Q1.

In measurement, what type of transactions are considered (during the

process of accounting)?

(a) Quantitative
(b) Qualitative
(c) Both (a) and (b)
(d) Depending on discretion of accountant
(e) None of the above
 EXPLANATION

• Quantitative Transactions are considered in accounting.

Q1. In measurement, what type of transactions are considered (during the
process of accounting)?

(a) Quantitative
(b) Qualitative
(c) Both (a) and (b)
(d) Depending on discretion of accountant
(e) None of the above

Solution: (a)
Q2. Accounting starts with …… financial transactions and ends with ……
accounting information.

(a) recording, communicating

(b) classifying, analysing
(c) identifying, analysing
(d) identifying, communicating
(e) None of the above
 EXPLANATION

• Accounting starts with

• identifying a transaction and then recording in Journal
• then classifying in the ledger
• then summarising in final accounts
• then interpretation through Ratio analysis
• then finally communicating the information to the users of the financial
statement.

Thus, the first step is identifying and the last step is communicating the
information.
Q2. Accounting starts with …… financial transactions and ends with ……
accounting information.

(a) recording, communicating

(b) classifying, analysing
(c) identifying, analysing
(d) identifying, communicating
(e) None of the above

Solution: (d)
Q3. Book keeping is:

(a) wider concept than accounting

(b) narrower concept than accounting
(c) same as accounting
(d) not related to accounting
(e) None of the above
 EXPLANATION

• Bookkeeping is the process of systematic recording and classification of

financial transactions of an organisation.

• The most important focus of bookkeeping is to maintain an accurate record

of all the monetary transactions of a business. Companies use this
information to take major investment decisions.

• The bookkeeper maintains bookkeeping records. Accurate bookkeeping is

critical for business as it gives a piece of reliable information on the
performance of a company.

• Accounting is a wider concept than book keeping as it starts where book

keeping ends. Moreover, book keeping is a part of accounting.
Q3. Book keeping is:

(a) wider concept than accounting

(b) narrower concept than accounting
(c) same as accounting
(d) not related to accounting
(e) None of the above

Solution: (b)
Q4. Which of the following is not the objective of accounting?

(a) Maintain systematic and complete record of business transactions.

(b) Ascertain financial position of business.
(c) Window Dressing of books of accounts.
(d) Provide useful information to various interested parties.
(e) All of the above are its objectives
 EXPLANATION

• The term 'window dressing' means manipulation of accounts so as to present

the financial statements in a way to show better position than the actual.

• It is not an objective of accounting.

Q4. Which of the following is not the objective of accounting?

(a) Maintain systematic and complete record of business transactions.

(b) Ascertain financial position of business.
(c) Window Dressing of books of accounts.
(d) Provide useful information to various interested parties.
(e) All of the above are its objectives

Solution: (c)
Q5. Which of these is not a limitation of accounting?

(a) It is historical in nature

(b) It ignores quantitative elements
(c) It is not free from personal bias
(d) It is affected by window dressing
(e) None of the above
 EXPLANATION

• Accounting ignores qualitative elements. This is its limitation.

Q5. Which of these is not a limitation of accounting?

(a) It is historical in nature

(b) It ignores quantitative elements
(c) It is not free from personal bias
(d) It is affected by window dressing
(e) None of the above

Solution: (b)
Q6. Which of the following statements is not true?

(a) Accounting depends on book keeping.

(b) Accountancy depends on book keeping and accounting.
(c) Accounting includes summarising the classified transactions.
(d) Accountancy is narrow in scope.
(e) None of the above
 EXPLANATION

• Book-keeping: It is an art of recording in the books of accounts, the monetary

aspect of commercial and financial transactions. Book-keeping is concerned
with record keeping or maintenance of books of accounts.

• Accounting: It is the process of identifying, recording, classifying,

summarising, interpreting and communicating financial information relating
to an organisation to the interested users for judgement and decision-
making. Accounting is a wider concept than book-keeping. It starts where
book-keeping ends.

• Accountancy: Accountancy refers to the entire body of the theory and

practice of accounting. It is the systematic knowledge of accounting. It tells
us why and how to prepare the books of accounts and how to summarise the
accounting information and communicate it to the interested parties.
Q6. Which of the following statements is not true?

(a) Accounting depends on book keeping.

(b) Accountancy depends on book keeping and accounting.
(c) Accounting includes summarising the classified transactions.
(d) Accountancy is narrow in scope.
(e) None of the above

Solution: (d)
Q7. _____________ is the process of grouping the transactions of one nature at
one place, in a separate account.

(a) Recording
(b) Classifying
(c) Summarising
(d) Interpretation
(e) None of the above
 EXPLANATION

• Classifying of financial information is concerned with systematic analysis of

the recorded data. It involves posting of journalized transactions in the
concerning ledger accounts by grouping them into the accounts that are of
similar nature and balancing thereof. It is worth mentioning here, the advent
of computers has aided this process significantly. Ledger accounts are
balanced automatically when using a particular program developed for
financial accounting purpose.
Q7. _____________ is the process of grouping the transactions of one nature at
one place, in a separate account.

(a) Recording
(b) Classifying
(c) Summarising
(d) Interpretation
(e) None of the above

Solution: (b)
Q8. Which of the following statements is correct ?

(a) Public is not a user of accounting

(b) Potential investors are an internal user of accounting
(c) Suppliers of goods and services on credit are example of long-term creditors
(d) One of the limitations of accounting is that the figure given in financial
statements ignore the effects of changes in price level
(e) None of the above
 EXPLANATION

• Public at large is interested in knowing future plans of enterprises as a source

of employment and provider of amenities in the locality.

• Potential investors are an external user of accounting.

• Suppliers of goods and services on credit are example of short-term

creditors.
Q8. Which of the following statements is correct ?

(a) Public is not a user of accounting

(b) Potential investors are an internal user of accounting
(c) Suppliers of goods and services on credit are example of long-term creditors
(d) One of the limitations of accounting is that the figure given in financial
statements ignore the effects of changes in price level
(e) None of the above

Solution: (d)
Q9. Information provided by accounting should be factual and verifiable. It
should be free from error and bias. It should be such that users can depend
upon the information provided. The given description describes which essential
qualitative characteristic of accounting information ?

(a) Relevance
(b) Reliability
(c) Comparability
(d) Understandability
(e) None of the above
 EXPLANATION

• Reliability is described as one of the two primary qualities (relevance and

reliability) that make accounting information useful for decision-making.

• Reliable information is required to form judgments about the earning

potential and financial position of a business firm. Reliability differs from
item to item.

• Some items of information presented in an annual report may be more

reliable than others. For example, information regarding plant and machinery
may be less reliable than certain information about current assets because of
differences in uncertainty of realization.

• Reliability is that quality which permits users of data to depend upon it with
confidence as representative of what it purport to represent.
Q9. Information provided by accounting should be factual and verifiable. It
should be free from error and bias. It should be such that users can depend
upon the information provided. The given description describes which essential
qualitative characteristic of accounting information ?

(a) Relevance
(b) Reliability
(c) Comparability
(d) Understandability
(e) None of the above

Solution: (b)
Q10. Which of these is not a part of current liabilities?

(a) Bank overdraft

(b) Bills payable
(c) Debentures
(d) Short term Creditors
(e) None of the above
 EXPLANATION

• Debentures are non-current liabilities because their payment falls due after
more than one year.
Q10. Which of these is not a part of current liabilities?

(a) Bank overdraft

(b) Bills payable
(c) Debentures
(d) Creditors
(e) None of the above

Solution: (c)
Q11. According to consistency concept, which of the following statements is
correct?

(a) Accounting principles should be changed year to year to benefit the

organisation.
(b) Accounting principles or methods should remain same from year to year.
(c) Business firm can change accounting methods according to the changed
circumstances of business.
(d) Both (b) and (c)
(e) None of the above
 EXPLANATION

• The consistency principle does not prohibit companies to change their

accounting policies and methods.

• In fact, companies are free to change their accounting policies and methods
if there are one or more logical reasons to do so and the change so adopted
more clearly reflects the business through financial statements.

• The change so applied must be supported by credible reasons and must also
be disclosed in the notes to the financial statements along with the date of
change, appropriate reasons for change and the date from which the change
will take place.
Q11. According to consistency concept, which of the following statements is
correct?

(a) Accounting principles should be changed year to year to benefit the

organisation.
(b) Accounting principles or methods should remain same from year to year.
(c) Business firm can change accounting methods according to the changed
circumstances of business.
(d) Both (b) and (c)
(e) None of the above

Solution: (d)
Q12. Which of the following events are based on the accounting concept of
going concern?

(a) Outside parties purchase the debentures and shares of the enterprise.
(b) Prepaid expenses, which have no realisable value are shown as assets in
balance sheet
(c) Classification of current and fixed assets is made in accounting books
(d) All of the above
(e) None of the above
 GOING CONCERN CONCEPT

• It states that the accounting of the business transactions is to be done with

the assumption that the business firm will continue to carry out its
operations indefinitely.

• It assumes that the business firm will not liquidate in the near future.

• This concept provide the basis for showing the value of assets in the balance
sheet.

• This assumption allows us to charge from the revenue only that part of asset
which has been consumed or used to earn that revenue in that period and
carry forward remaining amount in next years over the life of the asset.
Q12. Which of the following events are based on the accounting concept of
going concern?

(a) Outside parties purchase the debentures and shares of the enterprise.
(b) Prepaid expenses, which have no realisable value are shown as assets in
balance sheet
(c) Classification of current and fixed assets is made in accounting books
(d) All of the above
(e) None of the above

Solution: (d)
Q13. According to business entity principle, business is treated as a unit separate
and distinct from its:

(a) owners
(b) promoters
(c) shareholders
(d) All of the above
(e) None of the above
 BUSINESS ENTITY CONCEPT

• It assumes that the business entity has a distinct and separate entity from its
owners.

• For the purposes of accounting also business and owner is to be treated as

separate entities.

• The accounting entries are to be made in the books of accounts of the

business from the business point of view only.

• Business books of accounts will record assets and liabilities of the business
only.

• Assets and liabilities of the of the owner will therefore not appear in the
books of business.
Q13. According to business entity principle, business is treated as a unit separate
and distinct from its:

(a) owners
(b) promoters
(c) shareholders
(d) All of the above
(e) None of the above

Solution: (d)
Q14. Which accounting standard deals with preparation of Cash Flow Statement
?

(a) AS - 1
(b) AS - 3
(c) AS - 5
(d) AS - 7
(e) None of the above
 EXPLANATION

• AS-3 deals with Cash Flow Statement.

