Question 1
Which of the following is a cash inflow from financing activities?
✅ Correct Answer: Issue of debentures
Explanation: Financing activities relate to raising long-term funds. Issue of debentures brings cash into the business.
Question 2
Shareholders of a company are considered:
✅ Correct Answer: Owners of the company
Explanation: Equity shareholders are the real owners of the company and bear ultimate risks and rewards.
Question 3
Which ratio is calculated to evaluate short-term liquidity excluding inventory?
✅ Correct Answer: Quick Ratio
Explanation: Quick Ratio excludes inventory because inventory may not be readily convertible into cash.
Question 4
Interest on drawings is generally charged to:
✅ Correct Answer: Compensate firm for personal withdrawals
Explanation: Interest on drawings compensates the firm for the use of business funds by partners for personal purposes.
Question 5
Which of the following is NOT a characteristic of goodwill?
✅ Correct Answer: It has physical existence
Explanation: Goodwill is an intangible asset and does not have physical form.
Question 6
A company issued 25,000 shares of ₹10 each payable ₹3 on application, ₹4 on allotment and ₹3 on final call. Amount received on application will be:
✅ Correct Answer: ₹75,000
Explanation: Application money = 25,000 × 3 = ₹75,000. (Students often miss zero placement in large amounts.)
Question 7
Current Ratio of a company is 3: 1. If current liabilities are ₹1,50,000, working capital will be:
✅ Correct Answer: ₹3,00,000
Explanation:
Current Assets = 3 × 1,50,000 = ₹4,50,000
Working Capital = ₹4,50,000 - ₹1,50,000 = ₹3,00,000.
Question 8
A company sold equipment costing ₹80,000 for ₹70,000. Loss on sale while preparing operating activities will be:
✅ Correct Answer: Added to net profit
Explanation: Loss on sale reduces accounting profit but is non-operating in nature, so it is added back.
Question 9
Which of the following transactions increases current assets as well as current liabilities simultaneously?
✅ Correct Answer: Purchase of inventory on credit
Explanation: Inventory (current asset) increases and creditors (current liability) also increase.
Question 10
Gross Profit Ratio is 20%. If Revenue from Operations is ₹25,00,000, Gross Profit will be:
✅ Correct Answer: ₹5,00,000
Explanation:
Gross Profit = 20% of ₹25,00,000 = ₹5,00,000.
Question 11
Assertion (A): Debenture holders have voting rights in company meetings.
Reason (R): Debenture holders are creditors of the company.
✅ Correct Answer: A is false, but R is true
Explanation: Debenture holders are creditors and generally do not have voting rights in company management.
Question 12
Assertion (A): Depreciation reduces net profit but not cash balance.
Reason (R): Depreciation is a non-cash expense.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Depreciation is only an accounting charge and does not involve actual cash outflow.
Question 13
Read the following case carefully:
Sun Ltd. forfeited 300 shares of ₹10 each issued at par for non-payment of allotment ₹2 and final call ₹3. Application money received was ₹5 per share.
Amount debited to Share Capital Account is:
✅ Correct Answer: ₹3,000
Explanation: Share Capital Account is debited with called-up value of forfeited shares.
300 × 10 = ₹3,000.
Question 14
Read the following information carefully:
Net Profit before tax = ₹3,80,000
Depreciation = ₹40,000
Increase in creditors = ₹25,000
Increase in debtors = ₹15,000
Net increase in operating cash flow will be:
✅ Correct Answer: ₹50,000
Explanation: Add depreciation ₹40,000 and increase in creditors ₹25,000.
Deduct increase in debtors ₹15,000.
Net increase = ₹50,000.
Question 15
A company introduced strict credit control policies to recover dues faster. Which ratio is expected to improve?
✅ Correct Answer: Debtors Turnover Ratio
Explanation: Efficient recovery from customers increases debtors turnover ratio.
Question 16
Debt of a company is ₹15,00,000 and shareholders' funds are ₹10,00,000. Debt-Equity Ratio will be:
✅ Correct Answer: 1.5: 1
Explanation:
$$ \text{Debt-Equity Ratio} = \frac{15,00,000}{10,00,000} = 1.5:1 $$
Question 17
A company has very high current ratio but low profitability. Which is the most likely reason?
✅ Correct Answer: Excessive idle current assets
Explanation: Idle cash, excessive inventory, or unused current assets may reduce profitability despite high liquidity.
Question 18
Which transaction will improve Quick Ratio immediately?
✅ Correct Answer: Pay creditors using cash
Explanation: Reduction in current liabilities improves quick ratio if quick assets decrease proportionately less. (Tricky conceptual adjustment.)
Question 19
A business earns profits consistently but faces shortage of cash due to high credit sales. This highlights difference between:
✅ Correct Answer: Profitability and liquidity
Explanation: Profitability refers to earning profits, whereas liquidity refers to availability of cash for payments.
Question 20
A company reissued forfeited shares of ₹10 each at ₹9 per share. Amount forfeited on these shares was ₹4 per share. Amount transferred to Capital Reserve per share is:
✅ Correct Answer: ₹3
Explanation:
Discount on reissue = ₹1
Forfeited amount = ₹4
Balance transferred to Capital Reserve = ₹3 per share.
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