REVISED QUESTION BANK – WITH ANSWERS 2025

II PUC ACCOUNTANCY (30)

 CHAPTER: 01
ACCOUNTING FOR PARTNERSHIP BASIC CONCEPTS

PART - A
I] Multiple Choice Questions:

1] The agreement between partners may be in

a] Oral b] Written c] Oral or Written d] Duplicate

2] Partnership deed may not contains:

a] Name of the firm b] Name and address of the partners c] Profit and loss sharing ratio d] Ownership of property.

3] If any partner has advanced some money to the firm beyond the amount of his capital, he shall be
entitled to get interest on the amount at the rate of:
a] 5% p.a. b] 6% p.a. c] 8% p.a. d] 7% p.a.

4] Interest on capital is generally provided for, when:

a] The partners contribute unequal amounts of capital but share profits
equally. b] The partners contribute equal amounts of capital but share profit
unequally c] Both (a) & (b) situation
d] The partners contribute equal amounts of capital but withdrawn unequally.

5] When fixed amount is withdrawn on the first day of every month, interest on total amount for the year
ending will be calculated for:
a] 5 & 1/2 months b] 4 &1/2 months c] 6 &1/2 months d] 6 months

6] When varying amounts are withdrawn at different intervals, the interest is calculated by using:
a] Simple Method b] Average Method c] Product Method d] Weighted method

7] Adjustment for correction of omission and commission can be made in

a] Profit and loss adjustment account
b] Directly in the Capital Accounts of concerned
partners c] Revaluation account
d] Both (a) & (b) situations.

8] In order to form a Partnership, there should be at least,

a] One person b] Two people c] Seven people d] Fifty people

9] The business of a partnership concern may be carried on by

a] Two b] All the partners c] Any of them acting for all d] All Partners or any of them acting for all.

10] The agreement between Partners must be to share:

a] Profits b] Losses c] Profits and loss d] Duties and responsibilities

11] The liability of a Partner for acts of the firm is

a] Limited b] Unlimited c] Minimum d] Maximum

12] The partnership Deed should be properly drafted and prepared as per the provisions of the
a] Partnership Act. b] Stamp Act c] Companies Act d] Registration Act

13] The clauses of Partnership Deed can be altered with the consent of,

a] Two Partners b] Ten Partners c] Twenty Partners d] All the Partners

14] In absence of partnership deed profits or losses must be shared in
a] Capital proportion b] Equal c] Agreed proportion d] Any other proportion

15] When the dates of withdrawal are not specified, interest on drawings is to be calculated for the average
period of
a] 5 months b] 6 months c] 7 months d] 8 months

II. Fill in the blank questions:

1]Section 4 of the Indian Partnership Act, 1932 defines

Partnership
2] A partnership firm has no separate legal entity.
3] In order to form a partnership, there should be at least 2 persons of a common goal.
4] Partnership is the result of agreement between two or more persons to do business and share its profits and
losses.
5] It is preferred that the partners have an agreement in writing.
6] The agreement between partners should be to carry on some business.
7] Each partner carrying on the business is the principal as well as the agent for all other
partners.
8] The liability of a partner for his acts is unlimited.
9] In the absence of Partnership deed interest on advance from Partner will be charged @ 6% percentage per
annum.
10] Under fixed capital method, the capitals of the partners shall remain fixed.
11] Under fluctuating capital method, the partners’ capital account balances changes from time to time.
12] Profit and Loss appropriation account is merely an extension of profit and loss account of firm.
13] Profit and Loss appropriation account Dr.
To interest on capital account.
(Transferring interest on capital to P/L appropriation
account).
14] Profit and loss appropriation Account Dr.
To Salary to partner’s account
(Transferring partners salary to P/L Appropriation
A/c)
15] P/L Appropriation A/c Dr.
To Partners Capital /Current A/c.
(Transferring profit in appropriation account)

III. Match the followings

A B
a] The partnership Act i] 1932
b] Consent of all partners ii] Alteration of partnership deed
c] Interest on drawings in absence of deed iii] No partner is charged
d] Each partner has only one account iv] Fluctuating capital method
e] Assurance to minimum amount of profit v] Guarantee of profit

IV. Short Answer Questions :

1] What is a Partnership Firm?
Ans: Partnership is a relation between two or more persons who join hands to set up a business and share its profits and
losses.

2] Write any one feature of Partnership.

Ans: a) Two or more persons b) Agreement between Partners

3] State any one content of the Partnership Deed.

Ans: Name and Address of all the Partners

4] Mention any one method of maintaining Partners capital.

Ans: i) Fixed Capital Method

5] Why is the Profit and Loss Appropriation account prepared?

Ans: It is prepared to sow how the Profit are appropriated or distributed among the Partners after making necessary
adjustments.

6] What is the rate of Interest on advances by Partners as per Partnership Act?

Ans: 6% p.a.

7] When do you prepare partners’ Current Accounts in partnership firms?

Ans: Partners’ current account is prepared under Fixed Capital Method.

8] State any one feature of fluctuating capital method.

Ans: Capital balance of each partner changes year after year.

9] Find out Interest at 5 % p.a. on capital of ₹2,50,000 for 6 months.

Ans: 2,50,000 x 5/100x6/12= ₹ 6,250

10] Give one example for past adjustment.

Ans: a) Omission of interest on partners’ capital b) Omission of partner’s salary in the accounts.

State True or False for the following cases:

1] In absence of partnership deeds, the profit or loss of the firm is to be shared equal.
Ans: True

2] Under Fixed Capital Method the Partners’ Capital Accounts will always show a debit balance.
Ans: False

3] When a fixed amount is withdrawn during the middle of every month, interest on the total amount is calculated
for 6 months.
Ans: True

4] Profit and Loss appropriation account is merely an extension of the Profit and Loss Account of a firm.
Ans: True

5] Interest on partners’ capital is debited to Partners’ Capital Accounts.

Ans: False
PART - B

Two Marks questions:

1] What is partnership?
Ans: When two or more persons join hands to set up a business and share its profits and losses, they are said to be
partnership.

2] Define Partnership.
Ans: According to sec 4 of the Indian Partnership Act – 1932 “Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all are any of them acting for all”

3] What is a partnership deed?

Ans: Partnership Deed is the written agreement on stamp paper containing terms of Partnership, duly signed by all
Partners.

4] What is the fixed capital method?

Ans: It is a method under which the capitals of the partners shall remain fixed year after year. It will change only
when additional capital is introduced or a part of the capital is withdrawn.
Under this method, two accounts are maintained for each partner, capital account and current account.
5) What is the fluctuating capital method?
Ans: Fluctuating capital method is a method under which the capitals of the partners fluctuate or change from year
to year. Under this method only one account that is capital account is maintained for each partner.

6) State any two differences between fixed and fluctuating capital methods.

Fixed capital system Fluctuating capital system

1.Two accounts are maintained like, partners’ capital 1. Only one account that is capital account is
and current account maintained for each partner
2. The capitals of the partners shall remain fixed 2. The capital of the partners fluctuates or
unless additional capital is introduced. changes from year to year.

7] What is the guarantee of profit to a partner?

Ans: Sometimes a partner is admitted into the firm with a guarantee of certain minimum amount of profit
Such guarantee may be given by all the old partners in a certain ratio or by any of the old partners, individually to
the new partner. Such an assurance or promise is known as guaranteed of profit to a partner.

8] What do you mean by past adjustments?

Ans: Past adjustments are the adjustments to be made in respect of Omission or errors in the recording of transactions /
preparation of final accounts of partnership firm

9] Name any two methods for calculation of Interest on drawings.

Ans: a) Product Method b) Average Period Method

10] When do the Interest on drawings be generally provided to partners?

Ans: Interest on drawings is generally charged on partners when it is specifically expressed in an agreement.

11] How do you close a profit and loss appropriation account in partnership?
Ans: I close profit and loss appropriation account by transferring the final profit among the partners in their profit
sharing ratio.

12] State any two special aspects of partnership accounts.

