PRC-1 · Chapter 1
Accounting Basics MCQs with Answers
100 multiple-choice questions on Accounting Basics for PRC-1 Fundamentals of Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
At the end of the financial year, the total assets of 'Apex Technologies' are valued at Rs. 5.4 million, while its total liabilities stand at Rs. 2.1 million. According to the accounting equation, what is the value of the owner's equity?
- A) Rs. 7.5 million
- B) Rs. 3.3 million
- C) Rs. 2.1 million
- D) Rs. 5.4 million
Show answer & explanation
Answer: B) Rs. 3.3 million
According to the fundamental accounting equation, assets are always equal to liabilities plus capital. Therefore, the owner's equity is calculated by subtracting total liabilities from total assets, which results in Rs. 3.3 million.
Question 2
'Zaman Logistics' recently upgraded its primary delivery truck by replacing its engine, which significantly increased its load-carrying capacity and efficiency. How should this cost be classified in the books of accounts?
- A) Revenue expenditure
- B) Capital expenditure
- C) Administrative expense
- D) Deferred revenue expenditure
Show answer & explanation
Answer: B) Capital expenditure
Replacing an engine enhances the profit-earning capacity and life of the asset, making it a capital expenditure. In contrast, running and ongoing costs are classified as revenue expenditures.
Question 3
Mr. Salman, the owner of a retail store, withdrew Rs. 50,000 from the business bank account to pay for his son's personal school fees. The separation of this personal transaction from business expenses is dictated by which accounting principle?
- A) Prudence concept
- B) Matching concept
- C) Business entity concept
- D) Going concern concept
Show answer & explanation
Answer: C) Business entity concept
The business entity concept requires that a business and its owner are treated as completely separate and distinct entities for accounting purposes. Therefore, personal withdrawals are treated as drawings rather than business expenses.
Question 4
Which of the following items would normally be classified as a 'current asset' in the statement of financial position of a manufacturing company?
- A) Specialized production machinery
- B) Trade receivables expected to be settled in 60 days
- C) A newly constructed warehouse building
- D) Long-term investments in shares of another company
Show answer & explanation
Answer: B) Trade receivables expected to be settled in 60 days
Current assets are those assets that provide economic benefits in the short term, usually within one year. Trade receivables, inventory, and cash are standard examples of current assets.
Question 5
'Silverline Electronics' purchased a new central air conditioning unit for its office on credit from 'CoolBreeze Ltd'. What is the correct double-entry for this transaction?
- A) Debit Purchases, Credit Cash
- B) Debit Office Equipment, Credit CoolBreeze Ltd
- C) Debit CoolBreeze Ltd, Credit Office Equipment
- D) Debit Office Equipment, Credit Purchases
Show answer & explanation
Answer: B) Debit Office Equipment, Credit CoolBreeze Ltd
Purchasing an asset on credit increases the asset (Debit Office Equipment) and increases the liability owed to the supplier (Credit CoolBreeze Ltd). It is not recorded in purchases, which is reserved for trading goods.
Question 6
According to the conceptual framework of accounting, which of the following is the most accurate definition of an asset?
- A) A resource owned by the business that guarantees future profits.
- B) A present economic resource controlled by the entity as a result of past events.
- C) A physical item purchased solely for resale purposes.
- D) An expense paid in advance for long-term use.
Show answer & explanation
Answer: B) A present economic resource controlled by the entity as a result of past events.
The conceptual framework formally defines an asset as a present economic resource controlled by the entity as a result of past events. It is not merely something 'owned', as control is the key factor.
Question 7
'Crescent Traders' repaid a bank loan of Rs. 200,000 via an online bank transfer. What is the overall impact of this transaction on the accounting equation?
- A) Decrease in assets and decrease in equity
- B) Decrease in assets and decrease in liabilities
- C) Increase in liabilities and decrease in equity
- D) No change in total assets
Show answer & explanation
Answer: B) Decrease in assets and decrease in liabilities
Repaying a loan using bank funds decreases the business's cash asset and simultaneously decreases its loan liability. The fundamental accounting equation remains in balance.
Question 8
The accounting practice of ensuring that expenses related to revenue are reported in the exact same period when the revenue is recognized is an application of the:
- A) Materiality concept
- B) Consistency concept
- C) Matching concept
- D) Prudence concept
Show answer & explanation
Answer: C) Matching concept
The matching concept requires that income and expenses that relate to each other are matched together and reported in the same accounting period. This ensures a true and fair view of profitability.
Question 9
In the double-entry bookkeeping system, a credit entry will inherently result in an increase in which of the following types of accounts?
- A) Assets and Expenses
- B) Liabilities and Equity
- C) Assets and Income
- D) Expenses and Liabilities
Show answer & explanation
Answer: B) Liabilities and Equity
According to the rules of double-entry, a credit entry represents an increase in liabilities, equity, or income. Conversely, debit entries represent increases in assets and expenses.
Question 10
Unless there is an intention to liquidate the business, financial statements are prepared on the assumption that the enterprise will continue its operations for the foreseeable future. This is known as the:
- A) Accrual basis
- B) Substance over form principle
- C) Going concern basis
- D) Prudence concept
Show answer & explanation
Answer: C) Going concern basis
The going concern concept assumes that a business will continue its operations indefinitely and has neither the intention nor the need to liquidate or materially curtail its scale of operations.
Question 11
Which international body is directly responsible for issuing the International Financial Reporting Standards (IFRS)?
- A) International Accounting Standards Board (IASB)
- B) Financial Accounting Standards Board (FASB)
- C) Global Accounting and Audit Principles Board (GAAP)
- D) International Accounting Standards Committee (IASC)
Show answer & explanation
Answer: A) International Accounting Standards Board (IASB)
The International Financial Reporting Standards (IFRS) are globally recognized accounting standards issued by the International Accounting Standards Board (IASB).
Question 12
The proprietor of 'Style Garments' took home clothing inventory worth Rs. 15,000 for his family's personal use. Which account must be debited to accurately record this event?
- A) Purchases account
- B) Sales account
- C) Drawings account
- D) Inventory account
Show answer & explanation
Answer: C) Drawings account
When an owner withdraws assets, including inventory or cash, from the business for personal use, it is recorded as a debit to the Drawings account. This decreases the overall owner's equity.
Question 13
Consider the following balances for 'Nova Enterprises': Trade Payables Rs. 55,000, Short-term Bank Overdraft Rs. 25,000, Trade Receivables Rs. 40,000, Long-term Bank Loan Rs. 150,000. What is the total amount of current liabilities?
