CAP-I: 30 Long Q&As — Accounting • Economics • CMS • Mercantile Law
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Accounting — Final Accounts, Inventory, Depreciation, Partnerships
Q1) Year-end adjustments: prepayments, outstanding expenses, and presentation
Answer: At period end, convert cash-timing entries into accrual-true statements. Recognize outstanding wages, rent, utilities for benefits consumed but unpaid; create prepaid assets for the unexpired portion of insurance/advertising; remove personal transactions (e.g., life policy) from business expenses as drawings; calculate interest on loans strictly for months outstanding; apply depreciation per policy and class; and set provisions such as AFDD and discount on debtors. Effects: Profit & Loss reflects current-period costs only; Balance Sheet shows accruals under current liabilities, prepaids under current assets, fixed assets at written-down values, and capital adjusted for drawings.
Q2) Provision for doubtful debts and discount on debtors — correct order & base
Answer: First purify trade receivables (remove dishonored/irrecoverable items, adjust contra balances and returns). Compute AFDD on the adjusted debtors. Then compute provision for discount on debtors net of AFDD, since discount applies to realizable receivables after expected losses. Present AFDD as a deduction from debtors; discount provision as separate deduction or grouped by policy. The order matters: reversing it overstates expense and understates assets.
Q3) Sale-or-Return (approval) at period end — reversal & closing stock
Answer: Where risks/rewards haven’t transferred (goods still returnable), reverse sales and debtors for such consignments, and include the goods in closing stock at cost (selling price less margin/markup). Journals: Dr Sales, Cr Debtors; Dr Closing Stock (SOR) at cost, Cr Trading. This avoids artificial revenue inflation and preserves cost-matching in COGS; disclosure can be in notes if material.
Q4) Bank Reconciliation Statement — typical reconciling items & logic
Answer: Differences arise from cheques issued but not yet presented (deducted in cash book, not in bank statement), cheques deposited but not yet credited, bank charges/interest/direct credits, and dishonored items. Build BRS starting from either book balance: add back items that reduce one side only and deduct items that increase the other. The aim is not to alter ledger (unless errors) but to explain timing & errors and post necessary corrections in the cash book.
Q5) Rectification of errors: suspense account usage and impact on profit
Answer: If the trial balance disagrees, open Suspense A/c temporarily. Correct one-sided errors (posting to wrong side, casting errors, partial omissions) via Suspense; two-sided errors (wrong account, wrong amount both sides) bypass Suspense. Classify as affecting or not affecting profit: e.g., purchases posted to furniture (capitalization) increases asset and reduces expense → profit understated; sales omitted → profit understated. After rectification, Suspense should close to zero.
Q6) Depreciation: SLM vs WDV; change of method and disclosure
Answer: SLM charges equal expense annually on depreciable amount; WDV applies a fixed rate to carrying value, front-loading expense. Change of method is treated prospectively unless local standards require retrospective restatement. On change, recompute depreciation going forward using the new basis; disclose rationale and effect. Asset disposals use either provision method (maintain Accumulated Depreciation) or equal installment (net book value directly).
Q7) Consignment closing stock with normal loss — valuation steps
Answer: For normal loss (e.g., evaporation), spread total cost (including proportionate non-recurring expenses like freight/insurance) over effective units (goods sent minus normal loss). Closing stock is valued at cost per effective unit × unsold units; abnormal loss is separately recognized at book value with insurance claim if any. This prevents cost per unit from being overstated due to inherent wastage.
Q8) Partnership admission: goodwill treatment & revaluation
Answer: On admission, revalue assets/liabilities to fair values; transfer profit/loss on revaluation to old partners’ ratio. For goodwill, if raised, debit Goodwill and credit partners’ capital (old ratio); if premium is brought in cash by the new partner, credit old partners in sacrificing ratio. Hidden goodwill is inferred from total capital implied by new partner’s contribution. Revise profit-sharing ratio and adjust reserves accordingly.
