Business Data Management · Quiz 2 · May 2026

**1. Distinguish capital profits from operating profits:** A capital reserve is an equity reserve associated with capital profits or specified capital transactions, rather than the recurring profit from ordinary trading. A general reserve set aside from operating earnings is a different category. **2. Match the introductory example:** Among the options, a gain from a non-routine sale of land is the intended example of a capital profit. Amounts owed to suppliers are liabilities, and cash in a register is an asset; neither is a reserve. **Answer: D — profit from a non-regular capital activity, such as selling land.** **Convention note:** This follows the paper’s introductory capital-profit terminology. A disposal gain is not automatically credited to a capital reserve in current financial reporting: AS 10 generally recognizes the gain or loss on disposal of property, plant and equipment in profit or loss. Creating a reserve is a separate accounting matter. A: **Incorrect:** Amounts owed to suppliers are trade payables, a liability. B: **Incorrect:** Cash is an asset, not a capital reserve. C: **Incorrect:** A general reserve from regular operations is a revenue reserve. D: **Correct:** This is the intended capital-profit example among the supplied alternatives.

**1. Identify what is acquired:** The coffee-bean machine is equipment, so assets increase by ₹10,000. Buying on credit means cash is not paid immediately. **2. Identify the financing:** The business owes the supplier ₹10,000, increasing accounts payable, a liability. The entry is a debit to Equipment and a credit to Accounts Payable. **3. Check the equation:** In \(Assets=Liabilities+Equity\), both assets and liabilities rise by the same ₹10,000, while equity is unchanged. Acquiring equipment is not an immediate ₹10,000 expense. **Answer: D — assets increase and liabilities increase.** A: **Incorrect:** There is no owner contribution or profit increasing equity in this purchase. B: **Incorrect:** The purchase creates a payable but does not reduce equity immediately. C: **Incorrect:** This would describe a cash purchase; the stated purchase is on credit. D: **Correct:** Equipment and accounts payable each increase by ₹10,000.

**1. Define an account by its subject:** An account collects increases, decreases and the resulting balance for one particular item, such as Cash, Sales, Equipment or a supplier payable. It summarizes all transactions affecting that item. **2. Distinguish the chronological record:** A journal records transactions in date order. Posting those entries to individual ledger accounts makes it possible to determine each item’s balance; an account is not a diary of every business event. **Answer: A — a specialized record of transactions related to a specific item.** A: **Correct:** This is precisely the item-specific tracking and summarizing role of an account. B: **Incorrect:** A chronological transaction record describes the journal rather than an individual account. C: **Incorrect:** An account is an internal accounting record, not necessarily a tax filing. D: **Incorrect:** Brand valuation rules do not define an account.

**1. Identify resources and claims:** Assets are the business’s resources. Creditors’ claims are liabilities, and owners’ residual claim is equity. **2. Write the equality:** \[Assets=Liabilities+Equity.\] Equivalently, \(Equity=Assets-Liabilities\) and \(Liabilities=Assets-Equity\). For example, assets 100 financed by debt 40 leave owners’ equity 60. **Answer: D — Assets = Liabilities + Equity.** A: **Incorrect:** Liabilities equal assets minus equity, not their sum. B: **Incorrect:** Adding liabilities to assets double-counts the creditors’ financing rather than isolating equity. C: **Incorrect:** The subtraction order is reversed; equity is assets minus liabilities. D: **Correct:** This balances all resources against creditors’ and owners’ claims.