- A) Rs. 55,000
- B) Rs. 80,000
- C) Rs. 230,000
- D) Rs. 120,000
Show answer & explanation
Answer: B) Rs. 80,000
Current liabilities are obligations payable within one year. Here, Trade Payables (Rs. 55,000) and Bank Overdraft (Rs. 25,000) are current liabilities, totaling Rs. 80,000.
Question 14
The prudence concept in accounting requires caution when making judgments under conditions of uncertainty. Which of the following actions correctly applies the prudence concept?
- A) Recognizing expected future profits immediately.
- B) Valuing inventory at the higher of cost or market value.
- C) Overstating the value of business assets.
- D) Creating an allowance for doubtful debts.
Show answer & explanation
Answer: D) Creating an allowance for doubtful debts.
The prudence concept states that assets and income should not be overstated, while liabilities and expenses should not be understated. Creating an allowance for doubtful debts anticipates potential future losses, applying this caution.
Question 15
During the accounting period, the assets of 'Pioneer Traders' increased by Rs. 7 million, while the owner's equity decreased by Rs. 3 million. Based on the accounting equation, what must have been the corresponding change in total liabilities?
- A) Decreased by 10 million
- B) Increased by 10 million
- C) Increased by 4 million
- D) Decreased by 4 million
Show answer & explanation
Answer: B) Increased by 10 million
The accounting equation is Assets = Liabilities + Equity. If Assets (+7) = Liabilities (X) + Equity (-3), solving for X means Liabilities must have increased by 10 million to balance the equation.
Question 16
Commercial banks and other financial lenders review an entity's financial statements primarily to assess:
- A) The day-to-day operational efficiency of the staff.
- B) The entity's capacity to pay interest and repay the loan principal on maturity.
- C) The exact tax liabilities to be paid to the government.
- D) The marketing strategies adopted by the management.
Show answer & explanation
Answer: B) The entity's capacity to pay interest and repay the loan principal on maturity.
Lenders utilize financial statements specifically to assess the financial stability of a borrower, ensuring the entity has the continuing ability to pay interest and repay the principal loan amount at maturity.
Question 17
According to the conceptual framework, a 'liability' is defined as:
- A) A future economic resource controlled by the business.
- B) A present obligation of the entity to transfer an economic resource as a result of past events.
- C) An expense paid in advance for a future period.
- D) The residual interest of the owners in the business.
Show answer & explanation
Answer: B) A present obligation of the entity to transfer an economic resource as a result of past events.
The standard definition of a liability under the conceptual framework is a present obligation of the entity to transfer an economic resource as a result of past events.
Question 18
According to the conceptual framework, 'Equity' is formally defined as:
- A) The total physical cash reserves currently held by the business.
- B) The present obligation of the entity to transfer economic resources.
- C) The residual interest in the assets of the entity after deducting all its liabilities.
- D) The gross inflows of economic benefits during the accounting period.
Show answer & explanation
Answer: C) The residual interest in the assets of the entity after deducting all its liabilities.
Equity represents the owners' residual claim on the business. It is defined as the residual interest in the assets of the entity after deducting all of its obligations or liabilities.
Question 19
'BlueSky IT' purchased a simple wastebasket for Rs. 500. Although it will be used for several years, the accountant expensed it immediately rather than capitalizing it. Which accounting concept justifies this practical approach?
- A) Materiality concept
- B) Prudence concept
- C) Accrual concept
- D) Separate entity concept
Show answer & explanation
Answer: A) Materiality concept
The materiality concept allows minor expenditures, like a wastebasket or calculator, to be written off as expenses immediately because their cost is too insignificant to justify the administrative effort of capitalization and tracking.
Question 20
In the context of accounting principles, what does the 'Duality' or 'Dual Aspect' concept signify?
- A) Every transaction is recorded in two different currencies.
- B) Every transaction has two effects that keep the accounting equation in balance.
- C) A business must maintain both a cash book and a passbook.
- D) Assets and income are always recorded twice.
Show answer & explanation
Answer: B) Every transaction has two effects that keep the accounting equation in balance.
The dual aspect concept is the foundation of double-entry bookkeeping, dictating that every financial transaction has equal and opposite debit and credit effects, ensuring the accounting equation remains balanced.
Question 21
If 25% of the total assets of 'Nexus Logistics' are financed by liabilities, and the total assets amount to Rs. 250,000, what is the total amount of the owner's equity?
- A) Rs. 187,500
- B) Rs. 62,500
- C) Rs. 150,000
- D) Rs. 200,000
Show answer & explanation
Answer: A) Rs. 187,500
If total assets are Rs. 250,000 and liabilities finance 25% (Rs. 62,500), then according to the accounting equation (Assets = Liabilities + Equity), Equity is Rs. 250,000 - Rs. 62,500 = Rs. 187,500.
Question 22
A commercial entity received Rs. 2 million from a customer for the sale of a commercial vehicle, and on the same day received a bank loan of Rs. 5 million to expand its showroom. How should these two financial receipts be classified?
- A) Both are capital receipts.
- B) Both are revenue receipts.
- C) The sale is a revenue receipt; the loan is a capital receipt.
- D) The sale is a capital receipt; the loan is a revenue receipt.
Show answer & explanation
Answer: C) The sale is a revenue receipt; the loan is a capital receipt.
Income generated from ordinary trading activities (like selling goods) is a revenue receipt, whereas funds acquired from non-routine transactions like obtaining a bank loan are capital receipts.
Question 23
Which of the following accounting practices best illustrates the 'Substance over form' concept?
- A) Expensing a small stapler immediately instead of capitalizing it.
- B) Recording a vehicle acquired on a finance lease as an asset, even though legal title has not transferred.
- C) Delaying the recognition of sales revenue until cash is received.
- D) Valuing inventory strictly at its original purchase cost.
Show answer & explanation
Answer: B) Recording a vehicle acquired on a finance lease as an asset, even though legal title has not transferred.
Substance over form dictates that financial statements should reflect the economic reality of a transaction rather than just its legal form. Recording a leased asset reflects that the business enjoys its economic benefits despite lacking legal title.
Question 24
'Luminous Electronics' consistently uses the exact same inventory valuation method (such as FIFO) every single year. Which qualitative characteristic is primarily achieved by this practice?
- A) Timeliness
- B) Comparability
- C) Verifiability
- D) Understandability
Show answer & explanation
Answer: B) Comparability
The consistency concept ensures that identical accounting methods are applied across different periods, which directly enhances the comparability of the financial statements over time.
