Model Test Paper - 1

CMA Foundation Paper - 3

Fundamentals of Laws and Ethics
Section A

1. Choose the correct answer from the given four alternatives:

(i) In an executed contract, the obligation of ________:
(a) both the parties have been fulfilled
(b) both the parties are outstanding
(c) obligation of one party is outstanding
(d) none of these
(ii) A contract with or by a minor is a:
(a) valid contract
(b) void contract
(c) voidable contract
(d) voidable at the option of either party
(iii) The term consideration is defined in _______ section of the Indian
Contract Act, 1872.
(a) 2(a)
(b) 2(d)
(c) 3(a)
(d) 2(h)
(iv) The implied warranties as per the Sale of Goods Act, 1930
includes_____.
(a) enjoyment of undistributed possession
(b) disclosure of dangerous nature of goods
(c) quality or fitness by usage of trade
(d) all of the above
(v) Goods are at the risk of the party who has the:
(a) delivery of goods
(b) ownership of goods
(c) custody of goods
(d) dealership of goods
(vi) Sellers means a person_______.
(a) who sells or agrees to sell goods
3.1
 3.2 O Solved Scanner CMA Foundation Paper 3 (New
(b) who bear authority to sell
(c) who only agrees to sell goods
(d) who is desirous of selling
(vii) For terms not defined in the Sales of Goods Act, reference is made
to–
(a) Indian Contract Act
(b) Companies Act
(c) Transfer of Immovable Property Act
(d) Consumer Protection Act
(viii) The term “goods” in the sale of goods means:
(a) moveable goods other than money and actionable claims
(b) all moveable goods only
(c) tangible consumable goods
(d) tangible goods
(ix) Out of the following, _______ is an instance of constructive delivery
of goods:
(a) the transfer of bill of lading
(b) attornment by a person in possession of the goods
(c) handing over the key of warehouse to the buyer
(d) actual delivery of the goods to the buyer
(x) ‘Good the acquisition of which is contingent upon some events
happening or non-happening will be treated:
(a) future goods
(b) unascertained goods
(c) contingent goods
(d) forward commodities
(xi) When a promise note, bill of exchange or cheque is transferred to
any person, so as to continue the person the holder thereof, the
instrument is said—
(a) to be valid
(b) to be endorsed
(c) to be transferred
(d) to be negotiated
 Model Test Paper O 3.3

(xii) A cheque is always payable on—

(a) the date mentioned therein
(b) demand
(c) 3 days after presentation
(d) Within 3 months from date of cheque
(xiii) When an Instrument is drawn conditionally or for a special purpose
as a collateral security and not for the purpose of transferring
property therein it is called a—
(a) escrow Instrument
(b) inchoate Instrument
(c) ambiguous Instrument
(d) clean & documentary bill
(xiv) A bearer instrument is negotiated by—
(a) delivery only
(b) delivery and endorsement
(c) stamping and attestation
(d) it cannot be negotiated
(xv) Crossing of a cheque effects the—
(a) negotiability of the cheque
(b) mode of payment on the cheque
(c) both (a) and (b)
(d) none of the above
(xvi) Where neither party makes any appropriation, the payment is to be
applied in–
(a) random manner
(b) Alphabetical manner
(c) Alpha - Numeric manner
(d) in the order of time
(xvii) An agreement to do impossible thing is—
(a) invalid agreement
(b) void
(c) voidable
(d) Illegal
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(xviii) Damages are–
(a) punitive in nature
(b) deterrent in nature
(c) compensatory in nature
(d) all the three
(xix) A quasi contract lacks–
(a) agreement
(b) consent
(c) both
(d) none of these
(xx) Wagering agreement is illegal in—
(a) Gujarat
(b) Kerala
(c) Haryana
(d) Jammu & Kashmir
(xxi) Under the Sale of Goods Act, 1930, the term “Mercantile Agent”
means a mercantile agent, having as such agent, authority
to______.
(a) Sell goods or consign goods for the purpose of sale
(b) Buy goods
(c) Raise money on the security of goods
(d) All of the above
(xxii) Section 19 of the Sale of Goods Act, deals with passing of property
of _____ goods.
(a) Unascertained goods
(b) Future goods
(c) Ascertained or specific goods
(d) Contingent goods
(xxiii) Pledging of goods obtained on sale or return basis will:
(a) Complete the sale
(b) Not complete the sale
(c) Complete agreement to sale
(d) None of the above
(xxiv) For a valid contract of sale, delivery may be:
(a) Actual delivery
 Model Test Paper O 3.5

