Question 1
Which of the following statements correctly explains the objective of preparing a Cash Flow Statement?
✅ Correct Answer: To show inflow and outflow of cash and cash equivalents
Explanation: Cash Flow Statement records the movement of cash and cash equivalents from operating, investing, and financing activities during an accounting period.
Question 2
A company forfeited shares originally issued at ₹10 each for non-payment of final call of ₹2. Amount already received was ₹7 per share. What amount will be transferred to Share Forfeiture Account per share?
✅ Correct Answer: ₹7
Explanation: Share Forfeiture Account receives only the amount already paid by shareholders. Here, ₹7 was received before forfeiture.
Question 3
Which of the following is treated as a capital receipt?
✅ Correct Answer: Proceeds from issue of shares
Explanation: Issue of shares increases owners' capital and is therefore a capital receipt, not a revenue receipt.
Question 4
Debentures issued at discount and redeemable at premium result in:
✅ Correct Answer: Both discount and premium being losses
Explanation: Discount on issue and premium on redemption both represent losses for the company and are treated as capital losses.
Question 5
Which ratio indicates the ability of a business to meet short-term obligations?
✅ Correct Answer: Current Ratio
Explanation: Current Ratio compares current assets with current liabilities and measures short-term solvency.
Question 6
A partnership firm earned profits of ₹2,40,000. Interest on capital allowed to partners amounted to ₹40,000 and salary to partner was ₹20,000. If profit-sharing ratio is equal, what amount will each partner receive from remaining profit?
✅ Correct Answer: ₹90,000
Explanation: $\text{Remaining profit} = \text{₹}2,40,000 - \text{₹}40,000 - \text{₹}20,000 = \text{₹}1,80,000$.
Equal partners receive ₹90,000 each.
Question 7
X Ltd. purchased machinery worth ₹5,00,000 by issuing debentures. This transaction will appear in:
✅ Correct Answer: Notes to accounts only, not in Cash Flow Statement
Explanation: This is a non-cash transaction. Such transactions are disclosed separately in notes, not in the Cash Flow Statement.
Question 8
A company's current assets are ₹6,00,000 and current ratio is 2:1. Current liabilities will be:
✅ Correct Answer: ₹3,00,000
Explanation: $\text{Current Ratio} = \text{Current Assets} / \text{Current Liabilities}$
$2 = 6,00,000 / \text{Current Liabilities}$
Current Liabilities = ₹3,00,000.
Question 9
While preparing Common Size Statement, each item of Balance Sheet is generally expressed as percentage of:
✅ Correct Answer: Total assets or total liabilities
Explanation: In Common Size Balance Sheet, every item is shown as a percentage of total assets or total liabilities.
Question 10
A business has a debt-equity ratio of 3:1. Which of the following best reflects this situation?
✅ Correct Answer: High financial risk
Explanation: A high debt-equity ratio indicates greater dependence on borrowed funds and therefore higher financial risk.
Question 11
Assertion (A): Goodwill is recorded in the books only when it is purchased.
Reason (R): Internally generated goodwill has no reliable measurable cost.
✅ Correct Answer: Both A and R are true, and R is correct explanation of A
Explanation: Purchased goodwill has a measurable value, whereas internally generated goodwill lacks objective valuation.
Question 12
Assertion (A): Preference shareholders receive dividend before equity shareholders.
Reason (R): Preference shareholders are owners of the company.
✅ Correct Answer: Both A and R are true, but R does not explain A
Explanation: Preference shareholders do receive dividend first, but the reason is their preferential rights, not merely ownership status.
Question 13
Read the following case carefully:
Zenith Ltd. issued 20,000 equity shares of ₹10 each at a premium of ₹2 payable as:
Application ₹3, Allotment ₹5 (including premium), First and Final Call balance.
A shareholder holding 500 shares failed to pay allotment and call money.
How much amount is unpaid on these 500 shares?
✅ Correct Answer: ₹4,500
Explanation: $\text{Allotment unpaid} = \text{₹}5 \times 500 = \text{₹}2,500$
$\text{Call unpaid} = \text{₹}4 \times 500 = \text{₹}2,000$
Total unpaid = ₹4,500.
Question 14
Read the following information:
A company reported Net Profit before tax ₹4,00,000. Depreciation charged was ₹50,000. Gain on sale of machinery ₹20,000. Increase in creditors ₹30,000.
Cash flow from operating activities will increase by:
✅ Correct Answer: ₹60,000
Explanation: Add depreciation ₹50,000 and increase in creditors ₹30,000.
Deduct gain on sale ₹20,000.
Net increase = ₹60,000.
Question 15
A firm has opening inventory of ₹40,000, purchases ₹2,60,000, and closing inventory ₹50,000. Cost of Revenue from Operations is:
✅ Correct Answer: ₹2,50,000
Explanation: $\text{Cost of Revenue from Operations} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock}$
$= \text{₹}40,000 + \text{₹}2,60,000 - \text{₹}50,000 = \text{₹}2,50,000.$
Question 16
A company redeemed debentures worth ₹5,00,000 at 5% premium. The amount payable to debenture holders will be:
✅ Correct Answer: ₹5,25,000
Explanation: $\text{Premium} = 5\% \text{ of ₹}5,00,000 = \text{₹}25,000.$
Total amount payable = ₹5,25,000.
Question 17
Which of the following situations may improve the Current Ratio but reduce profitability?
✅ Correct Answer: Excess purchase of inventory
Explanation: Holding excessive inventory increases current assets and current ratio but may reduce profitability due to storage and holding costs.
Question 18
A company issued shares at premium. Which account will be credited with premium amount?
✅ Correct Answer: Share Premium Account
Explanation: Premium received on issue of shares is credited to Securities Premium (Share Premium) Account.
Question 19
A firm's quick ratio is 1:1. If current liabilities are ₹1,50,000 and inventory is ₹50,000, current assets are:
✅ Correct Answer: ₹2,00,000
Explanation: $\text{Quick Assets} = \text{Current Liabilities} = \text{₹}1,50,000.$
$\text{Current Assets} = \text{Quick Assets} + \text{Inventory}$
$= \text{₹}1,50,000 + \text{₹}50,000 = \text{₹}2,00,000$.
(Tricky concept: students often forget to add inventory back to quick assets).
Question 20
A company has consistently high profits but poor cash balance. Which is the most probable reason?
✅ Correct Answer: Large amount blocked in receivables
Explanation: Profits may be high due to credit sales, but cash remains low if customers have not yet paid receivables.
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