Economics — Micro & Macro Core Concepts
Q9) Law of demand and exceptions (Giffen, Veblen, expectations)
Answer: The law of demand states an inverse relation between price and quantity demanded, ceteris paribus. Exceptions: Giffen goods (strong income effect for inferior staples), Veblen goods (conspicuous consumption where higher price signals status), expectations (anticipated price rises pull demand forward), and speculative markets. Distinguish movements along the demand curve (price-only changes) from shifts (income, tastes, related goods, expectations, population).
Q10) Price elasticity of demand — five types & total-revenue test
Answer: Types: perfectly elastic, elastic (>1), unitary (=1), inelastic (<1), perfectly inelastic. Use the TR test: if price↓ and TR↑ → elastic; if price↓ and TR unchanged → unitary; if price↓ and TR↓ → inelastic. Determinants include substitutes, budget share, necessity vs luxury, time horizon. For exams, compute elasticity via percentage or mid-point (arc) formula to avoid base bias.
Q11) Consumer equilibrium via indifference curves & budget line
Answer: With well-behaved preferences, equilibrium lies at the tangency of the budget line and the highest attainable indifference curve: MRSxy = Px/Py. Corner solutions occur if tangency happens outside the feasible set or goods are perfect substitutes/complements. Income changes pivot the budget in parallel (income effect), while price changes rotate the slope (substitution + income effects).
Q12) Short-run costs: MC, AVC, ATC, and their relationships
Answer: With diminishing marginal returns, MC first falls then rises; AVC and ATC are U-shaped. MC cuts AVC and ATC at their minimum points. AFC declines continuously as output spreads fixed costs. In competitive supply, the firm’s SR supply is the MC curve above the minimum AVC (shutdown criterion).
Q13) National Income (NI): product, income, expenditure methods & pitfalls
Answer: Product method sums value added across sectors; income method aggregates factor incomes (wage, rent, interest, profit); expenditure method adds C+I+G+(X−M). Avoid double counting (use value added), include imputed rent of owner-occupied housing, treat inventory change carefully, and exclude purely financial transactions and transfer payments.
Q14) Multiplier: intuition, leakages, and simple computation
Answer: An autonomous increase in spending raises income multiple times due to induced consumption. In the simple model, multiplier k = 1/(1−MPC) = 1/MPS. Leakages (savings, taxes, imports) reduce k: in an open, taxed economy, k = 1/(MPS+MPT+MPM). Policy uses: estimating output/employment impact of fiscal expansions.
Q15) Monetary policy tools: OMO, reserve ratios, bank rate & selectives
Answer: To curb inflation, central banks conduct open-market sales, raise reserve ratios, and increase the policy/bank rate; selective controls include margin requirements, credit rationing, moral suasion, and direct action. Transmission lags and expectations matter; coordination with fiscal policy improves efficacy.
Q16) Fiscal policy: instruments & budget balances (revenue/primary/fiscal)
Answer: Instruments: taxation, public expenditure, borrowing, transfers. Budget balances: revenue deficit (revenue exp − revenue rec), primary deficit (fiscal deficit − interest), fiscal deficit (total exp − total rec excl. borrowings). Counter-cyclical policy smooths demand; composition of spending (capex vs current) shapes long-run growth.
Commercial Mathematics & Statistics — TVM, Index Numbers, Stats
Q17) Simple vs Compound Interest; effective annual rate (EAR)
Answer: Simple interest grows linearly: SI = P·R·N/100. Compound interest: A = P(1+R/m)^{mN}. Convert nominal to EAR: (1+R/m)^{m} − 1. Compare projects by EAR for consistent annualized returns; for irregular timing, use IRR/XIRR ideas (beyond CAP-I scope but good context).
Q18) Present value of annuities: immediate vs due; amortization hint
Answer: For level payment P, rate i, n periods: PV_immediate = P/i · (1 − (1+i)^{-n}). For annuity-due: PV_due = PV_immediate · (1+i). Loan amortization splits each payment into interest (i×opening balance) and principal reduction; final balance reaches zero at period n.
Q19) Sinking fund for asset replacement — required periodic deposit
Answer: To accumulate S in n periods at rate i, periodic deposit A solves S = A·(((1+i)^n − 1)/i) ⇒ A = S·i / ((1+i)^n − 1). If deposits occur at the beginning, multiply by (1+i). Include expected scrap value to reduce S.