(b) Symbolic delivery

(c) Constructive delivery
(d) All of these
(xxv) The events of force majeure render the contract of ‘Sale of Goods’.
(a) Voidable
(b) Void
(c) Enforceable
(d) Unenforceable (1 × 25 = 25 marks)
Answer:
(i) (a)
(ii) (b)
(iii) (b)
(iv) (d)
(v) (b)
(vi) (a)
(vii) (a)
(viii) (a)
(ix) (b)
(x) (c)
(xi) (d)
(xii) (b)
(xiii) (a)
(xiv) (a)
(xv) (c)
(xvi) (d)
(xvii) (b)
(xviii) (c)
(xix) (c)
(xx) (a)
(xxi) (d)
(xxii) (c)
(xxiii) (a)
(xxiv) (d)
(xxv) (b)
 3.6 O Solved Scanner CMA Foundation Paper 3 (New
2. State whether the following statement given below is TRUE or FALSE:
(i) Every contract is an agreement but every agreement is not a
contract.
(ii) Goods displayed in a shop window with a price level will amount to
offer.
(iii) A gave a piece of suit-length to X a leading tailor to be returned to
him on Payment of his charges after making a party dress for him.
This is a case of sale.
(iv) Noting is a formal notarial certificate attesting the dishonour of a bill
or note. (1 mark each)
Answer:
(i) True
(ii) True
(iii) False
(iv) True

3. Answer the following question:

(a) Explain what are the exceptions to general rule “No Consideration,
No Contract”. (10 marks)
Answer:
NO CONSIDERATION – NO CONTRACT: [Sec. 25]
The general rule is ex-nudo pacto non oritur action i.e. an agreement
made without consideration is void. For example if A promises to pay B
` 1,000 without any obligation from B. This is a void agreement for want
of consideration. However, the Act itself provides exceptions to this rule
in Section 25 itself.
As per Section 25, an agreement made without consideration is not
void in the following circumstances:
1. Promise made on An agreement made without consideration
account of natural is valid if it is in writing and registered and is
love and affection made on account of natural love and
affection between parties standing in a near
relation to each other. Thus, an agreement
without consideration will be valid provided.
(a) It is expressed in writing.
 Model Test Paper O 3.7

(b) It is registered under the law.

(c) It is made on account of natural love
and affection.
(d) It is between parties standing in near
relation to each other.
2. Promise to Voluntary service means service done
compensate for without any request. An agreement made
voluntary services without consideration is valid if it is a
promise to compensate a person who has
already voluntarily done something for the
promisor. To apply this rule the following
essentials must exist.
(a) The service should have been done
voluntarily.
(b) The service should have been done for
the promisor.
(c) The promisor must have been in
existence at the time when the service
was done.
(d) The intention of promisor must have
been to compensate the promisee.
(e) The service rendered must also be
legal.
Example: A finds B’s purse and gives it
to him. B promises to give A ` 50. This
is a contract.
3.8 O Solved Scanner CMA Foundation Paper 3 (New
3. Promise to pay A promise by a debtor to pay a time-barred
time-barred debt debt is also enforceable. But the promise
must be in writing. It must be signed by the
promisor or his authorised agent. The
promise may be to pay the whole or part of
the debt.
Example: A owes B ` 1,000 but the debt is
barred by the Limitation Act. A signs a
written promise to pay ` 500 on account of
the debt. The promise will be valid and
binding without any fresh consideration.
4. Creation of Agency According to Section 185 of the Contract
Act, no consideration is necessary to create
an agency. Thus when a person is
appointed as an agent, his appointment is
valid even if there is no consideration.
5. Completed Gifts Gifts once made cannot be recovered on
the ground of absence of consideration.
Absence of consideration will not affect the
validity of any gift already made. Thus if a
person gives certain properties as gift to
another according to the provisions of the
Transfer of Property Act, he cannot
subsequently demand the property back on
the ground there was no consideration.
Example: A gave a watch as a gift to B on
his birthday. Later on A cannot demand the
watch back on the ground there was no
consideration.
6. Contract of Under section 127, no consideration is
guarantee needed for a contract of guarantee. In other
words, contract of guarantee needs no
consideration.
 Model Test Paper O 3.9