• Information about the cash flows of an enterprise is useful in providing users

of financial statements with a basis to assess the ability of the enterprise to
generate cash and cash equivalents and the needs of the enterprise to utilise
those cash flows.
Q14. Which accounting standard deals with preparation of Cash Flow Statement
?

(a) AS - 1
(b) AS - 3
(c) AS - 5
(d) AS - 7
(e) None of the above

Answer: (b)
Q14. Accrual concept is based on:

(a) matching principle

(b) dual aspect principle
(c) cost principle
(d) going concern concept
(e) None of the above

Solution: (a)
Q15. From the given options, identify which of the following cannot be
considered a fundamental accounting assumption?

(a) Conservatism
(b) Going concern
(c) Consistency
(d) Accrual
(e) None of the above
 EXPLANATION

As per AS 1 of the ICAI, certain fundamental accounting assumptions underlie

the preparation and presentation of financial statements. They are usually not
specifically stated because their acceptance and use are assumed. Disclosure is
necessary only if they are not followed.

The following have generally been accepted as fundamental accounting

assumptions:

a. Going Concern

b. Consistency

c. Accrual
Q15. From the given options, identify which of the following cannot be
considered a fundamental accounting assumption?

(a) Conservatism
(b) Going concern
(c) Consistency
(d) Accrual
(e) None of the above

Solution: (a)
Q16. As per which of the following accounting principle, contingent liabilities are
shown in the balance sheet?

(a) Dual aspect principle

(b) Principle of full disclosure
(c) Principle of materiality
(d) Going concern concept
(e) Accrual
 EXPLANATION

• Composite.
The full disclosure principle is a concept that requires a business to report all
necessary information about their financial statements and other relevant
information to any persons who are accustomed to reading this information.

• Example of the full disclosure principle:

Company X purchased a piece of property, and are now the current owners. A
passing pedestrian had a terrible fall on the property and got badly injured. This
pedestrian is now suing Company X for a significant amount of money for
negligence. The pedestrian is likely to win the lawsuit in the following year.
Under the full disclosure principle, Company X should disclose the anticipated
losses from the lawsuit in the footnotes of their financial statement, even
though the loss has not been confirmed or finalised yet.
Q16. As per which of the following accounting principle, contingent liabilities are
shown in the balance sheet?

(a) Dual aspect principle

(b) Principle of full disclosure
(c) Principle of materiality
(d) Going concern concept
(e) Accrual

Solution: (b)
Q17. Which of the following accounting adjustments bears direct relation to
principle of prudence ?

(a) outstanding expenses are accounted for

(b) provision for bad debts is created
(c) depreciation is charged on fixed assets
(d) All of the above
(e) None of the above
 EXPLANATION

• Under the prudence concept, do not overestimate the amount of revenues

recognized or underestimate the amount of expenses. Also, one should be
conservative in recording the amount of assets, and not underestimate
liabilities. The result should be conservatively-stated financial statements.

• Prudence would normally be exercised in setting up, for example, an

allowance for doubtful accounts or a reserve for obsolete inventory. In both
cases, a specific item that will cause an expense has not yet been identified,
but a prudent person would record a reserve in anticipation of a reasonable
amount of these expenses arising at some point in the future.
Q17. Which of the following accounting adjustments bears direct relation to
principle of prudence ?

(a) outstanding expenses are accounted for

(b) provision for bad debts is created
(c) depreciation is charged on fixed assets
(d) All of the above
(e) None of the above

Solution: (b)
Q18. The junior accountant in a big Indian Multinational company decided to
omit the ‘paisa’ in certain figures and showed the rounded off figures in financial
statements. The senior accountant agreed with the junior accountant in this
respect on account of:

(a) principle of full disclosure

(b) going concern concept
(c) materiality principle
(d) accrual concept
(e) conservatism concept
 EXPLANATION

• Materiality Concept states that only those information should be stated in

the financial statement which have an impact on the decision making of the
users. Here, paise will not have any impact on the decision making of the
users therefore, it is not a material information and can be omitted.
Q18. The junior accountant in a big Indian Multinational company decided to
omit the ‘paisa’ in certain figures and showed the rounded off figures in financial
statements. The senior accountant agreed with the junior accountant in this
respect on account of:

(a) principle of full disclosure

(b) going concern concept
(c) materiality principle
(d) accrual concept
(e) conservatism concept

Solution: (c)
Q19. The very popular ‘Double entry system’ is based on which accounting
principle/concept?

(a) Going concern concept

(b) Business entity principle
(c) Matching principle
(d) Dual aspect principle
(e) None of the above
 EXPLANATION

• The dual aspect concept states that every business transaction requires
recordation in two different accounts. This concept is the basis of double
entry accounting, which is required by all accounting frameworks in order to
produce reliable financial statements.
Q19. The very popular ‘Double entry system’ is based on which accounting
principle/concept?

(a) Going concern concept

(b) Business entity principle
(c) Matching principle
(d) Dual aspect principle
(e) None of the above

Solution: (d)
Q20. Consider the following lists and identify the correct code:
List I List II
1. Cash flow statement (i) AS-10
2. Plant, property and equipment (ii) AS-3
3. Valuation of inventories (iii) AS - 13
4. Accounting for investments (iv) AS - 2

(a) 1 (iii) 2 (i) 3 (iv) 4 (ii)

(b) 1 (ii) 2 (i) 3 (iv) 4 (iii)
(c) 1 (ii) 2 (i) 3 (iii) 4 (iv)
(d) 1 (i) 2 (ii) 3 (iv) 4 (iii)
(e) 1 (iii) 2 (ii) 3 (i) 4 (iv)
 AS 1 Disclosure of Accounting Principles AS 16 Borrowing Costs
AS 2 Valuation of Inventories AS 17 Segment Reporting
AS 3 Cash Flow Statements AS 18 Related Party Disclosures
AS 4 Contingencies and Events Occurring After the Balance Sheet AS 19 Leases
Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and AS 20 Earnings Per Share
Changes in Accounting Policies
AS 6 Depreciation Accounting AS 21 Consolidated Financial Statements
AS 7 Construction Contracts (Revised 2002) AS 22 Accounting for taxes on income
AS 9 Revenue Recognition AS 23 Accounting for Investments in Associates in Consolidated
Financial Statements
AS 10 Accounting for Fixed Assets AS 24 Discontinuing Operations
AS 11 The Effects Of Changes In Foreign Exchange Rates (Revised AS 25 Interim Financial Reporting
2003)
AS 12 Accounting for Government Grants AS 26 Intangible Assets
AS 13 Accounting for Investments AS 27 Financial Reporting of Interests in Joint Ventures
AS 14 Accounting for Amalgamations AS 28 Impairment of Assets
AS 15 Employee Benefits (Revised 2005) AS 29 Provisions, Contingent Liabilities and Contingent Assets
Q20. Consider the following lists and identify the correct code:
List I List II
1. Cash flow statement (i) AS-10
2. Plant, property and equipment (ii) AS-3
3. Valuation of inventories (iii) AS - 13
4. Accounting for investments (iv) AS - 2

(a) 1 (iii) 2 (i) 3 (iv) 4 (ii)

(b) 1 (ii) 2 (i) 3 (iv) 4 (iii)
(c) 1 (ii) 2 (i) 3 (iii) 4 (iv)
(d) 1 (i) 2 (ii) 3 (iv) 4 (iii)
(e) 1 (iii) 2 (ii) 3 (i) 4 (iv)

Solution: (b)
Q21. Which of the following is correctly matched ?

(a) Quality of management is not recorded in books - Full disclosure principle

(b) Change in method of valuation of stock is shown in footnotes - Consistency
concept
(c) Making provision for likely bad debts should remain consistent with previous
years - Money measurement principle
(d) Provision should be made for pending law suit against firm - Principle of
conservatism
(e) None of the above
 EXPLANATION

The convention of conservatism is the convention of caution, or the policy of

playing safe. This principle requires that in the situation of uncertainty and
doubt, the business transactions should be recorded in such a manner that the
profits and assets are not overstated and losses and liabilities are not
understated. The following are some examples:

1. Closing stock is valued at cost price or Net realisable value, whichever is lower.

2. Joint life insurance policy is shown only at surrender value as against the
amount paid.

3. Provision for doubtful debt is created in anticipation of bad debts etc.

4. Provision for pending law suit against the firm, which may either be decided in
its favour.
Q21. Which of the following is correctly matched ?

(a) Quality of management is not recorded in books - Full disclosure principle

(b) Change in method of valuation of stock is shown in footnotes - Consistency
concept
(c) Making provision for likely bad debts should remain consistent with previous
years - Money measurement principle
(d) Provision should be made for pending law suit against firm - Principle of
conservation
(e) None of the above

Solution: (d)
Q22. During periods of inflation, the figure of net profit as depicted by profit and
loss account may not be accurate because of:

(a) matching principle

(b) historical cost principle
(c) principle of prudence
(d) dual aspect principle
(e) None of the above
 EXPLANATION

• The cost principle is an accounting principle that records assets at their

respective cash amounts at the time the asset was purchased or acquired.
The amount of the asset that is recorded may not be increased for
improvements in market value or inflation, nor can it be updated to reflect
any depreciation.
Q22. During periods of inflation, the figure of net profit as depicted by profit and
loss account may not be accurate because of:

(a) matching principle

(b) historical cost principle
(c) principle of prudence
(d) dual aspect principle
(e) None of the above

Solution: (b)
Q23. What will be the impact of following transaction on the accounting
equation:
Transaction :- Cash Withdrawn by Proprietor

(a) Decrease in assets, decrease in liabilities

(b) Decrease in assets, decrease in capital
(c) Increase in assets, increase in liabilities
(d) Increase in assets, increase in capital
(e) None of the above
 EXPLANATION

• The accounting equation states that a company's total assets are equal to the
sum of its liabilities and its shareholders' equity. This straightforward number
on a company balance sheet is considered to be the foundation of the
double-entry accounting system.

• Cash withdrawn by proprietor would reduce assets and capital.

Q23. What will be the impact of following transaction on the accounting
equation:
Transaction :- Cash Withdrawn by Proprietor

(a) Decrease in assets, decrease in liabilities

(b) Decrease in assets, decrease in capital
(c) Increase in assets, increase in liabilities
(d) Increase in assets, increase in capital
(e) None of the above

Solution: (b)
Q24. Which of the following correctly depicts the effect on accounting equation
for outstanding expenses?

