Question 1
Which of the following is considered a cash outflow from investing activities?
✅ Correct Answer: Purchase of machinery
Explanation: Investing activities involve acquisition and disposal of long-term assets. Purchase of machinery results in cash outflow.
Question 2
Which account is credited when shares are forfeited for non-payment of allotment and calls?
✅ Correct Answer: Share Forfeiture Account
Explanation: The amount already received from shareholders on forfeited shares is transferred to Share Forfeiture Account.
Question 3
Which ratio is mainly used to assess long-term solvency of a company?
✅ Correct Answer: Debt-Equity Ratio
Explanation: Debt-Equity Ratio compares borrowed funds with shareholders' funds and measures long-term financial stability.
Question 4
Goodwill of a firm is valued because it:
✅ Correct Answer: Represents favourable business reputation
Explanation: Goodwill reflects the reputation, customer loyalty and earning capacity of the business.
Question 5
Interest on debentures is treated as:
✅ Correct Answer: Charge against profits
Explanation: Interest on debentures must be paid irrespective of profits, so it is treated as a charge against profits.
Question 6
A company issued 50,000 shares of ₹10 each payable ₹4 on application, ₹3 on allotment and ₹3 on final call. Amount received on application will be:
✅ Correct Answer: ₹2,00,000
Explanation:
Application money per share = ₹4.
Total application due and received = 50,000 × ₹4 = ₹2,00,000.
Question 7
Current Assets are ₹9,00,000 and Current Liabilities are ₹3,00,000. If cash ₹1,00,000 is used to pay creditors, the new Current Ratio will be:
✅ Correct Answer: 4:1
Explanation:
New Current Assets = ₹9,00,000 - ₹1,00,000 = ₹8,00,000.
New Current Liabilities = ₹3,00,000 - ₹1,00,000 = ₹2,00,000.
$$ \text{Current Ratio} = \frac{8,00,000}{2,00,000} = 4:1 $$
This highlights a tricky ratio adjustment context.
Question 8
A company sold old machinery at a loss of ₹15,000. While preparing Cash Flow Statement (Indirect Method), this loss will be:
✅ Correct Answer: Added to net profit
Explanation: Loss on sale is a non-operating expense already deducted in net profit calculation, so it must be added back to compute operating cash flows.
Question 9
Which transaction will NOT affect working capital?
✅ Correct Answer: Collection from debtors
Explanation: Collection from debtors converts one current asset (debtors) into another current asset (cash), leaving total current assets and working capital completely unchanged.
Question 10
Gross Profit Ratio is 25%. If gross profit is ₹4,00,000, Revenue from Operations will be:
✅ Correct Answer: ₹16,00,000
Explanation:
$$ \text{Revenue from Operations} = \frac{\text{Gross Profit}}{\text{GP Ratio}} = \frac{4,00,000}{0.25} = ₹16,00,000 $$
Question 11
Assertion (A): Quick Ratio is a more stringent test of liquidity than Current Ratio.
Reason (R): Quick Ratio excludes inventory from current assets.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Quick Ratio excludes inventory because inventory may not be readily convertible into cash, making it a stricter test of liquidity status.
Question 12
Assertion (A): Depreciation is added back while calculating cash flow from operating activities.
Reason (R): Depreciation does not involve actual cash outflow.
✅ Correct Answer: Both A and R are true, and R correctly explains A
Explanation: Depreciation reduces accounting net profit but does not involve any operational cash leakage, so it must be added back.
Question 13
Read the following case carefully:
Bright Ltd. forfeited 400 shares of ₹10 each issued at par for non-payment of allotment ₹2 and final call ₹3. Shareholders had paid only application money of ₹5 per share.
Amount debited to Share Capital Account will be:
✅ Correct Answer: ₹4,000
Explanation:
Share Capital Account is debited with the total called-up value of the forfeited shares.
Called-up value = 400 shares × ₹10 = ₹4,000.
Question 14
Read the following information carefully:
Net Profit before tax = ₹8,00,000
Depreciation = ₹1,00,000
Increase in debtors = ₹50,000
Decrease in inventory = ₹30,000
Net increase in operating cash flow will be:
✅ Correct Answer: ₹80,000
Explanation:
Add depreciation ₹1,00,000 and decrease in inventory ₹30,000.
Deduct increase in debtors ₹50,000.
Net adjustment increase value = 1,00,000 + 30,000 - 50,000 = ₹80,000.
Question 15
A company introduced strict collection policies and reduced average collection period. Which ratio improved directly?
✅ Correct Answer: Debtors Turnover Ratio
Explanation: Faster collection and lesser delays from trade receivables directly boost the Debtors Turnover Ratio.
Question 16
A company has debt ₹24,00,000 and shareholders' funds ₹18,00,000. Debt-Equity Ratio is:
✅ Correct Answer: 4:3
Explanation:
$$ \text{Debt-Equity Ratio} = \frac{24,00,000}{18,00,000} = \frac{4}{3} = 4:3 $$
Question 17
A company has high Quick Ratio but low Current Ratio. Which situation is most likely?
✅ Correct Answer: Very low inventory levels
Explanation: Quick Ratio completely excludes inventory. Exceptionally low inventory levels prevent the current ratio from pulling ahead of the quick ratio.
Question 18
Which transaction will decrease Quick Ratio immediately?
✅ Correct Answer: Cash purchase of inventory
Explanation: Cash (quick asset) decreases while inventory increases. Since inventory is excluded from quick assets composition, Quick Ratio falls immediately.
Question 19
A business reports increasing profits but poor liquidity because most sales are on long credit periods. This situation highlights difference between:
✅ Correct Answer: Liquidity and profitability
Explanation: Profitability reflects theoretical accounting earnings, while liquidity indicates the actual availability of cash assets to fulfill day-to-day payments.
Question 20
A company reissued forfeited shares at ₹9 per share. The shares had been forfeited after receiving ₹4 per share. Face value of shares is ₹10. Amount transferred to Capital Reserve per share will be:
✅ Correct Answer: ₹3
Explanation:
Discount allowed on reissue = ₹10 - ₹9 = ₹1.
Forfeited amount available = ₹4.
Balance transferred to Capital Reserve = ₹4 - ₹1 = ₹3 per share.
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