**1. Use the gross-profit definition:** \(Gross\ Profit=Net\ Sales-Cost\ of\ Goods\ Sold\). It measures trading performance before operating expenses and other later income-statement charges. **2. Locate the traditional account section:** In the Trading and Profit & Loss Account format used by this question, the Trading Account calculates gross profit. The Profit & Loss section then begins with gross profit and deducts other expenses to reach net profit. **Answer: C — the Trading Account section of the Income Statement.** **Convention note:** Modern statement formats may present gross profit directly within a single profit-and-loss statement without a separately titled Trading Account. The answer uses the traditional format specified by the options. A: **Incorrect:** In the traditional two-section format, this later section derives net profit from gross profit. B: **Incorrect:** The balance sheet reports assets and claims at a date, not gross profit for a period. C: **Correct:** The Trading Account matches sales against cost of goods sold to derive gross profit. D: **Incorrect:** Operating cash flow measures cash movement and is not the gross-profit calculation.

**1. Recall what the ratio measures:** \(Debtors\ Turnover=Net\ Credit\ Sales/Average\ Trade\ Receivables\). More turnovers generally mean receivables are collected more frequently relative to sales. **2. Translate into collection time:** Using a 365-day year, 6 turnovers imply about \(365/6=60.8\) collection days, whereas 10 imply \(365/10=36.5\) days. The implied collection period falls by roughly 24.3 days. **3. State the likely operational implication:** The firm is converting credit sales into cash more efficiently, assuming comparable measurement and business conditions. The ratio alone does not prove the reason for the change. **Answer: A — improved efficiency in converting credit sales into cash.** A: **Correct:** The higher turnover corresponds to a shorter implied collection period. B: **Incorrect:** Extending collection terms generally raises receivables and tends to reduce turnover, all else equal. C: **Incorrect:** The implied collection period decreases rather than increases. D: **Incorrect:** Falling credit sales with unchanged debtors would reduce the ratio.

**1. Recognize the receivable from the original sale:** Supplying the burger on credit initially records revenue and an amount due from the customer. The promised future payment is an asset, not a payment made in advance by the shop. **2. Remove an uncollectible asset:** Once the debt is judged unrecoverable, the receivable is written off. In the simplified direct-write-off treatment, debit Bad Debts Expense and credit Accounts Receivable for the amount owed. **3. Identify the effect:** The loss reduces the business’s assets and profit/equity; it does not create a capital reserve or a liability. **Answer: B — a write-off treated as a bad-debt expense.** **Convention note:** Under an allowance/expected-credit-loss approach, the expense may have been recognized earlier; the final write-off is then charged against the allowance. The option describes the introductory direct-write-off treatment. A: **Incorrect:** A prepaid expense arises from paying for a future benefit, not from a customer failing to pay. B: **Correct:** The irrecoverable receivable is written off as a bad-debt loss under the simplified treatment. C: **Incorrect:** An uncollectible customer debt is a loss rather than a capital profit. D: **Incorrect:** The customer owes the shop; the shop has not incurred a long-term obligation.

**1. Allocate historical cost to the portion sold:** The original land cost is ₹200,000. Selling exactly half means the cost attributable to that half is \(200000/2=100000\). Land is not depreciated in this simplified example. **2. Calculate the realized gain:** Sale proceeds for that half are ₹600,000, so \[Gain=600000-100000=500000.\] **3. Exclude the unsold portion’s unrealized appreciation:** The current market value does not replace the original cost under the stated cost principle. The remaining half retains cost ₹100,000, and its market appreciation is not part of the gain on the half sold. **Answer: A — ₹500,000.** **Convention note:** The amount is the realized disposal gain. The question calls it “Capital Reserve” profit under its simplified terminology; AS 10 generally records a PPE disposal gain in profit or loss rather than automatically transferring it to a capital reserve. A: **Correct:** This is ₹600,000 proceeds less ₹100,000 historical cost of the half sold. B: **Incorrect:** This value has no relation to the stated proceeds and allocated cost. C: **Incorrect:** This subtracts the full original cost rather than the half attributable to the sale. D: **Incorrect:** This is the appreciation of the whole plot, including land that has not been sold.

