AFD – Post-Midterm Practice Questions – FA

For end term, do practice problems. Summarize key learnings from each chapter and learn
to apply to HUL Report.
Long term assets chapter 6
1. Sale of assets (question I had asked in the class as well)
Sale of Assets
Based on the following Information on Buildings Account, compute the missing amounts in the
two tables. Compute the Gain / Loss on sale of buildings if cash proceeds from sale of Buildings
equaled 75,000.
Buildings, Gross Cost:

Beginning Balance Additions Disposals Ending balance

1,764,623 596,088 X 2,288,200

Buildings, Accumulated Depreciation:

Beginning Balance Additions Disposals Ending balance
226,533 Y 1,812 283,954

Solution
1. Answer: 1,764,623 + 596,088 – X = 2,288,200; X = Cost of Buildings Disposed = 72,511
226,533 + Y – 1,812 = 283,954; Y = Depreciation Expense = 59,233.

Cost of Buildings Disposed – Accumulated Depreciation on Buildings Disposed =

72,511 – 1,812 = 70,699

Gain on sale of buildings = 75,000 – 70,699 = 4,301.

Chapter 7 ( Less Probable not part of end term, but you should be clear)

Data on sales, receivables, and allowances for credit losses for the last three years:

Item 2019 2020 2021

Net Trade Receivables( Closing) 420.45 311.55 366
Allowance for credit
Losses( Closing) 11.76 8.75 9
Sales 19,778 21,051 21,644
Bad Debt Expense 4.55 2.82 35

Assume all sales are on credit and there are no cash advances from customers. Opening Net
Trade Receivable for 2019 was 29,479 and Opening Allowance for Credit Losses for 2019 was
1,186. Compute the following for 2020 and 2021:

a. Bad Debt Written off 

b. Cash collections from customers 
c. Based on the write-offs in 2021 from part (a), comment on the company’s bad debt
expense policy. (1M)

Try on your own. Not for exam. But conceptually you should be clear

Chapter 8 Operating Liabilities

Read /Calculate warranty liability including Journal Entry not difficult

Ch 9 : Nothing much
Various types of Loans : Terminology may be used in other places

Ch 11: Do solve : 11.2 11

Calculation of EPS (bit tough, treat it as independent situations for options)

Ruskin Ltd., a profit-making company, has a paid-up capital of Rs. 100 lakhs consisting of 10
lakhs ordinary shares of Rs. 10 each. Currently, it is earning an annual pre-tax profit of Rs. 60
lakhs. The company’s shares are listed and are quoted in the range of Rs. 50 to 80.
The management wants to diversify production and has approved a project which will cost Rs.
50 lakhs and which is expected to yield a pre-tax income of Rs. 40 lakhs per annum. To raise this
additional capital, the following options are under consideration by the management:
(i) To issue equity share capital for the entire additional amount. It is expected that the new
shares (face value of Rs. 10) can be sold at a premium of Rs. 15.
(ii) To borrow at 16% the entire amount.
(iii) To issue equity capital for Rs. 25 lakhs (face value of Rs. 10) and borrow at 16% for the
balance amount. In this case, the company can issue shares at a premium of Rs. 40 each.

Advise the management as to how the additional capital can be raised, keeping in mind that the
management wants to maximise the earnings per share. The company pays income tax at 50%.

[Answer: Option I: Rs. 4.17, Option II: 4.60, Option III:

4.57]

Impact of transactions on EPS and other equity : 2021 question

Company has Equity as follows
Share capital (10000 Shares of FV Rs. 10) 1,00,000
Other Equity
Retained Earnings 5,55,000
Securities Premium 120,000
OCI 20,000
General Reserve 2,12,000
-------------
Total 10,07,000
Borrowings 200,000
The market Price of the Share on the record date was Rs. 80 and the
EPS was Rs. 8 per share.
The Company has decided to simultaneously do the following
(a) Stock Split to Face Value of Rs. 5
(b) Issue a Bonus Shares of 1:1 after the split
Required:
After (a) and (b) above calculate the following
i. Share Capital
ii. Other Equity
iii. Write the Journal entry for issue of Bonus Shares
iv. What would be the impact (increase/decrease/no change) of (a) and (b) on the
I. Market Price of the stock 2. Cash Balance 3. Debt Equity Ratio 4. EPS]

Chapter 12 : Ratios
Consider the following information related to three clothing retailers:

Item GAP Spiegel J. Crew

Days Inventory 73 108.2 93.9

Debt Collection Period 0 90.2 0

Days Payable 43.8 116.5 49.6

Current Ratio 2.11 0.74 1.32

Do any of these companies appear to have a short-term liquidity problem? Explain in 2-3
sentences.
Spiegel appears to have liquidity problems. Spiegel’s current ratio is less than 1. Its cash conversion cycle
is the longest of the three companies = 90.2 + 108.2 – 116.5 = 81.9 days.

1. Daley Inc. is consistently profitable. Its normal financial statement ratios are as follows:
 Current Ratio 3 to 1
Inventory Turnover 4 times
Total Liabilities to Total Assets 0.5 to 1
Determine whether each of the following transactions or events increased, decreased, or had no
effect on each of the three ratios:

(a) Daley declared dividend in AGM but did not pay it yet.
(b) Accounts Payable were paid at year end; and
(c) Customers returned invoiced goods for which they had not paid. Daley made a profit on its
sales. Assume perpetual inventory method.