Question 25
While bookkeeping primarily focuses on the routine task of recording daily financial transactions, 'Accounting' is a broader concept that also encompasses:
- A) Exclusively managing the cash flows and physical cash of the business.
- B) Summarizing, analyzing, and reporting these recorded transactions in the financial statements.
- C) Setting up the daily physical inventory counts in the warehouse.
- D) Only calculating the corporate tax payable to the government authorities.
Show answer & explanation
Answer: B) Summarizing, analyzing, and reporting these recorded transactions in the financial statements.
Bookkeeping is restricted to the daily recording of financial data, whereas accounting is a wider discipline that includes the summarization, analysis, and reporting of that data through financial statements.
Question 26
'Sterling Services' completed a consulting project for a client in December but did not receive the cash payment until February of the following financial year. The accountant recognized the revenue in December. This approach strictly follows which basis of accounting?
- A) Cash basis
- B) Going concern basis
- C) Accrual basis
- D) Prudence basis
Show answer & explanation
Answer: C) Accrual basis
The accrual basis of accounting dictates that income and expenses are recognized when they are earned or incurred, regardless of when the physical cash is actually exchanged.
Question 27
What is the immediate effect on the accounting equation when a business uses its cash at the bank to fully settle an outstanding balance owed to a credit supplier?
- A) Decrease in an asset and decrease in equity.
- B) Increase in an asset and increase in a liability.
- C) Decrease in an asset and decrease in a liability.
- D) Decrease in a liability and increase in owner's equity.
Show answer & explanation
Answer: C) Decrease in an asset and decrease in a liability.
Paying a credit supplier reduces the cash balance (decrease in asset) and simultaneously settles the amount owed (decrease in trade payables liability).
Question 28
Which of the following internal stakeholders relies on financial statements primarily to assess whether the business can continue to provide secure employment and pay remuneration?
- A) Lenders
- B) Investors
- C) Employees
- D) Government authorities
Show answer & explanation
Answer: C) Employees
Employees are internal users of financial statements who review financial data to assess the stability and profitability of their employer, ensuring their jobs and remuneration are secure.
Question 29
A debit entry in the general ledger usually represents an increase in which of the following accounting elements?
- A) Assets and Income
- B) Liabilities and Income
- C) Assets and Expenses
- D) Liabilities and Expenses
Show answer & explanation
Answer: C) Assets and Expenses
Following the rules of double-entry bookkeeping, a debit entry is utilized to record an increase in either an asset account or an expense account.
Question 30
According to IAS 1, which of the following documents is NOT considered a part of a complete set of financial statements?
- A) Statement of financial position
- B) Statement of comprehensive income
- C) Director's report
- D) Notes to the financial statements
Show answer & explanation
Answer: C) Director's report
A complete set of financial statements includes the statement of financial position, comprehensive income, changes in equity, cash flows, and notes. The director's report or auditor's report is external to this specific set.
Question 31
A business receives Rs. 1 million as a bank loan and Rs. 500,000 from the cash sale of inventory. How are these items categorized?
- A) Both are capital receipts.
- B) Both are revenue receipts.
- C) The bank loan is a capital receipt; the sale of inventory is a revenue receipt.
- D) The bank loan is a revenue receipt; the sale of inventory is a capital receipt.
Show answer & explanation
Answer: C) The bank loan is a capital receipt; the sale of inventory is a revenue receipt.
Routine operating income like the sale of inventory constitutes a revenue receipt, whereas financing activities like acquiring a bank loan represent capital receipts.
Question 32
Which accounting principle ensures that transactions are recorded strictly in monetary terms, ignoring non-financial factors like employee morale or management expertise?
- A) Understandability
- B) Money Measurement concept
- C) Accounting period concept
- D) Matching Concept
Show answer & explanation
Answer: B) Money Measurement concept
The money measurement concept dictates that only transactions and events capable of being accurately expressed in monetary terms are recorded in the financial books.
Question 33
Which of the following best describes the 'Historical Cost' concept?
- A) Assets are constantly revalued to reflect their current market price.
- B) Assets are recorded at the actual cash equivalent amount paid to acquire them.
- C) Assets are recorded at their estimated future replacement cost.
- D) Assets are depreciated fully in the year of purchase.
Show answer & explanation
Answer: B) Assets are recorded at the actual cash equivalent amount paid to acquire them.
The historical cost concept requires that an asset is initially recorded in the accounting records at the original, objective cost incurred to acquire it, regardless of future market value changes.
Question 34
The double entry to correctly record the withdrawal of cash from a business bank account by the proprietor for personal use is:
- A) Debit Drawings, Credit Bank
- B) Debit Bank, Credit Drawings
- C) Debit Capital, Credit Cash
- D) Debit Cash, Credit Bank
Show answer & explanation
Answer: A) Debit Drawings, Credit Bank
When an owner withdraws cash for personal use, it decreases the business bank asset (Credit Bank) and increases drawings (Debit Drawings), which effectively reduces equity.
Question 35
According to the conceptual framework, income encompasses both revenue and gains. It is defined as an increase in economic benefits that results in:
- A) An increase in overall business liabilities.
- B) A decrease in owner's equity.
- C) An increase in equity, other than contributions from equity participants.
- D) An increase in equity, strictly from owner investments.
Show answer & explanation
Answer: C) An increase in equity, other than contributions from equity participants.
Income is defined as an increase in economic benefits during the period that results in an increase in equity, specifically excluding any direct capital contributions from the owners.
Question 36
Which of the following is explicitly considered a capital transaction?
- A) Purchase of inventory for resale
- B) Payment of monthly staff wages
- C) Routine maintenance of a delivery vehicle
- D) Purchase of specialized manufacturing machinery
Show answer & explanation
Answer: D) Purchase of specialized manufacturing machinery
A capital transaction involves acquiring a non-current asset that will generate benefits over a long period, such as purchasing machinery. Items like wages and inventory are revenue transactions.
Question 37
Why are 'Notes to the financial statements' considered an integral part of a complete set of financial statements?
- A) They provide the personal opinions of the directors on future sales.
- B) They list the exact names of all individual employees.
- C) They provide a narrative description and disaggregation of items presented in the primary statements.
- D) They contain the company's daily cash book ledgers.
Show answer & explanation
Answer: C) They provide a narrative description and disaggregation of items presented in the primary statements.
Notes are essential because they provide explanatory narrative, accounting policies, and detailed breakdowns of the aggregated figures presented in the main financial statements.
