Question 1
Which of the following is treated as a financing activity in a Cash Flow Statement?
✅ Correct Answer: Issue of equity shares
Explanation: Financing activities relate to raising long-term funds and changes in share capital or borrowings. Issue of equity shares brings cash into the business.
Question 2
When shares are issued at a premium, the premium amount is credited to:
✅ Correct Answer: Securities Premium Account
Explanation: The excess amount received over face value is credited to Securities Premium Account.
Question 3
Which ratio indicates the ability of a business to pay short-term liabilities immediately?
✅ Correct Answer: Quick Ratio
Explanation: Quick Ratio measures immediate solvency by comparing quick assets with current liabilities.
Question 4
In the absence of a partnership deed, interest on partner's loan is allowed at:
✅ Correct Answer: 6% p.a.
Explanation: According to the Indian Partnership Act, interest on partner’s loan is allowed at 6% p.a. if the deed is silent.
Question 5
Which of the following statements about debentures is correct?
✅ Correct Answer: Debentures are long-term borrowings
Explanation: Debentures are long-term debt instruments issued by companies to borrow funds.
Question 6
A company issued 40,000 shares of ₹10 each payable ₹3 on application, ₹4 on allotment and balance on final call. Amount due on allotment will be:
✅ Correct Answer: ₹1,60,000
Explanation:
Allotment money per share = ₹4.
Total allotment due = 40,000 × ₹4 = ₹1,60,000.
Question 7
Current Assets are ₹6,00,000 and Current Liabilities are ₹3,00,000. If inventory worth ₹1,00,000 is purchased on credit, new Current Ratio will be:
✅ Correct Answer: 1.75: 1
Explanation:
New Current Assets = ₹6,00,000 + ₹1,00,000 = ₹7,00,000.
New Current Liabilities = ₹3,00,000 + ₹1,00,000 = ₹4,00,000.
$$ \text{Current Ratio} = \frac{7,00,000}{4,00,000} = 1.75:1 $$
Question 8
A machine costing ₹1,50,000 is sold for ₹1,80,000. Profit on sale while calculating cash flow from operating activities will be:
✅ Correct Answer: Deducted from net profit
Explanation: Profit on sale of machinery is non-operating income already included in net profit, so it is deducted.
Question 9
Which transaction will increase working capital?
✅ Correct Answer: Sale of building for cash
Explanation: Sale of building converts fixed asset into current asset (cash), thereby increasing working capital.
Question 10
Gross Profit Ratio is 30%. Revenue from Operations is ₹18,00,000. Gross Profit will be:
✅ Correct Answer: ₹5,40,000
Explanation:
Gross Profit = 30% of ₹18,00,000 = ₹5,40,000.
Question 11
Assertion (A): Securities Premium Account can be used for writing off preliminary expenses.
Reason (R): Securities premium is considered a capital profit.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Securities premium is a capital gain and can be utilized only for specified purposes including writing off preliminary expenses.
Question 12
Assertion (A): Collection from debtors affects Quick Ratio.
Reason (R): Collection from debtors converts one quick asset into another.
✅ Correct Answer: A is false, but R is true
Explanation: Collection from debtors does not change total quick assets; it only changes their form from debtors to cash.
Question 13
Read the following case carefully:
Star Ltd. forfeited 1,000 shares of ₹10 each issued at par for non-payment of allotment ₹2 and first call ₹3. Application money ₹5 per share had been received.
Amount credited to Share Forfeiture Account is:
✅ Correct Answer: ₹5,000
Explanation:
Amount already received = ₹5 per share.
Total forfeiture = 1,000 × ₹5 = ₹5,000.
Question 14
Read the following information carefully:
Net Profit before tax = ₹7,00,000
Depreciation = ₹90,000
Increase in creditors = ₹20,000
Increase in debtors = ₹40,000
Net increase in operating cash flow will be:
✅ Correct Answer: ₹70,000
Explanation:
Add depreciation ₹90,000 and increase in creditors ₹20,000.
Deduct increase in debtors ₹40,000.
Net increase = 90,000 + 20,000 - 40,000 = ₹70,000.
Question 15
A retail business introduced QR-code based instant customer payments. Which ratio is expected to improve directly?
✅ Correct Answer: Debtors Turnover Ratio
Explanation: Instant payments reduce outstanding receivables, improving debtors turnover ratio.
Question 16
A company has debt ₹20,00,000 and shareholders' funds ₹16,00,000. Debt-Equity Ratio is:
✅ Correct Answer: 1.25: 1
Explanation:
$$ \text{Debt-Equity Ratio} = \frac{20,00,000}{16,00,000} = 1.25:1 $$
Question 17
A business has high sales but low inventory turnover ratio. Which conclusion is most appropriate?
✅ Correct Answer: Inventory level is excessive
Explanation: Low inventory turnover indicates slow movement or overstocking of inventory despite sales.
Question 18
Which of the following will improve Current Ratio immediately?
✅ Correct Answer: Payment of current liabilities
Explanation: When current ratio is above 1, payment of current liabilities reduces liabilities proportionately more, improving the ratio. (Tricky conceptual adjustment.)
Question 19
A company shows high accounting profits but poor cash position due to excessive credit sales. This highlights the difference between:
✅ Correct Answer: Profitability and liquidity
Explanation: Profitability reflects earning capacity, while liquidity reflects availability of cash for day-to-day operations.
Question 20
A company reissued forfeited shares at ₹8 per share which were originally forfeited after receiving ₹5 per share. Face value of shares is ₹10. Amount transferred to Capital Reserve per share will be:
✅ Correct Answer: ₹3
Explanation:
Discount on reissue = ₹2.
Forfeited amount = ₹5.
Balance transferred to Capital Reserve = ₹5 - ₹2 = ₹3 per share.
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