(a) This transaction would decrease the current ratio, have no effect on the inventory turnover ratio,
and increase the total liabilities/total asset ratio. Daley’s current liabilities are increased by the
declaration of a cash dividend. Declaration means a dividend is proposed but not paid.
(b) The payment of accounts payable would increase the current ratio, have no effect on inventory
turnover ratio, and decrease the total liabilities/total asset ratio.
(c) If customers returned invoiced goods for which they had not paid, Daley’s current ratio and
inventory turnover would decrease, and the total liabilities/total asset ratio would increase.

2. Consider the following information for ABC Co:

2022 2021 2020
Sales 5,970 5,650 5,179
Cost of Goods Sold 3,193 3,038 2,806
Average Inventory 406 380 415
a. Compute the inventory turnover for each year.
b. What was the average number of days that inventories were held in each year.
c. How well has the retailer managed its inventories over the three years?

2022 2021 2020

Sales 5,970 5,650 5,179
Cost of Goods Sold 3,193 3,038 2,806
Average Inventory 406 380 415
Inventory Turnover 7.86 7.99 6.76
Days Inventory 46.4 45.7 54.0
COGS/Sales 53.5 53.8% 54.2%

The company experienced an increasing inventory turnover between 2020 and 2021. The company’s
product might have received rapid market acceptance, so it was able to move its products quickly. Further
the COGS/Sales shows that these sales were at higher gross margin. In 2022, COGS/Sales declined
further – gross margin improved, but its inventory turnover declined. Perhaps the company increased its
inventory in 2022 anticipating higher sales which did not occur. The unsold inventory resulted ina lower
inventory turnover.

Question: Information for two retailers appears below. One is a discount clothes retailer that
offers very low prices and the other is a boutique retailer sells branded clothing to a niche
segment. Income tax rate is 35%. Indicate which of these companies is the discount retailer and
which is the boutique retailer.

A B
Sales 3,750 6,834
Interest Expense 1 17
Net Profit 476 243
Average Total Assets 2,458 2,574

Solution
A B
Sales 3,750 6,834
Interest Expense 1 17
Net Profit 476 243
Average Total Assets 2,458 2,574
Profit Margin 13% 4%

Asset Turnover 1.53 2.66

Company A that has the higher margin and lower asset turnover must be the boutique retailer (product
differentiator) and company B with the lower margin and higher turnover must be the discount retailer
(cost leader).

Chapter 13
Do solve: 13-1, 13-4, only indirect method 13-2, 13-10 and 11

2. The following items appear in the financial statement of Berger Paints (amounts in
thousands):

Sales 14,600
Depreciation (210)
Income Taxes (200)
Other Expenses (13,900)
Net profit 290
 Accounts Receivable Decrease 780
Inventories Decrease 80
Prepaid Expense Decrease 100
Accounts Payable Increase 90
Other Current Liabilities Decrease 240

a. Compute Cash flow from operations based on the given information and state your
assumptions ***
b. Why did cash from operations exceed net profit? Discuss the major reasons.

We make an assumption that tax paid and liability are same

Net Profit before tax 490
Additions:
Depreciation 210
Decrease in A/R 780
Decrease in Inventories 80
Decrease in Prepaid Expenses 100
Increase in Accounts Payable 90
Subtractions:
Decrease in Other Current Liabilities -240
Cash Flow from Operations 1,510
Less: Direct Tax paid 200
Cash flow from operating activities 1310
Berger decreased its non-cash current assets particularly A/R generating positive cash flows. Although it
repaid other current liabilities, the reduction in A/R dominated and caused cash from operations to exceed
net profit.

3. Chill Airlines reported a decrease of wages payable on its cash flow statement of $21
million. Cash paid to employees as salaries and wages for the year were $8,853 million.
Compute the wages and salaries expense for the year.

Solution
Cash payments for Wages and salaries 8,853
Less: Decrease in Wages and salaries payable -21
Wages and Salaries expense 8,832

4. For the year 2008, Dumas Company’s Gross profit was Rs. 96,000; the cost of goods
manufactured was Rs. 340,000; the beginning inventories of Work in Process and
Finished Goods were Rs. 28,000 and Rs. 45,000, respectively; and the ending inventories
of work in process and finished goods were Rs. 38,000 and Rs. 52,000, respectively.
What was the sales for 2008?
To find Dumas’ sales for 2008, we need to first look at the finished goods inventory T-account:

We solve for cost of goods sold as follows:

Rs. 45,000 + Rs. 340,000 - X = Rs. 52,000
X = Rs. 333,000

Now that we know cost of goods sold, we can solve for sales using this figure and the gross profit amount
given.
Gross profit is the difference between sales revenue and cost of goods sold. To find sales, we need only
add cost of goods sold to gross profit.

Sales in 2001 would be:

Rs. 333,000 + Rs. 96,000 = Rs. 429,000
Note: Data on Work in process Inventories is irrelevant to the solution.

3. Assume that Franks Co has changed its shares outstanding for the year 31 st Dec 2021 as follows:

January 1 Beginning Balance 90,000

April 1 Issued 30,000 shares
July 1 Repurchased 39,000 shares
November 1 Issued 60,000 shares
December 31 Ending Balance 141,000
Computed the weighted average shares outstanding for 2021
Solution:

Since there are many issues and 1 buy back we use step approach till each date

90,000 × (3/12) + 120,000 × (3/12) + 81,000 × (4/12) + 141,000 × (2/12) = 103,000.