Q.1 Which of the following represents the accounting equation?
Assets = Liabilities + Equity
Assets = Revenue + Expenses
Liabilities = Assets + Equity
Equity = Assets + Revenue
Explanation - The basic accounting equation is Assets = Liabilities + Equity, showing that a company's resources are financed by debts and owner's capital.
Correct answer is: Assets = Liabilities + Equity
Q.2 What is the primary purpose of a trial balance?
To prepare the balance sheet
To check the accuracy of ledger accounts
To calculate net profit
To record transactions
Explanation - A trial balance is prepared to ensure that total debits equal total credits, helping detect errors in ledger postings.
Correct answer is: To check the accuracy of ledger accounts
Q.3 Which method of depreciation is based on the asset's usage?
Straight-line method
Declining balance method
Units of production method
Sum-of-the-years-digits method
Explanation - Units of production depreciation charges expenses based on the actual usage or output of the asset, unlike other methods which use time.
Correct answer is: Units of production method
Q.4 In financial accounting, accrual basis means:
Revenue and expenses are recognized when cash is received or paid
Revenue is recognized when earned, and expenses when incurred
Only expenses are recorded when paid
Revenue is recognized at the year-end
Explanation - Accrual accounting records income and expenses when they are earned or incurred, regardless of cash flow.
Correct answer is: Revenue is recognized when earned, and expenses when incurred
Q.5 Which financial statement shows a company’s financial position at a particular date?
Income Statement
Balance Sheet
Cash Flow Statement
Statement of Retained Earnings
Explanation - The balance sheet provides a snapshot of assets, liabilities, and equity at a specific point in time.
Correct answer is: Balance Sheet
Q.6 What is the main objective of cost accounting?
To prepare financial statements
To control costs and assist in decision-making
To comply with taxation rules
To maintain cash flow
Explanation - Cost accounting helps management analyze costs, control expenditures, and make informed business decisions.
Correct answer is: To control costs and assist in decision-making
Q.7 Which of the following is considered a current asset?
Building
Machinery
Inventory
Patents
Explanation - Current assets are assets expected to be converted into cash within a year. Inventory is a classic example.
Correct answer is: Inventory
Q.8 What is goodwill in accounting?
Tangible asset
Intangible asset
Liability
Equity investment
Explanation - Goodwill arises when a company is purchased for more than its fair value of assets and liabilities, representing brand value, reputation, and other intangibles.
Correct answer is: Intangible asset
Q.9 Which ratio indicates a company’s ability to meet short-term obligations?
Debt-to-Equity Ratio
Current Ratio
Return on Assets
Gross Profit Margin
Explanation - Current ratio = Current Assets / Current Liabilities; it measures liquidity and short-term financial health.
Correct answer is: Current Ratio
Q.10 Double-entry bookkeeping requires that each transaction:
Affects only one account
Is recorded twice in cash accounts
Has equal debit and credit entries
Is recorded in the trial balance only
Explanation - In double-entry bookkeeping, every transaction impacts at least two accounts to maintain the accounting equation balance.
Correct answer is: Has equal debit and credit entries
Q.11 Which of the following is NOT an expense for a company?
Salaries paid
Rent paid
Purchase of equipment
Utility bills
Explanation - Purchasing equipment is a capital expenditure, not an operational expense. Expenses are costs incurred to generate revenue.
Correct answer is: Purchase of equipment
Q.12 Which accounting standard deals with revenue recognition?
AS 1
AS 9
AS 2
AS 10
Explanation - AS 9 (Accounting Standard 9) specifies the accounting treatment of revenue from the sale of goods, rendering of services, and interest/dividend income.
Correct answer is: AS 9
Q.13 FIFO and LIFO are methods used for:
Depreciation
Inventory valuation
Asset revaluation
Revenue recognition
Explanation - FIFO (First In First Out) and LIFO (Last In First Out) are inventory costing methods to calculate cost of goods sold and ending inventory.
Correct answer is: Inventory valuation
Q.14 Which of the following is a liquidity ratio?
Current Ratio
Debt-to-Equity Ratio
Gross Profit Margin
Inventory Turnover
Explanation - Liquidity ratios measure a company's ability to pay off short-term obligations. Current ratio is the most common liquidity ratio.
Correct answer is: Current Ratio
Q.15 Which accounting principle assumes that a business will continue to operate indefinitely?
Matching Principle
Going Concern Principle
Accrual Principle
Revenue Recognition Principle
Explanation - The going concern principle assumes that a business will not liquidate in the foreseeable future, allowing assets and liabilities to be valued accordingly.
Correct answer is: Going Concern Principle
Q.16 Deferred revenue represents:
Revenue earned but not received
Cash received for unearned services
Profit earned in advance
Revenue lost due to bad debts
Explanation - Deferred revenue is money received for goods or services not yet delivered. It is recorded as a liability until earned.
Correct answer is: Cash received for unearned services
Q.17 Which cost is irrelevant for decision-making?
Sunk cost
Incremental cost
Opportunity cost
Marginal cost
Explanation - Sunk costs are past expenditures that cannot be recovered and should not affect current decision-making.
Correct answer is: Sunk cost
Q.18 Which of the following represents a capital structure decision?
Issuing bonds or equity
Setting sales prices
Managing inventory levels
Recording depreciation
Explanation - Capital structure decisions involve determining the proportion of debt and equity financing for a company.
Correct answer is: Issuing bonds or equity
Q.19 Operating leverage measures:
Sensitivity of net income to sales changes
Liquidity position
Market share
Debt repayment capacity
Explanation - Operating leverage shows how a change in sales affects operating profit due to the presence of fixed costs.
Correct answer is: Sensitivity of net income to sales changes
Q.20 Which is a non-cash expense?
Rent expense
Depreciation
Utility bills
Salaries
Explanation - Depreciation is a non-cash accounting expense that spreads the cost of an asset over its useful life.
Correct answer is: Depreciation
Q.21 What does EBIT stand for?
Earnings Before Interest and Taxes
Earnings Before Income and Transfers
Equity Based Income Total
Earnings Before Investment and Trade
Explanation - EBIT is a measure of a firm's profitability that excludes interest and income tax expenses.
Correct answer is: Earnings Before Interest and Taxes
Q.22 Which of the following is classified as a contingent liability?
Bank loan
Pending lawsuit
Accounts payable
Accrued expenses
Explanation - Contingent liabilities depend on the outcome of a future event, like the potential loss from a pending lawsuit.
Correct answer is: Pending lawsuit
Q.23 Net working capital is calculated as:
Current Assets - Current Liabilities
Total Assets - Total Liabilities
Current Liabilities - Current Assets
Equity + Debt
Explanation - Net working capital measures a firm's short-term financial health and liquidity by subtracting current liabilities from current assets.
Correct answer is: Current Assets - Current Liabilities
Q.24 Which of the following is considered an operating activity in cash flow?
Issuing shares
Paying salaries
Buying machinery
Paying dividends
Explanation - Operating activities include the primary revenue-generating activities of a business, such as paying salaries, selling goods, and collecting receivables.
Correct answer is: Paying salaries
Q.25 What does the term 'amortization' refer to in accounting?
Gradual reduction of intangible assets
Gradual repayment of a loan
Charging depreciation on fixed assets
Writing off bad debts
Explanation - Amortization is the systematic write-off of the cost of an intangible asset over its useful life, similar to depreciation for tangible assets.
Correct answer is: Gradual reduction of intangible assets