(a) Decrease in assets, Decrease in liabilities, No change in capital

(b) Decrease in assets, No change in liabilities, Decrease in capital in capital
(c) No change in assets, Increase in liabilities, Decrease in capital
(d) Decrease in assets, Increase in liabilities, Decrease in capital
(e) None of the above
 EXPLANATION

• Outstanding Expenses are added to Liabilities because it is business'

CURRENT LIABILITY and deducted from CAPITAL because it causes a decrease
in owner's equity.
Q24. Which of the following correctly depicts the effect on accounting equation
for outstanding expenses?

(a) Decrease in assets, Decrease in liabilities, No change in capital

(b) Decrease in assets, No change in liabilities, Decrease in capital in capital
(c) No change in assets, Increase in liabilities, Decrease in capital
(d) Decrease in assets, Increase in liabilities, Decrease in capital
(e) None of the above

Solution: (c)
Q24. Goods costing Rs 40,000 sold at a profit of 20% for cash. Examine the effect
on accounting equation:

(a) Increase in assets Rs. 40,000, Increase in capital Rs. 40,000

(b) Increase in assets Rs. 48,000, Increase in capital Rs. 48,000
(c) Increase in assets Rs. 8,000, Increase in capital Rs. 8,000
(d) Increase in assets Rs. 8,000, decrease in capital Rs. 8,000
(e) None of the above
 EXPLANATION

• Cash would increase by 48000 and stock decrease by 40000. Net increase in
assets would be 8000.

• Capital would increase by amount of profit i.e. 8000.

Q24. Goods costing Rs 40,000 sold at a profit of 20% for cash. Examine the effect
on accounting equation:

(a) Increase in assets Rs. 40,000, Increase in capital Rs. 40,000

(b) Increase in assets Rs. 48,000, Increase in capital Rs. 48,000
(c) Increase in assets Rs. 8,000, Increase in capital Rs. 8,000
(d) Increase in assets Rs. 8,000, decrease in capital Rs. 8,000
(e) None of the above

Solution: (c)
Q25. A firm XYZ and Co. made credit sales in January 2021 of 10,000/-. And by
31st March they had received only 7,000/- with 3,000/- still receivable. How
much revenue would be recognized in books of accounts for year ended 31st
March 2021 ?

(a) 3,000
(b) 7,000
(c) 10,000
(d) 4,000
(e) None of the above
 EXPLANATION

• Accounting transactions are recorded in the books of accounts when they

occur. This is known as the Mercantile System. So as opposed to the cash
system, in accrual concept, the revenue or expenditure is recognized in the
year they are realized.

• The revenue will be recognized in the year it has been realized in. So say firm
XYZ and Co. made credit sales in January of 2108 of 10,000/-. And by 31st
March they had received only 7,000/- with 3,000/- still receivable. However,
the entire 10,000/- will be recognized in the year 2017-2018, irrespective of
how much money was actually received.
Q25. A firm XYZ and Co. made credit sales in January 2021 of 10,000/-. And by
31st March they had received only 7,000/- with 3,000/- still receivable. How
much revenue would be recognized in books of accounts for year ended 31st
March 2021 ?

(a) 3,000
(b) 7,000
(c) 10,000
(d) 4,000
(e) None of the above

Solution: (c)
Q26. When the number of accounts to be debited or credited is more than one,
entry made for recording the transaction is called ……… journal entry ?

(a) single
(b) compound
(c) normal
(d) simple
(e) None of the above
 EXPLANATION

• A compound journal entry is an accounting entry in which there is more than

one debit, more than one credit, or more than one of both debits and
credits. It is essentially a combination of several simple journal entries.
Q26. When the number of accounts to be debited or credited is more than one,
entry made for recording the transaction is called ……… journal entry ?

(a) single
(b) compound
(c) normal
(d) simple
(e) None of the above

Solution: (b)
Q27. If goods of Rs. 20,000 are purchased on credit from Vinayak, the:

(a) Purchases account is debited with Rs. 20,000

Vinayak account is credited with Rs. 20,000.

(b) Purchases account is debited with Rs. 20,000

Cash account is credited with Rs. 20,000.

(c) Vinayak account is debited with Rs. 20,000

Purchases account is credited with Rs.20,000.

(d) Vinayak account and Purchases account are debited with Rs. 20,000

(e) Vinayak account and Purchases account are credited with Rs. 20,000
EXPLANATION
Q1. Which
Q27. If goods
of the
of Rs.
following
20,000 are
is anpurchased
example of
onComposite
credit fromRatio
Vinayak,
? the:

(a) Purchases
Current Ratio
account is debited with Rs. 20,000
(b) Acid Test
Vinayak account
Ratiois credited with Rs. 20,000.
(c) Debtor Turnover Ratio
(d) Purchases
(b) Net Profit Ratio
account is debited with Rs. 20,000
(e) None
Cash account
of the
is above
credited with Rs. 20,000.

(c) Vinayak account is debited with Rs. 20,000

Purchases account is credited with Rs.20,000.

(d) Vinayak account and Purchases account are debited with Rs. 20,000

(e) Vinayak account and Purchases account are credited with Rs. 20,000

Solution: (a)
Q28. Ashish (proprietor) withdrew ` 50,000 from bank for private use. Which
account will be debited while passing journal entry?

(a) Ashish
(b) Cash
(c) Drawings
(d) Bank
(e) No Entry passed as Ashish is proprietor of firm
 EXPLANATION

• A drawing account is an accounting record maintained to track money

withdrawn from a business by its owners.
Q28. Ashish (proprietor) withdrew ` 50,000 from bank for private use. Which
account will be debited while passing journal entry?

(a) Ashish
(b) Cash
(c) Drawings
(d) Bank
(e) No Entry passed as Ashish is proprietor of firm

Solution: (c)
Q29. Payment of wages for installation of machinery will be recorded as:

(a) Debit Machinery A/c and credit Cash A/c

(b) Debit Cash A/c and credit Machinery A/c
(c) Debit Wages A/c and credit Cash A/c
(d) Debit Machinery A/c and credit Wages A/c
(e) None of the above
 EXPLANATION

• Wages for installation of machinery are added to machinery’s cost.

Q29. Payment of wages for installation of machinery will be recorded as:

(a) Debit Machinery A/c and credit Cash A/c

(b) Debit Cash A/c and credit Machinery A/c
(c) Debit Wages A/c and credit Cash A/c
(d) Debit Machinery A/c and credit Wages A/c
(e) None of the above

Solution: (a)
Q30. In big business institutions, it is not easy to record all the transactions in
one journal and post them into various accounts. So, for the easy and accurate
recording of all the transactions, ___________ are maintained.

(a) Special Books

(b) Twin Books
(c) Casting Books
(d) Subsidiary Books
(e) None of the above
 EXPLANATION

The 8 Subsidiary books are as follows:

1.Cash Book
2.Purchase Book
3.Sales Book
4.Purchase Return Book
5.Sales Return Book
6.Bills Receivable Book
7.Bills Payable Books
8.Journal Proper
Q30. In big business institutions, it is not easy to record all the transactions in
one journal and post them into various accounts. So, for the easy and accurate
recording of all the transactions, ___________ are maintained.

(a) Special Books

(b) Twin Books
(c) Casting Books
(d) Subsidiary Books
(e) None of the above

Solution: (d)
Q31. In the context of subsidiary books in accounting, which of the following is
incorrectly matched ?

(a) Purchase of goods from MA Ltd. – Purchase Book

(b) Purchase of stationery in cash - Cash Book
(c) Depreciation on buildings - Journal Proper
(d) Sale of goods in exchange for cash - Sales Book
(e) None of the above is incorrect
 EXPLANATION

• The first and most important subsidiary book is the cash book. It records all
the transactions related to cash and bank receipts and payments

• Purchase Book is a subsidiary book that is used to record all the transactions
related to credit purchases. The purchases of the asset are never recorded in
the purchase book.

• The Sales Book records all the transactions related to credit sales. The sales
book cannot record the sale of assets.

• There are certain transactions that cannot be recorded in any of the above-
mentioned books; these transactions are termed miscellaneous transactions.
So, the Journal Proper is used to record all the miscellaneous transactions. It
includes transactions such as credit purchase and sale of assets,
depreciation, etc.
Q31. In the context of subsidiary books in accounting, which of the following is
incorrectly matched ?

(a) Purchase of goods from MA Ltd. – Purchase Book

(b) Purchase of stationery in cash - Cash Book
(c) Depreciation on buildings - Journal Proper
(d) Sale of goods in exchange for cash - Sales Book
(e) None of the above is incorrect

Solution: (d)
Q32. Which of the following is a correct difference between reserves and
provision ?

(a) Reserves are Charge against profit. Provisions are appropriation of profits.
(b) Reserve is created to meet known liability. Provision is created to meet
unknown liability.
(c) Generally, creation of a reserve is at the discretion of management. Provision
must be made even if there are no profits.
(d) All of the are correct
(e) None of the above is correct
 EXPLANATION

• Provisions are Charge against profit. Reserves are appropriation of profits.

• Provision is created to meet known liability. Reserve is created to meet

unknown liability.

• Creation of provision is necessary. It must be made even if there are no

profits. Generally, creation of a reserve is at the discretion of management.
Reserves cannot be created unless there are profits.
Q32. Which of the following is a correct difference between reserves and
provision ?

(a) Reserves are Charge against profit. Provisions are appropriation of profits.
(b) Reserve is created to meet known liability. Provision is created to meet
unknown liability.
(c) Generally, creation of a reserve is at the discretion of management. Provision
must be made even if there are no profits.
(d) All of the are correct
(e) None of the above is correct

Solution: (c)
Q33. Which of the following is incorrect in respect of Depreciation ?

(a) It is decline in the book value of fixed assets.

(b) It includes loss of value due to effluxion of time, usage or obsolescence.
(c) It is a continuing process.
(d) Depreciation is deducted before calculating taxable profits.
(e) None of the above is incorrect
 EXPLANATION

• Depreciation is an accounting method of allocating the cost of a tangible

asset over its useful life and is used to account for declines in value over
time.
Q33. Which of the following is incorrect in respect of Depreciation ?

(a) It is decline in the book value of fixed assets.

(b) It includes loss of value due to effluxion of time, usage or obsolescence.
(c) It is a continuing process.
(d) Depreciation is deducted before calculating taxable profits.
(e) None of the above is incorrect

Solution: (e)
Q34. Which of the following would not be considered as application of cash
while preparing cash flow statement ?

(a) Redemption of preference shares

(b) Purchase of investments
(c) Payment of dividend
(d) Issue of shares
(e) Loss on Operation
 EXPLANATION

• Issue of shares is a source of cash.

Q34. Which of the following would not be considered as application of cash
while preparing cash flow statement ?