Ans: a) Maintenance of Partners capital accounts b) Dissolution of partnership
 CHAPTER: 02
RECONSTITUTION OF PARTNERSHIP FIRM: ADMISSION OF A PARTNER

PART-A
One Mark Questions:

I] Multiple Choice Questions:

1] At the time of admission of a new partner, general reserve appearing in the old balance sheet is transferred to:
a] All Partners Capital Account b] New Partner’s Capital Account
c] Old Partners Capital Account d] Not to be transferred

2] A, B and C are partners in a firm. If D is admitted as a new partner:

a] Old firm is dissolved b] Old firm and old partnership are dissolved
c] Old partnership is reconstituted d] Old partnership dissolved

3] On the admission of a new partner, increase in the value of asset is credited

to: a] Profit and Loss Adjustment (Revaluation) Account b] Asset
account
c] Old Partners Capital account d] New partner’s capital account

4] At the time of admission of a partner, undistributed profits appeared in the balance sheet of the old
firm is transferred to the capital accounts of:
a] Old partners in old profit sharing ratio b] Old partners in new profit sharing
ratio c] All the partners in new profit sharing ratio d] All partners capital account
equally

5] A and B are partners with capitals of ₹45,000 each. C is admitted for 1/3rd share and he brings in
₹60,000 as his capital. Hidden goodwill is,
a] ₹60,000 b] ₹30,000 c] ₹90,000 d] ₹45,000

6] Which of the following are treated as reconstitution of a Partnership Firm?

a] Admission of a partner b] Change in profit sharing ratio
c] Retirement of a partner d] All of above

7] Profit or Loss on revaluation is shared among the partners in

the :

A] Old profit sharing ratio b] New profit sharing ratio

c] Capital ratio d] Equal ratio

8] Assets and Liabilities are recorded in Balance Sheet after the admission of a partner at:
a] Original value b] Revalued value
c] Realisable value d] Book value as appeared in old balance sheet

9] Old Profit Sharing Ratio - New Profit Sharing Ratio is = a] Sacrificing ratio b] Gaining ratio
c] Both the above d] None of the above

10] In the absence of an agreement to the contrary, it is implied that old partners will contribute to new
partner’s share of profit in the ratio of:
a] Capital b] Old profit-sharing ratio
c] Sacrificing ratio d] Equally
 11] The balance of reserves and other accumulated profits at the time of admission of a new partner
are transferred to:
a] All partners in the new ratio b] Old partners in the new ratio
c] Old partners in the old ratio d] Old partners in the sacrificing ratio

12] Revaluation Account is debited for the:

a] increase in provision for doubtful debts b] increase in the value of
building c] decrease in the amount of creditors d] transfer of loss on
revaluation

13] A and B are partners sharing profits in the ratio of 3:1. C is admitted into partnership for 1/4th share.
The sacrificing ratio of A and B will be:
a] Equal b] 3:1
c] 2:1 d] 3:2

14] On the admission of a new partner, increase in the value of assets is debited to:
a] Profit and Loss adjustment account b] Assets account
c] Old partners’ capital account d] New partner’s capital account

15] A and B are partners sharing profits in the ratio of 3:1. They admit C for ¼th share in the future profits.
The new profit-sharing ratio will be:
a] A , B𝟑, C 𝟒 b] A 8 , B 4 , C 4
𝟏𝟔 𝟏𝟔 𝟏𝟔 16 16 16

C] A10, B2, C 4 d] A 8 , B9, C 10

16 16 16 16 16 16

16] X and Y share profits in the ratio of 3:2. Z was admitted as a partner who gets 1/5th share. New profit
sharing ratio, if Z acquires 3/20 from X and 1/20 from Y would be:
a] 9:7:4 b] 8:8:4 c] 6:10:4 d] 10:6:4

17] Asha and Nisha are partners sharing profit in the ratio of 2:1. Asha’s son Ashish was admitted for 1/4
share of which 1/8 was gifted by Asha to her son. The remaining was contributed by Nisha. Goodwill of the
firm is valued at Rs.40,000. How much of the goodwill will be credited to the old partners capital account?
a] ₹2,500 each b] ₹5,000 each c] ₹20,000 each d] ₹25,000 each.

18] If average profit is ₹15,000, Capital employed is ₹1,00,000 and Normal rate of return is 10%, then the
value of goodwill under capitalization method is;
a] ₹25,000 b] ₹50,000 c] ₹75,000 d] ₹10,000

II. Fill in The Blanks:

1]Old ratio is used to distribute accumulated profits and losses at the time of admission of a new partner.

2] Profit or loss on revaluation is shared among the old partners in Old ratio
3] Old ratio – New ratio = Sacrifice ratio
4] Accumulated losses are transferred to the capital accounts of the old partners at the time of admission in their old
ratio.
5] General reserve is to be transferred to old partners capital accounts at the time of admission of a new partner.
6] Goodwill brought in by new partner in cash is to be distributed among old partners in sacrifice ratio.
7] If the amount brought by new partner is more than his share in capital, the excess is known as Hidden goodwill.
8] Asset Account is debited for the increase in the value of an
asset.
9] Unrecorded asset is to be credited to Revaluation account.
10] Due to change in profit sharing ratio, some partners will gain in future profits while others will loose.
11] Goodwill is an intangible asset.
12] New partner’s capital account is credited for cash brought in by new partner for his share of
goodwill.
13] New profit sharing ratio is required for sharing future profits and also for adjustment of capitals.

III. Match the following type of questions:

A B
a. Sacrifice ratio i Old share – New share
b. Goodwill ii Intangible asset
c. New share iii Old share – share sacrificed
d. Average profit method iv Valuation of Goodwill
e. Right of new partner v Share in future profits
f. Shortage of funds vi Reason for admission
g. Accounting for Intangible asset vii AS-26

IV. Very short answer questions:

1] What is Partnership?
Ans: When two or more persons join hands to set up a business and share its profits and losses, they are said to be
partnership.

2] What do you mean by reconstitution of a Partnership Firm?

Ans: Any change in the existing agreement amounts to reconstitution of the Partnership firm.

3] State any one reason for admission of a new partner.

Ans: To Increase the Capital / To get additional capital.

4] State any one right acquired by a newly admitted partner.

Ans: Right to share the assets and profits of the partnership firm.

5] Why the NPSR is required at the time of admission of a partner?

Ans: NPSR is required to share the future profit or losses.

6] What is Goodwill?
Ans: Goodwill refers to the reputation of a firm in respect of profit expected in future over and above the normal profit.

7] State any one factor affecting the value of goodwill.

Ans: Nature of the business.

8] What is normal profit?

Ans: Normal profit is minimum compensation that a firm receives for operating. OR Normal profit means normal
return on capital employed.

9] State any one method of valuation of goodwill.

Ans: (a) Average profit method.

10] Give the formula for sacrifice

ratio.
Ans: Sacrifice ratio = Old share – New
share

11] Which account is to be debited to record the increase in the value of an asset?
Ans: Assets A/c is to be debited

12] What is Revaluation Account?

Ans: Revaluation A/c is an a/c prepared in connection with recording of increase or decrease in value of Assets and
liabilities and find out the profit or loss on revaluation.
13] Which account will be credited when there is a loss on revaluation?
Ans: Revaluation A/c is credited when there is loss on revaluation.

14] Which account will be debited when the cash is brought by a new partner for his share of goodwill?
Ans: Cash/Bank A/c is debited.

15] What is hidden goodwill?

Ans: If the amount brought by new partner is more than his share in capital, the excess is known as Hidden goodwill.

State True or False in following cases:

1] Goodwill brought in cash by new partner is distributed among old partner in their Sacrificing ratio.
Ans: True

2] In case of admission of a partner, profit or loss on revaluation is transferred to Old Partners’ Capital Accounts.
Ans: True

3] Accumulated profit is transferred to all partners’ capital Accounts including new partner.
Ans: False

4] The debit balance of Profit and Loss Account shown in the assets side of the Balance Sheet will be debited to
Old Partners Capital Accounts.
Ans: True

5] Increase in the value of an asset is credited to Revaluation Account

Ans: True

6] The traditional name of Revaluation A/c is ‘Profit and Loss Adjustment A/c’.
Ans: True

7] Goodwill is an intangible asset.

Ans: True

8] Decrease in the value of liability is debited to Revaluation Account.

Ans: False

9] Sacrifice ratio is required to distribute the cash brought by new partner among old partners for his share of goodwill.
Ans: True

10] Share sacrificed = Old share – New share.

Ans: True
 CHAPTER: 03
RECONSTITUTION OF PARTNERSHIP FIRM: RETIREMENT AND DEATH OF A PARTNER

One Mark Questions:

PART - A
I] Multiple Choice Questions:

1] Abhishek, Rajat and Vivek are partners sharing profits in the ratio of 5:3:2. If Vivek retires, the New
Profit- Sharing Ratio between Abhishek and Rajat will be–
a] 3:2 b] 5:3 c] 5:2 d] 1:1

2] The old profit-sharing ratio among Rajendra, Satish and Tejpal were 2:2:1. The New Profit Sharing
Ratio after Satish’s retirement is 3:2. The gaining ratio is;
a] 3:2 b] 2:1 c] 1:1 d] 2:2

3] Anand, Bahadur and Chander are partners sharing profits equally. On Chander’s retirement, his share is
acquired by Anand and Bahadur in the ratio of 3:2. The New Profit Sharing Ratio between Anand and
Bahadur will be:
a] 8:7 b] 4:5 c] 3:2 d] 2:3

4] In the absence of any information regarding the acquisition of share in the profit of the
retiring/deceased partner by the remaining partners, it is assumed that they will acquire his/her share
in:
a] Old Profit Sharing Ratio b] New Profit Sharing Ratio c] Equal Ratio d] gain ratio

5] On retirement/death of a partner, the remaining partner(s) who have gained due to change in profit
sharing ratio should compensate the
a] retiring partners only.
b] remaining partners (who have sacrificed) as well as retiring partners.
c] remaining partners only (who have
sacrificed). d] Remaining partners who have
gained

6] Amount due to deceased partner is settled in the following manner;

a] Immediate full payment
b] Transferred to Loan Account
c] Partly paid in cash and the balance transferred to Loan A/c
d] All of the above.

