Q1. Which of the following is NOT a component of a balance sheet?
(a) Assets
(b) Liabilities
(c) Revenue
(d) Equity
Answer: (c)
Explanation: Revenue is reported on the income statement, not the balance sheet. The balance sheet consists of assets, liabilities, and equity.
Q2. The primary purpose of the cash flow statement is to show:
(a) Profitability of the firm over a period
(b) Sources and uses of cash during a period
(c) Changes in owners’ equity
(d) Market value of assets
Answer: (b)
Explanation: The cash flow statement details cash inflows and outflows from operating, investing, and financing activities.
Q3. Depreciation expense is recorded to:
(a) Increase net profit
(b) Reflect the reduction in market value of an asset each year
(c) Allocate the cost of a tangible fixed asset over its useful life
(d) Decrease tax liability directly
Answer: (c)
Explanation: Depreciation is an allocation of historical cost of a tangible asset over its estimated useful life, not a market‑value adjustment.
Q4. Which ratio measures a firm’s ability to meet short‑term obligations?
(a) Debt‑to‑Equity ratio
(b) Current ratio
(c) Return on Equity
(d) Gross profit margin
Answer: (b)
Explanation: The current ratio (Current Assets ÷ Current Liabilities) assesses liquidity and short‑term solvency.
Q5. In the context of financial statements, “contingent liability” refers to:
(a) A liability that is certain and measurable
(b) A possible obligation arising from past events, whose existence will be confirmed only by uncertain future events
(c) An amount already paid in advance
(d) Equity contributed by shareholders
Answer: (b)
Explanation: Contingent liabilities are potential obligations (e.g., lawsuits) that depend on future outcomes and are disclosed in notes if probable and estimable.
Q6. Which of the following items appears under “Operating Activities” in the cash flow statement?
(a) Purchase of machinery
(b) Payment of dividends
(c) Collection from customers
(d) Issue of share capital
Answer: (c)
Explanation: Cash received from customers is part of cash flows from operating activities.
Q7. The accounting equation can be expressed as:
(a) Assets = Liabilities – Equity
(b) Assets + Liabilities = Equity
(c) Assets = Liabilities + Equity
(d) Equity = Assets + Liabilities
Answer: (c)
Explanation: The fundamental accounting equation states that assets are financed by either liabilities or owners’ equity.
Q8. Which financial statement shows the result of operations for a period?
(a) Balance Sheet
(b) Statement of Cash Flows
(c) Income Statement (Profit & Loss Account)
(d) Notes to Accounts
Answer: (c)
Explanation: The income statement summarizes revenues, expenses, and resulting profit or loss for a given period.
Q9. “Working capital” is calculated as:
(a) Total Assets – Total Liabilities
(b) Current Assets – Current Liabilities
(c) Fixed Assets – Long‑term Debt
(d) Share Capital + Reserves
Answer: (b)
Explanation: Working capital represents the short‑term financial health of a firm, measured by excess of current assets over current liabilities.
Q10. Which of the following is a non‑cash expense?
(a) Salaries paid
(b) Rent expense
(c) Depreciation
(d) Interest paid
Answer: (c)
Explanation: Depreciation reduces profit but does not involve an outflow of cash; it is a non‑cash charge.
Q11. The “quick ratio” (acid‑test) excludes which of the following from current assets?
(a) Cash and bank balances
(b) Marketable securities
(c) Inventory
(d) Accounts receivable
Answer: (c)
Explanation: Quick ratio = (Cash + Marketable securities + Receivables) ÷ Current Liabilities; inventory is excluded because it is less liquid.
Q12. In a classified balance sheet, “long‑term investments” are shown under:
(a) Current Assets
(b) Fixed Assets
(c) Investments (non‑current)
(d) Current Liabilities
Answer: (c)
Explanation: Long‑term investments are non‑current assets and appear separately under the investments heading.
Q13. Which statement is true about preference shares?
(a) They carry voting rights equal to equity shares
(b) Dividends on preference shares are paid after equity dividends
(c) Preference shareholders have a preferential claim on dividends and assets in liquidation
(d) Preference shares cannot be redeemed
Answer: (c)
Explanation: Preference shares have priority over equity shares for dividend payment and repayment of capital upon winding up.