**1. Calculate gross profit:** Subtract cost of goods sold from sales: \(1000000-400000=600000\). This is before operating expenses and depreciation. **2. Deduct all stated operating charges:** EBIT includes depreciation as an expense. Therefore \[EBIT=1000000-400000-300000-50000=250000.\] **3. Distinguish EBIT from EBITDA:** The subtotal before depreciation is ₹300,000; after the separate ₹50,000 depreciation charge, operating income is ₹250,000. No interest or tax is deducted when calculating EBIT. **Answer: B — ₹250,000.** A: **Incorrect:** ₹600,000 is gross profit, before operating expenses and depreciation. B: **Correct:** Deducting COGS, operating expenses and depreciation gives this amount. C: **Incorrect:** No additional ₹20,000 expense is stated to produce this figure. D: **Incorrect:** This omits the separately listed ₹50,000 depreciation expense.

**1. Assign cash-flow signs:** Purchasing equipment uses cash, so it contributes −₹100,000 to investing activities. Selling land receives cash, contributing +₹40,000. **2. Net the two amounts:** \(Net\ Investing\ Cash\ Flow=-100000+40000=-60000\). Parentheses indicate a cash outflow, so the correct presentation is ₹(60,000). **Answer: B — ₹(60,000).** A: **Incorrect:** This adds the magnitudes and ignores their opposite directions. B: **Correct:** The net is a ₹60,000 investing cash outflow. C: **Incorrect:** The magnitude is right, but a positive sign would incorrectly describe an inflow. D: **Incorrect:** This treats the land sale as an outflow instead of an inflow.

**1. Define the cost-flow assumption:** FIFO means First-In, First-Out. The earliest purchased units’ costs are assigned to cost of goods sold before costs of later purchases. **2. Infer the ending inventory:** The costs left in inventory are therefore generally the more recent purchase costs. This is an accounting cost-flow assumption and need not describe the exact physical movement of each item. **Answer: A — the oldest inventory costs are assigned to goods sold first.** A: **Correct:** FIFO charges the oldest available cost layers to sales first. B: **Incorrect:** FIFO is based on historical cost layers, not automatic replacement-cost revaluation. C: **Incorrect:** This describes a weighted-average cost approach. D: **Incorrect:** This describes Last-In, First-Out rather than FIFO.

**1. Match the ratio to the lender’s question:** A lender wants to know how well earnings cover interest payments. The standard interest coverage ratio is \(ICR=EBIT/Interest\ Expense\), measuring the multiple of interest covered by earnings before interest and tax. **2. Explain why net profit alone is insufficient:** Net profit is already after interest and tax and is an absolute amount, so it does not directly compare available operating earnings with the size of the interest obligation. For example, EBIT 100 and interest 20 gives coverage of 5 times. **3. Choose the closest option:** B expresses the intended ability-to-service-interest rationale. Its word “liquidity” is imprecise: EBIT coverage is an earnings-based solvency measure, not a direct cash-flow or cash-balance measure. **Answer: B — B — it specifically assesses interest-servicing capacity.** **Convention note:** The standard EBIT/interest formulation is used here. Some analysts also report EBITDA-based coverage, but it is a separately defined variant and should not be confused with conventional times-interest-earned. A: **Incorrect:** Non-operating income is not categorically unusable for paying interest, so this absolute claim is false. B: **Correct:** This is the intended debt-servicing rationale, interpreted as coverage from operating earnings rather than literal liquidity. C: **Incorrect:** An amount of net profit and a dimensionless coverage ratio cannot be compared this way. D: **Incorrect:** Standard ICR uses EBIT, which has already deducted depreciation; it does not exclude that expense.

**1. Remove inventory from current assets:** Quick assets exclude inventory because selling it may take time. With no other exclusions stated, quick assets are \(133-80=53\). **2. Divide by current liabilities:** \[Quick\ Ratio=\frac{Current\ Assets-Inventory}{Current\ Liabilities}=\frac{53}{100}=0.53:1.\] **3. Interpret the result:** The firm has ₹0.53 of quick assets per ₹1 of current liabilities. The larger ratio 133/100=1.33 is the current ratio, not the quick ratio. **Answer: A — 0.53 : 1.** A: **Correct:** The numerator is 53 after subtracting inventory. B: **Incorrect:** This divides inventory by liabilities, rather than quick assets by liabilities. C: **Incorrect:** Quick assets of 53 are below liabilities of 100. D: **Incorrect:** This includes inventory and is the current ratio.

