Question 1
Which of the following items is treated as a financing activity in the Cash Flow Statement?
✅ Correct Answer: Redemption of preference shares
Explanation: Financing activities involve changes in long-term liabilities and shareholders' funds. Redemption of preference shares decreases share capital.
Question 2
When shares are issued for consideration other than cash, the amount is generally credited to:
✅ Correct Answer: Vendor's Account
Explanation: When shares are issued to vendors for purchase of assets/business, Vendor's Account is credited before settlement through shares.
Question 3
Which ratio helps in measuring a company's ability to pay immediate liabilities without selling inventory?
✅ Correct Answer: Quick Ratio
Explanation: Quick Ratio excludes inventory and focuses on highly liquid assets available for immediate payment of liabilities.
Question 4
A partnership deed is silent about interest on capital. In such a situation:
✅ Correct Answer: No interest on capital is allowed
Explanation: According to Partnership Act, no interest on capital is allowed unless agreed upon in the partnership deed.
Question 5
Which of the following statements is correct regarding debentures?
✅ Correct Answer: Debentures are generally redeemable after a fixed period
Explanation: Debentures are borrowed funds and are usually redeemable after a specified period.
Question 6
A company issued 8,000 shares of ₹10 each at a premium of ₹2 payable on allotment. Total amount collected as securities premium will be:
✅ Correct Answer: ₹16,000
Explanation: $\text{Premium per share} = \text{₹}2$
$\text{Total Securities Premium} = 8,000 \times \text{₹}2 = \text{₹}16,000$
Question 7
Current Assets of a firm are ₹5,40,000 and Current Liabilities are ₹2,70,000. If inventory worth ₹90,000 is sold for cash at cost, Current Ratio will:
✅ Correct Answer: Remain unchanged
Explanation: Both current assets and liabilities remain unchanged because inventory converts into cash. Hence, Current Ratio remains same.
Question 8
A company sold machinery costing ₹2,00,000 for ₹2,40,000. Profit on sale of machinery while preparing Cash Flow Statement will be:
✅ Correct Answer: Deducted from operating activities
Explanation: Profit on sale is non-operating income already included in net profit, so it is deducted from operating cash flow.
Question 9
A business purchased computers for office use through bank loan. This transaction will:
✅ Correct Answer: Not affect working capital
Explanation: Non-current asset increases and long-term liability increases simultaneously; working capital remains unaffected.
Question 10
Gross Profit Ratio of a business is 40%. Revenue from Operations is ₹15,00,000. Gross Profit will be:
✅ Correct Answer: ₹6,00,000
Explanation: $\text{Gross Profit} = 40\% \text{ of ₹}15,00,000 = \text{₹}6,00,000$.
Question 11
Assertion (A): Interest paid on debentures is charged against profit before tax.
Reason (R): Debenture holders are creditors of the company.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Interest on debentures is a charge against profits because debenture holders are creditors and payment is obligatory.
Question 12
Assertion (A): Current Ratio of 1:1 is always considered satisfactory.
Reason (R): Current Ratio measures relationship between current assets and current liabilities.
✅ Correct Answer: A is false, but R is true
Explanation: Current Ratio measures liquidity, but 1:1 may not always be satisfactory depending on business nature and industry norms.
Question 13
Read the following case carefully:
Nova Ltd. forfeited 400 shares of ₹10 each issued at par for non-payment of final call of ₹2 per share. Shareholders had already paid application and allotment money totaling ₹8 per share. Amount transferred to Share Forfeiture Account will be:
✅ Correct Answer: ₹3,200
Explanation: $\text{Amount already received} = \text{₹}8 \times 400 = \text{₹}3,200$
This amount is credited to Share Forfeiture Account.
Question 14
Read the following information carefully:
Net Profit before tax = ₹5,00,000
Depreciation = ₹60,000
Decrease in creditors = ₹20,000
Increase in outstanding expenses = ₹10,000
Net adjustment in operating activities will be:
✅ Correct Answer: +₹50,000
Explanation: Add depreciation ₹60,000 and increase in outstanding expenses ₹10,000.
Deduct decrease in creditors ₹20,000.
Net increase = +₹50,000
Question 15
A supermarket chain reduced credit sales and encouraged digital cash payments. Which aspect improved directly?
✅ Correct Answer: Cash liquidity position
Explanation: More immediate cash receipts improve liquidity and ability to meet short-term obligations.
Question 16
A company has debt of ₹6,00,000 and shareholders' funds of ₹3,00,000. Debt-Equity Ratio is:
✅ Correct Answer: 2:1
Explanation: $\text{Debt-Equity Ratio} = \text{Debt} / \text{Shareholders' Funds}$
$= \frac{6,00,000}{3,00,000} = 2:1$.
Question 17
A business has high current ratio but very low quick ratio. This may indicate:
✅ Correct Answer: Heavy dependence on inventory
Explanation: Large inventory increases current assets but is excluded from quick assets, causing low quick ratio.
Question 18
Which of the following will improve Quick Ratio immediately?
✅ Correct Answer: Payment to creditors
Explanation: Paying creditors reduces current liabilities and improves quick ratio if quick assets reduce proportionately less. (Tricky analytical concept.)
Question 19
A firm earns consistent profits but faces difficulty in paying salaries regularly. Which statement is most appropriate?
✅ Correct Answer: Profitability and liquidity are different concepts
Explanation: A business may earn profits but still face liquidity problems if cash is blocked in receivables or inventory.
Question 20
A company reissued forfeited shares originally forfeited on which ₹4 per share had been received. Maximum permissible discount on reissue is:
✅ Correct Answer: ₹4 per share
Explanation: Discount on reissue cannot exceed amount forfeited on those shares. Here, maximum discount allowed is ₹4 per share.
🔙 Back to Scorecard