Question 38
If a business purchases property, plant, and equipment (PPE), which financial statement is immediately and directly impacted by the increase in non-current assets?
- A) Statement of comprehensive income
- B) Statement of financial position
- C) Statement of changes in equity
- D) Income tax return
Show answer & explanation
Answer: B) Statement of financial position
The statement of financial position (balance sheet) reports the entity's assets, liabilities, and equity at a specific point in time. An increase in PPE directly increases the non-current assets reported here.
Question 39
Which qualitative characteristic of financial information assures users that the information accurately represents the economic phenomena it purports to represent, often confirmed by independent auditors?
- A) Timeliness
- B) Verifiability
- C) Comparability
- D) Understandability
Show answer & explanation
Answer: B) Verifiability
Verifiability helps assure users that information faithfully represents the economic transactions. It means that different knowledgeable and independent observers (like auditors) could reach a consensus on the data.
Question 40
The qualitative characteristic of 'Understandability' implies that financial information should be:
- A) Stripped of all complex transactions to make it simple.
- B) Presented clearly and concisely for users who have a reasonable knowledge of business and economic activities.
- C) Kept exclusively for internal management review.
- D) Translated into multiple languages automatically.
Show answer & explanation
Answer: B) Presented clearly and concisely for users who have a reasonable knowledge of business and economic activities.
Understandability means classifying, characterizing, and presenting information clearly. However, it assumes the users have a reasonable knowledge of business and economic activities to comprehend complex but necessary data.
Question 41
'Metro Retailers' recorded gross sales of Rs. 800,000 during the year. However, customers returned goods worth Rs. 40,000, and the business allowed settlement discounts amounting to Rs. 15,000. What is the correct figure for net sales?
- A) Rs. 760,000
- B) Rs. 745,000
- C) Rs. 785,000
- D) Rs. 800,000
Show answer & explanation
Answer: B) Rs. 745,000
Net sales are calculated by deducting both sales returns and any discounts allowed from the gross sales figure. Therefore, Rs. 800,000 - Rs. 40,000 - Rs. 15,000 equals Rs. 745,000.
Question 42
'Global Traders' earns its primary income by selling electronic appliances. How should the income generated strictly from the sale of these appliances be classified in the financial statements?
- A) Capital Receipt
- B) Other income
- C) Revenue
- D) Deferred Income
Show answer & explanation
Answer: C) Revenue
According to accounting principles, income arising in the course of the ordinary, primary trading activities of an entity is formally classified as revenue.
Question 43
The accountant of 'Horizon Corp' is calculating liabilities for the year-end statement of financial position. The balances include: Trade Payables Rs. 45,000, Accrued Electricity Rs. 10,000, Long-term Bank Loan Rs. 300,000, and a Bank Overdraft of Rs. 20,000. What is the total of the current liabilities?
- A) Rs. 75,000
- B) Rs. 55,000
- C) Rs. 375,000
- D) Rs. 345,000
Show answer & explanation
Answer: A) Rs. 75,000
Current liabilities are obligations expected to be settled within one year. This includes the Trade Payables (Rs. 45,000), Accrued Electricity (Rs. 10,000), and the Bank Overdraft (Rs. 20,000), which sum up to Rs. 75,000.
Question 44
Which of the following activities is strictly classified as 'book-keeping' rather than the broader scope of 'accounting'?
- A) Analyzing the profitability of a new product line.
- B) Summarizing financial data to prepare the statement of comprehensive income.
- C) The routine recording of daily financial transactions in the books of prime entry.
- D) Reporting financial performance to external investors.
Show answer & explanation
Answer: C) The routine recording of daily financial transactions in the books of prime entry.
Book-keeping is specifically concerned with only the mechanical recording of financial transactions. Accounting is a broader term that includes summarizing, analyzing, and reporting those transactions.
Question 45
Which of the following transactions undertaken by 'Pioneer Manufacturing' represents a capital expenditure?
- A) Paying the monthly electricity bill for the factory.
- B) Paying for the routine servicing and oil change of delivery vans.
- C) Purchasing a new robotic assembly arm for the production line.
- D) Purchasing raw materials for manufacturing goods.
Show answer & explanation
Answer: C) Purchasing a new robotic assembly arm for the production line.
Capital expenditure involves acquiring or improving non-current assets that provide long-term economic benefits, such as a new machine. Routine costs like bills, servicing, and raw materials are revenue expenditures.
Question 46
'Urban Architects' purchases new drafting computers for their office on credit from 'Tech Source'. What is the correct double-entry to record this specific transaction?
- A) Debit Purchases Account, Credit Tech Source Account
- B) Debit Office Equipment Account, Credit Bank Account
- C) Debit Office Equipment Account, Credit Tech Source Account
- D) Debit Tech Source Account, Credit Office Equipment Account
Show answer & explanation
Answer: C) Debit Office Equipment Account, Credit Tech Source Account
Purchasing an asset on credit increases the non-current asset (Debit Office Equipment) and increases the liability owed to the supplier (Credit Tech Source). The Purchases account is only used for trading inventory.
Question 47
At the start of the year, 'Dynamic Enterprises' had total assets of Rs. 600,000 and total equity of Rs. 400,000. During the year, total assets increased by Rs. 100,000 and total liabilities decreased by Rs. 50,000. What is the new equity at the end of the year?
- A) Rs. 500,000
- B) Rs. 550,000
- C) Rs. 450,000
- D) Rs. 600,000
Show answer & explanation
Answer: B) Rs. 550,000
Initially, Liabilities = 600k (Assets) - 400k (Equity) = 200k. At year-end, Assets are 700k (600k+100k) and Liabilities are 150k (200k-50k). Therefore, new Equity is Assets (700k) - Liabilities (150k) = Rs. 550,000.
Question 48
Which of the following best describes the primary purpose of the Statement of Financial Position?
- A) To show the total revenue and expenses generated over a specific accounting period.
- B) To detail the cash inflows and outflows during the financial year.
- C) To present the financial position of the entity by listing its assets, liabilities, and equity at a specific point in time.
- D) To show the changes in the owner's capital account over the year.
Show answer & explanation
Answer: C) To present the financial position of the entity by listing its assets, liabilities, and equity at a specific point in time.
The statement of financial position (formerly balance sheet) is a snapshot that presents an entity's assets, liabilities, and equity at a specific point in time.
Question 49
The owner of 'Breeze Boutiques' pays her personal life insurance premium using a cheque drawn on the business bank account. According to the separate entity concept, how should this be recorded in the business books?
- A) As an insurance expense for the business.