7] Deceased partner’s share of profit in the accrued profit may be calculated on the basis of
a] Last year’s profit b] average profit of past few years c] Sales d] All the above

8] Items to be considered while calculating the amount payable to the deceased partner is:
a] His share of capital b] His share of
reserve c] His share of accrued profit d] All the
above

9] Accrued profit is ascertained on the following ways

a] Average profit b] Previous year’s profit c] On sales d] All of the above.

10] Amount payable to the Executors of the deceased partner is transferred

to: a] Executors loan account. b] Executors account.
c] Remaining partners’ capital accounts. d] deceased partner’s capital account.
II. Fill in the blanks:

1] Old ratio is used to distribute accumulated profits and losses at the time of retirement of a
partner.
2] Profit or loss on revaluation is shared among the partners in old ratio on retirement of a
partner.
3] New ratio – Old ratio = Gain ratio.
4] Accumulated losses are transferred to the Capital Accounts of the partners at the time of retirement in their old
ratio.
5] General reserve is to be transferred to all the partner’s capital accounts at the time of retirement of a partner.
6] In the absence of any instruction, Retiring Partner’s Capital A/c is closed by transferring its balance to
retiring partner’s loan A/c
7] New profit sharing ratio is used for adjustment of continuing partner’s capitals.
8] X, Y and Z are the partners sharing profits and losses in the ratio of 3:2:1. If Y retires, the new ratio of X and Z will be
3:1
9] Share gained is calculated by deducting old share from the New Share.
10] The ratio in which the remaining partners share future profits after retirement is called new profit sharing ratio.
11] The balance in the retiring partner’s loan A/c is shown on the Liability side of the B/S till the last installment is
paid.
12] The amount paid to the Retiring Partner in excess of what is due to him is called hidden goodwill.
13] In the absence of any agreement as the disposal of amount due to retiring partner, Sec.37 of the Indian
Partnership Act, 1932 is applicable.
14] Executors account is generally prepared at the time of death of a
partner.
15] Accounting treatment at the time of retirement and death is
same/similar.
16] The period from date of the last B/S and the date of the partner’s death is called intervening period.
17] Profit and loss suspense account is debited for the transfer of share of accrued profit of a deceased
partner.
18] Amount payable to the Executors of the deceased partner is transferred to Executor’s loan account.

III. Match the following type of questions:

A B

a. Gaining ratio i Required for contribution to retiring partner share of goodwill

b. Gained share ii New share – Old share
c .New share iii Old share + acquired share
d .Executor’s account iv Death of a partner
e. Section 37 of partnership act v Outgoing partner receive 6% interest
f Amount due to deceased partner vi Transfer to Executor’s account

IV. One Marks Questions.

1] What do you mean by retirement of a partner?

Ans: A partner is said to be retired from the firm, when his relation with the firm as a partner comes to an end

2] Give the formula for calculating Gain Ratio.

Ans: Gain Ratio = New ratio – Old ratio.

3] Why Gain Ratio required on retirement of a partner?

Ans: Gaining ratio is required to adjust retiring partner’s share of goodwill among continuing partners.

4] Why the New Ratio is required on retirement of a partner?

Ans: New ratio is required to share future profits/ losses between remaining partners.
5] Give the formula for calculation of new profit-sharing ratio on retirement of a partner.
Ans: New Profit-Sharing Ratio = Old share + share gained (Acquired share)

6] What do you mean by hidden goodwill?

Ans: Hidden goodwill refers to the amount paid to retiring partner in excess of actual amount due to him.

7] When do you prepare executors account?

Ans: Executer’s account is prepared at the time of a death of a partner.

8] How do you close the executors account?

Ans: Executor account is closed by transferring its balance to Executor loan account.

9] Who is an ‘Executor’?
Ans: Executor is the legal representative of a deceased partner in a partnership firm.

10] Which account is credited for the share of accrued profit of a deceased partner?
Ans: Deceased partner’s capital account.

11] What is intervening period?

Ans: The period from date of last balance sheet till to the date of death is called intervening period.

State true or false in the following cases:

1] Profit or loss on revaluation is transferred to All Partners’ Capital Accounts in case of retirement of a partner.
Ans: True

2] Accumulated profit is transferred to Continuing Partners Capital Accounts.

Ans: False

3] Adjustment of partners’ capitals of the remaining partners is to be made in the New Ratio.
Ans: True

4] New Share = Old share + share sacrificed.

Ans: False

5] Share gained is computed by deducting Old share from the New Share.
Ans: True

6] Increase in the value of asset is debited to Revaluation Account.

Ans: False

7] Sec 37 of the Indian Partnership Act, 1932 states that the outgoing partner has an option to receive either
interest @ 6% p.a. till the date of payment or such share of profits which has been earned with his money.
Ans: True

8] Deceased partner’s claim is transferred to his Executor’s Account.

Ans: True

9] Deceased partners’ share of profit for the intervening period may be calculated on the basis of last year’s
profit/ average profit of the past few years or on the basis of sales.
Ans: True

10] Deceased partner may be paid in one lump sum or installments with interest.
Ans: True

11] Retirement normally takes place at the end of an accounting period, where as death of a partner may occur at
any time.
Ans: True
12] Amount payable to the Executors of the deceased partner is transferred to executor’s loan account.
Ans: True

PART- B

TWO MARKS QUESTIONS:

1] Mention any two circumstances for the retirement of a

partner.

Ans: (a) Due to old age of a partner (b) Misunderstanding with

other partners.

(2] What is Gain Ratio?

Ans: The gain ratio is the ratio in which the remaining partners gain or acquire the share of retiring partner on
his retirement. Gain Ratio = New Ratio – Old Ratio

3] State any two differences between sacrificing ratio and gaining ratio.
Sacrifice ratio Gain ratio
a. Calculated at the time of admission of a partner a. Calculated at the time of retirement of a partner.
b. It is required to distribute the goodwill brought in cash b. It is required to write off the goodwill raised to the extent
by the new partner. of a retiring partner.
c. Sacrifice ratio = Old Ratio – New Ratio c. Gain ratio = New Ratio – Old Ratio

4] State any two purposes of calculating new profit-sharing ratio.

Ans: (a) To share the future profits of the firm.
(b) To write off the firm’s goodwill.
(c) To adjust the remaining partners’ capital.

5] How do you close the Revaluation Account on retirement of a partner?

Ans: By transferring profit or loss on revaluation account to the capital account of all the partners in their old ratio.

6] Mention any two modes of disposal of amount due to Retiring Partner.

Ans: (a)Settlement is made in lump sum by cash or by cheque.
(b) Amount due to retiring partner is treated as loan.
(c) Amount due to retiring partner is partly paid in cash and the balance amount transferred to his loan a/c.

7] Pass the journal entry to close Retiring Partner’s Capital Account when the payment is made immediately.
Ans: Retiring partner’s Capital A/c .................................................. Dr.
To Cash/ Bank A/c ----
(retiring partner’s a/c is settled by payment)

8] Give the journal entry to close Retiring partner capital Account when it is transferred to Loan A/c.
Ans: Retiring Partner’s Capital A/c ............................................Dr.
To Retiring Partner’s loan A/c
(Amount due to retiring partnrer transferred to his loan A/c)

9] Give the journal entry to close Revaluation Account when there is a profit.
Ans: Revaluation A/c ...................................................................... Dr.
To All Partners’ Capital A/c
(Profit on revaluation transferred to partners Capital a/c)
10] Give the journal entry to close Revaluation Account when there is a loss.
Ans: All partners’ Capital A/c .......................................................... Dr.
To Revaluation A/c ----
(Loss on revaluation transferred to partners’ Capital a/c)

11] Why do firms revalue the assets and liabilities on retirement?

Ans: On retirement of the partner the assets and liabilities of the firm are revalued in order to ascertain true position
of the business. The value of some of the assets and liabilities may be increased or decreased. To record the
increase or decrease in the value of assets and liabilities firms prepare revaluation a/c.

12] Why retiring partner is entitled to a share of goodwill of the firm?

Ans: The retiring partner is entitled to his share of goodwill at the time of retirement because the goodwill has been
earned by the firm with the efforts of all partners including retiring partner.

13] Pass the journal entry for Deceased Partner’s Share of profits for the intervening period:
Ans: Profit & loss suspense A/c Dr.
To Decreased partners’ capital A/c
(Decreased partners share profit given.)

14] Give the meaning of accrued profit.

