Question 1
Which of the following is classified as an operating activity in a Cash Flow Statement?
✅ Correct Answer: Cash received from customers
Explanation: Operating activities relate to the principal revenue-generating activities of the business. Cash received from customers is an operating inflow.
Question 2
Securities Premium Account cannot be used for:
✅ Correct Answer: Paying dividend to shareholders
Explanation: Securities Premium can be used only for specific purposes prescribed under law. Payment of dividend is not permitted.
Question 3
Which ratio indicates the speed with which debtors are converted into cash?
✅ Correct Answer: Debtors Turnover Ratio
Explanation: Debtors Turnover Ratio measures efficiency in collecting receivables from customers.
Question 4
If a partner withdraws goods for personal use, the entry will:
✅ Correct Answer: Reduce capital account
Explanation: Drawings reduce partner's capital because business resources are withdrawn for personal use.
Question 5
Which statement is correct regarding shares issued at discount?
✅ Correct Answer: It results in capital loss to the company
Explanation: Issue of shares at discount causes a capital loss because shares are issued below face value.
Question 6
A company issued 15,000 shares of ₹10 each at par. Application money was ₹4 per share and allotment money ₹6 per share. A shareholder holding 500 shares failed to pay allotment money. Calls in Arrears will be:
✅ Correct Answer: ₹3,000
Explanation: Allotment unpaid = 500 × 6 = ₹3,000.
This amount is treated as Calls in Arrears.
Question 7
Current Assets are ₹7,20,000 and Current Liabilities are ₹3,60,000. If creditors of ₹60,000 are paid, new Current Ratio will be:
✅ Correct Answer: 2.2: 1
Explanation:
New Current Assets = 7,20,000 - 60,000 = ₹6,60,000
New Current Liabilities = 3,60,000 - 60,000 = ₹3,00,000
$$ \text{Current Ratio} = \frac{6,60,000}{3,00,000} = 2.2: 1 $$
Question 8
A company sold old furniture for cash at a loss. Loss on sale while preparing Cash Flow Statement (Indirect Method) will be:
✅ Correct Answer: Added to net profit
Explanation: Loss on sale reduces accounting profit but does not involve operating cash outflow, so it is added back.
Question 9
Which of the following transactions will decrease working capital?
✅ Correct Answer: Purchase of machinery for cash
Explanation: Purchase of machinery reduces current assets (cash) without affecting current liabilities, decreasing working capital.
Question 10
Gross Profit Ratio is 25%. If Revenue from Operations is ₹16,00,000, Cost of Revenue from Operations will be:
✅ Correct Answer: ₹12,00,000
Explanation:
Gross Profit = 25% of ₹16,00,000 = ₹4,00,000
Cost of Revenue = 16,00,000 - 4,00,000 = ₹12,00,000.
Question 11
Assertion (A): Interest on partner's loan is payable even if the firm incurs losses.
Reason (R): Partner's loan is treated separately from capital contribution.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Interest on partner's loan is a charge against profits because the loan is treated separately from capital.
Question 12
Assertion (A): A very high Current Ratio may indicate inefficient use of resources.
Reason (R): Excessive current assets may remain idle.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Very high liquidity may indicate idle cash, excessive inventory, or poor utilization of resources.
Question 13
Read the following case carefully:
Galaxy Ltd. issued 4,000 shares of ₹10 each at a premium of ₹1. A shareholder holding 200 shares failed to pay allotment money of ₹4 per share including premium. Amount of securities premium not received is:
✅ Correct Answer: ₹200
Explanation:
Premium per share = ₹1
Unpaid premium = 200 × 1 = ₹200.
Question 14
Read the following information carefully:
Net Profit before tax = ₹5,00,000
Depreciation = ₹80,000
Increase in debtors = ₹40,000
Decrease in inventory = ₹20,000
Net increase in cash from operating activities will be:
✅ Correct Answer: ₹60,000
Explanation: Add depreciation ₹80,000 and decrease in inventory ₹20,000.
Deduct increase in debtors ₹40,000.
Net increase = (80,000 + 20,000) - 40,000 = ₹60,000.
Question 15
A business shifted from credit sales to online instant payment systems. Which ratio is most likely to improve immediately?
✅ Correct Answer: Debtors Turnover Ratio
Explanation: Instant payments reduce debtors and improve debtors turnover ratio.
Question 16
A company has shareholders' funds ₹12,00,000 and debt ₹9,00,000. Debt-Equity Ratio is:
✅ Correct Answer: 3:4
Explanation:
$$ \text{Debt-Equity Ratio} = \frac{9,00,000}{12,00,000} = 3:4 $$
Question 17
A business has low inventory turnover ratio despite high sales. Which is the most probable reason?
✅ Correct Answer: Excessive inventory holding
Explanation: Low inventory turnover indicates inventory is moving slowly, often due to overstocking.
Question 18
Which of the following will improve Current Ratio?
✅ Correct Answer: Payment of current liabilities
Explanation: Paying current liabilities reduces both current assets and current liabilities, usually improving current ratio when the ratio is above 1. (Tricky analytical concept.)
Question 19
A company reports high profits but negative operating cash flow. Which situation best explains this?
✅ Correct Answer: Excessive credit sales with poor recovery
Explanation: Credit sales increase profits but do not generate cash until receivables are collected.
Question 20
A company forfeited shares on which ₹6 per share had been received. The shares were later reissued at a discount of ₹2 per share. Amount transferred to Capital Reserve per share will be:
✅ Correct Answer: ₹4
Explanation:
Forfeited amount = ₹6
Discount on reissue = ₹2
Balance transferred to Capital Reserve = 6 - 2 = ₹4 per share.
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