Question 1
Which of the following items is shown under Financing Activities in a Cash Flow Statement?
✅ Correct Answer: Issue of equity shares
Explanation: Financing activities relate to changes in shareholders' funds and borrowings. Issue of equity shares increases share capital.
Question 2
Which account is debited when shares are forfeited for non-payment of allotment and call money?
✅ Correct Answer: Share Capital Account
Explanation: On forfeiture, Share Capital Account is debited with the called-up amount of shares forfeited.
Question 3
Which ratio is best suited to assess operational efficiency of inventory management?
✅ Correct Answer: Inventory Turnover Ratio
Explanation: Inventory Turnover Ratio indicates how effectively inventory is sold and replaced during the year.
Question 4
Goodwill of a firm is valued at ₹3,00,000. New partner brings ₹1,20,000 as premium for 1/4th share. Hidden goodwill of the firm will be:
✅ Correct Answer: ₹4,80,000
Explanation: $\text{Hidden Goodwill} = \text{Premium brought} \times \text{Reciprocal of share acquired}$
$= \text{₹}1,20,000 \times 4 = \text{₹}4,80,000$.
(Tricky concept often asked in exams.)
Question 5
Which of the following is NOT a feature of debentures?
✅ Correct Answer: They are ownership securities
Explanation: Debentures are debt instruments, not ownership securities. Debenture holders are creditors of the company.
Question 6
A company has Current Assets ₹8,00,000 and Current Liabilities ₹4,00,000. It purchases inventory worth ₹1,00,000 on credit. New Current Ratio will be:
✅ Correct Answer: 1.8: 1
Explanation: $\text{New Current Assets} = \text{₹}9,00,000$
$\text{New Current Liabilities} = \text{₹}5,00,000$
$\text{Current Ratio} = \frac{9,00,000}{5,00,000} = 1.8:1$.
(Students often assume ratio remains unchanged.)
Question 7
A company issued 20,000 shares of ₹10 each payable ₹3 on application, ₹4 on allotment and balance on call. How much amount is due on call?
✅ Correct Answer: ₹60,000
Explanation: $\text{Call amount per share} = \text{₹}10 - \text{₹}3 - \text{₹}4 = \text{₹}3$
$\text{Total call due} = 20,000 \times \text{₹}3 = \text{₹}60,000$.
Question 8
A business sold old machinery at a profit. Which effect will occur while preparing Cash Flow Statement (Indirect Method)?
✅ Correct Answer: Profit on sale is deducted from net profit
Explanation: Profit on sale is a non-operating income already included in net profit, so it is deducted while calculating operating cash flow.
Question 9
Which of the following transactions increases cash flow from investing activities?
✅ Correct Answer: Sale of investments
Explanation: Sale of investments brings cash into the business and is treated as investing inflow.
Question 10
A firm has Revenue from Operations ₹10,00,000 and Cost of Revenue from Operations ₹7,50,000. Gross Profit Ratio is:
✅ Correct Answer: 25%
Explanation: $\text{Gross Profit} = \text{₹}10,00,000 - \text{₹}7,50,000 = \text{₹}2,50,000$
$\text{Gross Profit Ratio} = \frac{2,50,000}{10,00,000} \times 100 = 25\%$.
Question 11
Assertion (A): Reissue of forfeited shares at discount is allowed only up to the amount forfeited on those shares.
Reason (R): Company cannot incur capital loss on reissue beyond forfeited amount.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Discount on reissue is adjusted against Share Forfeiture Account, so discount cannot exceed forfeited amount.
Question 12
Assertion (A): A high Quick Ratio always indicates efficient management.
Reason (R): Quick Ratio measures immediate liquidity position.
✅ Correct Answer: A is false, but R is true
Explanation: Quick Ratio measures liquidity, but an excessively high ratio may also indicate idle funds and inefficient utilization.
Question 13
Read the following case carefully:
Moon Ltd. issued 5,000 debentures of ₹100 each at par redeemable at 5% premium after 5 years.
What amount of premium on redemption will be payable?
✅ Correct Answer: ₹25,000
Explanation: $\text{Total debenture value} = \text{₹}5,00,000$
$\text{Premium} = 5\% \text{ of ₹}5,00,000 = \text{₹}25,000$.
Question 14
Read the following information carefully:
Net Profit before tax = ₹2,80,000
Depreciation = ₹30,000
Decrease in inventory = ₹20,000
Increase in prepaid expenses = ₹10,000
Net increase in cash from operating activities will be:
✅ Correct Answer: ₹40,000
Explanation: Add depreciation ₹30,000 and decrease in inventory ₹20,000.
Deduct increase in prepaid expenses ₹10,000.
Net increase = ₹40,000.
Question 15
A retail chain introduced digital inventory tracking to avoid overstocking and stock-outs. Which ratio is likely to improve directly?
✅ Correct Answer: Inventory Turnover Ratio
Explanation: Efficient inventory management improves inventory turnover by ensuring faster stock movement.
Question 16
A company has shareholders' funds of ₹8,00,000 and debt of ₹4,00,000. Debt-Equity Ratio is:
✅ Correct Answer: 1:2
Explanation: $\text{Debt-Equity Ratio} = \text{Debt} / \text{Shareholders' Funds}$
$= \frac{4,00,000}{8,00,000} = 1:2$
Question 17
A company with high profits still failed to pay short-term liabilities on time. Which ratio was most likely weak?
✅ Correct Answer: Current Ratio
Explanation: Current Ratio measures short-term solvency. High profits do not always ensure adequate liquidity.
Question 18
Which of the following will decrease Quick Ratio immediately?
✅ Correct Answer: Cash purchase of inventory
Explanation: Quick assets decrease because cash is used to buy inventory, but inventory is excluded from quick assets.
(Tricky conceptual question.)
Question 19
A partnership deed is silent regarding interest on drawings. In such case:
✅ Correct Answer: Interest is not charged
Explanation: If partnership deed is silent, no interest on drawings or capital is charged unless mutually agreed.
Question 20
A company converted ₹2,00,000 debentures into equity shares. Which statement is correct?
✅ Correct Answer: It converts debt into ownership capital
Explanation: Conversion of debentures replaces long-term debt with equity share capital without involving cash payment.
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