Ans: The profit from the date of last balance sheet till to the date of a death of a partner in a partnership firm is
considered as accrued profit.

15] State any two differences between retirement and death of a partner.
Retirement of a partner Death of a partner

a. Takes place generally at the end of the year a. Takes place at any time during the year

b. Retiring partners’ capital a/c settlement takes b. Decreased partners’ capital a/c settlement takes
place between the firm & retiring partner himself. place between the firm & executors of the deceased
partner.

c. Retiring partner's capital a/c balance is not paid c. Deceased partners’ capital a/c balance is paid to
to him immediately on his retirement. the executors immediately on the date of death.

16] Write any two ways of settlement of claims of the deceased partner.
Ans: (a) Immediate full payment by cash.
(b) Partly paid in cash and balance transferred to loan account.

17] Write the journal entry to close the deceased partner’s Capital Account.
Ans: Deceased partners’ capital A/c ............................................ Dr To Deceased partners executor A/c ----
(Balance of deceased partner capital account transferred)

18] Pass Journal entry for transfer of accrued profit of the deceased partner.
Ans: Profit and Loss suspense A/c ............................................ Dr To Deceased partners’ capital A/c
(Accrued profit transferred to deceased partner)

19] Write the journal entry for cash paid immediately to the executors of the deceased partner
Ans: Deceased partners executor A/c ............................................ Dr To Cash A/c/Bank A/c
(Payment made to deceased partner executors)

20] How do you close the executors account when the payment is not made immediately?
Ans: When the payment is not made immediately executor’s account can be closed by transferring the balance due to the
executor’s loan account.
21] A, B, C were partners in a firm sharing profits in the ratio of 5:4:1. The profit of the firm for the year
ending on 31-03-2024 was ₹12,000. B dies on 30-6-2024. Calculate B’s share of profit from 01 04-2024 to 30-
06-2024.
Ans: 12,000x 4 x 3 = ₹1,200
10 12

22] Give the Journal entry when retiring partner’s whole amount is treated as loan.
Ans: Retiring Partner’s Capital A/c ............................................Dr.
To Retiring Partner’s loan A/c
(Amount due to retiring partner transferred to his loan A/c)

23] Pass the Journal entry when retiring partner is partly paid in cash and the remaining amount is
treated as loan.
Ans: Retiring Partner’s Capital A/c ........................................ Dr.
To Cash/ Bank. A/c
To Retiring Partners loan. A/c
(Being part payment to retiring partner made on his retirement and remaining amount transferred His loan a/c)

24] P, Q and R are partners in a firm sharing profits in the ratio of 3:2:1. R retires and the balance in his
Capital Account after making necessary adjustments workout to be ₹60,000. P and Q agreed to pay him
₹75,000 in full settlement of his claim. Find out the hidden goodwill.
Ans: R's capital after adjustment = ₹60000
Claim settled = ₹75000
Hidden Goodwill= ₹75000 - ₹60000
= ₹15000
 CHAPTER: 04
DISSOLUTION OF PARTNERSHIP
FIRM

PART - A

One Mark Questions:

I] Multiple Choice Questions:

1] On dissolution of a firm, bank overdraft is transferred to:

a] Cash Account b] Bank Account c] Realisation Account d] Partner’s capital
Account

2] On dissolution of a firm, partner’s loan account is transferred to:

a] Realisation Account b] Partner’s Capital Account c] Partner’s Current Account d] cash or bank account.

3] After transferring liabilities like creditors and bills payables in the Realisation Account, in the absence of
any information regarding their payment, such liabilities are treated as:
a] Never paid b] Fully paid c] Partly paid d] Paid at deductible percentage.

4] When realisation expenses are paid by the firm on behalf of a partner, such expenses are debited to:
a] Realisation Account b] Partner’s Capital Account c] Partner’s Loan Account d] cash or bank account

5] Unrecorded assets, when taken over by a partner are shown in:

a] Debit of Realisation Account b] Debit of Bank Account c] Credit of Realisation Account d] Credit of Bank Account.

6] Unrecorded liabilities, when paid are shown in:

a] Debit of Realisation Account b] Debit of Bank Account c] Credit of Realisation Account d] Credit of Bank Account.

7] The accumulated profits and reserves are transferred to:

a] Realisation Account b] Partners’ Capital Accounts c] Bank Account d] Cash Account.

8] On dissolution of the firm, partner’s capital accounts are closed through:

a] Realisation Account b] Drawings Account c] Cash or Bank Account d] Loan Account.

9] Dissolution of firm means to

a] Breaking of relationship between all the partners
b] Breaking of relationship between one or two partners
c] Breaking the relationship between two out of Five
partners d] Breaking of relationship between two out of
four partners

10] Dissolution partnership firm brings

a] To an end of business b] To the continuation of business
c] To the end of partnership d] To the continuation of partnership

11] Dissolution of partnership implies that

a] The end of partnership b] The end of firm
c] The continuation of partnership d] The continuation of firm

12] Dissolution of partnership may not take place

a] On changes in existing profit sharing ratio b] On admission of a new partner
c] On intervention of court d] On retirement of a partner

13] Dissolution of firm may not take place

a] By an agreement b] By compulsion
c] By notice d] By completion of the venture
14] The court may not order a partnership firm to dissolve on
a] The death of any partner b] The insanity of any partner
c] The permanent incapability of any partner d] The guilty of misconduct of any partner

15] Losses on dissolution including deficiency of capital Shall not be paid

a] Out of profits b] Out of bank loan
c] Out of partners’ capital d] Out of partner’s individual contribution

II. Fill in the blank

1] All assets (except cash/bank and fictitious assets) are transferred to the debit side of the realisation
account. 2] All external liabilities are transferred to the credit side of realisation account.
3] Accumulated losses are transferred to the capital account in profit sharing ratio.
4] If a liability is assumed by a partner, such a Partner's Capital Account is to be
credited. 5] If an asset is taken over by a partner such a partner capital account is to
be debited.
6] No entry is required when a creditor accepts a fixed asset in payment of his dues.
7] When the creditor accepts an asset whose value is much more than the amount due to him, the excess amount paid
will be credited to the realizattion Account.
8] When the firm has agreed to pay the partner a fixed amount for realisation work irrespective of the actual
amount spent, such fixed amount is debited to Realisation Account and Credited to Capital Account
9] Partner’s loan is not transferred to the Realisation Account.
10] Partner’s current accounts balances are transferred to respective Partners’ capital Account

III. Match the following

A B
a] Breaking of relationship between some of the partners i] Dissolution of partnership
b] Dissolution by happening of contingencies ii) Death of a partner some of the partners
c] Partners' loan ii) Settled by payment
d] Assets taken over by a partner iv] Debited to Partners' capital account
e] profit on realization vi] Credited to all partners ‘capital account

IV. Short answer Questions

1] State any one difference between dissolution of partnership and dissolution of partnership firm.
Dissolution of Partnership Dissolution of Partnership Firm
a. The books of accounts are not closed a. The books of accounts are closed.

2] State any one order of settlement of accounts on dissolution.

Ans: 1. Amount which is received on the sale of assets should be used in this sequence:
i. Paying off all external expenses and liabilities

3] State any one process of dissolution of partnership firm.

Ans: a. Dissolution by agreement b. Dissolution by court. OR sale /realisation of assets

4] What is a realisation account?

Ans: Realisation Account is an account, which is prepared at the time of Dissolution of a partnership firm to ascertain the
profit or loss on realisation assets and payment of liabilities.

5] How do you close a realisation account?

Ans: The balance of realization account is transferred to all partner’s capital accounts in profit sharing ratio.
 6] On what account does the realisation account differ from the revaluation account.
Realisation Account Revaluation Account
a. It is prepared at the time of dissolution of firm. a. It is prepared at the time of admission, retirement or
death of the partner.
b. It records the actual relisation of assets and settlement b. It records the effect of revaluation of assets and
of all liabilities. liabilities.

7] State any one way of dissolution of partnership

firm.
Ans: a. Dissolution by agreement b. Dissolution by court.

State True or False:

1] A firm is compulsorily dissolved when a partner decides to retire.

Ans: False.

2] Court can order a firm to be dissolved when a partner becomes insane.

Ans: True.

3] Dissolution of partnership cannot take place without intervention of the court.

Ans: False.

4] Losses, including deficiency of capital shall be paid first out of capital of partners.
Ans: False.

5] Realisation account is prepared to ascertain the net effect of assets realised and liabilities paid.
Ans: True.
 CHAPTER: 05
ACCOUNTING FOR SHARE
CAPITAL

PART - A
One Mark Questions:

I] Multiple Choice Questions:

1] Equity shareholders are:

a] Creditors b] Customer of the company c] Owners d] Debtors

2] Nominal share capital is :

a] That part of the authorized capital which is issued by the company.
b] The amount of capital which is actually applied for by the prospective
shareholders c] The maximum amount of share capital which a company is
authorized to issue. d] The amount actually paid by the shareholders.

