Commerce Accountancy

Accounting Principles and Practice

1,227 Questions

Accounting principles and practice questions cover core concepts like assets, depreciation, financial statements, and ledger adjustments. These topics are essential for commerce students preparing for academic and competitive exams. Regular practice ensures a strong grasp of standard accounting standards and business operations.

Asset depreciationFinancial statement adjustmentsAccounting standardsSingle entry systemCapital expenditure

Accounting Principles and Practice Questions

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

The _____ ratio may indicate the firm is experiencing stock outs and lost sales. 

  1. Average payment period

  2. Inventory turnover

  3. Average collection period

  4. Quick
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The average payment period (APP) is defined as the number of days a company takes to pay off credit purchases. It is calculated as accounts payable/ (total annual purchases/360).  As the average payment period increases, cash should increases as well, but working capital remains the same. APP ratio may indicate the firm is experiencing stock outs and lost sales.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

Low assets turnover may indicate                .

  1. Low assets

  2. High cost of maintenance

  3. Idle assets

  4. Higher sales

  5. Both (B) and (C) above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Net Asset Turnover ratio = Sales/ Net Asset

Asset turnover highlights the amount of assets that the firm used to produce its total sales. Therefore a low asset turnover would indicate that the firm has idle or improperly use assets.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

Sale of inventory on account will cause the inventory turnover ratio to                    .

  1. increase

  2. decrease

  3. remain unchanged

  4. none of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Inventory turnover ratio = Cost of goods sold(COGS) / Average inventory

Let Cost of goods sold be $Rs. 80000$ , Opening inventory = $Rs. 20000$ and Closing Inventory = $Rs.30000$
Average Inventory = [Opening Inventory + Closing Inventory] / 2
                                = $[20000 + 30000] / 2 $
                                 $Rs. 25000$
Inventory turnover ratio = $80000/ 25000$
                                         = $3.2 $ times
If inventory of $Rs. 10000$ is sold on credit then COGS = $Rs. 90000$ and the Closing Inventory = $Rs. 20000$
Revised Average Inventory = $[20000 +20000] /2$
                                               = $Rs. 20000$

Revised Inventory turnover ratio = 90000/2000080000/25000
                                         = 4.53.2 times

So sale of Inventory on account will cause the inventory turnover ratio to Increase.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

Large inventory accumulation is anticipation of price rise in future.

  1. Inventory turnover ratio

  2. Fixed charge coverage ratio

  3. Debt to Equity ratio

  4. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Inventory turnover ratio = Cost of goods sold / Average inventory. Large inventory accumulation in anticipation of price rise means high inventory levels relative to sales, resulting in a low turnover ratio. This indicates goods are being stockpiled rather than sold.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

Borrowing from short term and investing in long term assets indicated by _________________.

  1. Current assets to fixed assets ratio

  2. Current ratio

  3. Fixed assets turnover ratio

  4. Inventory turnover ratio
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The current assets to fixed assets ratio helps analyze the composition of assets. A shift toward short-term financing for long-term investments is often analyzed through asset structure ratios.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

There is deterioration in the management of working capital of XYZ Ltd. What does it refer to?

  1. That the capital employed has reduced

  2. That the profitability has gone up

  3. That debtors collection period has increased

  4. That sales has decreased
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Debtor collection period is the time that it takes to convert balances from account receivables back into cash flow. This can apply to an individual transaction or to the business's overall transaction history for a period of time. The lower the debtor collection period the more efficient is the company in collecting payment from its customers.

Multiple choice elements of accounts dual effect of transactions and types of accounts meaning and classification of business transactions develop the understanding of recording of transactions in journal illustrations on journal entries

In accounting, profit prior to incorporation is treated as _________.

  1. Revenue Reserve

  2. Secret Reserve

  3. Capital Reserve

  4. General Reserve
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A capital reserve is a type of account on a municipality's or company's balance sheet that is reserved for long-term capital investment projects or other large and anticipated expenses that will incurred in the future. 

Profit prior to incorporation is the profit earned or loss suffered during the period before incorporation. It is not legally available for distribution as dividend because a company cannot earn a profit before it comes into existence
Hence, Profit prior to incorporation is treated as Capital Reserve.

Multiple choice elements of accounts dual effect of transactions and types of accounts meaning and classification of business transactions develop the understanding of recording of transactions in journal illustrations on journal entries

The term 'Internal Reconstruction' includes _______________.

  1. Reduction of Share Capital

  2. Variation in Shareholder's rights

  3. Alteration of Share Capital

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

 

Internal reconstruction is a method in which the reconstruction is undertaken without winding up the company and forming a new one. It involves a reduction in the share capital of the company. It also relieves the company from its debts and losses through negotiation with the creditors. Thus, we can say that it is the internal rearrangement of the financial structure of the company.

