided into
two types i.e. Internal Users & External Users. Employees can be categorized under internal
users for an organization.

Question7 As per Section 44 AB Tax audit provision applies to a person carrying on a profession if the
gross receipts in profession for an accounting year exceeds _______ .
(a) Rs 10 lakhs
(b) Rs 25 lakhs
(c) Rs 50 lakhs
(d) Rs 100 lakhs
(e) Rs 200 lakhs

Correct Answer Rs 50 lakhs

Answer Explanation Under IT Act 1961 Sec. 44AB, it is mandatory for auditing the accounts of a professional to
have a ‘Tax audit’. It applies to a person carrying on a profession, if the gross receipt in
profession for an accounting year exceeds Rs 50 lakhs.

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Question8 In the Accrual basis of accounting, the transactions related to Revenues, Costs, Assets and
Liabilities are recorded _____ .
(a) in the succeeding period of accrual
(b) in the period in which are actually received or paid
(c) in the period in which they accrue
(d) either 2 or 3
(e) None of the above

Correct Answer in the period in which they accrue

Question9 Calculate the value of Ravi’s purchases in the year 2016 based on the given facts â€¢ The
sales for the year were Rs 500000 â€¢ All his sales were made at a markup of 25% â€¢ His
opening inventory value was Rs 46500 and his closing inventory value was Rs 31800
(a) Rs. 374600
(b) Rs. 519500
(c) Rs. 439320
(d) Rs. 319400
(e) Rs. 414700

Correct Answer Rs. 414700

Answer Explanation First let’s calculate the Cost Price ie. the Sale Price less the Profit margin (markup)
Markup Price = Cost Price ( 1 + Markup %)
500000 = Cost Price (1 + 25%)
500000 = Cost Price (1 + .25)
Cost Price = 500000 / 1.25
Cost Price = 400000
Purchases in the year = Starting inventory (46500) + Inventory sold (400000) – Ending
inventory (31800) = 414700

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Question10 What is the sum of money called in consideration for which the insurer agrees to
compensate the insured ?
(a) Maturity sum
(b) Insurance
(c) Contract
(d) Policy
(e) Premium

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Correct Answer Premium
Answer Explanation The insurer agrees to compensate the insured in consideration of a sum of money called
premium. The premium can be paid at predetermined period i.e. monthly, quarterly or
annually for a fixed period.

Question11 Based on the ALM technique in risk management, which of the given statements hold true?
(a) The main objective of ALM is interest rate risk management
(b) Helps to meet the companies need of cash flow and capital
(c) It helps to remove risk and improve operation efficiency
(d) Both 1 and 2
(e) All of the above

Correct Answer Both 1 and 2

Answer Explanation In order to meet organization’s need of cash flow and capital, ALM (Asset Liability
Management) is very important & vital for proper management of finance.
Interest rate risk management and Liquidity are also important objectives of ALM

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Question12 In case a working partner of a firm receives Salary, Commission or Remuneration, the same
is taxable under the head ________ .
(a) Income from business
(b) Income from other sources
(c) Income from business and profession
(d) Income from salaries
(e) Income from house property

Correct Answer This pdf will expire in 3 months.

Income from salaries
Answer Explanation As per Section 192 of the Income Tax Act 1961, salary, bonus, commission or remuneration
due to or received by a working partner from the firm is taxable under the head ‘Income
from Salaries’.

Question13 Leave travel concession enjoys the benefits of a tax perquisite or exemption from tax for
_____ .
(a) Three journeys
(b) Two journeys
(c) One journey
(d) One journey in a block of 4 years
(e) Two journey in a block of 4 years

Correct Answer Two journey in a block of 4 years

Answer Explanation Section 10 of IT Act provides certain exemption from income termed as allowances.
Regarding leave travel concession, it provides full exemption in case of Two journey in a
block of 4 years.

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Question14 The cost of replacing the set of services needed of any incumbent in a defined position is
known as ________
(a) Expected replacement Cost
(b) Group replacement cost
(c) Individual replacement cost
(d) Positional replacement cost
(e) Expected conditional value

Correct Answer Positional replacement cost

Answer Explanation Under human resource accounting, position replacement cost (Flamholtz Model – 1973)
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refers to the cost of replacing the set of services required of any incumbent in a defined
position. Often the determination on replacement cost of an employee is subjective & is
very difficult to ascertain. The human asset value of a top management exit may be
phenomenal/substantial.

