Civil Services Preparatory School – CSPs

Mock Exam CSS 2025

Accountancy and Auditing Paper-I

PART-I(MCQS): MAXIMUM 30 PART-I (MCQS) MAXIMUM MARKS =20

MINUTES PART-II MAXIMUM MARKS =80

NOTE: (i) First attempt PART-I (MCQ) on separate Answer Sheet which shall be taken back after 30 minutes. (ii)
Overwriting/cutting of the options/answers will not be given credit.

1. A company's beginning inventory was overstated by $3,000, now ending inventory is understated by $2,000. If
purchases were properly reported, then earnings before taxes will be:
A) Overstated by $5,000. C) understated by $1,000.
B) understated by $5,000. D) overstated by $1,000.
2. Slovac Company purchased a machine that has an estimated useful life of eight years for $7,500. Its salvage
value is estimated at $500. What is the depreciation expense for the second year, assuming Slovac uses the double-
declining balance method of depreciation?
A) $1,438. C) $1,406.
B) $1,875. D) $3,750.
3. Which of the following statements about inventory is most accurate?
A) Generally accepted accounting principles (GAAP) requires the use of higher of cost or market value for inventory.
LIFO will provide the most useful estimate of inventory value and FIFO will provide the most useful estimate of the cost of
B)
goods sold.
C) First in first out (FIFO) accounting, in times of falling prices, will tend to overstate reported profit margins.
In periods of rising prices, when converting the income statement from last in first out (LIFO) to first in first out (FIFO), net
D)
income will rise if there is no LIFO liquidation during the period.
4. A last in, first out (LIFO) liquidation in an environment of rising prices will NOT do which of the following?
A) Increase gross income. C) Reduce inventory value.
B) Increase taxable income. D) Increase cost of goods sold (COGS).
5. Formika Company recently purchased Palmer Inc. for $5 million. The sum of the individual assets for Palmer
Inc. was determined to be $4.5 million, so Formika recorded the $500,000 difference as goodwill on the asset side of
its balance sheet. Which of the following describes the proper accounting treatment for goodwill?
A) Amortize goodwill over the lesser of its useful life or 40 years.
Compare the carrying value of goodwill to its fair market value on an annual basis and adjust owner’s equity if the carrying value
B)
is less than fair market value.
C) Deplete goodwill on a per unit basis as it is used in the company’s operations.
Compare the carrying value of goodwill to its fair market value on an annual basis and report an impairment charge on the income
D)
statement if the carrying value is greater than fair market value.
6. Ironman Nutrition has traditionally followed a conservative policy of expensing most costs. However, the new
CFO is an advocate of capitalization. During a meeting with company executives he explains that compared to
expensing, capitalization is least likely to result in:
A) Higher net cash flows. C) Lower debt to equity ratio.
B) Lower income variability. D) Greater initial return on assets.
7. If a company is focusing on achieving the highest return on assets (ROA) and return on equity (ROE) possible,
which type of depreciation method should be used?
A) Straight Line. C) Sum of year's digits.
B) Accelerated depreciation. D) Double declining balance.
8. Which of the following would be subject to depletion?
A) Mineral rights. B) Goodwill. C) Patent. D) Trademarks.
9. When comparing capitalizing versus expensing costs which of the following statements is most accurate?
A) Expensing costs creates lower cash flows from operations and lower cash flows from investing.
B) Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.
C) Capitalizing costs creates lower cash flows from operations and higher cash flows from investing.
D) None of these
10. Which of the following statements regarding capitalizing versus expensing costs is least accurate?
A) Capitalization results in higher profitability initially.
B) Total cash flow is higher with capitalization than expensing.
C) Cash flow from investing is higher with expensing than with capitalization.
D) None of these
11) Allocating an intangible asset’s cost to the income statement over time is known as
A) depreciation. B depletion C) amortization D) none of these
12) Intangible assets with finite useful lives are:
A) Amortized over their actual lives.
B) Not amortized, but are tested for impairment at least annually.
C) Amortized over their expected useful lives.
D) None of these
13) Under U.S. GAAP, an asset is impaired when:
A) The firm can no longer fully recover the carrying amount of the asset.
B) accumulated depreciation plus salvage value exceeds acquisition costs.
C) The present value of future cash flows exceeds the carrying amount of the asset.
D) None of these
14) An impairment write-down is least likely to decrease a company's:
A) debt-to-equity ratio. B) assets. C) future depreciation expense D) None of these
15) Interest Expense shown on Income Statement related to bond is based on
A) Current market rate B) Market rate at issuance C) Coupon Payment D) Unamortized Discount
16) When a firm records a lease as a capital lease:
A) Its working capital increases.
B) Its current ratio decreases.
C) Its debt-to-asset ratio increases.
D) Its financial leverage ratio decreases
17) In a given period, the firm's beginning gross investment is 4,000 and ending gross investment is 12,000. The
accumulated depreciation at the beginning was 800 and the ending balance in this account was 900. The firm uses
straight-line depreciation. The average age of the firm's assets at the end of the period is ________.
A) 5 years B) 13.3 years C) 9 years D) 15 years
18) Compared to conventional bon, a convertible bond will have
A) Lower Interest Cost B) Higher Interest Cost C) Both have Equal Cost D) None of these
19) A perpetual Debt will be treated as
A) Equity
B) Debt
C) Have characteristics of both so decide based on the characteristic to treat as Equity or Debt
D) None of these
20) A change in accounting method
A) Change in accounting estimate
B) Change in accounting principle
C) Not allowed in US GAAP
D) None of these
 PART-II
SECTION-A