3] Interest on calls in arrears is charged according to “Table F” at:

a] 10% b] 6% c] 8% d] 11

4] Money received in advance from shareholders before it is actually called-up by the directors is:
a] Debited to calls in advance account b] Credited to calls in advance account
c] Debited to calls account d] Credited to calls account

5] Shares can be forfeited

a] For non- payment of call money b] For failure to attend meeting
c] For failure to repay the loan to the bank d] For which shares are pledged as a security.

6] The profit on reissue of forfeited shares is transferred to:

a] general reserve b] capital redemption reserve
c] capital reserve d] revenue reserve

7] Balance of share forfeited account is shown in the balance sheet under the item:
a] Current liabilities and provisions b] Reserves and Surplus
c] Share capital d] Unsecured loan

8] Issued share capital is a part of :

a] Reserve capital b] Unissued capital
c] Authorised capital d] Uncalled capital

9] Maximum numbers of members in a private company is

a] 40 b] 200 c] 70 d] 100

10] An instance when more applications are received than the number offered to the public
a] Less offers b] over subscription c] under subscription d] More offer

11] Paid up capital is a part of

a] Called up capital b] Reserve capital c] Authorized capital d] Subscribed capital

12] If a shareholder fails to pay call money, it is called

a] First call b] Calls in advance c] Calls in arrears d] First and final call

13] From the date of issue of prospectus the company to get minimum subscription
with in a] 120 days b] 130 days c] 100 days d] 125 days
14] The amount received in advance is a of the company.
a] Liability b] Assets c] Expenses d] Income

II. Fill in the blanks:

1] A company is an artificial person.
2] Subscribed capital is the part of the issued
capital.
3] The directors of a company must be a
shareholders.
4] Call money received in advance I called calls in advance.
5] 5 lakhs is the minimum paid up capital of a Public
Company.
6] Minimum paid up capital of a private company is 1 lakh.
7] One months must elapse between two calls.
8] Two is the minimum number of members in a private
company.
9] Capital Reserve are created out of capital profit.
10] The amount of buy back of shares in any financial year should not exceed 25% of the paid up
capital.
11] Profit on forfeiture of shares is transferred to Capital reserve account.

III. MATCH THE F0LLOWING:

A B
1] Equity shares (i) ordinary shares
2] Common seal (ii) official signature of the company
3] Shares (iii) fractional part of the capital
4] Prospectus (iv) an invitation to the public by new company
5] Subscribed capital (v) part of issued capital
6] Allotment of shares (vi) steps in the procedure of share issue
7] premium (vii) excess amount
8] calls in Arrears (viii) unpaid calls
9] calls in advance (ix) liability of the company
10] issue of shares at discount (x) amount less than the nominal/face value of shares

IV. VERY SHORT ANSWER QUESTIONS:

1] State any one kind of

company.

Ans: (a) on the basis of number

of members : a. Public
Company b.Private Company

2] What is issued capital?

Ans: Issued capital is part of authorized capital which is actually issued to the public for subscription.

3] What is buy-back of shares?

Ans: When a company purchase its own shares, it is called buy-back of shares.

4)When the reserve capital is used?

Ans : In the event of winding up of the company

5] What is Over subscription?

Ans: When the company receives applications for more number of shares than the number of shares offered to the
public for subscription, it is called over subscription.
6) What is under subscription?
Ans: under subscription means number of shares applied for by the public is less than the number of shares offered to the
public for subscription.

7) What is issue of shares at Par.

Ans: It means issue of shares at a price equal to face value of the shares of the company.

8) What is issue of shares at Premium?

Ans: It means the issue of shares at a price higher or more than the face value of shares.

9) When the shares are forfeited?

Ans : Shares are forfeited when a shareholder fails to pay the allotment money or call money or both.

10) State any one type of shares.

Ans: Equity shares.

11) Expand OPC.

Ans: One Person Company.

State True or False:

1] Share application account is a liability account.
Ans: True

2] Company’s share are generally transferable.

Ans: True

3] Paid up capital may exceed called capital.

Ans: False

4] Forfeiture of shares is cancellation of the rights of shareholders.

Ans: True

5] The Articles of the Association must authorize the company for the buy-back of shares.
Ans: True

PART-B

TWO MARKS QUESTIONS:

1] What is company?
Ans: It is an artificial person having corporate legal entity, distinct from its members and has a common seal.

2} State any two features of company.

Ans: a) Separate Legal Entity b) Limited Liability:

3] What is Prospectus?
Ans: It is an invitation to the public to purchase (subscribe) its shares. It contains a complete information about the
company.

4] What is calls in arrears?

Ans: Shareholder fails to pay the amount due on allotment or on any of the calls. Such amount is known as calls in
arrears.

5] Stat any two methods of issue of shares.

Ans: (i) Public issue or IPO ii) Bonus issue
6] What is issue of shares for consideration other than cash?
Ans : Issue of shares by the company to the vendors from whom it has purchased assets such as Machinery,
Buildings etc., is known as issue of shares for consideration other than cash. Here, no cash is received by the issue
of shares.

7] What is forfeiture of shares?

Ans: Cancellation of the right of a shareholder on shares held by him due to non-payment of allotment money or call
money or both due on such shares.

8] Give the journal entry for transfer of profit on re-issue of forfeited shares.
Ans: Share Forfeiture A/c................... Dr.
To Capital Reserve A/c
(Profit on reissue of forfeited shares)

9] Name any two categories of share capital.

Ans : a) Authorised capital b) Issued capital

10] Give the journal entry for transfer of Share application money.
Ans : Share application A/c ................... Dr.
To share capital A/c
(application money transferred)
 CHAPTER: 06
ISSUE AND REDEMPTION OF DEBENTURES PART – A

I] Multiple Choice Questions:

1] Debentures which are transferable by mere delivery are:

a] Registered debentures b] First debentures c] Bearer debentures d] Secured debentures

2] Debenture holders are

a] Owners of the company b] Lenders of the company c] Debtors of the company d] Trustees of the company

3] Excess value of net assets over purchase considerations at the time of purchase of business is credited to:
a] General reserve b] Capital reserve c] Vendor’s account d] Assets account.

4] Own debentures are those debentures of the company which:

a] The company allots to its own
promoters b] The company allots to its
director
c] The company purchases from the market and keeps them as investment
d] The company allots to the public.

5] Premium on Redemption of Debentures A/C is A/c

a] Assets b] Income c] Liability d] Expenses

6] loss on issue of debentures is treated as:

a] intangible assets b] currents assets c] current liability d] miscellaneous expenses

7] In the event of liquidation of the company, the debenture holders have priority
a] interest b] principal amount c] both (a) and (b) above d] discount

8] debentures cannot be redeemed at:

a] premium b] Discount c] Par d] More than 10% premium

9] Debentures cannot be redeemed out of:

a] Profits b] Provisions c] Capital d] Reserves

10] A company issued 2,000, 8% debentures of ₹100 each at par value redeemable at 10% premium. 8%
stands for:
a] Rate of Dividend b] Rate of tax c] Rate of interest d] Rate of TDS

11] X company Ltd, purchased machinery for ₹20,000, payable ₹6,500 in cash and the balance by issue of
12% debentures of ₹100 each at a discount of 10%. How many debentures would be required to issue to the
vendor? a] 155 debentures of ₹100 each b] 150 debentures of ₹100 each
c] 135 debentures of ₹100 each d] 145 debentures of ₹100 each

12] XYZ company Ltd issued 5,000 6% debentures of ₹100 each at Par and are redeemable at 10%
premium. Premium on redemption will be debited at the time of issue of debentures to:
a] Loss on Issue of Debentures A/c b] Share Discount
A/c c] Security premium A/c d] General reserve
A/c

13] Methods of Redemption of Debentures are:

a] By annual drawings b] By profit
c] By payment in lump sum d] By using general reserve fund
14] If the market price of the Debentures is more than the face value, at the time of Redemption this will
be a capital loss and is transferred to;

a] Capital reserve b] General reserve

c] Profit on redemption of Debentures d] Loss on Redemption of Debentures

15] The following journal entry appears in the books of a company.

Bank A/c Dr. ₹9,50,000
Loss on issue of debentures A/c Dr. ₹1,50,000
To 8% Debentures A/c
₹10,00,
000 To premium on Redemption of debentures A/c
₹1,00,0
00
In this case, Debentures are issued at a discount of %
a] 15% b] 5% c] 10% d] 8%

II. FILL IN THE BLANKS:

1] Debentures issued as collateral security will be debited to Debentures

A/c
2] Discount on issue of debentures is a Fictitious assets
3] Coupon rate is Rate of interest at which the amount is paid by the company on its debentures.
4] When all the debentures are redeemed, Debenture redemption reserve A/c is credited to general reserve
A/c.
5] NBFC registered with the RBI create redemption reserve equivalent to at least 25% of the value of
outstanding debentures issued through public issue.
6] Withdrawal from Debenture Redemption Reserve is permissible only after 10 % of debentures have been
redeemed.
7] In case of conversion of the debentures into shares, Debenture holders’ A/c is debited and Share capital A/c is
credited.
8] If own debentures are purchased by the company for the investment purpose, own debentures will be shown
as an asset in the Balance Sheet.
9] Debentures which are transferable by mere delivery are called bearer debentures.
10] Debentures A/c is shown under the head long term borrowings in the Balance Sheet.