(a) Redemption of preference shares

(b) Purchase of investments
(c) Payment of dividend
(d) Issue of shares
(e) Loss on Operation

Answer: (d)
Q35. A machine is purchased for ` 60,000 and is expected to have a useful life of
10 years. At the end of 10th year it is expected to have a sale value of ` 6,000 but
expenses related to its disposal are estimated at ` 1,000. Then its depreciable
cost is:

(a) 54,000
(b) 60,000
(c) 55,000
(d) 56,000
(e) None of the above
 EXPLANATION

• The depreciable value of the asset is the combined cost of purchase and
installation of an asset that can be depreciated minus its salvage value.
Q35. A machine is purchased for ` 60,000 and is expected to have a useful life of
10 years. At the end of 10th year it is expected to have a sale value of ` 6,000 but
expenses related to its disposal are estimated at ` 1,000. Then its depreciable
cost is:

(a) 54,000
(b) 60,000
(c) 55,000
(d) 56,000
(e) None of the above

Solution: (c)
Q36. Which of the following is/are the advantage(s) of straight line method of
depreciation ?

(a) It results into almost equal burden of depreciation and repair expenses taken
together every year on profit and loss account
(b) Income Tax Act accept this method for tax purposes
(c) As a large portion of cost is written-off in earlier years, loss due to
obsolescence gets reduced
(d) All of the above
(e) None of the above
 EXPLANATION

• All of these are advantages of written down value method of depreciation.

Q36. Which of the following is/are the advantage(s) of straight line method of
depreciation ?

(a) It results into almost equal burden of depreciation and repair expenses taken
together every year on profit and loss account
(b) Income Tax Act accept this method for tax purposes
(c) As a large portion of cost is written-off in earlier years, loss due to
obsolescence gets reduced
(d) All of the above
(e) None of the above

Solution: (e)
Q37. Use of common unit of measurement and common format of reporting
promotes:

(a) Comparability
(b) Understandability
(c) Relevance
(d) Reliability
(e) None of the above
 EXPLANATION

• Comparability' characteristic of accounting information requires the use of

common units and common format of reporting. It is the most important
quality of accounting information. Comparability means accounting
information of a current year can be comparable with that of the previous
years.
Q37. Use of common unit of measurement and common format of reporting
promotes:

(a) Comparability
(b) Understandability
(c) Relevance
(d) Reliability
(e) None of the above

Solution: (a)
Q38. The Trading and Profit and Loss Account is prepared under which attribute
of accounting:

a) Summarising
b) Recording
c) Classifying
d) Analysis and Interpretation
(e) None of the above
 EXPLANATION

• Summarising the transactions - It involves presenting the classified data in a

manner and in the form of statements, which are understandable by the
users. It includes Trial balance, Trading Account, Profit and Loss Account and
Balance Sheet.
Q38. The Trading and Profit and Loss Account is prepared under which attribute
of accounting:

a) Summarising
b) Recording
c) Classifying
d) Analysis and Interpretation
(e) None of the above

Solution: (a)
Q39. Business transactions are recorded:

(a) in chronological order.

(b) weekly.
(c) at the end of the month.
(d) at the discretion of accountant.
(e) at the discretion of propreitor.
 EXPLANATION

• A journal is a chronological (arranged in order of time) record of business

transactions. A journal entry is the recording of a business transaction in the
journal. A journal entry shows all the effects of a business transaction as
expressed in debit(s) and credit(s) and may include an explanation of the
transaction.
Q39. Business transactions are recorded:

(a) in chronological order.

(b) weekly.
(c) at the end of the month.
(d) at the discretion of accountant.
(e) at the discretion of propreitor.

Solution: (a)
Q40. As per the accounting rules of debit and credit, which of the following
would be debited ?

(a) an increase in asset

(b) a decrease in asset
(c) an increase in liability
(d) an increase in capital
(e) None of the above
EXPLANATION
Q40. As per the accounting rules of debit and credit, which of the following
would be debited ?

(a) an increase in asset

(b) a decrease in asset
(c) an increase in liability
(d) an increase in capital
(e) None of the above

Solution: (a)
Q41. Cash column of Cash – book always shows:

(a) Debit balance

(b) Credit balance
(c) Debit or Credit balance
(d) Zero balance
(e) None of the above
 EXPLANATION

• Cash column of cash book will always show debit balance because cash
payment can never exceed the cash in hand.
Q41. Cash column of Cash – book always shows:

(a) Debit balance

(b) Credit balance
(c) Debit or Credit balance
(d) Zero balance
(e) None of the above

Solution: (a)
Q42. Trial Balance might match in spite of presence of:

(a) Errors of complete omission

(b) Errors of principle
(c) Errors of commission
(d) Both (a) and (b)
(e) None of the above
 EXPLANATION

• Error of principle: An error of principle is an error which violates the

fundamentals of book keeping. For example, purchase of furniture is debited
in the Purchase A/c (Expense A/c) instead of Furniture A/c (Asset A/c), then
the debit side of the trial balance will still agree with the credit side but the
principles of book keeping will be violated.
• Compensatory error: An incorrect debit entry being offset by an equal credit
entry or vice versa may allow the trial balance to agree. For example, if one
account in the ledger is debited Rs. 100 less and another account in the
ledger is credited Rs. 100 less, then these errors will cancel out each other.
This means that one error is neutralised by another same error on the
opposite side, allowing the trial balance to agree.
• Error of omission: If a transaction is completely omitted that is both the
aspects of an entry are omitted to be recorded in the double entry book
keeping system, the trial balance will still agree.
Q42. Trial Balance might match in spite of presence of:

(a) Errors of complete omission

(b) Errors of principle
(c) Errors of commission
(d) Both (a) and (b)
(e) None of the above

Solution: (d)
Q43. If the trial balance does not tally even after many efforts then which of the
following Account is opened ?

(a) Purchase account

(b) Suspense account
(c) Sales account
(d) Inventory account
(e) None of the above
 EXPLANATION

• Suspense accounts are used when your trial balance is out of balance or
when you have an unidentified transaction. The suspense account is a
general ledger account that acts as a holding account until the error is
discovered or the unknown transaction is identified.
Q43. If the trial balance does not tally even after many efforts then which of the
following Account is opened ?

(a) Purchase account

(b) Suspense account
(c) Sales account
(d) Inventory account
(e) None of the above

Solution: (b)
Q44. The party which is ordered to pay the amount on a bill of exchange is
known as:

(a) Drawee
(b) Payee
(c) Drawer
(d) Beneficiary
(e) None of the above
 EXPLANATION

There are 3 parties involved in a payment by bill of exchange:

• the drawer is the party that issues a bill of exchange – the 'creditor';
• the beneficiary or payee is the party to which the bill of exchange is payable;
• the drawee is the party to which the order to pay is sent - 'the debtor'.
Q44. The party which is ordered to pay the amount on a bill of exchange is
known as:

(a) Drawee
(b) Payee
(c) Drawer
(d) Beneficiary
(e) None of the above

Solution: (a)
Q45. Refusal by the acceptor to pay the bill on the maturity date is called:

(a) Dishonor of bill

(b) Retirement of bill
(c) Rebate on bill
(d) Discounting of bill
(e) None of the above
 EXPLANATION

• When the drawee (a person who is liable to pay) is not able to make the
payment on the date of maturity of a bill, a bill is said to be dishonoured.
Q45. Refusal by the acceptor to pay the bill on the maturity date is called:

(a) Dishonor of bill

(b) Retirement of bill
(c) Rebate on bill
(d) Discounting of bill
(e) None of the above

Solution: (a)
Q46. Choose the correct chronological order of ascertainment of the following
profits from the profit and loss account:

(a) Operating Profit, Net Profit, Gross Profit

(b) Operating Profit, Gross Profit, Net Profit
(c) Gross Profit, Operating Profit, Net Profit
(d) Gross Profit, Net Profit, Operating Profit
(e) None of the above
 EXPLANATION

• Gross Profit is the income left after deducting direct expenses; Operating
Profit is the income remained after deducting indirect expenses from gross
profit and Net Profit is the net of all expenses, interest, and taxes.
Q46. Choose the correct chronological order of ascertainment of the following
profits from the profit and loss account:

(a) Operating Profit, Net Profit, Gross Profit

(b) Operating Profit, Gross Profit, Net Profit
(c) Gross Profit, Operating Profit, Net Profit
(d) Gross Profit, Net Profit, Operating Profit
(e) None of the above

Solution: (c)
Q47. Income tax paid by a sole trader is reflected in his financial statements:

(a) On the debit side of the Trading Account

(b) On the debit side of the Profit and Loss Account
(c) As way of deduction from capital in the Balance Sheet
(d) As an asset in the Balance Sheet
(e) None of the above
 EXPLANATION

• For a Sole Proprietor, income tax is not an expense incurred to generate

revenue hence it is not treated as an expense to be paid out of profits. In this
case, income tax is treated as a personal expense resulting in drawings from
the business concluding to a reduction of capital.
Q47. Income tax paid by a sole trader is reflected in his financial statements:

(a) On the debit side of the Trading Account

(b) On the debit side of the Profit and Loss Account
(c) As way of deduction from capital in the Balance Sheet
(d) As an asset in the Balance Sheet
(e) None of the above

Solution: (c)
Q48. Rent paid on 1st October, 2020 for one year upto 30th September, 2021
was Rs.2400. Rent paid on 1st October, 2021 for the year upto 30th September,
2022 was Rs.3.200. Rent shown in the Profit and Loss Account for the year
ended on 31st December, 2021, would be:

(a) Rs. 2,600

(b) Rs. 5,200
(c) Rs. 3,200
(d) Rs. 6,000
(e) None of the above
 EXPLANATION

Rent shown in the Profit and Loss Account for the year ended on 31st
December, 2021:

2400*9/12 + 3200*3/12 = 2600

Q48. Rent paid on 1st October, 2020 for one year upto 30th September, 2021
was Rs.2400. Rent paid on 1st October, 2021 for the year upto 30th September,
2022 was Rs.3.200. Rent shown in the Profit and Loss Account for the year
ended on 31st December, 2021, would be:

(a) Rs. 2,600

(b) Rs. 5,200
(c) Rs. 3,200
(d) Rs. 6,000
(e) None of the above

Solution: (a)
Q49. Net profit of a firm before charging manager’s commission is Rs.21,000. If
the manager is entitled to 5% commission on profits after charging such
commission, how much manager will get as commission?

(a) Rs. 1,050

(b) Rs. 1,000
(c) Rs.2,100
(d) Rs.2,000
(e) None of the above
 EXPLANATION

Net profit of a firm before charging manager’s commission is Rs.21,000

Net profit of a firm after charging manager’s commission be x
Manager’s commission would be 0.05x

So,
21,000 – 0.05x = x
21,000 = 1.05x
x = 20,000
Commission = 1,000
Q49. Net profit of a firm before charging manager’s commission is Rs.21,000. If
the manager is entitled to 5% commission on profits after charging such
commission, how much manager will get as commission?