Question15 Among those listed below which is one of the prime features of ULIPs ?
(a) ULIPs are for short periods say 1 to 2 years
(b) ULIPs give many choices to the policy holder such as debt, balanced, growth etc. as per his
risk appetite
(c) There are no tax benefits in ULIPs
(d) There is no lock in period in ULIPs
(e) ULIPs offer limited choices to the investors

Correct Answer ULIPs give many choices to the policy holder such as debt, balanced, growth etc. as per his
risk appetite
Answer Explanation Under ULIP, policy holder gets benefits of investment & insurance. It offers multiple
choices to policy holders in terms of return such as growth, balance, debt or gilt plan which
gives varied return as per risk appetite.

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Question16 The assumption of going concern concept is that an entity will -

(a) close down in 12 months
(b) continue its operations for at least the next 12 months
(c) bring down its operation due to competition
(d) Both 1 and 3
(e) Both 2 and 3

Correct Answer This pdf will expire in 3 months.

continue its operations for at least the next 12 months
Answer Explanation There are certain accounting assumptions in formulating accounting policies. These are
used at the time of preparation & presentation of financial statements. One of them is
going concern concept. According to this it is assumed that an entity will continue its
operations for at least the next 12 months.

Question17 According to the guidelines issued by IRDA, each life insurer should revalue its assets once
in how many years to bring it near to current cost.
(a) 1 year
(b) 3 years
(c) 5 years
(d) 7 years
(e) 10 years

Correct Answer 3 years

Answer Explanation According to AS 6, IRDA has issued regulation that each life insurer should revalue its assets
once in 3 years to bring it near to current cost.

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Question18 Consider the equity and derivative instruments held by a life insurance company and which
are traded in active market - Which of the below statements is true with respect to their
valuation?
(a) Insurance company will assess at each balance sheet date for any impairment
(b) These instruments will be measured at fair value
(c) Unrealized profits / losses arising due to changes in the fair value will be taken to equity
under the head ‘Fair Value Change Account’
(d) Only 1 and 2 are true
(e) All 1, 2 and 3 are true

Correct Answer This pdf will expire in 3 months.

All 1, 2 and 3 are true
Answer Explanation With regards to the valuation of an equity instrument and derivative instrument traded in
active market of a life insurance company, are to be measured at fair value & the company
should assess at each balance sheet date for any impairment.

Question19 The payments of the insured amount of the policies in the event of death of the policy
holders together with bonus additions in the case of with-profit policies are called as
_________ .
(a) Death claims
(b) Maturity claims
(c) Survival benefits
(d) Surrender value payments
(e) Annuity payments

Correct Answer Death claims

Answer Explanation There are various types of claim payments depending upon the type of policy contract.
Claims are policy benefits. However, death claims are payments of the insured amount of
the policies in the event of death of the policy holders together with bonus additions in the
case of with-profit policies.

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Question20 _________ is the amount of capital that a company can issue at par value.
(a) Issued capital
(b) Share premium
(c) Fixed capital
(d) Authorized capital
(e) Paid up capital

Correct Answer This pdf will expire in 3 months.

Authorized capital
Answer Explanation The amount of capital that a company can issue at par value is called Authorized capital.
Before a company can raise equity capital, it must obtain permission to execute the sale of
stock. The company must specify the total amount of equity it wants to raise and the base
value of its shares, called the par value.

Question21 The annual value of a self-occupied property is calculated based on ______ (as per Income
Tax Act)
(a) the actual current market value
(b) the value as per municipal valuation
(c) on actual amount paid to acquire property
(d) the value as per indexation
(e) It is considered as NIL

Correct Answer It is considered as NIL

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Question22 A 50-year-old retired college professor Mahesh took a whole life insurance policy. For this
said policy upto what age will he have to pay the premium ?
(a) Maximum till he turns 65 years
(b) Maximum till he turns 75 years
(c) Maximum till he turns 80 years
(d) Maximum till he turns 80 years or death whichever is earlier
(e) Maximum till he turns 85 years or death whichever is earlier

Correct Answer This pdf will expire in 3 months.

