A-AS Level (CIE) Accounting Paper-3: Specimen Questions with Answers 30 - 31 of 50

Question 30

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Question

MCQ▾

Which of the following is not a limitation of ratio analysis?

Choices

Choice (4)
a.Difference in types of stock
b.Difference in experience
c.Difference in firm’s policy
d.Comparison with other firms

Answer

d.

Explanation

Accounting statements and ratio analysis shows important information about the performance of a business but it’s also important to remember, however that they do have limitations. The comparison of a firm’s performance with other firms or previous year’s performance should be taken with care due to the following reasons:

  • Difference in the type of stock which affects the rate of stock turnover and the gross profit margin.
  • Difference in the policy of firm’s as some firms are sell on cash basis as well as on credit terms. Others do not use the same policy.
  • Difference in experience because some firms may not operate profitably in their early years of trading, but this should not necessarily be the case expected in future years
  • Difference in management: Because small firms such as a sole trader are not expected to use an efficient manager as well as large firms.

Question 31

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Question

MCQ▾

Redeemable Preference Share is

Choices

Choice (4)
a.Current assets
b.Non-current liability
c.Current liability
d.Non-current assets

Answer

b.

Explanation

Company is not allowed to return to its shareholders the share money without the permission of court.

The conditions which have bearing on the accounting treatment are as under:

  • Such shares can be redeemed either out of the profits of the company which could otherwise be available for dividend
  • Out of the proceeds of a fresh issue of shares made for the purpose of redemption. “Capital redemption reserve account” consist of the number of shares redeemed out of profits.
  • No such shares be redeemed unless they are fully paid. If shares are redeemable at premium, then such premium must be provided for out of the profits of the company or out of the company’s share premium account. Capital redemption reserve account is available only for declaring fully paid bonus shares.

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