The various methods of internal reconstruction are:

1. Alteration of Share Capital: The alteration in the share capital can be done either by sub-division and consolidation of shares or by conversion of shares into stock or stock into shares.

2. Variation of Shareholder’s rights: As per Section 47(7) of the Companies Act, 1956 the company can vary the rights of the shareholders with the consent in writing of the holders of three-fourths of the issued and outstanding shares of that class.  It can also do so with the sanction of a resolution passed by a majority of the votes cast at a separate general meeting.

3. Reduction of Share Capital: The Company can reduce share capital by share cancellations or buybacks.

4. Compromise/Arrangement: Under this method, an agreement is made between the company and its members and outside liabilities in case of financial crisis whereby a sacrifice is made by the shareholders, creditors or debenture holders.

 5. Surrender of Shares: In this method, the shareholders are made to surrender their shares so that these can be allotted to debenture holders and creditors so as to reduce their liabilities.

Thus, the correct answer is D.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Capital reserves are normally created out of free of distributable profits.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Capital reserves are those reserves which are not created out of operating profits. Capital reserves refers to the amounts which are not free for distribution by way of dividend.. In case of companies, following are examples of capital reserves :

  • Profit prior to incorporation.
  • Premium on the issue of shares and debentures.
  • Profit on reissue of forfeited shares.
  • Profit on redemption of debentures.
  • Profit on sale of fixed assets.
  • Profit on revaluation of fixed assets.
  • Profit on a sale of  the whole undertaking or a part of it.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

__________ may be defined as a sum set aside out of divisible profits ad retained in order to provide for unexpected or unknown contingencies or loss or to equalize dividends or to strengthen the financial condition of the business.

  1. Provisions

  2. Reserve Fund

  3. Fund

  4. Specific Reserve
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

A reserve fund is a saving account or other highly liquid asset set aside by an individual or business to meet any future costs or financial obligations, especially those arising unexpectedly. 

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Under sinking fund method of depreciation any surplus in sinking fund A/c is transferred to ____________.

  1. Capital Reserve A/c

  2. General Reserve A/c

  3. Reserve Capital A/c

  4. Profit and loss A/c
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Any surplus in Sinking fund account may be transferred to general reserve account. If any deficit, that may be transferred to profit and loss account. The journal entry for this transaction is:

For Profit:

Sinking fund A/c ------Dr.
   To General reserve A/c

For Deficit:

Profit and loss A/c----- Dr. 
   To Sinking fund A/c

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Under sinking fund method of depreciation any deficit in sinking fund A/c is transferred to ____________.

  1. Capital Reserve A/c

  2. General Reserve A/c

  3. Reserve Capital A/c

  4. Profit and loss A/c
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Any surplus in Sinking fund account may be transferred to general reserve account. If any deficit, that may be transferred to profit and loss account. The journal entry for this transaction is:

For Profit:

Sinking fund A/c ------Dr.
   To General reserve A/c

For Deficit:

Profit and loss A/c----- Dr. 
   To Sinking fund A/c

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

When two firms amalgamate, general reserve is transferred to:

  1. New firm's account

  2. Revaluation account

  3. Partner's account

  4. Equal Ratio
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

When two or more partnership firms are amalgamated, the books of old firm are closed and books of new firm are opened.

While closing the books of the old firm :
1. Each firm should prepare a revaluation account relating to its own assets and liabilities and transfer the balance to the partner's capital account in the profit sharing ratio.
2. Entries of raising goodwill should be passed.
3. Transferring reserve to old partners capital account in old ratio.
4. Assets and liabilities not taken over by the new firm should be transferred to the capital accounts of partners in the ratio of their capitals.
5. The new firm should be debited with the difference between the value of assets and liabilities taken over by it; the assets should be credited and the liabilities debited.
6. Partner's capital account should be transferred to the new firm's account.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

A provision is a ___________.

  1. General reserve

  2. Specific reserve

  3. Capital reserve

  4. None of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
Specific reserve.
A Provision is the amount written off or retained by way of providing depreciation, renewals or diminution in the value of assets or retained by way providing for any liability of which the amount cannot be determined with substantial accuracy. In other words, Provision is an amount set aside out of income or profits. It is a retention of profir, made temporily, for a specific purpose. Therefore, provision may be considered as specific reserve.
Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Capital reserve is_______.

  1. created out of revenue profits

  2. created out of capital profits

  3. used for meeting revenue losses

  4. used for manipulating profit and loss
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Reserves which are created out of capital profit are known as capital reserve. Generally these reserves are not available for distribution as dividend among shareholders. Example of such reserves are - Profit prior to incorporation, Profit on forfeiture of shares, etc. In short, all capital profits are regarded as capital reserves.