Question 1
Which of the following is shown under Investing Activities in a Cash Flow Statement?
✅ Correct Answer: Purchase of machinery
Explanation: Investing activities involve purchase and sale of long-term assets. Machinery purchase is an investing cash outflow.
Question 2
The minimum subscription received before allotment of shares is important because:
✅ Correct Answer: It ensures legal compliance before issue of shares
Explanation: A company cannot proceed with allotment unless minimum subscription requirements are fulfilled as per SEBI guidelines.
Question 3
Which ratio is most useful to assess the immediate solvency of a business?
✅ Correct Answer: Quick Ratio
Explanation: Quick Ratio measures the ability to meet immediate liabilities using liquid assets excluding inventory.
Question 4
Interest on partner's drawings is credited to:
✅ Correct Answer: Profit and Loss Appropriation Account
Explanation: Interest on drawings is treated as income of the firm and credited to Profit and Loss Appropriation Account.
Question 5
Debenture holders receive:
✅ Correct Answer: Fixed rate of interest
Explanation: Debenture holders are creditors and receive fixed interest irrespective of company profits.
Question 6
A company issued 30,000 shares of ₹10 each payable ₹2 on application, ₹5 on allotment and balance on first call. Amount due on first call will be:
✅ Correct Answer: ₹90,000
Explanation:
First call amount per share = ₹10 - ₹2 - ₹5 = ₹3.
Total first call = 30,000 × ₹3 = ₹90,000.
Question 7
Current Ratio is 2: 1. Current assets are ₹4,00,000. If inventory worth ₹50,000 is purchased on credit, new Current Ratio will be:
✅ Correct Answer: 1.8: 1
Explanation:
Current liabilities initially = ₹2,00,000.
New Current Assets (CA) = ₹4,00,000 + ₹50,000 = ₹4,50,000.
New Current Liabilities (CL) = ₹2,00,000 + ₹50,000 = ₹2,50,000.
New ratio = $\frac{4,50,000}{2,50,000} = 1.8:1$.
Question 8
A company sold furniture at a profit of ₹12,000. While preparing Cash Flow Statement (Indirect Method), this profit will be:
✅ Correct Answer: Deducted from net profit
Explanation: Profit on sale of fixed asset is non-operating income already included in profit, so it must be deducted to find cash from operating activities.
Question 9
Which transaction increases working capital?
✅ Correct Answer: Sale of fixed asset for cash
Explanation: Sale of fixed asset increases current assets (cash) without increasing current liabilities, thus increasing working capital.
Question 10
Gross Profit Ratio is 40%. If cost of revenue from operations is ₹9,00,000, Revenue from Operations will be:
✅ Correct Answer: ₹15,00,000
Explanation:
If Gross Profit is 40%, Cost ratio = 60% (100 - 40).
Revenue = ₹9,00,000 ÷ 60% = ₹15,00,000.
(Tricky percentage conversion question.)
Question 11
Assertion (A): Goodwill is an intangible asset.
Reason (R): Goodwill cannot be seen or touched physically.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Goodwill lacks physical existence but provides economic benefit through business reputation.
Question 12
Assertion (A): Inventory is excluded while calculating Quick Ratio.
Reason (R): Inventory is considered less liquid compared to other current assets.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Inventory may not be converted into cash quickly, so it is excluded from quick assets.
Question 13
Read the following case carefully:
Alpha Ltd. forfeited 500 shares of ₹10 each issued at par due to non-payment of allotment ₹3 and final call ₹2. Shareholders had paid only application money of ₹5 per share.
Amount credited to Share Forfeiture Account will be:
✅ Correct Answer: ₹2,500
Explanation:
Amount received per share = ₹5.
Total forfeiture amount = 500 × ₹5 = ₹2,500.
Question 14
Read the following information carefully:
Net Profit before tax = ₹5,50,000
Depreciation = ₹70,000
Decrease in inventory = ₹30,000
Increase in prepaid expenses = ₹20,000
Net increase in operating cash flow will be:
✅ Correct Answer: ₹80,000
Explanation:
Add depreciation ₹70,000 and decrease in inventory ₹30,000.
Deduct increase in prepaid expenses ₹20,000.
Net increase = 70,000 + 30,000 - 20,000 = ₹80,000.
Question 15
A company started accepting online payments to reduce delay in collections from customers. Which ratio will improve directly?
✅ Correct Answer: Debtors Turnover Ratio
Explanation: Faster collection from customers improves debtors turnover ratio and liquidity.
Question 16
A company has debt ₹18,00,000 and shareholders' funds ₹12,00,000. Debt-Equity Ratio is:
✅ Correct Answer: 1.5: 1
Explanation:
$$ \text{Debt-Equity Ratio} = \frac{18,00,000}{12,00,000} = 1.5:1 $$
Question 17
A company has high current ratio but low quick ratio. This situation generally indicates:
✅ Correct Answer: Excessive inventory holding
Explanation: Inventory increases current assets but is excluded from quick assets, causing a low quick ratio.
Question 18
Which of the following transactions will NOT affect Current Ratio?
✅ Correct Answer: Collection from debtors
Explanation: Collection from debtors converts one current asset into another current asset, so total current assets remain unchanged. (Tricky conceptual question.)
Question 19
A company reports increasing profits every year but operating cash flows are continuously declining. Which is the most likely reason?
✅ Correct Answer: Rising credit sales and slow collection
Explanation: Credit sales increase profits, but delayed collection reduces actual cash inflow from operations.
Question 20
A company reissued forfeited shares at ₹7 per share which were originally forfeited after receiving ₹4 per share. If face value is ₹10, amount transferred to Capital Reserve per share will be:
✅ Correct Answer: ₹1
Explanation:
Discount on reissue = ₹3 (10 - 7).
Forfeited amount = ₹4.
Remaining balance transferred to Capital Reserve = ₹4 - ₹3 = ₹1 per share.
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