Maximum till he turns 85 years or death whichever is earlier
Answer Explanation Mahesh has to pay the premium for a maximum period of 35 years i.e. till the age of 85 yrs.
if he survives beyond 80 yrs.
LIC limits the maximum number of premiums that are payable either till the age of 80 or till
35 annual premiums are paid whichever is later.

Question23 The life insurance business started in India in the year _____
(a) 1818
(b) 1845
(c) 1956
(d) 1963
(e) 1947

Correct Answer 1818

Answer Explanation In India, Oriental Life Insurance Company in Calcutta commenced the business of life
insurance in 1818. It remained dominated by foreign companies for a very long time.
Thereafter, Indian Life Insurance Companies Act 1912 was enacted for regulating life
insurance business in India.

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Question24 Investment Committee members consists of which of the following - 1. Auditors appointed
by IRDAI 2. Minimum 2 Non-Executive directors of the insurer 3. Chief of investment
division 4. Chief Executive Officer 5. Appointed Actuary
(a) 1,3 and 4
(b) 2,4 and 5
(c) 1,2 and 5
(d) 2,3,4 and 5
(e) 1,2,3 and 4

Correct Answer This pdf will expire in 3 months.

2,3,4 and 5
Answer Explanation To check the activities of an insurance companies if they are investing as per the
regulations, IRDAI has taken steps that each insurance company must have an investment
committee consisting of all of the above-mentioned members.

Question25 On checking the books of a reputed company ABC ltd the following has been found. The
cash books recorded an overdrawn bank balance of Rs 10000 at 30 June 2017. It was also
discovered that a standing order of Rs 3000 has been recorded twice and that a dishonored
cheque of Rs 2000 had been debited in the bank book instead of being credited. Given
these transactions assess the correct bank balance ?
(a) Overdraft of Rs 9000
(b) Overdraft of Rs 10000
(c) Overdraft of Rs 11000
(d) Overdraft of Rs 14000
(e) Overdraft of Rs 16000

Correct Answer Overdraft of Rs 11000

Answer Explanation Overdrawn Bank Balance: Rs. 10,000
Less: Debit made twice: - Rs. 3000 (Standing order)
Add: Credit entry wrongly debited + Rs. 4000 ( 2000x2 as it was wrongly debited instead
of credit)
Correct Overdraft Bank Balance: Rs. 11000

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question26 An increase in the Life Insurance fund in the books of a Life Insurer can be due to - 1. The
Claims it has paid 2. The Expenses it has incurred 3. The Premiums it has received 4. The
Interest it has earned
(a) 1 and 2
(b) 2 and 3
(c) 3 and 4
(d) 1 and 4
(e) 3 and 1

Correct Answer This pdf will expire in 3 months.

3 and 4
Answer Explanation Expenses incurred & claims paid would be outgo consequently reducing the Life Insurance
fund. The Premiums received and Interest earned would be increasing the income.
Hence, in the books of a life insurer, the increase in the Life Insurance fund would be on
account of premiums and interest received.

Question27 The factor(s) affecting the Gross Value added includes - 1. Investment income 2.
Advertising spend 3. CSR activities
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) All 1, 2 and 3

Correct Answer Only 1

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Question28 In Life Insurance business, the investments in Government Securities or other approved
securities as per IRDAI Investment regulations should be ________ .
(a) not less than 20% of fund
(b) not less than 25% of fund
(c) not less than 35% of fund
(d) not less than 40% of fund
(e) not less than 50% of fund

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Correct Answer not less than 50% of fund
Answer Explanation

Question29 The Annual value of house property can be computed as - 1. The amount which is accrued
as rent from the house property 2. The amount which is actually earned as rent from
property 3. The amount for which the property might reasonably be expected to be let
from year to year
(a) Only statement 1
(b) Only statement 2
(c) Only statement 3
(d) Both statements 1 and 2
(e) Both statements 2 and 3

Correct Answer Only statement 3

Answer Explanation Sec. 22 to 27 of IT Act deals with income under the head ‘Income from House Property’.
According to this act, the only income that is charged to tax on notional basis would be
amount for which the property might reasonably be expected to be let from year to year.