- B) As a debit to the Drawings account and a credit to the Bank account.
- C) As a debit to the Capital account and a credit to Cash.
- D) It should not be recorded in the business books at all.
Show answer & explanation
Answer: B) As a debit to the Drawings account and a credit to the Bank account.
Under the separate entity concept, personal expenses paid from business funds are treated as owner withdrawals. The correct entry is to debit Drawings and credit Bank.
Question 50
'Swift Couriers' sold an old delivery van for Rs. 400,000. The carrying amount of the van in the books at the time of sale was Rs. 350,000. How is the Rs. 50,000 difference typically classified in the statement of comprehensive income?
- A) As a reduction in operating expenses.
- B) As routine sales revenue.
- C) As a capital receipt added directly to equity.
- D) As other income (gain on disposal).
Show answer & explanation
Answer: D) As other income (gain on disposal).
When a non-current asset is sold for more than its carrying amount, the resulting profit is not regular revenue. It is classified as a gain on disposal and presented within 'Other Income'.
Question 51
Mr. Asad, the sole proprietor of 'Apex Consulting', decides to transfer his personal car into the business for official use. What is the immediate impact of this transaction on the accounting equation?
- A) Increase in an asset, increase in a liability
- B) Increase in an asset, increase in owner's equity
- C) Decrease in an asset, decrease in owner's equity
- D) Increase in an asset, decrease in owner's equity
Show answer & explanation
Answer: B) Increase in an asset, increase in owner's equity
When an owner contributes personal assets, such as a car, to the business, it increases the business's total assets and simultaneously increases the owner's capital (equity).
Question 52
The total capital of 'Zephyr Traders' is Rs. 450,000 and its total liabilities stand at Rs. 150,000. Based on the fundamental accounting equation, what is the value of the firm's total assets?
- A) Rs. 300,000
- B) Rs. 450,000
- C) Rs. 600,000
- D) Rs. 150,000
Show answer & explanation
Answer: C) Rs. 600,000
The fundamental accounting equation states that Total Assets = Capital (Equity) + Total Liabilities. Therefore, Rs. 450,000 + Rs. 150,000 = Rs. 600,000.
Question 53
'BlueSky IT' purchased a new server for Rs. 200,000 on credit from 'Tech World'. What are the direct effects of this transaction on the elements of the financial statements?
- A) Decrease in an asset, increase in an expense
- B) Increase in an asset, increase in owner's equity
- C) Increase in an asset, increase in a liability
- D) Increase in an asset, decrease in a liability
Show answer & explanation
Answer: C) Increase in an asset, increase in a liability
Purchasing equipment on credit increases the non-current assets (the server) and simultaneously increases the current liabilities (accounts payable) owed to the supplier.
Question 54
In the double-entry bookkeeping system, a 'debit' entry is inherently used to record an increase in which of the following categories?
- A) Assets and Income
- B) Liabilities and Income
- C) Liabilities and Expenses
- D) Assets and Expenses
Show answer & explanation
Answer: D) Assets and Expenses
According to the rules of debit and credit, an increase in an asset or an increase in an expense is always recorded as a debit entry.
Question 55
Which of the following stakeholders is classified strictly as an 'external user' of a company's financial statements?
- A) The Chief Executive Officer (CEO)
- B) Departmental Managers
- C) Commercial Lenders (Creditors)
- D) Internal Audit Employees
Show answer & explanation
Answer: C) Commercial Lenders (Creditors)
Management, CEOs, and employees are internal users. Commercial lenders or creditors are external users who rely on financial statements to assess creditworthiness.
Question 56
Which accounting principle strictly dictates that a business must record an expense in the period it is incurred, regardless of when the cash is actually paid?
- A) Cash basis concept
- B) Materiality concept
- C) Matching (Accrual) concept
- D) Business entity concept
Show answer & explanation
Answer: C) Matching (Accrual) concept
The matching or accrual concept requires that expenses related to revenue generation be reported in the same period the revenue is recognized, irrespective of cash flow.
Question 57
The universally recognized accounting standards that guide the preparation of financial statements across many countries are known as IFRS. What does IFRS stand for?
- A) International Financial Reporting Standards
- B) Institute of Financial Reporting Standards
- C) Inter Financial Reporting Standards
- D) International Funds Reporting Standards
Show answer & explanation
Answer: A) International Financial Reporting Standards
IFRS stands for International Financial Reporting Standards, which are issued by the International Accounting Standards Board (IASB) to ensure global comparability.
Question 58
'Rapid Logistics' spent Rs. 150,000 on major structural alterations to their delivery vans, which permanently increased their payload capacity by 20%. How should this expenditure be classified?
- A) Current expenditure
- B) Revenue expenditure
- C) Outstanding expenditure
- D) Capital expenditure
Show answer & explanation
Answer: D) Capital expenditure
Expenditures that improve a non-current asset beyond its originally assessed standard of performance, such as increasing carrying capacity, are classified as capital expenditures.
Question 59
If a business acquires a machine on a long-term lease and records it as an asset despite not holding the legal title, it is applying which accounting concept?
- A) Materiality
- B) Prudence
- C) Substance over form
- D) Verifiability
Show answer & explanation
Answer: C) Substance over form
The 'substance over form' concept emphasizes the economic reality of a transaction (e.g., controlling the use of an asset) over its strict legal form (e.g., holding the legal ownership title).
Question 60
According to International Accounting Standards, which of the following is NOT considered a component of a 'complete set of financial statements'?
- A) Statement of financial position
- B) Statement of cash flows
- C) Statement of comprehensive income
- D) The independent auditor's report
Show answer & explanation
Answer: D) The independent auditor's report
A complete set of financial statements includes the statement of financial position, comprehensive income, changes in equity, cash flows, and notes. The director's or auditor's report is external to the financial statements.
Question 61
The underlying assumption that a business entity will continue to operate indefinitely and will not be liquidated in the foreseeable future is known as the:
- A) Accrual basis
- B) Going concern basis
- C) Historical cost concept
- D) Separate entity concept
Show answer & explanation
Answer: B) Going concern basis
The going concern assumption implies that an entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations in the foreseeable future.
Question 62
Which of the following statements best distinguishes 'book-keeping' from 'accounting'?
- A) Book-keeping is a broader term that encompasses all accounting functions.
- B) Book-keeping strictly involves recording transactions, whereas accounting includes summarizing, analyzing, and reporting them.
- C) Accounting is only done by external auditors, while book-keeping is done internally.
- D) There is no practical difference between the two terms.