Q14. The term “EBITDA” stands for:
(a) Earnings Before Interest, Taxes, Depreciation, and Amortization
(b) Earnings Before Income Tax, Dividends, and Amortization
(c) Economic Benefit of Internal Trade, Depreciation, and Amortization
(d) Estimated Business Income After Tax, Depreciation, and Amortization
Answer: (a)
Explanation: EBITDA adds back interest, taxes, depreciation, and amortization to net income to assess operating performance.
Q15. Which of the following would increase a company’s debt‑to‑equity ratio?
(a) Issuing new equity shares
(b) Repaying a long‑term loan
(c) Purchasing inventory on credit
(d) Converting debentures into equity shares
Answer: (c)
Explanation: Purchasing inventory on credit raises current liabilities (short‑term debt) while equity remains unchanged, increasing the debt‑to‑equity ratio.
Q16. “Goodwill” appearing in the balance sheet is classified as:
(a) Tangible fixed asset
(b) Current asset
(c) Intangible asset
(d) Liability
Answer: (c)
Explanation: Goodwill is an intangible asset arising from acquisition of a business at a price exceeding the fair value of identifiable net assets.
Q17. Which of the following ratios measures how efficiently a company uses its assets to generate sales?
(a) Net profit margin
(b) Return on Assets
(c) Asset turnover ratio
(d) Inventory turnover ratio
Answer: (c)
Explanation: Asset turnover = Sales ÷ Average Total Assets; it indicates sales generated per unit of asset invested.
Q18. In the preparation of a cash flow statement using the indirect method, an increase in accounts receivable is:
(a) Added to net income
(b) Subtracted from net income
(c) Ignored
(d) Multiplied by tax rate
Answer: (b)
Explanation: An increase in receivables means sales were made on cash not yet received, so cash flow is lower than net income; thus it is subtracted.
Q19. Which of the following is NOT a characteristic of a sole proprietorship?
(a) Unlimited liability
(b) Separate legal entity
(c) Simple to set up
(d) Owner retains all profits
Answer: (b)
Explanation: A sole proprietorship does not have a separate legal existence distinct from its owner.
Q20. The “times interest earned” ratio is calculated as:
(a) Net Income ÷ Interest Expense
(b) EBIT ÷ Interest Expense
(c) EBITDA ÷ Interest Expense
(d) Gross Profit ÷ Interest Expense
Answer: (b)
Explanation: Times interest earned (interest coverage) = EBIT (Earnings Before Interest and Taxes) divided by interest expense, showing ability to meet interest obligations.
Q21. Which financial statement provides information about changes in equity during a period?
(a) Balance Sheet
(b) Income Statement
(c) Statement of Changes in Equity
(d) Cash Flow Statement
Answer: (c)
Explanation: The statement of changes in equity details movements in share capital, reserves, retained earnings, etc., over the reporting period.
Q22. If a company’s current ratio is 1.5 and its current liabilities are ₹2,00,000, what are its current assets?
(a) ₹1,00,000
(b) ₹2,00,000
(c) ₹3,00,000
(d) ₹4,00,000
Answer: (c)
Explanation: Current Assets = Current Ratio × Current Liabilities = 1.5 × 2,00,000 = ₹3,00,000.
Q23. Which of the following is an example of a financing activity in the cash flow statement?
(a) Payment to suppliers
(b) Receipt of dividend income
(c) Repayment of a bank loan
(d) Purchase of office equipment
Answer: (c)
Explanation: Repayment of a loan reduces financing cash outflow and is classified under financing activities.
Q24. The “debt service coverage ratio” (DSCR) primarily measures:
(a) Profitability relative to sales
(b) Ability to cover interest and principal repayments from operating income
(c) Market valuation of equity
(d) Efficiency of inventory management
Answer: (b)
Explanation: DSCR = (Operating Income) ÷ (Debt Obligations – interest + principal); it assesses cash flow adequacy to meet debt commitments.
Q25. In a not‑for‑profit organization, the excess of income over expenditure is transferred to:
(a) Profit and Loss Appropriation Account
(b) Capital Fund
(c) General Reserve
(d) Share Capital Account
Answer: (b)
Explanation: Surplus (or deficit) in a not‑for‑profit entity is added to (or deducted from) the Capital Fund, which represents the organization’s equity.