**1. Calculate earnings per share:** Assuming the stated profit is attributable to the equity shares, \(EPS=500000/50000=\text{Rs.}\,10\) per share. **2. Calculate price relative to earnings:** \[P/E=\frac{Market\ Price\ per\ Share}{EPS}=\frac{120}{10}=12.\] **3. Keep the units consistent:** The numerator and denominator must both be per-share amounts. The result means the price is 12 times annual earnings per share; it is not a percentage. **Answer: A — 12.** A: **Correct:** The market price of 120 divided by EPS 10 equals 12. B: **Incorrect:** 10 is EPS in rupees, not the P/E multiple. C: **Incorrect:** This would require EPS 5, inconsistent with the given profit and share count. D: **Incorrect:** This approximately reverses the ratio and corresponds to earnings yield rather than P/E.

**1. Start with the owner’s contribution:** The ₹50,000 cash investment creates ₹50,000 of owners’ equity. The ₹10,000 equipment purchase on credit increases assets and liabilities equally and does not itself change equity. **2. Add profit under accrual accounting:** All ₹15,000 revenue is recognized, including ₹7,500 still receivable. Subtract expenses of ₹8,000 to get profit \(15000-8000=7000\). **3. Subtract distributions:** Dividends reduce equity directly rather than being an expense. Ending equity is \(50000+7000-2000=55000\). **4. Cross-check the balance sheet:** Ending cash is \(50000+7500-8000-2000=47500\). Adding equipment 10000 and receivables 7500 gives assets 65000; subtract payables 10000 to obtain equity 55000. **Answer: C — ₹55,000.** A: **Incorrect:** This includes profit but fails to subtract the dividend. B: **Incorrect:** This is total assets after the transactions, not equity after deducting liabilities. C: **Correct:** The contribution plus profit less dividend equals ₹55,000. D: **Incorrect:** This does not follow from the stated contribution, recognized revenue, expenses and dividend.

**1. Classify current assets:** Cash ₹10L, inventory ₹5L and accounts receivable ₹2L are current assets, totaling ₹17L. Patents and land are noncurrent assets and are excluded. **2. Classify current liabilities:** Creditors of ₹4L are current liabilities. The stated long-term bank loan of ₹10L is noncurrent; no current installment is separately provided. **3. Calculate net working capital:** \(Working\ Capital=Current\ Assets-Current\ Liabilities=17-4=\text{Rs.}\,13L\). Inventory is included in working capital even though it is excluded from the quick ratio. **Answer: B — ₹13L.** A: **Incorrect:** This includes noncurrent assets and the long-term loan, giving total assets minus total liabilities rather than working capital. B: **Correct:** Current assets of 17L less current liabilities of 4L give 13L. C: **Incorrect:** This also subtracts the noncurrent 10L loan from current assets. D: **Incorrect:** This is not the difference between the classified current assets and liabilities.

**1. Calculate the common revenue:** Selling 150 units for ₹15 gives \(Revenue=150\cdot15=\text{Rs.}\,2250\), unchanged by the inventory cost-flow method. **2. Calculate FIFO cost and profit:** FIFO sells the initial 100 units at ₹5 and 50 units from the ₹7 layer. Thus COGS is \(100\cdot5+50\cdot7=\text{Rs.}\,850\), giving gross profit \(2250-850=\text{Rs.}\,1400\). **3. Calculate LIFO cost and profit:** LIFO assigns 150 units from the most recent ₹7 layer, giving COGS \(150\cdot7=\text{Rs.}\,1050\) and gross profit \(2250-1050=\text{Rs.}\,1200\). **4. Compare:** Switching from LIFO to FIFO raises gross profit by \(1400-1200=\text{Rs.}\,200\), because the older inventory costs are lower. **Answer: A — ₹200 higher under FIFO.** A: **Correct:** FIFO lowers COGS by ₹200 and raises gross profit by the same amount. B: **Incorrect:** The computed profit difference is 200, not 300. C: **Incorrect:** Different cost layers produce different COGS in this rising-cost example. D: **Incorrect:** 150 is the quantity sold, not the profit difference.