7. Remission Remission means lesser performance of the

contract than what is actually to be
performed.
(b) Enumerate the Essentials of a valid Endorsement any three.
(3 marks)
Answer:
Essentials of a valid endorsement
(i) It must be on the instrument itself or on a separate slip of paper
(called allonge) attached thereto.
(ii) For the purpose of negotiation, it must be signed by the endorser.
(iii) The instrument may contain in addition to the signature of the
endorser, the name of the endorsee also. No particular form of words
is necessary for endorsement.
(iv) Endorsement is complete when the instrument is delivered to the
endorsee with the intention of passing the property in it to the
endorsee. Delivery is to be made by the endorser himself or
someone on behalf of him.
(c) Who is an Unpaid Seller? Briefly discuss the rights of an unpaid
seller. (4 + 6 = 10 marks)
Answer:
Unpaid Seller: The seller who has not received the whole of the price
of the goods sold is called an “unpaid seller”. According to Section 45,
the seller of goods is deemed to be an unpaid seller:
(a) When the whole of the price has not been paid, or
(b) When a bill of exchange or other negotiable instrument has been
received as conditional payment, and the same has been
dishonoured.
A seller who has been partly paid is also an unpaid seller.

Rights of an According to the Sale of Goods Act the

unpaid seller unpaid seller has the following rights. They
are:
A. Rights against the goods
B. Rights against the buyer
3.10 O Solved Scanner CMA Foundation Paper 3 (New
A. Rights against the An unpaid seller has some rights against the
goods goods sold when the property in the goods
has passed to the buyer. They are as
follows:
1. Right of Lien
2. Right of stoppage of goods in transit
3. Right of Re-sale
4. Right of withholding delivery
1. Right of Lien Lien is a right to retain possession of goods
[Sec. 47] until payment of price. According to Section
47(1) an unpaid seller can exercise the right
of lien in the following cases:
(i) Where the goods have been sold
without any stipulation as to credit.
(ii) Where the goods have been sold on
credit, but the period of credit has
expired.
(iii) Where the buyer becomes insolvent.
Conditions for the The following are the conditions precedent
exercise of lien to the exercise of the lien.
1. The ownership must have passed to the
buyer.
2. The goods must be in the possession of
the seller.
3. The whole or part of the price must
remain unpaid.
2. Right of The right of stoppage in transit is a right of
stoppage of stopping the goods, while they are in transit
goods in and retaining the possession until payment
transit [Sec. 50] of the price. This right is conferred on the
seller by Section 50 of the Act. This right
can be exercised under the following cases:
(i) the seller must be an unpaid seller.
(ii) the goods must be in-transit.
(iii) the buyer must have become insolvent.
 Model Test Paper O 3.11