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Question30 The factor(s) affecting the Gross Value added includes - 1. Total dividend payable for the
year 2. Advertising spend 3. CSR activities
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) All 1 , 2 and 3

Correct Answer Only 1

Answer Explanation GVA is arrived at by deducting the cost of all materials & services from outside suppliers
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from the sales revenue. Total dividend payable for the year is an important element which
effects the GVA calculations.

Question31 As per accounting procedures, the bank reconciliation statement is a part of ______ . 1.
Financial Statement 2. Cash Book 3. Bank Account
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 2 and 3
(e) Neither 1 nor 2 nor 3

Correct Answer Neither 1 nor 2 nor 3

Answer Explanation A bank reconciliation statement is prepared to reconcile any difference that may exist
between the cash book & the pass book. It is none of the stated options i.e. Cash book,
Bank account or Financial statements. It’s an internal exercise done to ascertain any
difference that may exist between the cash book & the pass book for identifying cause of
delay & take remedial action.

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Question32 Arrange these stages of Money Laundering from start to end –

1.Layering
2. Placement
3. Integration
(a) 2,1,3
(b) 3,2,1
(c) 3,1,2
(d) 1,2,3
(e) 2,3,1

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Correct Answer 2,1,3
Answer Explanation The process of money laundering can be broadly classified into three stages. Starting from
Placement, the next stage being Layering & the last is Integration.

Question33 In which type of securities will a money market mutual fund scheme invest in ?
(a) Fixed deposits upto 3 years maturity
(b) Short term securities
(c) Government securities
(d) Both 1 and 2
(e) All the three above

Correct Answer Short term securities

Answer Explanation A money market fund's purpose is to provide investors with a safe place to invest easily
accessible, cash-equivalent assets for a short to very short period - sometimes even for a
day or two. So, they invest in short term securities only.

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Question34 Locate which of the given below statements fall under the 'OVERCASTING' error.
(a) There were bad debts to the tune of Rs 2000 in the ledger. The accountant carried forward
this amount this amount wrongly as Rs 20000 to the trial balance
(b) Kalpesh was supposed to make an entry on the debit side of ledger, but instead made an
entry on the credit side of the correct ledger account
(c) A wrong entry was in the ledger by an accountant of an insurance company. The amount
was wrongly entered as Rs 1000 instead of the correct amount of Rs 2000
(d) Meena sold goods to 4 customers of Rs 5000, Rs 10000, Rs 5000 and Rs 15000 respectively.
She entered the three amounts correctly in the sales day book. However, when she totaled
the months sale, she came to Rs 40000 instead of Rs 35000.
(e) Paresh sold goods to 4 customers of Rs 5000, Rs 10000, Rs 5000 and Rs 15000 respectively.
He entered the three amounts correctly in the sales day book. However, when he totaled
the months sale, he came to Rs 30000 instead of Rs 35000.

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Correct Answer Meena sold goods to 4 customers of Rs 5000, Rs 10000, Rs 5000 and Rs 15000 respectively.
She entered the three amounts correctly in the sales day book. However, when she totaled
the months sale, she came to Rs 40000 instead of Rs 35000.

Answer Explanation The term casting means adding up which affects the agreement of trial balance. This error
may be an error of overcasting or undercasting.
Overcasting arithmetically summing up the total more than the actual or what they are.
Meena totaled the months sale to Rs 40000 instead of Rs 35000, is clear example of
overcasting.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question35 From the options below, which one is a standardized forward contract which is traded on
an organized exchange ?
(a) Delta contract
(b) Forwards contract
(c) Futures contract
(d) Options
(e) Interest Rate swap

Correct Answer Futures contract

Answer Explanation
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Futures contract is a standardized forward contract which is traded on an organized
exchange. Futures contracts are similar to forward contracts, where two parties agree to
buy or sell an underlying asset at a predetermined price on a pre-specified date. The key
difference of a forward contract, which is traded over-the-counter (between two parties
personally), a futures contract is traded on an organized exchange.