Show answer & explanation
Answer: B) Book-keeping strictly involves recording transactions, whereas accounting includes summarizing, analyzing, and reporting them.
Book-keeping is limited to the mechanical recording of financial data. Accounting is a wider discipline that involves interpreting, summarizing, and presenting that data in financial statements.
Question 63
In accounting terminology, what is the formula to calculate the 'Net Assets' of a business?
- A) Total Assets + Total Liabilities
- B) Current Assets - Current Liabilities
- C) Total Assets - Total Liabilities
- D) Fixed Assets + Current Assets
Show answer & explanation
Answer: C) Total Assets - Total Liabilities
Net Assets are calculated by deducting Total Liabilities from Total Assets, which mathematically equates to the Owner's Equity.
Question 64
Which of the following correctly represents a valid rearrangement of the fundamental accounting equation?
- A) Capital = Assets + Liabilities
- B) Assets = Capital - Liabilities
- C) Liabilities = Capital - Assets
- D) Capital = Assets - Liabilities
Show answer & explanation
Answer: D) Capital = Assets - Liabilities
The basic accounting equation is Assets = Liabilities + Capital. By rearranging it algebraically, Capital (Equity) equals Assets minus Liabilities.
Question 65
According to the conceptual framework, a liability is best defined as:
- A) A future obligation resulting from expected future events.
- B) An expense paid in advance to a credit supplier.
- C) A present obligation of the entity arising from past events, expected to result in an outflow of resources.
- D) A resource controlled by the business that decreases equity.
Show answer & explanation
Answer: C) A present obligation of the entity arising from past events, expected to result in an outflow of resources.
The formal definition of a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits.
Question 66
Mr. Zafar, the owner of a retail business, withdrew Rs. 20,000 from the business cash till to pay for his personal vacation. The requirement to record this as 'Drawings' instead of a business expense is based on the:
- A) Materiality concept
- B) Prudence concept
- C) Business entity concept
- D) Accrual concept
Show answer & explanation
Answer: C) Business entity concept
The business entity concept dictates that the business and its owner are entirely separate entities for accounting purposes, so personal withdrawals cannot be treated as business expenses.
Question 67
A company decides to use the straight-line method for depreciation every year rather than switching methods randomly. This practice strictly adheres to which accounting concept?
- A) Prudence concept
- B) Consistency concept
- C) Matching concept
- D) Realization concept
Show answer & explanation
Answer: B) Consistency concept
The consistency concept requires that an entity applies the same accounting policies and methods from one period to the next to allow for accurate comparability over time.
Question 68
Which accounting principle ensures that events like employee morale or the operational skill of a manager are entirely ignored in the financial records?
- A) Money measurement concept
- B) Historical cost concept
- C) Going concern concept
- D) Materiality concept
Show answer & explanation
Answer: A) Money measurement concept
The money measurement concept dictates that only transactions and events capable of being accurately expressed in monetary terms are recorded in the financial books.
Question 69
The 'Historical Cost' concept implies that non-current assets are initially recorded in the accounting records at:
- A) Their estimated replacement cost in the future.
- B) The actual cash equivalent amount paid to acquire them.
- C) Their current fair market value.
- D) Their net realizable value upon liquidation.
Show answer & explanation
Answer: B) The actual cash equivalent amount paid to acquire them.
The historical cost concept requires that assets are recorded at their original purchase price (the actual cost incurred to acquire them).
Question 70
The 'Prudence concept' in accounting specifically demands caution when making estimates. Therefore, accountants must ensure that they do NOT:
- A) Overstate liabilities and understate assets.
- B) Understate expenses and overstate liabilities.
- C) Overstate assets and overstate income.
- D) Understate income and overstate expenses.
Show answer & explanation
Answer: C) Overstate assets and overstate income.
The prudence concept requires a cautious approach, specifically ensuring that assets and income are not overstated, and liabilities and expenses are not understated.
Question 71
According to the core principles of accounting, the 'Matching Concept' requires a business to match:
- A) Current assets with current liabilities.
- B) Income recognized in a period with the expenses incurred to generate it.
- C) Total capital with the total reserves.
- D) Long-term debt with non-current assets.
Show answer & explanation
Answer: B) Income recognized in a period with the expenses incurred to generate it.
The matching concept determines that expenses related to generating specific revenue must be matched and reported in the exact same period when that revenue is recognized.
Question 72
If 'Crest Furniture' issues a cheque of Rs. 50,000 to fully settle a balance owed to a timber supplier, what is the immediate impact on the total assets of the business?
- A) Total assets will increase.
- B) Total assets will decrease.
- C) Total assets will remain unchanged.
- D) Only equity will decrease.
Show answer & explanation
Answer: B) Total assets will decrease.
Paying a supplier via cheque reduces the business's bank balance, causing an immediate decrease in total assets. It simultaneously decreases total liabilities.
Question 73
'Sunrise Manufacturing' incurred two costs: (1) Rs. 50,000 on an engine overhaul that increased a machine's production output by 15%, and (2) Rs. 10,000 on routine repairs for a broken factory window. How are these classified?
- A) Both are Capital expenditures.
- B) Both are Revenue expenditures.
- C) (1) is Revenue expenditure, (2) is Capital expenditure.
- D) (1) is Capital expenditure, (2) is Revenue expenditure.
Show answer & explanation
Answer: D) (1) is Capital expenditure, (2) is Revenue expenditure.
An overhaul that enhances capacity or efficiency beyond original estimates is a capital expenditure. Routine maintenance like window repairs is a revenue expenditure.
Question 74
According to the conceptual framework, 'Income' arises during an accounting period from an increase in assets or a decrease in a liability that directly results in:
- A) An increase in equity, strictly from owner contributions.
- B) An increase in equity, other than contributions from the owner.
- C) A decrease in equity, including owner distributions.
- D) An overall decrease in non-current assets.
Show answer & explanation
Answer: B) An increase in equity, other than contributions from the owner.
Income is defined as an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets, or decreases of liabilities, that result in an increase in equity (other than those relating to owner contributions).
Question 75
Based on the dual-aspect concept, if a transaction results in a decrease in an asset, which of the following might be the corresponding effect to keep the equation balanced?
- A) An increase in another asset or an increase in equity.
- B) A decrease in a liability or a decrease in equity (e.g., an expense).
- C) An increase in a liability or an increase in income.
- D) An increase in another asset or a decrease in a liability.
Show answer & explanation
Answer: B) A decrease in a liability or a decrease in equity (e.g., an expense).
