Question 1
Which of the following is NOT considered a cash equivalent while preparing Cash Flow Statement?
✅ Correct Answer: Equity shares purchased for long-term investment
Explanation: Cash equivalents are short-term and highly liquid investments. Long-term equity investments are not treated as cash equivalents.
Question 2
Securities Premium Account can be utilized for:
✅ Correct Answer: Writing off preliminary expenses
Explanation: As per Companies Act, Securities Premium can be used for limited purposes such as writing off preliminary expenses or bonus issue.
Question 3
Which ratio is most useful to judge long-term financial stability of a company?
✅ Correct Answer: Debt-Equity Ratio
Explanation: Debt-Equity Ratio measures relationship between borrowed funds and shareholders' funds, indicating long-term solvency.
Question 4
A partner is guaranteed a minimum profit of ₹80,000. Actual share of profit comes to ₹65,000. Deficiency will be:
✅ Correct Answer: ₹15,000
Explanation: $\text{Deficiency} = \text{Guaranteed amount} - \text{Actual share}$
$= \text{₹}80,000 - \text{₹}65,000 = \text{₹}15,000$.
Question 5
Which of the following transactions decreases working capital?
✅ Correct Answer: Redemption of debentures for cash
Explanation: Redemption of debentures reduces cash without affecting current liabilities, thus decreasing working capital.
Question 6
A company issued 5,000 shares of ₹10 each at a premium of ₹2. Amount payable on allotment included premium. If all shares are subscribed, total amount credited to Securities Premium Account will be:
✅ Correct Answer: ₹10,000
Explanation: $\text{Premium per share} = \text{₹}2$
$\text{Total premium} = 5,000 \times \text{₹}2 = \text{₹}10,000$.
Question 7
A firm's Current Ratio is 3:1 and working capital is ₹2,00,000. Find current liabilities.
✅ Correct Answer: ₹1,00,000
Explanation: $\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$.
Assume $\text{liabilities} = x$, $\text{assets} = 3x$.
$3x - x = 2,00,000 \Rightarrow 2x = 2,00,000 \Rightarrow x = \text{₹}1,00,000$.
(Tricky question frequently asked in CBSE exams.)
Question 8
A business purchased furniture for proprietor's residence and payment was made from business bank account. Which principle is violated?
✅ Correct Answer: Business Entity
Explanation: Business Entity concept states that owner and business are separate entities. Personal expenses should not be recorded as business expenses.
Question 9
A company's inventory turnover ratio is very high. This generally indicates:
✅ Correct Answer: Efficient inventory management
Explanation: Higher inventory turnover ratio generally reflects quick movement of stock and efficient inventory utilization.
Question 10
X Ltd. forfeited shares issued at par due to non-payment of allotment and call money. Amount already received from shareholder is transferred to:
✅ Correct Answer: Share Forfeiture Account
Explanation: The amount already received before forfeiture is credited to Share Forfeiture Account.
Question 11
Assertion (A): Depreciation is added back while calculating cash flow from operating activities using indirect method.
Reason (R): Depreciation is a non-cash expense.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Depreciation reduces accounting profit but does not involve actual cash outflow, so it is added back.
Question 12
Assertion (A): Goodwill brought in by incoming partner increases firm's net assets.
Reason (R): Goodwill represents reputation and future earning capacity of business.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Goodwill paid by incoming partner increases firm's assets and reflects business reputation and earning potential.
Question 13
Read the following case carefully:
Bright Ltd. issued 10,000 debentures of ₹100 each at 5% discount redeemable at 10% premium.
What is the total loss on issue of debentures?
✅ Correct Answer: ₹1,50,000
Explanation: $\text{Discount on issue} = 5\% \text{ of ₹}10,00,000 = \text{₹}50,000$
$\text{Premium on redemption} = 10\% \text{ of ₹}10,00,000 = \text{₹}1,00,000$
$\text{Total loss} = \text{₹}1,50,000$.
Question 14
Study the following information:
Net Profit after tax = ₹3,50,000
Depreciation = ₹40,000
Loss on sale of machinery = ₹10,000
Increase in Debtors = ₹20,000
Cash from operating activities will increase by:
✅ Correct Answer: ₹30,000
Explanation: Add non-cash/non-operating losses: $\text{₹}40,000 + \text{₹}10,000$
Deduct increase in debtors: ₹20,000
Net increase = ₹30,000.
Question 15
A retailer offers heavy discounts during festive season to clear old inventory quickly. Which objective is primarily achieved?
✅ Correct Answer: Improving inventory turnover
Explanation: Quick sale of inventory improves inventory turnover ratio and reduces holding cost.
Question 16
A company has Revenue from Operations ₹12,00,000 and Gross Profit ₹3,00,000. Gross Profit Ratio is:
✅ Correct Answer: 25%
Explanation: $\text{Gross Profit Ratio} = (\text{Gross Profit} / \text{Revenue from Operations}) \times 100$
$= (3,00,000 / 12,00,000) \times 100 = 25\%$.
Question 17
A business earns high net profit but faces shortage of cash for daily expenses. Which is the most probable reason?
✅ Correct Answer: Heavy investment in receivables
Explanation: Credit sales increase profits but cash is unavailable until debtors make payment.
Question 18
Which of the following will NOT affect Cash Flow from Investing Activities?
✅ Correct Answer: Issue of equity shares
Explanation: Issue of equity shares is a financing activity, not an investing activity.
(Tricky conceptual question.)
Question 19
A company has current assets of ₹4,50,000 including inventory of ₹1,20,000. Current liabilities are ₹3,00,000. Quick Ratio will be:
✅ Correct Answer: 1.1:1
Explanation: $\text{Quick Assets} = \text{₹}4,50,000 - \text{₹}1,20,000 = \text{₹}3,30,000$
$\text{Quick Ratio} = \frac{3,30,000}{3,00,000} = 1.1:1$.
Question 20
A company converted its debentures into equity shares. Which statement is correct regarding this transaction?
✅ Correct Answer: It reduces debt burden of company
Explanation: Conversion of debentures into equity reduces long-term debt and strengthens ownership capital without cash outflow.
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