(iv) the property in the goods must have

passed from the seller to the buyer.
3. Right of Re-sale An unpaid seller who has exercised either
[Sec. 54] the right of lien or the right of
stoppage-in-transit can resell such goods.
The right to resell the goods is called ‘right
of resale’. This right is conferred by Section
54. An unpaid seller can exercise the right
of resale in the following cases:
(i) where the goods are of a perishable
nature.
(ii) where the seller expressly reserves the
right of resale in case the buyer makes
a default in the payment of price.
(iii) where the seller has exercised his right
of lien or stoppage in transit, and gives
notice to the buyer of his intention to
resell the goods.
B. Rights against the An unpaid seller in addition to his rights
buyer personally against the goods, has the following rights
against the buyer personally.
1. Suit for price Where the property in goods has passed to
[Sec. 55] the buyer, and the buyer wrongfully neglects
or refuses to pay the price, the seller can
sue the buyer for price.
2. Suit for Where the buyer wrongfully neglects or
damages for refuses to accept and pay for the goods, the
non- seller can sue him for damages for
acceptance non-acceptance of the goods.
[Sec. 56]
3. Suit for Where the buyer repudiates the contract
repudiation before the date of delivery, the seller may
3.12 O Solved Scanner CMA Foundation Paper 3 (New
wait till the date of delivery or may treat the
contract as cancelled and sue for damages
for breach.
4. Suit for interest Where there is specific agreement between
[Sec. 61] the seller and the buyer regarding interest
on the price of goods, the seller may claim
it from the date when payment becomes
due. If there is no specific agreement, the
interest is payable from the date notified by
the seller to the buyer.

(d) Goods under the Sales of Goods Act, 1930 (3 marks)

Answer:
Definition of Goods: According to Section 2(7), “Goods means every
kind of moveable property other than actionable claims and money; and
includes stock and shares; growing crops, grass, trees and things
attached to or forming part of the land which are agreed to be severed
it before sale or under contract of sale”.
Example: Where the trees were sold so that they were to be cut out and
separated from land and taken away by the buyer. The contract was for
sale of trees as moveable goods.

(e) “Risk passes with property.” Comment. (5 marks)

Answer :
• The general rule is that the goods remain at the seller's risk until the
ownership is transferred to the buyer.
• After the ownership has passed to the buyer, the goods are at the
buyer's risk whether the delivery has been made or not. The rule is
resperit demino means the loss falls on the owner.
• But the parties may agree that risk will pass at different time when
ownership is passed.
• For example, the seller may agree to be responsible for the goods
even after the ownership is passed to the buyer or vice-versa.
 Model Test Paper O 3.13

• In the case of Consolidated Coffee Ltd. V. Coffee Board, one of the

terms adopted by the Coffee Board for auction of Coffee was that
the property in the Coffee knocked down to a bidder would not pass
until the payment of price and the goods would remain with the seller
at the risk of the buyer. In such cases, risk and property passes on
at different stages. It was further held that the buyer was at fault in
delaying delivery unreasonably and thus, on that ground he was
liable for the loss.
• In the case of Denby Hamilton & co. Ltd. V. Baider, D contracted to
purchase 30 tons of apple juice from B. B crushed the apples and
filled 30 tons of juice in casks and kept them ready for delivery. After
few deliveries, refused to take the rest. The juice became
deteriorated and had to be thrown away. Held, the property in goods
still with B, yet the loss had to be borne by D.
• Thus, where delivery has been delayed through the fault of either
the buyer or the seller, the goods are at the risk of the party at fault.

(f) State the essential elements of a valid contract. (5 marks)

Answer:
Essential elements of a valid contract
Section 10 of the Indian Contract Act, 1872 provides that “all agreements
are contracts if they are made by the free consent of parties competent
to contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void”.
The essential elements of a valid contract are:
(i) An offer or proposal by one party and acceptance of that offer by
another party resulting in an agreement-consensus-ad-idem.
(ii) An intention to create legal relations or an intent to have legal
consequences.
(iii) The agreement is supported by a lawful consideration.
(iv) The parties to the contract are legally capable of contracting.
(v) Genuine consent between the parties.
(vi) The object and consideration of the contract is legal and is not
opposed to public policy.
(vii) The terms of the contract are certain.
 3.14 O Solved Scanner CMA Foundation Paper 3 (New
(viii) The agreements is capable of being performed i.e., it is not
impossible of being performed.
Therefore, to form a valid contract there must be (1) an agreement, (2)
based on the genuine consent of the parties, (3) supported by a lawful
consideration, (4) made for a lawful object, and (5) between the
competent parties.