(a) Rs. 1,050

(b) Rs. 1,000
(c) Rs.2,100
(d) Rs.2,000
(e) None of the above

Solution: (b)
Q50. Which of the following types of accounts are shown in Balance Sheet ?

(a) Real and Personal

(b) Real and Nominal
(c) Nominal and Personal
(d) Real, Nominal and Personal
(e) None of the above
 EXPLANATION

• The Balance sheet is the statement which shows the assets, equity and
liabilities of the company. It is divided under Assets and equity & liabilities
heads. It shows balances of Personal and real account.
Q50. Which of the following types of accounts are shown in Balance Sheet ?

(a) Real and Personal

(b) Real and Nominal
(c) Nominal and Personal
(d) Real, Nominal and Personal
(e) None of the above

Solution: (a)
Q51. Sales: Rs. 1,00,000; Purchase: Rs. 60,000; Wages (to be charged to trading
account) Rs. 7,000. Closing stock was Rs. 3,000 more than opening stock. What is
the Gross Profit?

(a) Rs. 30,000.

(b) Rs. 33,000.
(c) Rs. 36,000.
(d) Rs. 40,000.
(e) None of the above.
 EXPLANATION

Gross Profit = Sales – Cost of Goods Sold

Cost of Goods Sold = OS + Purchases + Wages – CS

i.e. – 3,000 + 60,000 + 7,000 = 64,000

Sales = 1,00,000

Gross Profit = 1,00,000 – 64,000 = 36,000

Q51. Sales: Rs. 1,00,000; Purchase: Rs. 60,000; Wages (to be charged to trading
account) Rs. 7,000. Closing stock was Rs. 3,000 more than opening stock. What is
the Gross Profit?

(a) Rs. 30,000.

(b) Rs. 33,000.
(c) Rs. 36,000.
(d) Rs. 40,000.
(e) None of the above.

Solution: (c)
Q52. Heavy amount spent for the advertisement of new company product is:

(a) Deferred Revenue Expenditure

(b) Revenue Expenditure
(c) Capital Expenditure
(d) Either (A) or (C)
(e) None of the above
 EXPLANATION

• In business, Deferred Revenue Expenditure is an expense which is incurred

while accounting period. And the result and benefits of this expenditure are
obtained over the multiple years in the future.

• For example, revenue used for advertisement is deferred revenue

expenditure because it will keep showing its benefits over the period of two
to three years.
Q52. Heavy amount spent for the advertisement of new company product is:

(a) Deferred Revenue Expenditure

(b) Revenue Expenditure
(c) Capital Expenditure
(d) Either (A) or (C)
(e) None of the above

Solution: (a)
Q53. Inventory includes:

(a) merchandise purchased by a retailer and held for resale

(b) materials, maintenance supplies, consumables and loose tools awaiting use
in the production process
(c) machinery spares which can be used only in connection with an item of fixed
asset and whose use is expected to be irregular
(d) Both a and b
(e) None of the above
 EXPLANATION

• Inventories encompass goods purchased and held for resale, for example,
merchandise purchased by a retailer and held for resale, computer software
held for resale, or land and other property held for resale.

• Inventories also encompass finished goods produced, or work in progress

being produced, by the enterprise and include materials, maintenance
supplies, consumables and loose tools awaiting use in the production
process.

• Inventories do not include machinery spares which can be used only in

connection with an item of fixed asset and whose use is expected to be
irregular; such machinery spares are accounted for in accordance with
Accounting Standard (AS) 10, Accounting for Fixed Assets.
Q53. Inventory includes:

(a) merchandise purchased by a retailer and held for resale

(b) materials, maintenance supplies, consumables and loose tools awaiting use
in the production process
(c) machinery spares which can be used only in connection with an item of fixed
asset and whose use is expected to be irregular
(d) Both a and b
(e) None of the above

Solution: (d)
Q54. The cost of inventories comprise:

(a) costs of purchase

(b) costs of conversion
(c) other costs incurred in bringing the inventories to their present location and
condition
(d) All of the above
(e) None of the above
 EXPLANATION

• The cost of inventories should comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to their
present location and condition.

• The costs of conversion of inventories include costs directly related to the

units of production, such as direct labour. They also include a systematic
allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods.

• Other costs are included in the cost of inventories only to the extent that
they are incurred in bringing the inventories to their present location and
condition. For example, it may be appropriate to include overheads other
than production overheads or the costs of designing products for specific
customers in the cost of inventories.
Q54. The cost of inventories comprise:

(a) costs of purchase

(b) costs of conversion
(c) other costs incurred in bringing the inventories to their present location and
condition
(d) All of the above
(e) None of the above

Solution: (d)
Q55. FIFO formula assumes that the:

(a) items of inventory which were purchased or produced most recently are
consumed or sold first
(b) items of inventory which were purchased or produced first are consumed or
sold first
(c) items remaining in inventory at the end of the period are those which were
purchased or produced first
(d) Both (b) and (c)
(e) None of the above
 EXPLANATION

• The FIFO formula assumes that the items of inventory which were purchased
or produced first are consumed or sold first, and

• consequently the items remaining in inventory at the end of the period are
those most recently purchased or produced.
Q55. FIFO formula assumes that the:

(a) items of inventory which were purchased or produced most recently are
consumed or sold first
(b) items of inventory which were purchased or produced first are consumed or
sold first
(c) items remaining in inventory at the end of the period are those which were
purchased or produced first
(d) Both (b) and (c)
(e) None of the above

Solution: (b)
Q56. Which of the following is incorrect in respect of accounting for inventories
?

(a) A primary issue in accounting for inventories is the determination of the

value at which inventories are carried in the financial statements until the
related revenues are recognised.
(b) Net realisable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
(c) Inventories should be valued at the higher of cost and net realisable value.
(d) Inventories are usually written down to net realisable value on an itemby-
item basis.
(e) None of the above is incorrect
 EXPLANATION

• Inventories should be valued at the lower of cost and net realisable value.
Q56. Which of the following is incorrect in respect of accounting for inventories
?

(a) A primary issue in accounting for inventories is the determination of the

value at which inventories are carried in the financial statements until the
related revenues are recognised.
(b) Net realisable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
(c) Inventories should be valued at the higher of cost and net realisable value.
(d) Inventories are usually written down to net realisable value on an itemby-
item basis.
(e) None of the above is incorrect

Solution: (c)
Q57. The principal issue(s) in accounting for property, plant and equipment
include:

(a) recognition of the assets

(b) determination of carrying amounts
(c) determination of depreciation charges
(d) All of the above
(e) None of the above
 EXPLANATION

• The principal issues in accounting for property, plant and equipment are the
recognition of the assets, the determination of their carrying amounts and
the depreciation charges and impairment losses to be recognised in relation
to them.
Q57. The principal issue(s) in accounting for property, plant and equipment
include:

(a) recognition of the assets

(b) determination of carrying amounts
(c) determination of depreciation charges
(d) All of the above
(e) None of the above

Solution: (d)
Q58. Accounting Standard (AS) 10 applies to:

(a) biological assets

(b) wasting assets
(c) investments in securities
(d) All of the above
(e) None of the above
 EXPLANATION

• AS 10 doesn’t apply to biological assets related to agricultural activity and

wasting assets.
• Biological Asset is a living animal or plant.
• AS 13 deals with investments.
Q58. Accounting Standard (AS) 10 applies to:

(a) biological assets

(b) wasting assets
(c) investments in securities
(d) All of the above
(e) None of the above

Solution: (e)
Q59. Which of the following is incorrect ?

(a) Carrying amount is the cost of an asset less its residual value.
(b) Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life.
(c) The residual value of an asset is the estimated amount that an enterprise
would currently obtain from disposal of the asset, after deducting the estimated
costs of disposal.
(d) An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount.
(e) None of the above
 EXPLANATION

• Carrying amount is the amount at which an asset is recognised after

deducting any accumulated depreciation and accumulated impairment
losses.

• Depreciable amount is the cost of an asset, or other amount substituted for

cost, less its residual value.
Q59. Which of the following is incorrect ?

(a) Carrying amount is the cost of an asset less its residual value.
(b) Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life.
(c) The residual value of an asset is the estimated amount that an enterprise
would currently obtain from disposal of the asset, after deducting the estimated
costs of disposal.
(d) An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount.
(e) None of the above

Solution: (a)
Q60. Which of the following would be classified as costs of an item of property,
plant and equipment as per AS-10 ?

(a) costs of opening a new facility or business, such as, inauguration costs
(b) costs of introducing a new product or service (including costs of advertising
and promotional activities)
(c) costs of conducting business in a new location or with a new class of
customer (including costs of staff training)
(d) All of the above
(e) None of the above
 EXPLANATION

Examples of costs that are not costs of an item of property, plant and equipment
are:

(a) costs of opening a new facility or business, such as, inauguration costs;
(b) costs of introducing a new product or service( including costs of advertising
and promotional activities);
(c) costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
(d) administration and other general overhead costs.
Q60. Which of the following would be classified as costs of an item of property,
plant and equipment as per AS-10 ?

(a) costs of opening a new facility or business, such as, inauguration costs
(b) costs of introducing a new product or service (including costs of advertising
and promotional activities)
(c) costs of conducting business in a new location or with a new class of
customer (including costs of staff training)
(d) All of the above
(e) None of the above

Solution: (e)
Q61. ABC company acquired a machine for its new production line. The machine
was delivered in February 2021. Before putting it into use, an installation and
testing performed by certified technician is required. All the work including tests
were completed in April 2021 and ABC launched the new production line in July
2021. Company should start depreciation machinery in:

(a) February 2021

(b) April 2021
(c) July 2021
(d) Any of the above depending on discretion of accountant
(e) None of the above
 EXPLANATION

• Depreciation of an asset begins when it is available for use, i.e., when it is in

the location and condition necessary for it to be capable of operating in the
manner intended by management.
Q61. ABC company acquired a machine for its new production line. The machine
was delivered in February 2021. Before putting it into use, an installation and
testing performed by certified technician is required. All the work including tests
were completed in April 2021 and ABC launched the new production line in July
2021. Company should start depreciation machinery in:

(a) February 2021

(b) April 2021
(c) July 2021
(d) Any of the above depending on discretion of accountant
(e) None of the above

Solution: (b)
Q62. Which of the following would be included in definition of revenue for the
purposes of AS-9 ?

