Q1. Financial accounting is primarily concerned with:
(a) Providing information for internal decision‑making
(b) Recording transactions for tax authorities only
(c) Preparing financial statements for external users
(d) Managing inventory levels
Answer: (c)
Explanation: Financial accounting focuses on summarising, analysing, and reporting financial transactions to external parties such as investors, creditors, and regulators through financial statements.
Q2. Which of the following is NOT a qualitative characteristic of useful financial information?
(a) Relevance
(b) Reliability
(c) Comparability
(d) Complexity
Answer: (d)
Explanation: The IASB/FASB framework lists relevance, faithful representation (reliability), comparability, verifiability, timeliness, and understandability as qualitative characteristics. Complexity is not one of them.
Q3. The accounting equation can be expressed as:
(a) Assets = Liabilities – Owner’s Equity
(b) Assets = Liabilities + Owner’s Equity
(c) Assets + Liabilities = Owner’s Equity
(d) Assets – Owner’s Equity = Liabilities
Answer: (b)
Explanation: The fundamental accounting equation states that the resources (assets) of a business are financed either by creditors (liabilities) or owners (equity): Assets = Liabilities + Owner’s Equity.
Q4. Which principle requires that expenses be recognised in the same period as the revenues they help to generate?
(a) Going concern principle
(b) Matching principle
(c) Conservatism principle
(d) Consistency principle
Answer: (b)
Explanation: The matching principle dictates that expenses should be recorded in the same accounting period as the revenues they contributed to earning.
Q5. Accrual basis of accounting records revenues when:
(a) Cash is received
(b) An invoice is issued
(c) They are earned, regardless of cash receipt
(d) The fiscal year ends
Answer: (c)
Explanation: Under accrual accounting, revenue is recognised when it is earned (i.e., when the service is performed or goods delivered), not necessarily when cash is received.
Q6. Which of the following accounts normally has a debit balance?
(a) Capital
(b) Sales Revenue
(c) Accounts Payable
(d) Prepaid Insurance
Answer: (d)
Explanation: Asset accounts such as Prepaid Insurance have normal debit balances. Capital, revenue, and liability accounts normally have credit balances.
Q7. The process of transferring journal entries to ledger accounts is called:
(a) Posting
(b) Balancing
(c) Trial balancing
(d) Adjusting
Answer: (a)
Explanation: Posting is the act of transferring debit and credit amounts from the journal to the appropriate ledger accounts.
Q8. A trial balance is prepared to:
(a) Show the financial position of the business
(b) Detect errors in ledger posting
(c) Calculate net profit
(d) Prepare the cash flow statement
Answer: (b)
Explanation: The trial balance lists all ledger balances to verify that total debits equal total credits, helping detect posting errors.
Q9. Which of the following is an example of a nominal account?
(a) Machinery
(b) Creditors
(c) Rent Expense
(d) Capital
Answer: (c)
Explanation: Nominal accounts (temporary accounts) include revenues, expenses, gains, and losses. Rent Expense is an expense account.
Q10. Depreciation is allocated to:
(a) Reduce the market value of an asset
(b) Allocate the cost of a tangible asset over its useful life
(c) Increase net income in the early years
(d) Record cash outflow for asset purchase
Answer: (b)
Explanation: Depreciation systematically allocates the historical cost of a tangible fixed asset to expense over its estimated useful life.
Q11. The conservatism principle suggests that when in doubt:
(a) Overstate assets and income
(b) Understate assets and income
(c) Ignore the transaction
(d) Record at market value
Answer: (b)
Explanation: Conservatism directs accountants to anticipate no profits but provide for all possible losses, thus erring on the side of understatement.
Q12. Which financial statement shows the changes in equity during a period?
(a) Income Statement
(b) Balance Sheet
(c) Statement of Cash Flows
(d) Statement of Changes in Equity
Answer: (d)
Explanation: The Statement of Changes in Equity (or Statement of Retained Earnings) details movements in share capital, retained earnings, and other equity components.
