A profitable SaaS company reports ₹40 crore net income but its operating cash flow is barely positive. Deferred revenue on the balance sheet DECLINED sharply during the year while DSO rose. Which explanation is most consistent with these facts?
- A. Strong new-bookings growth inflated deferred revenue, boosting cash ahead of recognised income
- B. Cash collected upfront in prior periods is now being recognised as revenue with no matching new cash inflow, and slower collections tied up more cash in receivables ✓
- C. A large non-cash impairment charge depressed net income while cash was unaffected
- D. Aggressive capitalisation of development costs shifted expense out of the P&L into the balance sheet
Correct answer: B. A falling deferred revenue balance means the company is recognising previously-collected cash as income without fresh advance collections, and rising DSO ties up more cash in receivables, so profit outruns operating cash.
Management insists on recognising a full year's revenue at contract signing for a 12-month cloud subscription with a single continuous access obligation, arguing the customer paid upfront. Under Ind AS 115, what is the correct treatment and why?
- A. Recognise fully at signing because control of the software licence transferred to the customer at that date
- B. Recognise over the 12 months because the performance obligation (access to the service) is satisfied over time as the customer simultaneously receives and consumes the benefit ✓
- C. Recognise on a point-in-time basis at the end of the contract when the service is fully delivered
- D. Recognise 50% at signing and 50% at renewal to match the payment and risk profile
Correct answer: B. A hosted subscription giving continuous access is a single performance obligation satisfied over time, so revenue is recognised across the service period regardless of upfront payment, with the balance deferred.
A company has a DTA of ₹25 crore from carried-forward business losses. It has posted losses for three consecutive years but the board's new plan projects taxable profits from year 2. The auditor challenges recognition. What is the correct Ind AS 12 position?
- A. Recognise the full DTA because tax losses never expire and will eventually be used
- B. Recognise the DTA only to the extent convincing evidence of sufficient future taxable profit exists; a history of recent losses is strong evidence against recognition absent compelling support ✓
- C. Derecognise the entire DTA automatically because three years of losses triggers a mandatory write-off
- D. Recognise the DTA but disclose it as a contingent asset in the notes rather than on the balance sheet
Correct answer: B. Ind AS 12 requires convincing evidence of probable future taxable profit to recognise a DTA, and a recent history of losses is strong evidence against recognition unless there is compelling, specific support.
In building a WACC for an Indian tech company using FCFF-based DCF, an analyst uses the 10-year G-sec yield as the risk-free rate, but then also adds a separate 'country risk premium' on top of a US-derived equity risk premium. What is the primary conceptual error?
- A. The G-sec yield should never be used; only the US Treasury yield is valid as a risk-free rate
- B. Using a rupee-denominated risk-free rate (G-sec) already embeds Indian country and inflation risk, so also adding a US-based country risk premium double-counts India risk ✓
- C. Country risk premium should be subtracted, not added, because India is a growth market
- D. FCFF must be discounted at cost of equity, not WACC, making the risk-free choice irrelevant
Correct answer: B. The rupee G-sec yield already reflects Indian sovereign and inflation risk, so layering a country risk premium designed to convert a US risk-free rate on top of it double-counts the same risk.
During a DCF, a junior analyst subtracts scheduled debt principal repayments from FCFF each year before discounting, reasoning that cash leaves the firm. Why is this wrong for an enterprise-value DCF?
- A. Principal repayments are already captured in the terminal value, so subtracting them elsewhere is redundant
- B. FCFF is a pre-financing cash flow that belongs to all capital providers; debt principal repayment is a financing flow already reflected in the discount rate via the cost of debt ✓
- C. Principal repayments should be added back, not subtracted, because they reduce future interest
- D. Only interest, not principal, affects free cash flow, so both should be excluded from FCFF entirely
Correct answer: B. FCFF is the cash available to all capital providers before financing decisions; debt principal (and interest) is captured through WACC, so subtracting principal from FCFF double-counts the debt claim.
A company receives ₹2 lakh of legal services from an unregistered advocate and separately imports consulting services from a foreign affiliate. Under GST, how does the reverse charge mechanism apply?
- A. RCM applies to neither; both are exempt because the suppliers are unregistered or foreign
- B. RCM applies to both: the recipient pays GST on legal services from an advocate and on the import of services, and can claim ITC subject to eligibility ✓
- C. RCM applies only to the imported service; domestic advocate fees are always forward-charge
- D. RCM applies only to the advocate fees; imports of services are zero-rated and outside GST
Correct answer: B. Both advocate services and import of services are notified reverse-charge supplies, so the recipient discharges the GST liability and may claim ITC where the credit is otherwise eligible.
At quarter-end you find a ₹1.2 crore unexplained break between the sub-ledger and GL in a cash-clearing account, with the hard close due in 6 hours. Which approach best balances accuracy and the deadline?
- A. Post a plug entry to the P&L to force agreement and investigate next quarter
- B. Delay the close and refuse to sign off until the full break is root-caused, regardless of the deadline
- C. Decompose the break by aging and transaction type to isolate the driver, book only supportable adjustments, and record any genuinely unresolved residual to a suspense account with disclosure and a remediation owner ✓
- D. Reverse all entries in the account for the quarter and re-post them manually to eliminate the difference
Correct answer: C. Systematically isolating the break's drivers lets you correct what is supportable while parking a documented, owned residual in suspense, protecting both close integrity and the deadline rather than a blind plug or a missed close.
A five-year lease of equipment has a purchase option the lessee is reasonably certain to exercise, and the asset's economic life is eight years. Over what period should the right-of-use asset be depreciated under Ind AS 116?
- A. Over the 5-year lease term, matching the lease liability amortisation
- B. Over the 8-year economic life of the asset, because exercise of the purchase option is reasonably certain so ownership is expected to transfer ✓
- C. Over the shorter of lease term and useful life, i.e. 5 years, as a default rule
- D. The ROU asset is not depreciated; it is remeasured to fair value each year
Correct answer: B. When the lessee is reasonably certain to exercise a purchase option, Ind AS 116 requires depreciation over the asset's useful life (8 years) because ownership is expected to pass, overriding the lease-term default.
You discover that an error in prior-year inventory costing overstated last year's audited profit by an amount clearly above materiality, and comparatives are presented this year. What is the correct treatment?
- A. Adjust the error prospectively through the current year's P&L as a change in estimate
- B. Restate the comparative prior-period figures and adjust opening retained earnings, treating it as a prior-period error correction ✓
- C. Disclose only in the notes as a contingent adjustment without changing any numbers
- D. Book the full correction as an exceptional item in the current year's income statement
Correct answer: B. A material prior-period error is corrected retrospectively by restating comparatives and adjusting opening retained earnings, not through current-year profit as if it were an estimate change.
An acquirer pays ₹300 crore for a target whose identifiable net assets have a book value of ₹180 crore; fair valuation reveals an unrecognised customer relationship intangible worth ₹40 crore and a contingent liability with fair value ₹10 crore. Ignoring NCI, what goodwill arises?
- A. ₹120 crore, being consideration less book value of net assets
- B. ₹90 crore, being consideration less fair value of identifiable net assets (₹180 + ₹40 − ₹10 = ₹210) ✓
- C. ₹100 crore, recognising the intangible but ignoring the contingent liability
- D. ₹80 crore, deducting both the intangible and adding the contingent liability
Correct answer: B. Under Ind AS 103 goodwill equals consideration (₹300cr) minus the fair value of identifiable net assets (₹180 + ₹40 intangible − ₹10 contingent liability = ₹210cr), i.e. ₹90cr.