(g) What is quantum meruit ? (5 marks)

Answer :
Quantum meruit literally means "as much as earned" or reasonable
remuneration. It is used where a person claims reasonable remuneration
for the services rendered by him when there was no express promise to
pay the definite remuneration. Hence, the law implies reasonable
compensation for the services rendered by a party if there are
circumstances showing that they are to be paid for.
• The general rule is that where a party to a contract has not fully
performed what the contract demands as a condition of payment, he
cannot sue for that which he has done.
• But where one party who has performed part of his contract is
prevented by the other from completing it, he may sue on quantum
meruit, for the value of what he has done.
• The claim on a quantum meruit arises when one party abandons the
contract, or accepts the work done by another under a void contract.
• The party in default may also sue on a quantum meruit for what he
has done if the contract is divisible and the other party has had the
benefit of the part which as been performed.
• However, if the contract is not divisible, the party at fault cannot
claim the value of what he has done.

Section B

1. Choose the correct answer from the given four alternatives:

(i) Law is ________of ethics.
(a) No connection
(b) Decodification
 Model Test Paper O 3.15

(c) Codification
(d) Visualisation.
(ii) Business Ethics calls for avoidance of:
(a) Competition
(b) Publicity
(c) Monopoly
(d) Self Interest.
(iii) Ethics has evolved with evolution of:
(a) Culture
(b) Value
(c) Moral
(d) Society.
(iv) The terms ‘business ethics’ came into common use in year _______.
(a) 1950
(b) 1960
(c) 1970
(d) 1980
(v) Business ethics has a ________ application.
(a) Natural
(b) Practical
(c) Universal
(d) None of the above
(vi) Ethics has become the buzzword in the corporate world because of:
(a) Globalization
(b) Communication explosion
(c) Exploitation
(d) Both (a) and (b)
(vii) Corporate entities are legally considered as persons in _______.
(a) USA
(b) JAPAN
(c) CHINA
(d) None of the above
(viii) Business ethics has a _________ application _________.
(a) Business universal
(b) Natural
 3.16 O Solved Scanner CMA Foundation Paper 3 (New
(c) Practical
(d) None of the above
(ix) This is not of the 7 principles of public life:
(a) Integrity
(b) Honesty
(c) Content
(d) Accountability
(x) Ethics has evolved with evolution of:
(a) Culture
(b) Value
(c) Moral
(d) Society
(xi) ________ are beliefs about what is right and wrong or goods or bad.
(a) Mores
(b) Motivators
(c) Cultures
(d) Ethics
(xii) Business Ethics is in nature.
(a) Absolute
(b) Not absolute
(c) Permanent
(d) None of the above (1×12 = 12 marks)
Answer:
(i) (c)
(ii) (c)
(iii) (d)
(iv) (c)
(v) (c)
(vi) (d)
(vii) (a)
(viii) (a)
(ix) (c)
(x) (d)
(xi) (d)
(xii) (b)
 Model Test Paper O 3.17

4. ‘The ethics of business is the ethics of responsibility. The businessman

must promise that he will not harm knowingly’. Explain. (4 marks)
Answer:
• Over a period of time, business has developed a code of conduct that
creates greatest good and least harm to its pillars of support viz.
customers, employees, shareholders and community.
• Apparently, there is a contradiction between ethics and motive of profit.
It is now well accepted a fact that ethical behavior creates a positive
reputation that expands the opportunities for profit.
• A business is not restricted to its various assets viz. Building, Machine,
Working Capital only but is having a vision and a role, present or
prospective to play in the society.
• To achieve such goal it needs to make a number of sacrifices and take
responsibilities such as:
(a) Creation of awareness within the organization how its products and
services are accepted to the consumer, the industry and the society
at large.
(b) Sacrifice a part of profit to satisfy legal or other commitment for
corporate social responsibility.
(c) An organizational culture most likely to encourage high ethical
standard of risk tolerance, control and conflict tolerance.
(d) Spend on research and other innovations for protecting
environmental needs to carry out business / industrial operations.