III. MATCH THE FOLLOWING

A B
1] Secured debentures (i) type of debentures
2] Irredeemable debentures (ii) perpetual debentures
3] Discount on issue of debenture is (iii) Capital loss
4] Issued at par and redeemable at par (iv) Terms of issue of debentures
5] Redemption of debentures (v) discharge of liability

IV. VERY SHORT ANSWER QUESTIONS:

1] What is meant by Debentures?

Ans: Debentures are the written instruments acknowledging debt under the common seal of the company.

2] What is bond?
Ans: Bond is an instrument of acknowledgement of debt.

3] What is coupon Rate?

Ans: Coupon rate refers to a specified rate of interest on debentures.
4] What do you mean by Zero coupon rate debentures?
Ans: Zero coupon rate debentures refer to the debentures those do not carry a specific rate of interest.

5] What is meant by issue of debentures for consideration other than cash?

Ans: Issue of debentures for consideration other than cash means issuing debentures to vendors for purchasing of assets.

6] What do you mean by the issue of debentures as collateral security?

Ans: Issue debentures as a collateral security mean issuing debentures to the lenders in addition to some other assets
already pledged.

7] Name any one method of redemption of debentures.

Ans: Payment in Lump sum

8] What do you mean by redemption of debentures?

Ans: Redemption of debentures refers to repayment of the amount of debentures by the company.

9] Expand D.R.R.
Ans: Debenture Redemption Reserve

10] Expand D.R.F.I

Ans: Debenture Redemption Fund Investment

11] Expand A.I.F.Is.

Ans: All India Financial Institutions

12] State any one type/kind of debentures.

Ans: Secured Debentures.

State True or False:

1] Redemption of debentures is made by the company is accordance with the terms of issue.
Ans: True

2] A company can issue irredeemable debentures.

Ans: True

3] Debenture is a part of loaned capital.

Ans: True

4] Debenture holders have voting rights.

Ans: False

5] Debentures bear fixed interest.

Ans: True

6] Debentures cannot be issued at a discount for more than 10% of the face value.
Ans: False

7] Loss on issue of debentures is a revenue loss.

Ans: False

8] Debenture holders are not the members of the company.

Ans: True
 CHAPTER: 07
FINANCIAL STATEMENTS OF A COMPANY PART – A

I] Multiple Choice Questions:

1] Balance sheet of a company is required to be prepared in the format given in

a] Schedule III Part I b] Schedule III Part I
c] Schedule III Part III d] Schedule III Part IV

2] Which of the following is not required to be prepared under the Companies Act?
a] Statement of Profit and Loss b] Balance Sheet
c] Report of Director’s and Auditor’s d] Fund flow statement

3] External users of financial statements do not include:

a] Shareholders b] Banks c] Creditors d] Government

4] Securities premium reserve appears in a company’s balance sheet under:

a] Share Capital b] Long- term provisions
c] Reserves and Surplus d] Short-term provisions

5] 8% Debentures appear in a company’s balance sheet under the sub head _

a] Long-term provisions b] Long-term borrowings
c] Other current liabilities d] Other long-term liabilities

6] Which of the following is shown under the head “fixed assets”?

a] Inventories b] Trade receivables
c] Cash and cash equivalents d] Goodwill

7] Non-current assets are:

a] Expected to use in the business for long period b] Involved in entities operating
cycle c] Primarily held for trading d] Cash and cash equivalents

8] Current Assets does not include:

a] Short term investments b] Inventories c] Buildings d] Cash and cash equivalents

9] Current liabilities are to be paid within month

a] 3 months. b] 6 months. c] 9 months. d] 12 months.

10] Short-term borrowings appear in a company’s Balance Sheet under the head
a] Current Assets b] Current Liabilities c] Non-Current Liabilities d] Non-Current Assets

II. Fill in the blanks:

1] Financial statements are the basic and formal annual report.

2] Financial statements include Statement of profit and loss and Balance
sheet.
3] Income statement and Balance sheet are the financial statements.
4] The object of preparation of balance sheet is to ascertain the financial status of the enterprise.
5] Income statement is prepared to ascertain profitability.
6] Share capital appears under the head Shareholder’s
fund.
7] Capital reserve is shown under reserves and surplus
head.
8] Debit balance of statement of profit and loss shall be shown as Negative figure under surplus
head.
9] Loans which are repayable within twelve months are called as short term borrowings.
10] Fixed assets are classified as tangible and intangible assets.

III. Match the following

A B
a] Financial statements i) Formal annual reports
b] Long-term borrowings ii) Debentures
c] Provision for taxation iii) Short-term provisions
d] Revenue from operations iv) Sale of products
e] Purchase of Stock-in-trade v) Purchases of goods

Very Short Answer Questions:

1] Name any one type of financial statements.
Ans: Balance sheet

2] State any one feature of financial statements.

Ans: Recorded Facts

3] Name any one internal user of financial statements.

Ans: Employees

4] Write any one objective of financial statements.

Ans: To provide information about profitability and financial position

5] State any one type of reserve.

Ans: Capital Reserve, General Reserve.

6] Give an example for non-current asset.

Ans: Buildings

7] Where do you record the money received against share warrants?

Ans : Shareholder’s Fund

9] How do you treat credit balance of income statement under the head surplus?
Ans: It is shown in surplus under the head of Reserves and Surplus.

10] Write any one feature of current asset.

Ans: (a) Current assets is cash or is expected to realise within 12 months

11] How do you treat preliminary expenses?

Ans: It should be written off first out of securities premium and then out of profits, then it is treated as other non-current
assets.
State True or False:
1] The original cost is the basis of recording transactions.
Ans: True

2] Going concern postulates assumes that the enterprise exists for a longer period of time.
Ans: True

3] The financial statements do not show current financial condition of a business.

Ans: True.

4] While preparing financial statements, inventories valued at market price or cost price whichever is less.
Ans: True

5] Rounding off of figures in financial statements is not mandatory.

Ans: False

PART-B

1] Give the meaning of financial statements.

Ans: Financial statements are the basic and formal annual reports through which the corporate management
communicates financial information to its owners and various other external parties

2] Mention two types of financial statements.

Ans: a) Statement of profit and loss b) Balance Sheet

3] State any two features of financial statements.

Ans: a) Recorded Facts b) Accounting conventions followed

4] Write any two objectives of financial statements.

Ans : a) To provide information about earning capacity of the business.
b) To provide information about economic resources.

5] State any two benefits of financial statements.

Ans: a) Helps stock exchanges

6] Give any two limitations of financial statements.

Ans: (a) Do not reflect current situation (b) Assets may not realize (c)Bias

7] State any 2 postulates.

Ans: 1) Going concern postulate, 2) Money measurement postulate.

8] How will you disclose the following items in the Balance Sheet of a Company?
Ans: A) Loose tools – Current assets as inventories
B) Proposed dividend – Current liabilities as short term provisions.
9] State any two differences between current liabilities and non-current liabilities.
Current Liabilities Non-Current Liabilities.
1. It is paid within one year or less. Example: Trade 2. It is paid More than one year. Example:
payable Debentures

2. It is a short-term source of funds. 2. It is a long-term sources of funds.

10] Mention any two items which are shown under the head of non-current liabilities.
Ans: a) Capital Reserve b) Securities Premium Reserve

11] State any two differences between current assets and non current assets.
Current Assets Non-Current Assets
1. These assets are held on short term basis. 1. These assets are held on long term basis.

2. These assets are not subject to depreciation. 2. These assets are subject to
depreciation.
 CHAPTER -08
FINANCIAL STATEMENT ANALYSIS

PART - A
One Mark Questions:

I] Multiple Choice Questions:

1] The financial statements of a business enterprise include:

a] Balance sheet b] Statement of Profit and Loss. c] Cash flow statement d] All the above.