(a) Realised gains resulting from the disposal of fixed assets

(b) Unrealised gains resulting from the holding of non-current assets
(c) Unrealised holding gains resulting from the change in value of current assets
(d) Realised or unrealised gains resulting from changes in foreign exchange rates
(e) None of the above
 EXPLANATION

This Standard deals with the bases for recognition of revenue in the statement
of profit and loss of an enterprise. The Standard is concerned with the
recognition of revenue arising in the course of the ordinary activities of the
enterprise from:

— the sale of goods,

— the rendering of services, and
— the use by others of enterprise resources yielding interest, royalties and
dividends.
Q62. Which of the following would be included in definition of revenue for the
purposes of AS-9 ?

(a) Realised gains resulting from the disposal of fixed assets

(b) Unrealised gains resulting from the holding of non-current assets
(c) Unrealised holding gains resulting from the change in value of current assets
(d) Realised or unrealised gains resulting from changes in foreign exchange rates
(e) None of the above

Solution: (e)
Q63. In order to include foreign currency transactions and foreign operations in
the financial statements of an enterprise, transactions must be expressed in the
_____________ and the financial statements of foreign operations must be
translated into the __________.

(a) enterprise’s reporting currency, enterprise’s reporting currency

(b) US dollars, US dollars
(c) foreign currency in which transaction occurred, enterprise’s reporting
currency
(d) foreign currency in which transaction occurred, foreign currency in which
operations are carried out
(e) None of the above
 EXPLANATION

• In order to include foreign currency transactions and foreign operations in

the financial statements of an enterprise, transactions must be expressed in
the enterprise’s reporting currency and the financial statements of foreign
operations must be translated into the enterprise’s reporting currency.

• The principal issues in accounting for foreign currency transactions and

foreign operations are to decide which exchange rate to use and how to
recognise in the financial statements the financial effect of changes in
exchange rates.
Q63. In order to include foreign currency transactions and foreign operations in
the financial statements of an enterprise, transactions must be expressed in the
_____________ and the financial statements of foreign operations must be
translated into the __________.

(a) enterprise’s reporting currency, enterprise’s reporting currency

(b) US dollars, US dollars
(c) foreign currency in which transaction occurred, enterprise’s reporting
currency
(d) foreign currency in which transaction occurred, foreign currency in which
operations are carried out
(e) None of the above

Solution: (a)
Q64. As per AS-11, at each balance sheet date:

(a) foreign currency monetary items should be reported using the closing rate
(b) non-monetary items which are carried in terms of historical cost
denominated in a foreign currency should be reported using the exchange rate
at the date of the transaction
(c) foreign currency monetary items should be reported using the exchange rate
at the date of the transaction
(d) Both (a) and (b)
(e) Both (b) and (c)
 EXPLANATION

• foreign currency monetary items should be reported using the closing rate.

• non-monetary items which are carried in terms of historical cost

denominated in a foreign currency should be reported using the exchange
rate at the date of the transaction.

• Cash, receivables, and payables are examples of monetary items. Fixed

assets, inventories, and investments in equity shares are examples of non-
monetary items.
Q64. As per AS-11, at each balance sheet date:

(a) foreign currency monetary items should be reported using the closing rate
(b) non-monetary items which are carried in terms of historical cost
denominated in a foreign currency should be reported using the exchange rate
at the date of the transaction
(c) foreign currency monetary items should be reported using the exchange rate
at the date of the transaction
(d) Both (a) and (b)
(e) Both (b) and (c)

Solution: (d)
Q65. As per AS-11, foreign operations are classified as:

(a) integral foreign operations and non-integral foreign operations

(b) basic foreign operations and advanced foreign operations
(c) direct foreign operations and indirect foreign operations
(d) active foreign operations and passive foreign operations
(e) None of the above
 EXPLANATION

• A foreign operation that is integral to the operations of the reporting

enterprise carries on its business as if it were an extension of the reporting
enterprise’s operations. For example, such a foreign operation might only sell
goods imported from the reporting enterprise and remit the proceeds to the
reporting enterprise.

• In contrast, a non-integral foreign operation accumulates cash and other

monetary items, incurs expenses, generates income and perhaps arranges
borrowings, all substantially in its local currency. It may also enter into
transactions in foreign currencies, including transactions in the reporting
currency.
Q65. As per AS-11, foreign operations are classified as:

(a) integral foreign operations and non-integral foreign operations

(b) basic foreign operations and advanced foreign operations
(c) direct foreign operations and indirect foreign operations
(d) active foreign operations and passive foreign operations
(e) None of the above

Solution: (a)
Q66. Investments are assets held by an enterprise:

(a) for earning income by way of dividends, interest, and rentals

(b) for capital appreciation
(c) as stock-in-trade
(d) Both (a) and (b)
(e) All of the above
 EXPLANATION

• Investments are assets held by an enterprise for earning income by way of

dividends, interest, and rentals, for capital appreciation, or for other benefits
to the investing enterprise. Assets held as stock-in-trade are not
‘investments’.
Q66. Investments are assets held by an enterprise:

(a) for earning income by way of dividends, interest, and rentals

(b) for capital appreciation
(c) as stock-in-trade
(d) Both (a) and (b)
(e) All of the above

Solution: (d)
Q67. As per AS 13,

(a) Investments are classified as long term investments and current investments.
(b) The cost of an investment includes acquisition charges such as brokerage,
fees and duties.
(c) On disposal of an investment, the difference between the carrying amount
and the disposal proceeds, net of expenses, is recognised as Capital Reserve.
(d) All of the above are true.
(e) Only (a) and (b) are true.
 EXPLANATION

• On disposal of an investment, the difference between the carrying amount

and the disposal proceeds, net of expenses, is recognised in the profit and
loss statement.
Q67. As per AS 13,

(a) Investments are classified as long term investments and current investments.
(b) The cost of an investment includes acquisition charges such as brokerage,
fees and duties.
(c) On disposal of an investment, the difference between the carrying amount
and the disposal proceeds, net of expenses, is recognised as Capital Reserve.
(d) All of the above are true.
(e) Only (a) and (b) are true.

Solution: (e)
Q68. Nominal share capital is:

(a) that part of authorised capital which is issued by the company.

(b) The amount of capital which is actually applied by prospective shareholders.
(c) The amount of capital which is paid by the shareholders.
(d) The maximum amount of share capital that a company is authorised to issue.
(e) None of the above
 EXPLANATION

• Known as the registered capital or nominal capital of the company,

Authorised Capital is the maximum amount of share capital that a company is
allowed to issue to its shareholders as per its constitutional documents.
Q68. Nominal share capital is:

(a) that part of authorised capital which is issued by the company.

(b) The amount of capital which is actually applied by prospective shareholders.
(c) The amount of capital which is paid by the shareholders.
(d) The maximum amount of share capital that a company is authorised to issue.
(e) None of the above

Solution: (d)
Q69. A portion of share capital that is reserved by the company and will be
utilised only on the happening of winding up of the company is called:

(a) Reserve Capital

(b) Capital Reserve
(c) Issued Capital
(d) Subscribed Capital
(e) None of the above
 EXPLANATION

• Reserve capital is defined as the reserve that is uncalled, i.e., this capital is
called only when the company is on the verge of liquefying. Reserve capital is
the portion that is reserved by the company.

• This amount can only be used by the company when a particular event is
going to happen, i.e., beginning of the long-term projects, liquidation of the
company, etc. Reserve capital is known as the uncalled capital.
Q69. A portion of share capital that is reserved by the company and will be
utilised only on the happening of winding up of the company is called:

(a) Reserve Capital

(b) Capital Reserve
(c) Issued Capital
(d) Subscribed Capital
(e) None of the above

Solution: (a)
Q70. In preparation of cash flow statement, which of the following would be an
example of cash equivalent ?

(a) Acquisition of preference shares, just before their specified redemption date
(b) bank deposits with ultra short maturity period
(c) Demand deposits with banks
(d) Cash in hand
(e) Both a and b above
 EXPLANATION

• Cash flow statement shows flow of cash and cash equivalents.

• ‘Cash’ include: (a) Cash in hand, (b) Demand deposits with banks

• Cash equivalents include:

• Short term highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of
changes in value
• Securities with short maturity period of, say, three months or less from
the date of acquisition
Q70. In preparation of cash flow statement, which of the following would be an
example of cash equivalent ?

(a) Acquisition of preference shares, shortly before their specified redemption

date
(b) bank deposits with short maturity period
(c) Demand deposits with banks
(d) Cash in hand
(e) Both a and b above

Answer: (e)
Q71. If applicants for 80,000 shares were allotted 60,000 shares on pro rata
basis, the shareholder who was allotted 1,200 shares must have applied for:

(a) 2000 shares

(b) 1800 shares
(c) 1600 shares
(d) 1400 shares
(e) None of the above
 EXPLANATION

• Shares applied = 1200 * 800/600 = 1600

Q71. If applicants for 80,000 shares were allotted 60,000 shares on pro rata
basis, the shareholder who was allotted 1,200 shares must have applied for:

(a) 2000 shares

(b) 1800 shares
(c) 1600 shares
(d) 1400 shares
(e) None of the above

Solution: (c)
Q72. Suppose, following amounts were payable on issue of shares by a company:
Application: Rs. 3
Allotment: Rs. 3
First Call: Rs. 2
Final Call: Rs. 2
A holding 500 shares paid only application and allotment money whereas B
holding 400 shares did not pay final call. Amount of calls-in-arrear will be:

(a) 3600
(b) 3200
(c) 2800
(d) 2400
(e) None of the above
 EXPLANATION

Call in arrear:

A – 500 * 4 = 2000

B – 400*2 = 800

Total = 2800
Q72. Suppose, following amounts were payable on issue of shares by a company:
Application: Rs. 3
Allotment: Rs. 3
First Call: Rs. 2
Final Call: Rs. 2
A holding 500 shares paid only application and allotment money whereas B
holding 400 shares did not pay final call. Amount of calls-in-arrear will be:

(a) 3600
(b) 3200
(c) 2800
(d) 1800
(e) None of the above

Solution: (c)
Q73. 600 shares of 10 each were forfeited for non-payment of 2 per share on
first call and 5 per share on final call. Share forfeiture account will be credited
with:

(a) 1800
(b) 1200
(c) 4200
(d) 3000
(e) None of the above
 EXPLANATION

• Share forfeiture account will be credited with amount received on shares i.e.
600 * 3 = 1800
Q73. 600 shares of 10 each were forfeited for non-payment of 2 per share on
first call and 5 per share on final call. Share forfeiture account will be credited
with:

(a) 1800
(b) 1200
(c) 4200
(d) 3000
(e) None of the above

Solution: (a)
Q74. 2,000 shares of 10 on which 7 have been called and 5 has been paid are
forfeiture out of these 1,500 shares is reissued for 9 as fully paid. What is the
amount to be debited to share forfeiture account at the time of reissue of
shares?