A decrease in an asset must be balanced by either an increase in another asset, a decrease in a liability, or a decrease in equity (such as recognizing an expense).
Question 76
'Omega Corp' records a transaction that debits a consulting expense for Rs. 100,000 and credits accounts payable for Rs. 100,000. What is the impact on the financial elements?
- A) Increase in an asset, decrease in owner's equity.
- B) Decrease in a liability, increase in owner's equity.
- C) Increase in a liability, decrease in owner's equity.
- D) Increase in a liability, increase in an asset.
Show answer & explanation
Answer: C) Increase in a liability, decrease in owner's equity.
Crediting accounts payable increases the liability. Debiting an expense ultimately reduces net profit, which consequently decreases the owner's equity.
Question 77
Which of the following statements provides the most accurate definition of a 'Current Asset'?
- A) An asset purchased specifically for long-term use in the business operations.
- B) An asset that is expected to be realized in cash, sold, or consumed within one year or the normal operating cycle.
- C) A physical item that cannot be easily moved from the premises.
- D) The residual interest in the business owned by the proprietor.
Show answer & explanation
Answer: B) An asset that is expected to be realized in cash, sold, or consumed within one year or the normal operating cycle.
Current assets are those economic resources expected to provide short-term benefits, usually being realized, sold, or consumed within 12 months or a single normal operating cycle.
Question 78
Which of the following items found in a trial balance would definitely be classified as a 'Non-Current Liability' in the statement of financial position?
- A) A short-term bank overdraft facility.
- B) Trade payables owed to inventory suppliers.
- C) Accrued utility expenses for the last quarter.
- D) A bank loan that is fully repayable in five years.
Show answer & explanation
Answer: D) A bank loan that is fully repayable in five years.
Obligations that are not expected to be settled within 12 months of the reporting date are classified as non-current liabilities. A 5-year bank loan fits this definition perfectly.
Question 79
During the year, 'Neon Retailers' recorded gross sales of Rs. 850,000. Customers returned damaged goods worth Rs. 25,000, and the business allowed early settlement discounts of Rs. 15,000. What is the value of 'Net Sales'?
- A) Rs. 850,000
- B) Rs. 810,000
- C) Rs. 825,000
- D) Rs. 840,000
Show answer & explanation
Answer: B) Rs. 810,000
Net sales are calculated as Gross Sales minus Sales Returns minus Discounts Allowed. Rs. 850,000 - Rs. 25,000 - Rs. 15,000 = Rs. 810,000.
Question 80
Consider the following balances: Trade Creditors Rs. 40,000; Bank Overdraft Rs. 25,000; Bills Payable Rs. 15,000; Long-term Bank Loan Rs. 100,000. What is the total value of current liabilities?
- A) Rs. 180,000
- B) Rs. 65,000
- C) Rs. 80,000
- D) Rs. 40,000
Show answer & explanation
Answer: C) Rs. 80,000
Current liabilities include short-term obligations. Creditors (40k) + Bank Overdraft (25k) + Bills Payable (15k) = Rs. 80,000. The long-term loan is a non-current liability.
Question 81
If 'Dynamic Electronics' sells a batch of laptops to a walk-in customer for immediate physical cash, what is the correct double-entry to record this transaction?
- A) Debit Trade Receivables, Credit Sales
- B) Debit Cash, Credit Trade Receivables
- C) Debit Sales, Credit Cash
- D) Debit Cash, Credit Sales
Show answer & explanation
Answer: D) Debit Cash, Credit Sales
A cash sale increases the cash asset (Debit Cash) and increases the revenue generated (Credit Sales).
Question 82
Which of the following transactions undertaken by a manufacturing company is a clear example of 'Revenue Expenditure'?
- A) Purchasing a new heavy-duty forklift for the warehouse.
- B) Paying the monthly wages of the factory floor staff.
- C) Building an extension to the existing office premises.
- D) Paying legal fees for acquiring the title deeds to a new plot of land.
Show answer & explanation
Answer: B) Paying the monthly wages of the factory floor staff.
Revenue expenditures are routine, day-to-day operating costs that do not result in the creation of a long-term asset. Paying staff wages is a classic example.
Question 83
Commercial banks and other long-term lenders analyze a company's financial statements primarily to assess which specific factor?
- A) The exact marketing strategies employed by management.
- B) The continuing ability of the borrower to pay periodic interest and repay the principal sum at maturity.
- C) The daily attendance and operational efficiency of the workforce.
- D) The tax deductions claimed by the company's shareholders.
Show answer & explanation
Answer: B) The continuing ability of the borrower to pay periodic interest and repay the principal sum at maturity.
Lenders (like banks) use financial statements to evaluate credit risk, ensuring the entity is financially stable enough to service its debt obligations (interest and principal).
Question 84
The owner of 'Style Boutiques' pays her personal home electricity bill using her own personal cash from her private wallet. How should this event be treated in the accounting records of 'Style Boutiques'?
- A) It should be recorded as a business expense.
- B) It should be recorded as Drawings.
- C) It is not a business transaction and should be completely ignored in the business books.
- D) It should be recorded as an increase in capital.
Show answer & explanation
Answer: C) It is not a business transaction and should be completely ignored in the business books.
Since the owner paid a personal expense using personal funds, the business entity itself is completely unaffected. Therefore, it is not a business transaction and no entry is made in the business ledgers.
Question 85
In financial analysis, the term 'Net Current Assets' (often referred to as Working Capital) is calculated by which of the following formulas?
- A) Total Assets - Total Liabilities
- B) Non-Current Assets + Current Assets
- C) Current Assets - Current Liabilities
- D) Current Liabilities - Current Assets
Show answer & explanation
Answer: C) Current Assets - Current Liabilities
Net current assets represent the short-term liquidity of a business, calculated by subtracting total current liabilities from total current assets.
Question 86
'Pioneer Pharma' holds an exclusive patent for a new medical drug, granting them legal rights for 15 years. How is this patent classified in the statement of financial position?
- A) Current Asset
- B) Intangible Non-Current Asset
- C) Tangible Non-Current Asset
- D) Non-Current Liability
Show answer & explanation
Answer: B) Intangible Non-Current Asset
A patent is an economic resource providing long-term benefits (over 1 year) but lacks physical substance, making it an intangible non-current asset.
Question 87
At the start of the year, Mr. Tariq's capital was Rs. 200,000. During the year, the business made a net profit of Rs. 60,000, and Mr. Tariq withdrew Rs. 15,000 for personal use. What is the closing capital balance?