Question36 Name the cost which is required to make this non-current asset ready for use -
(a) Building
(b) Land
(c) Installation charges
(d) Vehicles
(e) Computers

Correct Answer Installation charges

Answer Explanation Capital expenditure improves the earning capacity of an asset. Such expenditure renders
an asset to work more efficiently or the asset lasts longer for more than one accounting
period. Cost associated with the installation charges; make these non-current assets ready
for use.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question37 From the given below options which are examples of Participating Policies -
(a) Annuity plans
(b) Children’s deferred insurance
(c) Endowment plans
(d) Both Children’s deferred insurance and Endowment plans
(e) Both Annuity plans and Endowment plans

Correct Answer This pdf will expire in 3 months.

Both Children’s deferred insurance and Endowment plans
Answer Explanation Children’s deferred insurance and Endowment plans are the participating policies of life
insurance. These policies participate in the profits of an insurance company besides giving
the capital benefit.

Question38 While recording the journal entries a sale to Madan for Rs 9100 was recorded as Rs 1900 in
the Madan receivable account and as Rs 9100 in the sales account. This error in recording
this transaction is a type of ______ .
(a) Unintentional error
(b) Transportation error
(c) Wrong carry over
(d) Undercasting error
(e) Overcasting error

Correct Answer Transportation error

Answer Explanation Transportation error is an error under which a transaction is recorded in the books of
prime/ original entry with the figures in wrong sequence as reported in the above case,
resulting in to disagreement in trial balance.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question39 Usually, quite a few policies are un-issued and policy stamps are required to be affixed on
such policies at the end of the year. Which journal entry has to be passed to record this
transaction?
(a) Policy Stamps A/c To Stamps on hand A/c
(b) Outstanding expenses A/c To Policy Stamps A/c
(c) Policy Stamps A/c To Other outstanding expenses A/c
(d) Policy Stamps A/c To cash A/c
(e) Stamps on hand A/c To Policy Stamps A/c

Correct Answer This pdf will expire in 3 months.

Policy Stamps A/c To Other outstanding expenses A/c
Answer Explanation Since at the year end, some policies may be unissued and policy stamps are required to be
affixed on such policies it is necessary to provide for outstanding expenses relating to
policy stamps.
It is done by passing the entry as; Policy Stamps A/c To Other outstanding expenses A/c.

Question40 With regards to 'posting the wrong amount' the most commonly found error pertains to
________ .
(a) Financial error
(b) Posting error
(c) Undercasting error
(d) Transposition error
(e) Principle error

Correct Answer Transposition error

Answer Explanation The most common form for posting the wrong amount is a Transposition Error.
(A transposition error is a simple error of data entry that occurs when two digits that are
either individual or part of a larger sequence of numbers are accidentally reversed
(transposed) when posting a transaction)

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Question41 In order to check the financial position of an organization on a specific date in regards to
what it owns and what it owes one can check its ________ .
(a) Bank Book
(b) Ledger
(c) Sales book
(d) Balance sheet
(e) Journal

Correct Answer Balance sheet

Answer Explanation Balance sheet shows the financial condition / position of an organization on a specific date
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in regards to what it owns and what it owes. It helps in determining the assets & liabilities
at the end of the period.

Question42 From where will the no claim payment be made in a maturity claim of ULIP ?
1. From the discretionary fund
2. From the Unit fund
3. From the Non unit fund
(a) Option 1
(b) Option 2
(c) Option 3
(d) Both Option 2 and 3
(e) Both Option 1 and 2

Correct Answer Option 3

Answer Explanation There are three types of claim payments under ULIP i.e. Death claims, Maturity claims &
Surrender value/ partial withdrawal payment. However, it is important to note that in case
of a maturity claim for a ULIP, no claim payment will be made from Non-unit fund
(Insurance amount) e.g. Premium allocation charges.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question43 One of the main feature of an Unit Linked Pension Plan is ______ .
(a) To give a short term benefit after maturity
(b) To give short term benefit after policy inception
(c) To give one large payment on maturity
(d) As in other policies, here the insurer does not provide a lump sum payment to policy
holder
(e) To have an attractive surrender value

Correct Answer This pdf will expire in 3 months.