**1. Record the goods sale:** Cash rises by ₹50,000 and inventory falls by its ₹30,000 cost. Total assets therefore rise by \(50000-30000=\text{Rs.}\,20000\), from ₹500,000 to ₹520,000. **2. Record the truck purchase:** The truck adds an asset of ₹100,000, but ₹40,000 cash is paid. The net asset increase is ₹60,000, matched by the new loan of ₹60,000. **3. Calculate ending assets:** \(500000+20000+60000=\text{Rs.}\,580000\). As a check, liabilities become 260000 and equity becomes \(300000+20000=320000\), summing to the same ₹580,000. **Answer: A — ₹580,000.** A: **Correct:** Both the ₹20,000 sale profit effect and ₹60,000 net truck-purchase effect are included. B: **Incorrect:** This fails to account for the ₹40,000 cash payment for the truck. C: **Incorrect:** This ignores both the inventory cost leaving assets and the cash payment for the truck. D: **Incorrect:** This is the asset balance after the sale but before the truck transaction.

**1. Calculate straight-line depreciation:** The depreciable amount is \(21000-1000=\text{Rs.}\,20000\). Dividing by five years gives annual depreciation ₹4000. After two years, SLM book value is \(21000-2(4000)=\text{Rs.}\,13000\). **2. Calculate written-down-value depreciation:** At 20% annually, year-1 book value is \(21000(0.8)=\text{Rs.}\,16800\). Year-2 book value is \(16800(0.8)=\text{Rs.}\,13440\). **3. Compare the book values:** \(BV_{SLM}-BV_{WDV}=13000-13440=-\text{Rs.}\,440\). Thus SLM produces a book value ₹440 lower at the end of year 2. **Answer: B — ₹440 lower under SLM.** A: **Incorrect:** The two methods give different year-2 carrying amounts. B: **Correct:** SLM is 13000 and WDV is 13440, so SLM is ₹440 lower. C: **Incorrect:** The magnitude is right but the direction is reversed. D: **Incorrect:** ₹1000 is the salvage value, not the year-2 difference.

**1. Separate share capital from share premium:** The issue raises \(100000\cdot\text{Rs.}\,50=\text{Rs.}\,50L\). Face-value share capital is \(100000\cdot\text{Rs.}\,10=\text{Rs.}\,10L\), leaving securities premium \(100000\cdot\text{Rs.}\,40=\text{Rs.}\,40L\) within reserves and surplus. **2. Calculate retained current-year profit:** Profit is ₹10L, of which ₹2L is distributed as dividends. The remaining ₹8L stays within equity reserves/surplus. **3. Treat the reserve transfer as an internal reclassification:** The ₹3L transfer to General Reserve is part of that retained ₹8L, leaving ₹5L in retained surplus. It is neither an additional expense nor an additional ₹3L of equity. **4. Sum the category:** Reserves and surplus are \(40+3+5=\text{Rs.}\,48L\). Total equity including the separately reported ₹10L share capital would be ₹58L. **Answer: C — ₹48L.** A: **Incorrect:** This omits the ₹3L General Reserve even though it remains within the same category. B: **Incorrect:** This includes only securities premium and omits retained profits. C: **Correct:** Securities premium 40L plus retained current-year profit 8L equals 48L. D: **Incorrect:** This is total equity, including 10L share capital, rather than reserves and surplus alone.