5. Explain Ethics as a principle. (4 marks)

Answer:
Ethics as a Principle:
• We have established that social evolution has developed definite
principles of civic behaviour, which have attained the status of principles.
• By principle, we understand that something proceeds and depends on
it for its cause.
• For instance, when one kicks a football, force is the principle that propels
it into motion and the ball remains in motion till the force lasts. In other
words, the physical world functions strictly according to the laws of
 3.18 O Solved Scanner CMA Foundation Paper 3 (New
physics. It is expected that people also submit their behavior , both in
thoughts and in actions, to these principles.
• An action is valid as long as it reflects the principle, just as the speed of
the moving ball depends on the force it receives.
6. What are the seven principles of Public life? Explain. (4 marks)
Answer:
The Seven Principles of Public Life
Selflessness Holders of public office should take decisions solely
in tells of the public interest. They should not do so in
order to gain financial or other material benefits for
themselves, their family, or their friends.
Integrity Holders of public office should not place themselves
under any financial or other obligation to outside
individuals or organizations that might influence them
in the performance or their official duties.
Objectivity In carrying out public business including making
public appointments, awarding contracts, or
recommending individuals for rewards and benefits,
holders of public office should make choices on merit.
Accountability Holders of public office are accountable for their
decisions and actions to the public and must submit
themselves to whatever scrutiny is appropriate to
their office.
Openness Holders of public office should be as open as
possible about all the decisions and actions that they
take. They should give reasons for their decisions
and restrict information only when the wider public
interest clearly demands.
Honesty Holders of public office have a duty to declare any
private interests relating to their public duties and to
take steps to resolve any conflicts arising in a way
that protects the public interest.
 Model Test Paper O 3.19

Leadership Holders of public office should promote and support

these principles by sound leadership and prove to be
an example in whatever they perform.

7. Explain the concept of 'business ethics'. (2 marks)

Answer:
The Concept of Business Ethics:
• Business ethics is a form of applied ethics where principles of ethics may
be applied to daily routine situations in any business.
• In broad sense ethics in business is simply the application of moral or
ethical norms to business.
• The term ethics has its origin from the Greek word “ethos”, which means
character or custom the distinguishing character, sentiment, moral
nature, or guiding beliefs of a person, group, or institution.
• The synonyms of ethics as per Collins Thesaurus are Conscience, moral
code, morality, moral philosophy, moral values, principles, rules of
conduct, standards.
• Business ethics compromises the principles and standards that guide
behaviour in the conduct of business.
• Business must balance their desire to maximize profits against the needs
of the stakeholders.
• Maintaining this balance often requires tradeoffs.
• To address these unique aspects of business, rules articulated and
implicit, are developed to guide the business to earn profits without
harming individuals or society as a whole.

8. “Good business ethics promotes good business”— Explain.

(4 marks)
Answer :
• In general the ethics is concerned with doing the right thing.
• The ethics covers the understanding and analysis of right and wrong,
good and bad or evil.
 3.20 O Solved Scanner CMA Foundation Paper 3 (New
• There is a growing realization all over the world that ethics is vitally
important for the survival and growth of any business and for the
progress of any society.
• Ethics leads to an efficient economy; ethics alone, not government or
laws, can protect society; ethics is good in itself; ethics and profits go
together in the long-run.
• An ethically responsible company is one which has developed a culture
of caring for people and for the environment; a culture which flows
downwards from the top managers and leaders.
• Adopting ethical behaviour in an organization not only increases and
enhances its goodwill but also leads to positive consequences in the
long run.
• Business ethics protects the interest of all stakeholders. Businessman
who follows business ethics improves his self image, gets self
satisfaction and motivates others also to follow the same principles.
• So in the era of global economy, for a successful business one has to
follow sound ethical practices.
• Ethics are important not only in business but in all aspects of life
because it is an essential part of the foundation on which civilized
society is built.
• A business or society that lacks ethical principles is bound to fail sooner
or later.
• An organization that has a strong ethical program in place will certainly
help in reducing the burden on the employees while deciding on some
alternatives, Ethics helps employees in developing a rationale behind the
actions that they undertake in the efficient performance of their duties.
• It will certainly help in reducing unnecessary tensions and unavoidable
thoughts that an individual gets surrounded with when he is faced such
kind of problems.
• This helps him in concentrating more on his work and less on the
indecisive thoughts that come to his mind.