Q1: Celebrity Company closes its accounts and prepares financial statements at the end of each calendar year; the following adjusted
trial balance was prepared at December 31 of the most recent year.
Trial Balance December 31, 2013
Heads Debits Credits

Sundry debtors 16000

Sundry creditors 22600
Administration and general expenses 31500
Bad debts 1200
Motor vehicle 120000
Accumulated depreciation motor vehicle 27000
Printing and stationery 8600
Advertisement 6000
Insurance 2000
Postage and telephone 1800
Salaries 86000
Vehicle expenses 13400
Rent and taxes 21000
Utilities expenses 42000
Share capital 123600
Purchases 311000
Sales 541000
Stock on 1-1-2013 40200
Cash and bank balances 13500

741200 741200

Additional information:
1. Rs. 2100 was payable for repair of motor vehicle
2. A provision for bad debts is to be created to the extent of 2.5%
3. Depreciation is charged on motor vehicle under WDV @ 20%
4. Stock on December 31st, 2013 was Rs 48,600 (NRV was Rs. 45,000)
Required:
I. Pass the adjusting entires
II. Prepare adjusted trail balance
III. Profit and loss statement and statement of financial position as at December 31 st, 2013

Q2: Ali and Bashir are chartered accountants and have been working as Managing Director (MD) and Chief Financial Officer (CFO)
in a listed company. In a recent meeting of the Board, the directors have decided to expand the business within six months by opening
20 retail outlets. This expansion would require financing of Rs. 300 million which may be arranged through bank loan.
The following information has been extracted from latest draft financial statements of the company:
Rs. in ‘000
Sales 1,700
Gross profit 545
Tax expense 23
Profit after tax 40
Total assets 2,500
Non-current assets 900
Inventories 850
Trade receivables 600
Share capital 800
Reserves 152
Long term debt @ 9% 750
Following additional information is also available:
1. 80% of the sales are on credit.
2. Opening inventory was Rs. 100 million.
3. 40% of current liabilities comprise of trade payables.
MD has advised the CFO to arrange the loan from MN Bank. He has also informed that the President of the bank is his good friend
and the loan can be arranged on a fast track basis at a mark-up of 15% per annum, subject to the following conditions:
1. current ratio and quick ratio should be at least 2:1 and 1:1 respectively;
2. gearing ratio should not exceed 40%; and
3. Interest cover should be at least 3.
CFO is not comfortable with this deal as the mark-up offered by the bank is much higher than the rate on the existing loan and it is
difficult for the company to meet the gearing requirements of the bank. However, MD has asked him to make certain changes in the
draft financial statements before submission to the bank; which according to the CFO are not in accordance with the IFRSs.
Required: (a) Compute liquidity, working capital and debt ratios of the company.
(b) What Are The Major Constraints On Relevant And Reliable Financial Statements?