Q13. Goodwill is classified as:
(a) A current asset
(b) A tangible fixed asset
(c) An intangible asset
(d) A liability
Answer: (c)
Explanation: Goodwill arises from acquisition of a business at a price exceeding the fair value of identifiable net assets and is an intangible asset.
Q14. Which of the following transactions will increase both an asset and a liability?
(a) Payment of salaries in cash
(b) Purchase of equipment on credit
(c) Owner withdrawing cash for personal use
(d) Receiving cash from a debtor
Answer: (b)
Explanation: Buying equipment on credit increases equipment (asset) and creates accounts payable (liability).
Q15. The term “closing stock” refers to:
(a) Goods sold during the year
(b) Goods remaining unsold at the end of the accounting period
(c) Goods returned by customers
(d) Goods in transit to the supplier
Answer: (b)
Explanation: Closing stock (ending inventory) is the value of goods still on hand at the balance sheet date.
Q16. Which concept assumes that the business will continue its operations for the foreseeable future?
(a) Money measurement
(b) Going concern
(c) Accrual
(d) Entity
Answer: (b)
Explanation: The going concern principle presumes the enterprise will remain in operation long enough to fulfil its commitments and objectives.
Q17. A contingent liability is:
(a) A definite obligation that must be paid immediately
(b) A possible obligation that depends on the outcome of a future event
(c) An asset that may become a liability
(d) A liability already recorded in the books
Answer: (b)
Explanation: Contingent liabilities are potential obligations arising from past events whose existence will be confirmed only by uncertain future events (e.g., lawsuits).
Q18. The “materiality” concept allows an accountant to:
(a) Ignore all immaterial items completely
(b) Treat insignificant items as if they were material
(c) Disregard items that could influence users’ decisions
(d) Treat insignificant items as immaterial and possibly omit or aggregate them
Answer: (d)
Explanation: Materiality permits the omission or aggregation of information that would not affect the decision‑making of users if misstated or omitted.
Q19. Which of the following is NOT a component of the cash flow statement?
(a) Operating activities
(b) Investing activities
(c) Financing activities
(d) Equity activities
Answer: (d)
Explanation: Cash flow statement classifies cash flows into operating, investing, and financing activities. “Equity activities” is not a standard category.
Q20. In a journal entry, the total debits must always:
(a) Be greater than total credits
(b) Be less than total credits
(c) Equal total credits
(d) Be zero
Answer: (c)
Explanation: Double‑entry accounting requires that every journal entry have equal total debits and total credits.
Q21. Which account is increased with a credit entry?
(a) Cash
(b) Equipment
(c) Service Revenue
(d) Salaries Expense
Answer: (c)
Explanation: Revenue accounts increase with a credit; asset accounts increase with a debit.
Q22. The term “book value” of an asset refers to:
(a) Its market selling price
(b) Its original cost minus accumulated depreciation
(c) Its replacement cost
(d) Its fair value less costs to sell
Answer: (b)
Explanation: Book value (carrying amount) = historical cost – accumulated depreciation (or amortisation).
Q23. Which of the following best describes “accrued expenses”?
(a) Expenses paid in advance
(b) Expenses incurred but not yet paid or recorded
(c) Expenses that have been paid and recorded
(d) Expenses related to future periods
Answer: (b)
Explanation: Accrued expenses are liabilities for costs that have been incurred but not yet paid or entered in the books (e.g., wages earned but not yet paid).
Q24. The principle that requires using the same accounting methods from period to period is:
(a) Consistency
(b) Comparability
(c) Prudence
(d) Materiality
Answer: (a)
Explanation: Consistency means an entity should apply the same accounting policies over time to ensure comparability of financial statements.
Q25. Which of the following statements about the balance sheet is true?
(a) It shows revenues and expenses for a period
(b) It reports cash flows from operating, investing, and financing activities
(c) It presents the financial position at a specific point in time
(d) It calculates net profit or loss for the year
Answer: (b) is incorrect; correct answer is (c)
Explanation: The balance sheet (statement of financial position) lists assets, liabilities, and equity as of a particular date, reflecting the entity’s financial position at that point.
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End of 25 MCQs.