(a) 14000
(b) 10000
(c) 1500
(d) 13500
(e) None of the above
 EXPLANATION

• Amount transferred to share forfeiture on 2000 shares = 2000 * 5 = 10,000

• Proportionate to 1500 shares would be 7500

• Discount on reissue to be adjusted from share forfeiture account = 1500

Q74. 2,000 shares of 10 on which 7 have been called and 5 has been paid are
forfeiture out of these 1,500 shares is reissued for 9 as fully paid. What is the
amount to be debited to share forfeiture account at the time of reissue of
shares?

(a) 14000
(b) 10000
(c) 1500
(d) 13500
(e) None of the above

Solution: (c)
Q75. A company issued 10,000 shares of 10 each at par; 3 on application; 3 on
allotment; 4 on first and final call. One shareholder holding 1,000 shares paid
the entire amount of his shares with application. Calculate amount received on
application.

(a) 40,000
(b) 37,000
(c) 33,000
(d) 31,000
(e) None of the above
 EXPLANATION

• Amount received = 9000 * 3 + 1000 * 10 = 37000

Q75. A company issued 10,000 shares of 10 each at par; 3 on application; 3 on
allotment; 4 on first and final call. One shareholder holding 1,000 shares paid
the entire amount of his shares with application. Calculate amount received on
application.

(a) 40,000
(b) 37,000
(c) 33,000
(d) 31,000
(e) None of the above

Solution: (b)
Q76. Which of the following is not presented under ‘current liabilities’ in the
balance sheet of a company?

(a) Short-term borrowings

(b) Deferred tax liabilities
(c) Short-term provisions
(d) Trade payables
(e) None of the above
EXPLANATION
Q76. Which of the following is not presented under ‘current liabilities’ in the
balance sheet of a company?

(a) Short-term borrowings

(b) Deferred tax liabilities
(c) Short-term provisions
(d) Trade payables
(e) None of the above

Solution: (b)
Q77. Under which of the following head/ sub-head is ‘forfeited shares’
presented in the balance sheet of a company?

(a) Reserves and surplus

(b) Share capital
(c) Other long-term liabilities
(d) Other current liabilities
(e) None of the above
 EXPLANATION

• When a shareholder defaults in paying allotment money or call money the

company has the power to forfeit the shares. Now whatever amount is
received by the company on forfeiting the shares is an capital receipt for the
company and hence it is shown as a part of the share capital. And also as per
the format prescribed by Schedule III to the Companies Act 2013, share
forfeiture balance has to be shown under share capital.
Q77. Under which of the following head/ sub-head is ‘forfeited shares’
presented in the balance sheet of a company?

(a) Reserves and surplus

(b) Share capital
(c) Other long-term liabilities
(d) Other current liabilities
(e) None of the above

Solution: (b)
Q78. Which of the following is not a sub-head under the current assets?

(a) Cash and cash equivalents

(b) Trademarks
(c) Short-term loans and advances
(d) Inventories
(e) None of the above
EXPLANATION
Q78. Which of the following is not a sub-head under the current assets?

(a) Cash and cash equivalents

(b) Trademarks
(c) Short-term loans and advances
(d) Inventories
(e) None of the above

Solution: (b)
Q79. ___________ are IFRS converged standards issued by the Central
Government of India under the supervision and control of ASB of ICAI and in
consultation with NFRA.

(a) IAS
(b) Indian FRS
(c) Ind-AS
(d) GAAP
(e) None of the above
 EXPLANATION

• Ind AS are IFRS converged standards issued by the Central Government of

India under the supervision and control of ASB of ICAI and in consultation
with NFRA. NFRA recommends these standards to the MCA.

• As per the MCA Notification dated 16th February 2015, Ind AS converged
with IFRS shall be implemented on voluntary basis from 1st April, 2015 and
mandatorily from 1st April, 2016.

• Separate roadmaps have been prescribed for implementation of Ind AS in

Banking companies, Insurance companies and NBFCs.
List of Ind AS
Q79. ___________ are IFRS converged standards issued by the Central
Government of India under the supervision and control of ASB of ICAI and in
consultation with NFRA.

(a) IAS
(b) Indian FRS
(c) Ind-AS
(d) GAAP
(e) None of the above

Answer: (c)
Q80. The analysis that is made to review and analyse the financial statements for
a number of years is known as:

(a) Horizontal Analysis

(b) Vertical Analysis
(c) Cash Flow Analysis
(d) Fund Flow Analysis
(e) None of the above
 EXPLANATION

• A horizontal analysis, also referred to as ‘trend analysis’, is a procedure in the

financial analysis where the amounts of financial information over a certain
period of time is compared line by line in order to make related decisions.

• Vertical analysis is the method of analysis of financial statements where each

line item is listed as a percentage of another item to conduct useful decision
making. Here, each line item on the income statement is expressed as a
percentage of sales revenue and each line item on the balance sheet is
expressed as a percentage of total assets.
Q80. The analysis that is made to review and analyse the financial statements for
a number of years is known as:

(a) Horizontal Analysis

(b) Vertical Analysis
(c) Cash Flow Analysis
(d) Fund Flow Analysis
(e) None of the above

Solution: (a)
Q81. The technique of studying the operational results and financial position
over a series of years is known as:

(a) Ratio Analysis

(b) Cash Flow Analysis
(c) Common Size Analysis
(d) Trend Analysis
(e) None of the above
 EXPLANATION

• Trend Analysis: It is a technique of studying the operational results and

financial position over a series of years. Using the previous years' data of a
business enterprise, trend analysis can be done to observe the percentage
changes over time in the selected data.
Q81. The technique of studying the operational results and financial position
over a series of years is known as:

(a) Ratio Analysis

(b) Cash Flow Analysis
(c) Common Size Analysis
(d) Trend Analysis
(e) None of the above

Solution: (d)
Q82. ______________ is considered as an ideal current ratio.

(a) 1:1
(b) 2:1
(c) 4:1
(d) No ideal ratio is there
(e) None of the above
 EXPLANATION

• The ideal current ratio is 2: 1. It is a stark indication of the financial

soundness of a business concern. When Current assets double the current
liabilities, it is considered to be satisfactory. Higher value of current ratio
indicates more liquid of the firm's ability to pay its current obligation in time.
Q82. ______________ is considered as an ideal current ratio.

(a) 1:1
(b) 2:1
(c) 4:1
(d) No ideal ratio is there
(e) None of the above

Solution: (c)
Q83. The working capital of ABC Ltd. is 2,00,000 and its current assets are
6,00,000. What is its current ratio?

(a) 3:1
(b) 2:1
(c) 1.5:1
(d) 1:1
(e) None of the above
 EXPLANATION

• WC = 200,000
• CA – CL = 200,000
• 600,000 – CL = 200,000
• CL = 400,000
• RATIO = CA/CL = 1.5:1
Q83. The working capital of ABC Ltd. is 2,00,000 and its current assets are
6,00,000. What is its current ratio?

(a) 3:1
(b) 2:1
(c) 1.5:1
(d) 1:1
(e) None of the above

Solution: (c)
Q84. ________ + Operating Profit Ratio (%) = 100%

(a) Gross Profit Ratio (%)

(b) Operating Ratio (%)
(c) Assets Turnover Ratio (%)
(d) Net Profit Ratio (%)
(e) None of the above
EXPLANATION
Q84. ________ + Operating Profit Ratio (%) = 100%

(a) Gross Profit Ratio (%)

(b) Operating Ratio (%)
(c) Assets Turnover Ratio (%)
(d) Net Profit Ratio (%)
(e) None of the above

Solution: (b)
Q85. What is the debt to equity ratio when the following information is available
Total Assets 35,00,000; Total Debts 25,00,000; Current Liabilities 8,00,000.

(a) 2.5:1
(b) 2:1
(c) 1.7:1
(d) 1.2:1
(e) Data Inadequate
 EXPLANATION

Debt to equity ratio = Debt/Equity

Debt = Total debt - Current liabilities = 25,00,000 - 8,00,000 = 17,00,000
Equity = Total assets - Total debts = 35,00,000 - 25,00,000 = 10,00,000
Debt to equity ratio = 17,00,000/10,00,000 = 1.7 : 1
Q85. What is the debt to equity ratio when the following information is available
Total Assets 35,00,000; Total Debts 25,00,000; Current Liabilities 8,00,000.

(a) 2.5:1
(b) 2:1
(c) 1.7:1
(d) 1.2:1
(e) Data Inadequate

Solution: (c)
Q86. B Ltd has a term Loan of 10,00,000. Interest on Loan for the year is T
1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio is:

(a) 2 times
(b) 3 times
(c) 4 times
(d) 8 times
(e) None of the above
 EXPLANATION

Interest coverage ratio = PBIT/Interest on long-term debt = 5,00,000/1,25,000 =

4 times.
Q86. B Ltd has a term Loan of 10,00,000. Interest on Loan for the year is T
1,25,000 and its PBIT is 5,00,000. Its interest coverage ratio is:

(a) 2 times
(b) 3 times
(c) 4 times
(d) 8 times
(e) None of the above

Solution: (c)
Q87. Calculate inventory turnover ratio from given information:
COGS = 1,50,000;
Closing Inventory = 60,000;
Excess of Closing Inventory over Opening Inventory = 20,000

(a) 4 times
(b) 3 times
(c) 2.5 times
(d) 2 times
(e) None of the above
 EXPLANATION

Opening inventory = Closing inventory - 20,000 = 60,000 - 20,000 = 40,000

Average inventory = (Opening inventory + Closing inventory)/2 = 40,000 +
60,000/2 = 1,00,000/2 =50,000
Inventory turnover ratio = 1,50,000/50,000 = 3 times
Q87. Calculate inventory turnover ratio from given information:
COGS = 1,50,000;
Closing Inventory = 60,000;
Excess of Closing Inventory over Opening Inventory = 20,000

(a) 4 times
(b) 3 times
(c) 2.5 times
(d) 2 times
(e) None of the above

Solution: (b)
Q88. If the debtor’s turnover ratio of MSD Ltd. is 6 times, creditors turnover ratio
is 4 times then what is its average collection period in months?

(a) 3
(b) 2
(c) 4
(d) 6
(e) None of the above
 EXPLANATION

Average collection period = 12/Debtor’s turnover ratio = 12/6 = 2

Q88. If the debtor’s turnover ratio of MSD Ltd. is 6 times, creditors turnover ratio
is 4 times then what is its average collection period in months?