**1. Derive the case’s earnings:** All case amounts are in millions of rupees. \(EBITDA=500-300-100=100\). Deduct depreciation 20 to obtain EBIT=80, then interest 10 to obtain PBT=70. Tax is \(0.30(70)=21\), so net profit/PAT is \(70-21=49\). **2. Calculate earnings per share and P/E:** PAT 49 million divided by 10 million shares gives EPS ₹4.90. Therefore \(P/E=73.50/4.90=15\). **3. Calculate dividend yield:** Dividend per share is \(24.5/10=\text{Rs.}\,2.45\). Yield is \((2.45/73.50)\cdot100=3.333\ldots\%\), or 3.33%. This uses market price, whereas dividends divided by earnings would give the payout ratio. **Answer: A — EPS ₹4.90; P/E 15.00; dividend yield 3.33%.** A: **Correct:** All three ratios use PAT and per-share market/dividend values correctly. B: **Incorrect:** ₹7 is pretax earnings per share, not after-tax EPS. C: **Incorrect:** 5% does not equal dividends per share divided by market price. D: **Incorrect:** ₹10 uses EBITDA per share, not PAT; the other ratios also fail.

**1. Derive the case’s earnings:** All case amounts are in millions of rupees. \(EBITDA=500-300-100=100\). Deduct depreciation 20 to obtain EBIT=80, then interest 10 to obtain PBT=70. Tax is \(0.30(70)=21\), so net profit/PAT is \(70-21=49\). **2. Determine and repeat the revenue growth rate:** Revenue grew from 400 to 500, a rate of \((500-400)/400=25\%\). Repeating 25% growth gives FY2026 revenue \(500(1.25)=625\). **3. Apply the new net profit margin:** At 11%, FY2026 net profit is \(625(0.11)=68.75\) million. The question’s “Profit Margin” is interpreted as net profit divided by revenue. **4. Calculate the absolute increase:** Subtract FY2025 PAT 49 from the new PAT: \(68.75-49=19.75\) million. Do not report the entire future profit as the increase. **Answer: C — ₹19.75 million.** A: **Incorrect:** This does not account for both the repeated growth and the new margin. B: **Incorrect:** This is not the difference between 68.75 and the current PAT of 49. C: **Correct:** The net profit increase is 68.75−49=19.75 million. D: **Incorrect:** 68.75 million is the future profit level, not its increase.

**1. Derive the case’s earnings:** All case amounts are in millions of rupees. \(EBITDA=500-300-100=100\). Deduct depreciation 20 to obtain EBIT=80, then interest 10 to obtain PBT=70. Tax is \(0.30(70)=21\), so net profit/PAT is \(70-21=49\). **2. Calculate working capital released:** Debtors fall by \(20\%\cdot50=10\), and inventory falls by \(20\%\cdot60=12\). The total released cash is 22 million. Converting these assets to cash alone leaves total assets unchanged. **3. Record the immediate debt repayment:** Repaying 22 reduces debt from 100 to 78 and reduces cash/assets from 400 to 378. Equity remains 200 under the stated assumptions. **4. Recalculate both ratios:** \[Debt/Equity=78/200=0.39,\qquad ROA=(49/378)\cdot100=12.96296\ldots\%.\] Rounded ROA is 12.96%, using the unchanged net profit. **Answer: D — Debt-Equity 0.39x and ROA 12.96%.** **Convention note:** This follows the question’s explicit assumption that net profit stays unchanged despite debt repayment, and uses the updated closing asset figure as the ROA denominator. In a subsequent period, lower interest could alter profit; average-asset ROA would require additional timing data. A: **Incorrect:** This is the original debt-equity ratio and original ROA, before repayment. B: **Incorrect:** The new debt ratio is right, but assets decrease after paying out the cash, so ROA changes. C: **Incorrect:** The released cash is 22, giving debt 78 rather than the 90 implied by this debt ratio. D: **Correct:** Debt is 78, equity 200 and assets 378, giving 0.39x and 12.96%.