2] Which of these are not the method of financial statement analysis?

a] Ratio analysis b] Comparative analysis c] Trend analysis d] Capitalisation method

3] From financial statement analysis, the creditors are interested to

know a] Liquidity b] Profit c] Efficiencies d] Share
capital

4] Comparative statements are also known as

a] Dynamic Analysis b] Vertical Analysis c] External Analysis d] Horizontal Analysis

5] Common Size Statements are also known as:

a] Vertical Analysis b] Dynamic Analysis c] Horizontal Analysis d] External Analysis

6] Percentage of each liability to the total liabilities is shown in:

a] Common Size Balance Sheet b] Common Size Income
statement c] Comparative Balance Sheet d] Comparative Income
statement

7] Tangible assets of the company increased from ₹4,00,000 to ₹5,00,000. What is the Percentage of change?
a] 20% b] 25% c] 33% d] 50%

8] In a common-size balance sheet, total equity and liabilities are assumed to be equal to:
a] 1,000 b] 100 c] 10 d] 1

9] Common Size Statements are useful in comparison of:

a] Intra-firm for the same or several years b] Inter-firm over different years
c] Both (a) & (b) above d] None of the above

10] An Annual Report is issued by a company to its:

a] Directors b] Auditors c] Shareholders d] Management

II. Fill in the blanks:

1] The term analysis means simplification of financial data
2] Interpretation means explaining the meaning and significance of the
data.
3] Comparative analysis is also known as Horizontal analysis.
4] Common Size Statement is also known as vertical analysis.
5] The term ‘financial analysis’ includes both ‘analysis and interpretation’.
6] The statement showing the profitability and financial position for different periods of time in a comparative
form is known as comparative statement.
7] The statement which indicate the relationship of different items of financial statement with a common item is called
Common size statement.
8] It is possible to assess the profitability, solvency and efficiency through the technique of Ratio
analysis
9] Percentage of each asset to the total assets is shown in common size Balance Sheet.
10] Analysis and interpretation are complimentary to each other

III. Match the following

A B
a] Trend Analysis i) Tools of Analysis of Financial Statements
b] Horizontal statement ii) Comparative Statements
c] Vertical statement iii) Common Size Statement

IV. Very Short Answer Type Questions:

1] What do you mean by Financial Statement Analysis?
Ans: Financial Statement Analysis means simplification of financial data by methodical classification given in financial
statement.

2] State any one object of Financial Statement Analysis.

Ans: To identify the reasons for change in the profitability / financial position of the firm.

3] State any one technique of Financial Statement Analysis.

Ans: Comparative Statement

4] State any one user of Financial Analysis.

Ans: Investors, Creditors, Shareholders.

5] What is Vertical Analysis?

Ans: It is a tool of financial analysis, in which data or figures are converted into percentages of a common base item.

6] What is Horizontal Analysis?

Ans: Analysis of financial statements in a comparative form called as horizontal analysis.

7] State any one importance of financial analysis.

Ans: Helpful to finance manager

8] State any one limitation of Financial Analysis.

Ans: a. It does not consider price level changes b. financial analysis is just a study of reports of the company.

9] Give the meaning of analysis.

Ans: Analysis means simplification of financial data by methodical classification.

10] Give the meaning of interpretation.

Ans: Interpretation means explaining the meaning and significance of data.

State True or False:

1.The Financial Statements of a business enterprise include Cash Flow Statement.
Ans: True.
2] Financial Analysis is used only by the creditors.
Ans: False
3] In a Common Size Statement, each item is expressed as a percentage of same common base.
Ans: True
4] Financial data will be comparative only when same accounting principles are used.
Ans: True
5] Non-monetary aspects are ignored in financial analysis.
Ans: True
 CHAPTER -09
ACCOUNTING RATIOS

PART - A
One Mark Questions:

I] Multiple Choice Questions:

1] The following group of ratios are primarily measure risk:

a] liquidity, activity, and profitability b] liquidity, activity, and inventory

c] liquidity, activity, and debt d] liquidity, debt and profitability

2] The ratios are primarily measures of return:

a] liquidity b] activity c] debt d] profitability

3] The of business firm is measured by its ability to satisfy its short-term obligations as and when
they become due:
a] activity b] liquidity c] debt d] profitability

4] ratios are a measure of the speed with which various accounts are converted into revenue
from operations or cash:
a] Activity b] Liquidity c] Debt d] Profitability

5] The two basic measures of liquidity are:

a] inventory turnover and current ratio b] current ratio and liquid ratio
c] gross profit margin and operating ratio d] current ratio and average collection period

6] The is a measure of liquidity which excludes , generally the least liquid asset:
A] current ratio, trade receivable b] liquid ratio, trade
receivable c] current ratio, inventory d] liquid ratio, inventory

7] The is useful in evaluating credit and collection policies.

a] average payment period b] current ratio c] average collection period d] current asset turnover

8] The measures the activity of a firm’s inventory.

a] average collection period b] inventory turnover ratio c] liquid ratio d] current ratio

9] The may indicate that the firm is experiencing stock outs and lost sales.
a] average payment period b] inventory turnover ratio c] average collection period d] quick ratio

10] ABC Co. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if
its average collection period was,
a] 30 days b] 36 days c] 47 days d] 37 days

11] are especially interested in the average payment period, since it provides them with a sense of
the bill-paying patterns of the firm.
a] Customers b] Stockholders c] Lenders and suppliers d] Borrowers and buyers

12] The ratios provide the information critical to the long run operation of the firm
a] liquidity b] activity c] solvency d] profitability

13] Dividend payout ratio refers to proportion of earnings that are distributed to
the; a] Shareholders b] Debenture holders c] Creditors d] Lenders
14] Trade payables turnover ratio indicates
a] Payments of Trade payables b] Payment to Creditors
c] Payment of Bank Loan d] Payment of Bills Payable

15] Liquidity ratios are expressed in;

a] Pure ratio form b] Percentage c] Rate or Time d] Integer

16] Current ratio is 2:1, current assets are ₹82,000. What will be Current liabilities?
a] ₹20,000 b] ₹38,000 c] ₹15,000 d] ₹41,000.

II. Fill in the blanks:

1] Accounting Ratios are an important tool of Financial Analysis

2] A ratio is a mathematical number calculated as a reference to relationship of two or more
numbers.
3] Ratio can be expressed as a fraction, proportion, percentage and a number of times.
4] If a ratio is compared with one variable from the statement of Profit and Loss and another variable from the
Balance Sheet, it is called comparative Ratio
5] Quick Ratio is also known as Acid Test Ratio.
6] Ratios are means to an end rather than the End itself.
7] Current ratio is the proportion of current assets to current liabilities.
8] Liquidity ratios are calculated to measure the short term solvency of the
business.
9] The quick assets are those assets which are quickly convertible into cash
10] The Profitabilty ratios are preliminary measures of return.
11] Ratio of gross profit to revenue from operations is known as gross profit
ratio.
12] Debt Equity ratio measures the relationship between long term debt and
equity.
13] Proprietary ratio expresses relationship of proprietor’s funds to net assets.
14] The Inventory Turnover ratio measures the activity of a firm’s inventory.
15] The Average collection period is useful in evaluating credit and collection policies.

III. Match the following

A B
a. Liquidity Ratios i. Short-term in nature
b. Solvency Ratios ii. Long-term in nature
c. Efficiency iii. Can be measured by activity Ratios
d. Acid-Test Ratio iv. Quick or Liquid Ratio
e. Debt Equity Ratio v. Relationship between long-term debt and equity
f. Net Profit Ratio vi. Relates net profit to revenue from operations
g. Price/Earning Ratio vii. Expressed in times
h. Book value per share viii. Expressed in rupees
i. Advertisement ix. Operating expenses
j. Interest paid x. financial expenses

Short Answer Type Questions:

1] Give the meaning of Ratio Analysis.
Ans: Ratio Analysis is the indispensable part of interpretation of results revealed by the financial statements.

2] State any one objective of ratio analysis.

Ans: To know areas of business which need more attention.
3] State any one use of ratio analysis.
Ans: Helpful in comparative analysis

4] Mention any one limitation of ratio analysis.

Ans: Ignores price level changes.

5] Mention any one type of ratio.

Ans: Liquidity ratio, Current ratio

6] Give one example for current assets.

Ans: Cash, Inventory

7] Give one example for current

liability. Ans: Trade payable, creditors,
Bank overdraft.

8] What is current ratio?

Ans: Current ratio is the proportion of current assets to current liabilities.

9] What is quick ratio?

Ans: Quick ratio is the ratio of Quick assets to current liabilities.

10] Name any one type of turnover ratio.

Ans: Inventory turnover ratio.

11] Give the meaning of net profit ratio.

Ans: Net profit ratio is a profitability ratio of net profit to revenue from operations.

12] Give the meaning of dividend payout ratio.

Ans: Dividend payout ratio refers to the proportion of earnings that are distributed to the shareholders.

13] What is activity ratio?

Ans: Activity ratio is the ratio that indicate the speed at which activities of the business are being performed.

14] State one significance of interest coverage ratio.

Ans: It reveals the number of times interest on long-term debts is covered by the profits available for interest.

15] Expand EPS.

Ans: Earning Per Share.

16] Expand ROI.

Ans: Return on Investment.

17] State any one profitability ratio.

Ans: Net profit ratio, Gross profit ratio.