(a) 3
(b) 2
(c) 4
(d) 6
(e) None of the above

Solution: (b)
Q89. From the following information, calculate Return on Investment.
Fixed Assets - 75,00,000;
Current Assets - 40,00,000;
Current Liabilities - 27,00,000;
12% Debentures - 80,00,000;
Net Profit before Interest, Tax and Dividend - 11,00,000

(a) 25%
(b) 20%
(c) 15%
(d) 12.5%
(e) None of the above
 EXPLANATION

• Return on Investment = EBIT / Capital Employed

• Capital Employed = Fixed Assets + Current Assets - Current Liabilities =

75,00,000 + 40,00,000-27,00,000 = 88,00,000

• Solving, we get 12.5%

Q89. From the following information, calculate Return on Investment.
Fixed Assets - 75,00,000;
Current Assets - 40,00,000;
Current Liabilities - 27,00,000;
12% Debentures - 80,00,000;
Net Profit before Interest, Tax and Dividend - 11,00,000

(a) 25%
(b) 20%
(c) 15%
(d) 12.5%
(e) None of the above

Solution: (d)
Q90. Find out Working Capital Turnover Ratio from following information:
Cash - 10,000
Bills receivable - 5,000
Sundry debtors - 25,000
Stock - 20,000
Sundry creditors - 30,000
Sales - 1,50,000

(a) 5 times
(b) 4 times
(c) 3 times
(d) 2 times
(e) None of the above
 EXPLANATION

• Current assets = Rs 10,000 + 5,000 + 25,000 + 20,000 = Rs 60,000

• Current liabilities = Rs 30,000
• Working Capital = Rs. 30,000
• Ratio = 150,000 / 30,000 = 5 times
Q90. Find out Working Capital Turnover Ratio from following information:
Cash - 10,000
Bills receivable - 5,000
Sundry debtors - 25,000
Stock - 20,000
Sundry creditors - 30,000
Sales - 1,50,000

(a) 5 times
(b) 4 times
(c) 3 times
(d) 2 times
(e) None of the above

Solution: (a)
Q91. Debt to Equity Ratio of X Ltd. is 1 : 2. What is the effect of conversion of
debentures into preference shares on this ratio?

(a) Increase
(b) Decrease
(c) No change
(d) Inadequate information
(e) None of the above
 EXPLANATION

• The two basic components of the Debt Equity ratio are outsiders’ funds and
shareholders’ funds. The outsiders’ funds include all debts/liabilities to
outsiders i.e. debentures, long term loans from financial institutions, etc.
Shareholders’ funds mean preference share capital, equity share capital,
reserves and surplus and fictitious assets like preliminary expenses.

• Debt to Equity Ratio will decrease as conversion of debentures into

preference shares will reduce the long-term debts but increase the equity.
Q91. Debt to Equity Ratio of X Ltd. is 1 : 2. What is the effect of conversion of
debentures into preference shares on this ratio?

(a) Increase
(b) Decrease
(c) No change
(d) Inadequate information
(e) None of the above

Solution: (b)
Q92. A firm carries an average inventory of Rs. 40,000. Its inventory turnover
ratio is 8 times. If it sells goods at a profit of 20% on revenue form operations,
i.e., sales, find out its profit.

(a) 40,000
(b) 60,000
(c) 80,000
(d) 4,00,000
(e) None of the above
 EXPLANATION

Inventory Turnover Ratio = COGS / Avg Stock

Solving, COGS = 3,20,000

Profit is 20% of sales or 25% of COGS

Profit = 80,000
Q92. A firm carries an average inventory of Rs. 40,000. Its inventory turnover
ratio is 8 times. If it sells goods at a profit of 20% on revenue form operations,
i.e., sales, find out its profit.

(a) 40,000
(b) 60,000
(c) 80,000
(d) 4,00,000
(e) None of the above

Solution: (c)
Q93. Which of the following transactions will result into ‘Flow of Cash’?

(a) Deposited Rs. 15,000 into bank

(b) Cash withdrawn from bank i.e. Rs. 12,000
(c) Sale of machinery of the book value of Rs. 74,000 at a loss of Rs. 9,000
(d) Converted Rs. 2,00,000, 9% Debentures into equity shares
(e) None of the above
 EXPLANATION

• Cash flow statement shows flow of cash and cash equivalents.

• ‘Cash’ include: (a) Cash in hand, (b) Demand deposits with banks

• Cash equivalents include:

• Short term highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of
changes in value
• Securities with short maturity period of, say, three months or less from
the date of acquisition
Q93. Which of the following transactions will result into ‘Flow of Cash’?

(a) Deposited Rs. 15,000 into bank

(b) Cash withdrawn from bank i.e. Rs. 12,000
(c) Sale of machinery of the book value of Rs. 74,000 at a loss of Rs. 9,000
(d) Converted Rs. 2,00,000, 9% Debentures into equity shares
(e) None of the above

Solution: (c)
Q94. Amongst the following, ‘Payment of bonus to the employees’ by an
insurance company is which type of activity?

(a) Operating Activity

(b) Investing Activity
(c) Financing Activity
(d) Both Operating and Financing Activity
(e) None of the above
 EXPLANATION

• Operating activities is a classification of cash flows within the statement of

cash flows. Items classified within this area are an entity’s primary revenue-
producing activity, so cash flows are generally associated with revenues and
expenses.
Q94. Amongst the following, ‘Payment of bonus to the employees’ by an
insurance company is which type of activity?

(a) Operating Activity

(b) Investing Activity
(c) Financing Activity
(d) Both Operating and Financing Activity
(e) None of the above

Solution: (a)
Q95. In case of a financial enterprise, dividend received will be shown under:

(a) Operating Activity

(b) Investing Activity
(c) Financing Activity
(d) Operating or Investing depending on discretion of accountant
(e) None of the above
 EXPLANATION

• Dividend received by a financial enterprise should be in operating activities.

• For companies other than financial enterprises, dividend received should be

classified as cash flows from investment activities.
Q95. In case of a financial enterprise, dividend received will be shown under:

(a) Operating Activity

(b) Investing Activity
(c) Financing Activity
(d) Operating or Investing depending on discretion of accountant
(e) None of the above

Solution: (a)
Q96. X Ltd. purchased machinery of Rs. 2,00,000 issuing a cheque of Rs. 50,000
and 8% Debentures of Rs. 1,50,000. In the cash flow statement, the transaction
will be shown as:

(a) Outflow under investing activity - 2,00,000 and inflow under financing
activity as Receipt for Debentures - 1,50,000.
(b) Outflow under investing activity - 50,000
(c) Outflow under investing activity - 200,000
(d) Inflow under financing activity – 1,50,000
(e) None of the above
 EXPLANATION

• Cash outflow in transaction is Rs. 50,000 only and shown in cash flow
statement.
Q96. X Ltd. purchased machinery of Rs. 2,00,000 issuing a cheque of Rs. 50,000
and 8% Debentures of Rs. 1,50,000. In the cash flow statement, the transaction
will be shown as:

(a) Outflow under investing activity - 2,00,000 and inflow under financing
activity as Receipt for Debentures - 1,50,000.
(b) Outflow under investing activity - 50,000
(c) Outflow under investing activity - 200,000
(d) Inflow under financing activity – 1,50,000
(e) None of the above

Solution: (b)
Q97. From the following information, calculate net cash flow from financing
activity for the year ended 31st March 2021:
Equity Share Capital as on 1st April 2020 – 10,00,000
Equity Share Capital as on 31st March 2021 – 12,00,000
Debentures as on 1st April 2020 - 1,00,000
Debentures Capital as on 31st March 2021 – 2,00,000
Interest on Debentures – Rs. 12,000
Dividend paid – Rs. 50,000
(a) 2,50,000
(b) 2,38,000
(c) 2,62,000
(d) 3,00,000
(e) None of the above
 EXPLANATION

Cash received from issue of Equity Share Capital - 2,00,000

Cash received from issue of Long-Term Borrowings (12% Debentures) - 1,00,000
Cash used in payment of interest on Long-Term Borrowings (12% Debentures) -
(12,000)
Cash used in payment of dividend - (50,000)

Thus, Net Cash flow from Financing Activities - 2,38,000

Q97. From the following information, calculate net cash flow from financing
activity for the year ended 31st March 2021:
Equity Share Capital as on 1st April 2020 – 10,00,000
Equity Share Capital as on 31st March 2021 – 12,00,000
Debentures as on 1st April 2020 - 1,00,000
Debentures Capital as on 31st March 2021 – 2,00,000
Interest on Debentures – Rs. 12,000
Dividend paid – Rs. 50,000
(a) 2,50,000
(b) 2,38,000
(c) 2,62,000
(d) 3,00,000
(e) None of the above

Solution: (b)
Q98. Calculate Operating profit before working capital changes from the
following information:
Net Profit Before Taxation – 28,800
Depreciation – 14,000
Loss on Sale of Fixed Assets – 4,000
Interest on Debentures – 1,800

(a) 42,800
(b) 46,800
(c) 48,600
(d) 34,600
(e) None of the above
 EXPLANATION

(A) Net Profit before Taxation: 28,800

(B) Items to be added:

Depreciation - 14,000
Loss on Sale of Fixed Assets - 4,000
Interest on Debentures - 1,800

(C) Operating profit before working capital changes (A+B) - 48,600

Q98. Calculate Operating profit before working capital changes from the
following information:
Net Profit Before Taxation – 28,800
Depreciation – 14,000
Loss on Sale of Fixed Assets – 4,000
Interest on Debentures – 1,800

(a) 42,800
(b) 46,800
(c) 48,600
(d) 34,600
(e) None of the above

Solution: (c)
Q99. Schedule of changes in working Capital is the first step in preparation of:

(a) Cash Flow statement

(b) Fund Flow statement
(c) Comparative statement
(d) Common size statement
(e) None of the above
EXPLANATION
Q99. Schedule of changes in working Capital is the first step in preparation of:

(a) Cash Flow statement

(b) Fund Flow statement
(c) Comparative statement
(d) Common size statement
(e) None of the above

Solution: (b)
Q100. Which of the following is would be not shown as application of fund while
preparing fund flow statement ?

(a) Trading loss or funds lost in operation

(b) Redemption of preference share capital
(c) Repayment of long term loan
(d) Net Decrease in working capital
(e) Buy-back of equity shares
EXPLANATION
Q100. Which of the following is would be not shown as application of fund while
preparing fund flow statement ?

(a) Trading loss or funds lost in operation

(b) Redemption of preference share capital
(c) Repayment of long term loan
(d) Net Decrease in working capital
(e) Buy-back of equity shares

Solution: (d)