Q20) Index numbers: Laspeyres, Paasche, Fisher; reversal tests
Answer: Laspeyres uses base-period weights; Paasche uses current-period weights. Fisher’s Ideal = √(Laspeyres × Paasche) and passes both time-reversal and factor-reversal tests, hence “ideal.” Use Fisher when consumption patterns shift materially.
Q21) Central tendency for grouped data: mean, median, mode
Answer: Mean: Σf·x̄_class / Σf (use class midpoints). Median: locate median class (N/2 position) and apply L + [(N/2 − cf_prev)/f_m]·h. Mode: L + [(f1−f0)/(2f1−f0−f2)]·h with f1 modal freq. Empirical relation: Mode ≈ 3Median − 2Mean (approx only).
Q22) Dispersion: standard deviation & coefficient of variation (CV)
Answer: For raw data, σ = √[(Σx²/n) − (x̄)²]; for grouped, use midpoints or step-deviation. CV = σ/x̄ × 100% compares relative variability across datasets with different means; lower CV → higher consistency (useful in finance, production quality, exam problems comparing two series).
Q23) Correlation & regression: Pearson r and lines of Y|X and X|Y
Answer: Pearson r measures linear association (−1 to +1). Regression of Y on X: Ŷ = a + bX, with slope b = r·(σy/σx). Regression of X on Y similarly uses r·(σx/σy). Use the lines for prediction; beware extrapolation beyond observed range.
Mercantile Law — Contract, Sale of Goods, Agency, Partnership
Q24) Essentials of a valid contract; agreement vs contract
Answer: A contract = agreement + enforceability. Essentials: offer & acceptance, intention to create legal relations, lawful consideration, capacity, free consent, lawful object, and possibility of performance. All contracts are agreements, but not all agreements are contracts—lack of an essential (e.g., capacity) leaves an agreement void/voidable.
Q25) Consideration: rules and recognized exceptions
Answer: Consideration must move at the promisor’s desire, be real, lawful, and need not be adequate. Exceptions (promise still binding): natural love & affection (written/registered), past voluntary services, promise to pay time-barred debt (written/signed), agency, completed gifts. Also note privity rule and its practical relaxations.
Q26) Free consent: coercion, undue influence, misrepresentation, fraud, mistake
Answer: Consent is free when not caused by coercion (threat/pressure), undue influence (dominant position), misrepresentation (innocent falsehood), or fraud (intentional deception). Unilateral mistake usually doesn’t void a contract; bilateral mistake of fact can render agreements void. Remedies: rescission, damages, or both depending on fault.
Q27) Sale of Goods: conditions vs warranties; implied terms
Answer: Conditions go to the root (breach → reject goods + damages); warranties are collateral (breach → damages only). Implied terms: title, description, merchantable quality, fitness for disclosed purpose (buyer relies on seller’s skill), and sample/sample+description. Parties may exclude some by agreement unless barred by statute.
Q28) Delivery, risk & property: unconditional appropriation; FOB/CIF brief
Answer: Risk generally passes with property (unless agreed otherwise). Property in unascertained goods passes on unconditional appropriation to the contract with mutual assent. Trade terms: FOB passes risk at ship’s rail; buyer arranges freight/insurance. CIF price includes cost, insurance, freight; seller must tender shipping docs; risk allocation follows the term.
Q29) Agency: creation (agreement, estoppel, necessity) and authority types
Answer: Agency may arise by express/implied agreement, estoppel/holding out (principal’s conduct), or necessity (urgent acts to protect interests). Authority can be actual (express/implied) or apparent; acts within apparent authority bind the principal vis-à-vis third parties. Ratification retro-validates otherwise unauthorized acts if conditions are satisfied.
Q30) Partnership: rights & duties; profit-share when deed is silent
Answer: Rights: participate in management, access books, share profits, indemnity, interest on advances (per deed). Duties: act in good faith, render true accounts, share losses, avoid secret profit/conflict, work within authority. If the deed is silent, partners share profits (and typically losses) equally; interest on capital is not automatic without agreement.
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