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.
Under Ind AS 116 / IFRS 16, how does a lessee generally account for what was previously an operating lease?
- A. Keeps it off-balance-sheet and expenses rent
- B. Recognizes a right-of-use asset and a lease liability on the balance sheet ✓
- C. Discloses it only in the notes
- D. Records it as a prepaid expense amortized over the term
Correct answer: B. Ind AS 116 requires lessees to recognize a right-of-use asset and a corresponding lease liability for most leases.
A deferred tax liability typically arises because of:
- A. Tax paid in excess of the amount due
- B. Taxable temporary differences where accounting profit currently exceeds taxable profit ✓
- C. Carried-forward business losses
- D. Permanent differences only
Correct answer: B. A DTL reflects taxable temporary differences (e.g., faster tax depreciation) that will reverse and be taxed later.
In a cash flow statement prepared by the indirect method, an increase in inventory is:
- A. Added to net profit under operating activities
- B. Deducted from net profit under operating activities ✓
- C. Shown as an investing outflow
- D. Shown as a financing inflow
Correct answer: B. Rising inventory consumes cash, so it is subtracted from profit in the operating section.
Under Ind AS 115 / IFRS 15, revenue is recognized when:
- A. Cash is collected from the customer
- B. Control of the good or service transfers to the customer ✓
- C. The contract is signed
- D. Goods leave the warehouse
Correct answer: B. Ind AS 115's model recognizes revenue as control of the promised good or service passes to the customer.
Under Ind AS/IFRS, goodwill acquired in a business combination is:
- A. Amortized over 5 years
- B. Amortized over 10 years
- C. Not amortized but tested annually for impairment ✓
- D. Written off immediately against reserves
Correct answer: C. Goodwill is not amortized under Ind AS/IFRS; it is subject to an annual impairment test.
Which of these is a permanent difference rather than a temporary difference for tax purposes?
- A. Book-versus-tax depreciation gap
- B. Provision for doubtful debts
- C. A statutory penalty that is permanently disallowed for tax ✓
- D. Unrealized gains on investments
Correct answer: C. A permanently disallowed penalty never reverses, so it is a permanent difference, not a timing one.
Other things equal, a company's WACC rises when:
- A. The risk-free rate falls
- B. The company's equity beta increases ✓
- C. The corporate tax rate increases
- D. The firm issues additional low-cost debt
Correct answer: B. A higher beta raises the cost of equity via CAPM, pushing WACC up.
In a period of rising prices, FIFO compared with LIFO reports profit that is:
- A. Lower, because cost of goods sold is higher
- B. Higher, because COGS is based on older, lower costs ✓
- C. Identical to LIFO
- D. Higher only because ending inventory is undervalued
Correct answer: B. FIFO expenses the oldest (cheaper) costs first, giving lower COGS and higher reported profit when prices rise.
A lessee capitalizes a finance lease at the:
- A. Total of all lease payments over the term
- B. Lower of fair value and present value of minimum lease payments ✓
- C. Residual value only
- D. Fair value plus total interest
Correct answer: B. A finance lease asset and liability are recorded at the lower of fair value and PV of minimum lease payments.
In consolidated financial statements, non-controlling interest is presented:
- A. As a long-term liability
- B. Within equity, separately from the parent's shareholders' equity ✓
- C. As a current liability
- D. As a deduction from goodwill
Correct answer: B. NCI is shown within equity but disclosed separately from the parent owners' equity.
Under Ind AS 116 / IFRS 16, a lessee's operating lease is now:
- A. Kept entirely off the balance sheet
- B. Recognised as a right-of-use asset and a lease liability ✓
- C. Expensed only as rent with no asset recognised
- D. Treated as a contingent liability
Correct answer: B. The standard removed the operating/finance distinction for lessees, requiring a right-of-use asset and lease liability on-balance-sheet.
In a DCF valuation, applying a higher discount rate (WACC), all else equal, results in:
- A. A higher present value of future cash flows
- B. A lower present value of future cash flows ✓
- C. No change to present value
- D. A higher terminal growth rate
Correct answer: B. A larger discount rate reduces the present value of each future cash flow.
In computing WACC, the cost of debt used is:
- A. The coupon rate before tax
- B. The after-tax cost of debt ✓
- C. The gross yield ignoring tax
- D. The risk-free rate
Correct answer: B. Because interest is tax-deductible, WACC uses the after-tax cost of debt.
Minimum Alternate Tax (MAT) under the Indian Income Tax Act is levied on:
- A. Total taxable income at normal rates
- B. Book profits of companies computed under Section 115JB ✓
- C. Only capital gains
- D. Dividend income alone
Correct answer: B. MAT ensures profitable companies pay a minimum tax on adjusted book profits under Section 115JB.
When a company revalues fixed assets upward under Ind AS, the revaluation surplus is credited to:
- A. Profit and loss (income statement)
- B. Other comprehensive income / revaluation reserve ✓
- C. Retained earnings directly
- D. Securities premium
Correct answer: B. An upward revaluation is recognised in OCI and accumulated in a revaluation reserve, not routed through P&L.
Under the GST reverse charge mechanism (RCM), the liability to pay tax rests with:
- A. The supplier of goods or services
- B. The recipient of goods or services ✓
- C. The e-commerce operator in every case
- D. The transporter only
Correct answer: B. Under RCM the recipient, rather than the supplier, is liable to remit the GST.
Which of the following is a temporary (timing) difference giving rise to deferred tax rather than a permanent difference?
- A. Fines and penalties disallowed for tax
- B. Difference between book and tax depreciation ✓
- C. Donations disallowed under tax law
- D. Exempt agricultural income
Correct answer: B. Depreciation differences reverse over time, creating deferred tax; disallowances and exemptions are permanent.
In the indirect-method cash flow statement, an increase in trade receivables is:
- A. Added to net profit
- B. Deducted from net profit in operating activities ✓
- C. Shown under financing activities
- D. Ignored entirely
Correct answer: B. A rise in receivables means revenue was recognised without cash inflow, so it is subtracted from profit.
The interest coverage ratio is computed as:
- A. Net profit divided by interest expense
- B. EBIT divided by interest expense ✓
- C. EBITDA divided by total debt
- D. Operating cash flow divided by interest paid
Correct answer: B. Interest coverage measures how many times operating earnings (EBIT) cover interest obligations.
Under the percentage-of-completion method for long-term contracts, revenue is recognised:
- A. Only when the contract is fully completed
- B. In proportion to the stage of completion ✓
- C. When cash is collected from the customer
- D. At the date the contract is signed
Correct answer: B. Revenue and costs are recognised progressively based on the measured stage of completion.