- A) Rs. 245,000
- B) Rs. 260,000
- C) Rs. 275,000
- D) Rs. 185,000
Show answer & explanation
Answer: A) Rs. 245,000
Closing Capital is calculated as Opening Capital (200k) + Net Profit (60k) - Drawings (15k) = Rs. 245,000.
Question 88
A business occasionally sublets an unused portion of its warehouse to a neighboring company. How should the rent received from this tenant be classified?
- A) Capital Receipt
- B) Revenue Receipt
- C) Capital Expenditure
- D) Liability
Show answer & explanation
Answer: B) Revenue Receipt
Rental income generated from the incidental use of business properties is treated as a routine operating inflow, which classifies it as a revenue receipt (other income).
Question 89
If a business undertakes a transaction described as 'Goods purchased on cash', how is this fundamentally classified?
- A) A complex transaction
- B) A non-financial event
- C) A capital receipt
- D) A simple transaction
Show answer & explanation
Answer: D) A simple transaction
Purchasing goods for immediate cash settlement is a routine, straightforward exchange with immediate financial settlement, making it a classic example of a simple transaction.
Question 90
Which of the following sets of accounting entries or actions will invariably result in a direct decrease in the owner's equity?
- A) Making a cash sale to a customer.
- B) Repaying a bank loan using the business bank account.
- C) The business paying routine operating expenses or the owner taking drawings.
- D) Purchasing inventory on credit from a supplier.
Show answer & explanation
Answer: C) The business paying routine operating expenses or the owner taking drawings.
Expenses reduce the net profit, which in turn reduces equity. Distributions to the owner (drawings) also directly reduce the residual equity held by the proprietor.
Question 91
The accounting concept that assures users that different knowledgeable and independent observers (such as external auditors) could reach consensus that a transaction is faithfully represented is known as:
- A) Timeliness
- B) Verifiability
- C) Understandability
- D) Materiality
Show answer & explanation
Answer: B) Verifiability
Verifiability is a qualitative characteristic ensuring that independent observers can verify the financial information, such as an auditor confirming an invoice matches the ledger.
Question 92
Providing financial information to decision-makers in time for it to be capable of influencing their economic decisions defines the qualitative characteristic of:
- A) Comparability
- B) Prudence
- C) Timeliness
- D) Substance over form
Show answer & explanation
Answer: C) Timeliness
Timeliness means having information available to decision-makers early enough so that it remains relevant and capable of influencing their decisions.
Question 93
Under the conceptual framework for financial reporting, what is the exact definition of 'Equity'?
- A) The total sum of all non-current assets held by the entity.
- B) The residual interest in the assets of the entity after deducting all its liabilities.
- C) The present obligation to transfer economic resources.
- D) The gross cash physically injected by the owner at startup.
Show answer & explanation
Answer: B) The residual interest in the assets of the entity after deducting all its liabilities.
Equity is formally defined as the residual interest in the assets of the entity after deducting all its liabilities (Assets - Liabilities = Equity).
Question 94
If the proprietor of 'Fresh Foods' takes home grocery items from the business inventory for a family dinner, what is the correct double entry to record this event?
- A) Debit Sales, Credit Drawings
- B) Debit Inventory, Credit Capital
- C) Debit Drawings, Credit Purchases
- D) Debit Purchases, Credit Drawings
Show answer & explanation
Answer: C) Debit Drawings, Credit Purchases
When an owner withdraws trading inventory for personal use, the business's purchases (or inventory) must be reduced (Credit Purchases), and the owner's drawings must be increased (Debit Drawings).
Question 95
'Nimbus IT Solutions' has an owner's equity balance of Rs. 850,000 and total external liabilities amounting to Rs. 320,000. What is the total value of the business assets?
- A) Rs. 1,170,000
- B) Rs. 530,000
- C) Rs. 850,000
- D) Rs. 320,000
Show answer & explanation
Answer: A) Rs. 1,170,000
Using the accounting equation (Total Assets = Equity + Liabilities), the total assets equal Rs. 850,000 + Rs. 320,000 = Rs. 1,170,000.
Question 96
When a business entity utilizes a 'Bank Overdraft' facility, allowing its checking account to drop into a negative balance, how is this negative balance classified in the financial statements?
- A) Non-Current Asset
- B) Current Asset
- C) Non-Current Liability
- D) Current Liability
Show answer & explanation
Answer: D) Current Liability
A bank overdraft represents short-term money borrowed from the bank that is repayable on demand, making it a current liability.
Question 97
When a credit customer returns damaged goods to 'Nova Electronics', it results in a 'Sales Return' (Return Inwards). What are the fundamental double-entry effects of this transaction?
- A) Increase in income (Credit), Increase in asset (Debit)
- B) Decrease in income (Debit), Decrease in asset (Credit)
- C) Decrease in expense (Credit), Decrease in liability (Debit)
- D) Increase in expense (Debit), Increase in liability (Credit)
Show answer & explanation
Answer: B) Decrease in income (Debit), Decrease in asset (Credit)
A sales return reduces the revenue generated (Decrease income -> Debit) and simultaneously reduces the amount owed by the customer (Decrease trade receivables asset -> Credit).
Question 98
When a business pays routine operating expenses using physical cash, which elements of the fundamental accounting equation are directly decreased?
- A) Assets and Liabilities
- B) Liabilities and Capital
- C) Assets and Capital (Equity)
- D) Only Assets decrease
Show answer & explanation
Answer: C) Assets and Capital (Equity)
Paying an expense with cash decreases the cash balance (an asset). Because expenses reduce net profit, they ultimately cause a corresponding decrease in the owner's capital (equity).
Question 99
An expense that has been incurred by the business during the current period but remains entirely unpaid at the statement of financial position date is classified as a:
- A) Current Asset
- B) Current Liability
- C) Non-Current Liability
- D) Revenue Receipt
Show answer & explanation
Answer: B) Current Liability
Unpaid or 'accrued' expenses represent short-term obligations to pay suppliers or service providers within the next operating cycle, making them current liabilities.
Question 100
If 'Falcon Distributors' receives a cheque of Rs. 40,000 from a credit customer settling their account, what is the net impact on the 'Total Assets' figure of the business?
- A) Total assets increase by Rs. 40,000
- B) Total assets decrease by Rs. 40,000
- C) Total assets remain completely unchanged
- D) Only liabilities decrease
Show answer & explanation
Answer: C) Total assets remain completely unchanged
The receipt of a cheque increases the bank balance (an asset) by 40,000 but simultaneously decreases trade receivables (another asset) by 40,000. The net effect on total assets is zero.