CA Inter P1 · Chapter 1
Introduction to Accounting Standards, Framework and Applicability MCQs with Answers
8 multiple-choice questions on Introduction to Accounting Standards, Framework and Applicability for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under the Framework for the Preparation and Presentation of Financial Statements issued by ICAI, information is said to possess a particular qualitative characteristic when it is free from material error and bias and users can depend upon it to represent faithfully what it purports to represent. This characteristic is:
- A) Comparability
- B) Understandability
- C) Relevance
- D) Reliability
Show answer & explanation
Answer: D) Reliability
The Framework describes reliability as the quality of information being free from material error and bias and faithfully representing what it purports to represent. Relevance concerns the ability of information to influence economic decisions, comparability concerns consistency across periods and entities, and understandability concerns ease of comprehension by users with reasonable knowledge.
Question 2
Which of the following is NOT one of the fundamental accounting assumptions referred to in AS 1, Disclosure of Accounting Policies?
- A) Prudence
- B) Going concern
- C) Consistency
- D) Accrual
Show answer & explanation
Answer: A) Prudence
AS 1 identifies going concern, consistency and accrual as the fundamental accounting assumptions; if they are followed, no specific disclosure is required. Prudence is not an assumption; it is one of the major considerations (along with substance over form and materiality) governing the selection and application of accounting policies.
Question 3
Case: The board of Vasundhara Textiles Ltd passed a resolution on 15 March 20X1 to replace its dyeing machines during the next financial year. No contract has been signed and no supplier has been approached as at 31 March 20X1. Applying the definition of a liability in the ICAI Framework, how should the planned replacement cost be dealt with in the financial statements for the year ended 31 March 20X1?
- A) A liability is recognised for the estimated replacement cost because the board has approved it
- B) No liability is recognised because there is no present obligation arising from a past event
- C) A provision is recognised at the present value of the expected replacement cost
- D) The amount is shown as a contingent liability in the notes
Show answer & explanation
Answer: B) No liability is recognised because there is no present obligation arising from a past event
Under the Framework, a liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of resources. A mere decision to acquire assets in the future does not create a present obligation, because the company can still change its mind. Hence nothing is recognised; a contingent liability also does not arise because there is no possible obligation from a past event.
Question 4
Case: Megh Traders started the year with net assets (equity) of ₹5,00,000 and closed the year with net assets of ₹6,40,000. During the year the owner introduced additional capital of ₹50,000 and withdrew ₹30,000. Applying the financial capital maintenance concept in nominal monetary units, the profit for the year is:
- A) ₹60,000
- B) ₹1,20,000
- C) ₹1,60,000
- D) ₹1,40,000
Show answer & explanation
Answer: B) ₹1,20,000
Under financial capital maintenance, profit is the increase in net assets after excluding contributions from and distributions to owners. Profit = Closing net assets 6,40,000 - Opening net assets 5,00,000 - Capital introduced 50,000 + Drawings 30,000 = ₹1,20,000. Simply taking the change in net assets (1,40,000) ignores owner transactions.
Question 5
Case: An entity had opening net assets of ₹8,00,000 and closing net assets of ₹9,20,000, with no capital introduced or withdrawn. The general price index moved from 120 at the start of the year to 132 at the end. Under the financial capital maintenance concept measured in units of constant purchasing power, the profit for the year is:
- A) ₹1,09,091
- B) ₹40,000
- C) ₹36,364
- D) ₹1,20,000
Show answer & explanation
Answer: B) ₹40,000
Opening capital must first be restated to end-of-year purchasing power: 8,00,000 x 132/120 = ₹8,80,000. Profit = Closing net assets 9,20,000 - restated opening capital 8,80,000 = ₹40,000. The balance of the nominal increase (1,20,000 - 40,000 = 80,000) is a capital maintenance adjustment forming part of equity, not profit.
Question 6
Within ICAI, which body is responsible for formulating Accounting Standards (AS) that are subsequently notified for companies under the Companies Act, 2013?
- A) The Financial Reporting Review Board (FRRB)
- B) The Accounting Standards Board (ASB)
- C) The Auditing and Assurance Standards Board (AASB)
- D) The Board of Studies (BoS)
Show answer & explanation
Answer: B) The Accounting Standards Board (ASB)
The Accounting Standards Board of ICAI formulates Accounting Standards after considering the applicable laws, customs and business environment in India. The AASB issues auditing standards, the Board of Studies handles education, and the FRRB reviews published financial statements for compliance; none of these formulates accounting standards.
Question 7
Case: Sarthak Components Ltd qualifies as a Small and Medium-sized Company (SMC) under the Companies (Accounting Standards) Rules. Which of the following Accounting Standards is NOT applicable to it at all?
- A) AS 9, Revenue Recognition
- B) AS 2, Valuation of Inventories
- C) AS 17, Segment Reporting
- D) AS 10, Property, Plant and Equipment
Show answer & explanation
Answer: C) AS 17, Segment Reporting
AS 17 on Segment Reporting is not applicable to SMCs, which are given this exemption to reduce the reporting burden on smaller entities. AS 2, AS 10 and AS 9 are recognition and measurement standards that apply to all companies, including SMCs.
Question 8
Under the ICAI Framework, assets carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset were acquired currently are measured on which basis?
- A) Present value
- B) Realisable (settlement) value
- C) Current cost
- D) Historical cost
Show answer & explanation
Answer: C) Current cost
Current cost measures assets at the amount that would be paid to acquire the same or an equivalent asset currently. Historical cost uses the amount paid at acquisition, realisable value uses the amount obtainable by selling the asset in an orderly disposal, and present value discounts the future net cash inflows the asset is expected to generate.