As in other policies, here the insurer does not provide a lump sum payment to policy
holder
Answer Explanation The Unit linked pension plans are totally different from other policies in term of their
features & claims payment. Even they are different from other unit link policies. Under the
Unit linked pension plans, insurance company does not provide a lump sum payment to
policy holder as it does in case of other policies.

Question44 The applicability of Prevention of Money Laundering Act (PML Act) covers ________
(a) All Financial Institutions in India
(b) All Stock Exchanges in India
(c) All Banks in India
(d) All Insurance Companies in India
(e) All Private Financial Institutions in India

Correct Answer All Financial Institutions in India

Answer Explanation Anti-money laundering guidelines prevent the anti-social elements from routing funds
through illegal channels for use against public interest. The PMLA guidelines were
introduced on 1st July 2005 & are applicable to all financial institutions as it poses risk to
entire financial system.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question45 When debt securities are transferred to the policy holders account, this is done at ______ .
(a) Weighted Average Price
(b) Cost Price
(c) Market Price
(d) Cost price or market price, whichever is lower
(e) Net amortized cost

Correct Answer Cost price or market price, whichever is lower

Answer Explanation
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This aspect of activity falls under segment reporting & as per AS -18, transfer of debt
securities to the policy holders account is done at cost price or market price, whichever is
lower.

Question46 From the options listed below, which accounting standards are not applicable to General
Insurance companies?
(a) Accounting for investments
(b) Accounting for borrowing costs.
(c) Accounting for Government grants
(d) All of the above
(e) None of the above

Correct Answer Accounting for investments

Answer Explanation The Institute of Chartered Accountants of India has set up an Accounting Standard Board to
formulate Accounting Standards. For insurance companies, compliance with accounting
standards issued by ICAI is mandatory. However, Accounting for investments is mandatory
for all companies other than general insurance companies.

WWW.TOP4SURE.IN IC 26 – LIFE INSURANCE FINANCE

Question47 Which of these is/are a function or power of IRDAI?

1. IRDA guarantees very good returns on insurance policies
2. Promote healthy competition in the insurance sector
3. Control and regulate the rates, advantages, terms and conditions that may be offered by
insurers
(a) Only 1
(b) Only 2
(c) Only 3
(d) Both 1 and 2
(e) Both 2 and 3

Correct Answer This pdf will expire in 3 months.

Only 3
Answer Explanation Government of India has constituted an authority called IRDAI under The IRDAI Act 1999. It
states its powers and functions which include control and regulation of the rates,
advantages, terms and conditions that may be offered by insurers in respect of general
insurance business which is not controlled by TAC.

Question48 What does the cash flow from investment activities include?
(a) It includes cash payments to acquire share
(b) It includes repayment of policy loan from policy holders
(c) It includes claim receipt from reinsurers
(d) It includes other income generated through policy holders
(e) It includes receipt of premium from policy holders

Correct Answer It includes cash payments to acquire share

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Question49 The item which will appear as cash outflow in a cash budget is________ .
(a) Revaluation of assets
(b) Depreciation of assets
(c) Coinsurance payments
(d) Collection of reinsurer
(e) Fresh issue of share capital

Correct Answer Coinsurance payments

Answer Explanation Fresh issue of share capital & collection of reinsurer is inflow. Similarly, revaluation &
depreciation of assets is not a cash flow at all.
Coinsurance payments will appear as cash outflow under the head; payment to
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intermediaries for processing business & allied expense.

Question50 Locate which out of the following is an error of omission?

1. XYZ Ltd. sold goods to Mak for Rs 6300 but omitted to record the transaction in both the
sales day book and the debtor’s ledger
2. XYZ Ltd. sold goods to Mak for Rs 1200 and recorded this in the sales day book. However
instead of debiting the amount to Mak’s account, it was debited to Harrys account
3. Purchase amount debited instead of Asset account
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Only statement 3 is correct
(d) Both statements 1 and 2 are correct
(e) Both statements 2 and 3 are correct

Correct Answer Only statement 1 is correct

Answer Explanation Under Error of Omission, a transaction is completely omitted in the financial records. Since
transaction is completely omitted (neither credit nor debit is recorded), there cannot be
difference in the trial balance.

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