Q3: Computation of Depreciation Expense

Limestone Construction purchased a concrete mixer on July 15, 2011. Company officials revealed the following information regarding
this asset and its acquisition:
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210 ,000
Residual value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . $20,000
Estimated useful life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 years
Estimated service hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . 50,000
Estimated production in units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000
The concrete mixer was operated by construction crews in 2011 for a total of 6,500 hours, and it produced 49,500 yards of concrete. It
is company policy to take a half-year’s depreciation on all assets for which it used the straight-line or double-declining-balance
depreciation method in the year of purchase.
Calculate the resulting depreciation expense for 2011 under each of the following methods, and specify which method allows the
greatest depreciation expense.
1. Double-declining-balance
2. Productive-output
3. Straight-line

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

Rupees

Sales 22,500,000

Less: Variable expenses 13,500,000

Contribution margin 9,000,000

Less: Fixed expenses 6,300,000

Net income 2,700,000

Required:

a. Compute the break-even point in rupees and the margin of safety.

b. What would be the contribution margin ratio and the break-even point in number of units if variable cost increases by Rs. 600 per
unit? Also compute the selling price per unit if the company wishes to maintain the contribution margin ratio achieved during the
previous year.
c. The company is also considering the acquisition of a new automated plant. This would result in the reduction of variable costs by
50% of the amount computed in (b) above whereas the fixed expenses will increase by 100%. If the new plant is acquired, how
many units will have to be sold next year to earn net income of Rs. 3,150,000.

Q5: A company’s Department 2 costs for June were:

Cost from Department 1 Rs.16320
Cost added in Department 2:
Materials Rs.43,415
Labor 56,100
Factory overhead (FOH) 58,575
The quantity schedule shows 12,000 units were received during the month from Department 1; 7,000 units were transferred to finished
goods; and 5,000 units in process at the end of June were 50% complete as to materials cost and 25% complete as to conversion cost.

Required: Prepare Cost of production report.

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

Opening stock nil

Production (units) 15,000

Sales (units) 10,000

Sales price per unit Rs.20

Unit cost:

Direct Material Rs.8

Direct labor 4

Variable production overhead 2

Variable sales overhead 2

Fixed costs for the month:

Production costs Rs.40,000

Administration costs 15,000

Sales and distribution costs 25,000

Required: Using marginal costing and direct costing calculate the profit. Also compute the value of stock.

Q7: The cordless phone manufacturing division of a consumer electronics company uses activity-based accounting. For simplicity,
assume that its accountants have identified only the following three activities and related cost drivers for manufacturing overhead:

ACTIVITY COST DRIVER

Materials handling direct materials cost
Engineering Engineering change orders
Power Kilowatt hours

Three types of cordless phones are produced: SA2, SA5, and SA9. Direct costs and cost-driver activity for each product for a recent
month are:
SA2 SA5 SA9
Direct materials cost Rs.25,000 Rs.50,000 Rs.125,000
Direct labour cost Rs.4,000 Rs.1,000 Rs.3,000
Kilowatt hours 50,000 200,000 150,000
Engineering change orders 13 5 2

Manufacturing overhead for the month was;

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

Required:
a. Compute the manufacturing overhead allocated to each product with the activity-based accounting system.

b. Suppose all manufacturing overhead costs have been allocated to products in proportion to their direct labour costs. Compute
the manufacturing overhead allocated to each product.
c. In which product costs—those in requirement 1 or those in requirement 2—do you have the most confidence? Why?