State True or False:

1] A ratio reflects quantitative and qualitative aspects of results.
Ans: False
2] Net profit refers to profit after tax (PAT)
Ans: True

3] Solvency refers to the ability of the enterprise to meet its current obligations.
Ans: False

4] Purchase of goods will increase the cost of Revenue from operations.

Ans: True

5] The only purpose of financial reporting is to keep the managers informed about the progress of operations.
Ans: False

6] Analysis of data provided in the financial statements is termed as financial analysis.

Ans: True

7] Long-term borrowings are concerned about the ability of a firm to discharge its obligations to pay interest and
repay the principal amount
Ans: True

8] A ratio is always expressed as a quotient of one number divided by another.

Ans: False

9] Ratios help in comparisons of a firm’s results over a number of accounting periods as well as with other business
enterprises.
Ans: True

10] A ratio reflects only quantitative aspect of results.

Ans: True

11] Liquidity ratios are essentially short-term in nature.

Ans: True

12] Current ratio is the proportion of current assets to current liabilities.

Ans: True

13] The quick assets are those assets which cannot be quickly converted into cash.
Ans: False

14] A higher interest coverage ratio ensures safety of interest of debts.

Ans: True

15] The liquidity ratios are preliminary measures of return.

Ans: False
16] Higher gross profit ratio is always a good sign.
Ans: True
17] Dividend payout ratio refers to the proportion of earning distributed to the shareholders.
Ans: True
18] Price Earnings Ratio =Market price of share / Earnings per share.
Ans: True
 CHAPTER -10
CASH FLOW STATEMENT

PART - A
One Mark Questions:

I] Multiple Choice Questions:

1] Example of cash inflows from investing activities is-
a] Cash receipts from disposal of fixed assets. b] Interest paid in cash for loans &
advances. c] Dividend paid to shareholders. d] Purchase of fixed assets.

2] Which one of the following is not a cash outflow from operating activities?
a] Cash payments to suppliers for goods and services. b] Cash payments to and on behalf of the employees.
c] Cash payments to acquire fixed assets. d] Cash payments to an Insurance Company for premium.

3] Which of the following is not a cash inflow from investing activities?

a] Cash receipts from disposal of fixed assets. b] Cash receipts from sale of goods and rendering of services.
c] Interest received in cash from loans and advances. d] Dividend received from investments in other enterprises.

4] Cash receipts from customers means:

a] Revenue from operations – opening trade receivables + closing trade
receivables. b] Revenue from operations + opening trade payables – closing
trade payables.
c] Revenue from operations + opening trade receivables – closing trade receivables.
d] Revenue from operations - opening trade receivables - closing trade receivables.

5] Purchases means:
a] Cost of revenue from operations + opening inventory – closing inventory.
b] Cost of revenue from operations – opening inventory + closing inventory.
c] Cost of revenue from operations – opening trade receivables + closing trade
receivables. d] Cost of revenue from operations - opening inventory - closing
inventory.

6] Purchase of land and building by paying cash is:

a] noncash item b] operating activity c] financing activity d] investing activity.

7] Issue of Debentures for cash is:

a] cash outflow b] cash inflow c] operating activity d] investing activity.

8] Repayment of bank loan is:

a] operating activity b] investing activity c] financing activity d] noncash transaction

9] Best example for extraordinary items:

a] salary paid b] tax paid c] rent paid d] loss due to theft

10] Buy back of its own equity shares by a Company is

a] cash outflow b] operating activity c] cash inflow d] investing activity
11] Which of the following is not a cash inflow?
a] Decrease in debtors b] Issue of shares c] Decrease in creditors d] Sale of fixed asset

12] Investment costing ₹10,000 sold for ₹12,000. The amount shown in investing activity is
a] ₹2,000 b] ₹10,000 c] ₹12,000 d] ₹2,200

II. Fill in the blanks questions.

1] Purchase of any asset by paying cash is cash outflow.
2] Collection of cash from trade receivables is cash inflow.
3] Operating activities constitute the primary activities of an
enterprise.
4] Investing activities relate to purchase and sale of fixed assets.
5] Indirect method of ascertaining cash flows from operating activities begins with the amount of net profit or
loss.
6] Cash flow statement prepared by indirect method is used by most companies in practice in case of operating
activities.
7] Cash Flow Statement helps in balancing of cash flows.
8] Generally operating activities result in determination of net profit or
loss.
9] Payment of tax on operating profit should be classified as operating
activity.
10] Changes in working capital arise due to fluctuation in amount of current
assets.
11] Cash paid to and on behalf of employees should be classified as operating
activity.
12] Interest item may be operating/investing/financing activity.

I. Very short answers Questions:

1] Mention any one benefit of cash flow statement.
Ans: Assessing the ability of the enterprise to generate cash and cash equivalents.

2] Give the meaning of cash flows.

Ans: It implies movement of cash in and out due to some non-cash items.

3] Give an example for investing activities.

Ans: Purchase of buildings.

4] Give an example for cash outflows from financing activities.

Ans: Cash repayment of amounts
borrowed.

5] Give an example for extraordinary

item. Ans: Loss due to theft or earthquake
or flood.

6] Expand ICAI.
Ans: Institute of Chartered Accountants of India.
7] What is the main objective cash flow statement?
Ans: The primary objective of cash flow statement is to provide useful information about the cash flows of an enterprise.

8] Name the tool of financial information about sources and uses of cash and cash equivalents.
Ans: Cash flow statement.

9] Give an example for cash outflow of investing activities.

Ans: Purchase of property, plant, equipment and Receipt from Interest non-current investments

10] State any one example of cash inflow from operating activity.
Ans: Proceeds from sale of goods and services to customers.

State True or False:

1] Extraordinary items are recurring in nature.

Ans: False

2] Cash flow statement is a first important financial statement.

Ans: False

3] An enterprise should report cash flows from operating activities either by using direct method or indirect method.
Ans: True

4] According to revised AS -3, preparation and presentation of cash flow statement is mandatory for all listed companies.
Ans: True

5] Dividend paid is an investing activity.

Ans: False

PART – B

Two Marks Questions:

1] What is cash flow statement?

Ans: A cash flow statement is a statement showing inflows & outflows of cash and cash equivalents from operating,
investing and financing activities of a company during a particular period.

2] State any two uses of cash flow statement.

Ans: a) It Provides information that enables users to evaluate changes in net assets of an enterprise.
b) It helps in balancing its cash inflow and cash outflow, keeping in response to changing condition.

3] Write any two objectives of preparing cash flow statement.

Ans: a) To provide useful information about cash flows b) To ascertain amount and certainty of cash flows

4] What do you mean by investing activities?

Ans: Investing activities are the activities relating to purchase and sale of long term assets.
5] Mention any two activities which are classified as per AS-3.
Ans: a) Cash flow from operating Activities b) Cash flow from investing Activities

6] Write any two examples for financing activities.

Ans: a) Cash proceeds from issue of equity shares, b) Cash proceeds from issue of equity Debentures

7] If revenue from operations are ₹48,000, opening trade receivables are ₹8,000 and closing trade receivables are
₹6,000, calculate cash receipts from customers.
Solution: Cash receipt from customers = Revenue from operation + Trade receivable in the beginning – Trade
receivable in the end
Cash receipt from customers= 48,000, +8,000-6,000=₹ 50,000

8] If purchases are ₹72,000, opening trade payables are ₹12,000 and closing trade payables are ₹9,000,
calculate cash payments to suppliers.
Ans: Cash payment to supplier= Purchases + Trade payables in the beginning – Trade payables in the end.
Cash payment to supplier = 72,000 + 12,000 – 9,000 =₹75,000

9] Give the meaning of financing activities.

Ans: Financing activities relate to long-term funds or capital of an enterprise, e.g., cash proceeds from issue of
equity shares, debentures, raising long-term bank loans, repayment of bank loan, etc.

10] What are the two methods of ascertaining cash flows from operating activities?
Ans: 1. Direct method 2. Indirect method.

11] Write any two cash inflows for investing activities.

Ans: a. Sale of property, plant, equipment, long-term investments
b. Proceeds from issue of preference or equity shares

12] Write any two cash outflows for financing activities.

Ans: a. Redemption of debentures and payment of the long-term debts
b. Payment of dividends and interest

13] State any two examples of operating activities.

Ans: A company manufacturing garments, operating activities are procurement of raw material, incurrence of
manufacturing expenses, sale of garments, etc.

14] Name any two items to be added back to net profit/loss, while calculating cash flow from operating
activities under indirect method
Ans: a. non-cash items such as Depreciation, Goodwill to be Written-off.
b. non-operating items such as Interest.

15] Write any two items to be deducted from net profit/loss while calculating cash flow from operating
activities under indirect method.
Ans: Non-operating items such as Dividend received, Profit on sale of Fixed Assets.

16] What are operating activities?

Ans: Operating activities are the activities that constitute primary or main activities of an
enterprises. Ex: Cash receipts from the sale of goods, cash payment to employees.