Commerce Accountancy

Accounting Principles and Practice

1,241 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 book keeping and accountancy adjustments in preparation of financial statements accrued income earned or accrued income need for adjustment, closing stock and outstanding expenses

Unaccrued Interest is an example of __________.

  1. Increase in asset & decrease in owner's liability

  2. Increase in liability & decrease in owner's liability

  3. Decrease in liability & owner's liability

  4. Increase in asset & owner's liability
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Unaccrued interest (interest received in advance) is a liability. Receiving it increases the company's liability and decreases the owner's equity (or represents a future obligation).

Multiple choice book keeping and accountancy adjustments in preparation of financial statements accrued income earned or accrued income need for adjustment, closing stock and outstanding expenses

Accrued Interest is an example of _________.

  1. Increase in asset & decrease in owner's liability

  2. Increase in liability & decrease in owner's liability

  3. Decrease in liability & owner's liability

  4. Increase in asset & owner's liability
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Accrued interest is interest earned but not yet received, which is an asset. Recognizing it increases assets and increases the owner's equity (via income).

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Premium on redemption is a/an  ____________ of a company payable in future.

  1. liability

  2. asset

  3. income

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

If a company agrees to pay a premium upon redemption, that premium represents a future obligation or debt that the company must settle, making it a liability.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Debentures premium cannot be used to ____________.

  1. write off the discount on issue of shares or debentures

  2. write off the premium on redemption of shares or debentures

  3. pay dividends

  4. write off capital loss
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Securities Premium (or Debenture Premium) has restricted uses under the Companies Act. It cannot be used to pay dividends to shareholders.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Capital redemption reserve account is prepared when ___________.

  1. redemption is done out of issue of fresh shares

  2. redemption is done out of profits of the company

  3. redemption is done through company's capital fund

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

The Capital Redemption Reserve (CRR) is created when preference shares are redeemed out of the company's divisible profits, rather than from the proceeds of a fresh issue of shares.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

When the owners debentures are cancelled any profit on cancellation is transferred to __________.

  1. General reserve

  2. Capital reserve

  3. P/L Account

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
When own debenture are purchased by the company from the open market, these can be purchased for two reasons, either for cancellation or for investments. Profit on account of cancellation of debenture is a capital profit and should be transferred to capital reserve account.
Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

State the formula for turnover ratio.

  1. $\dfrac {\text {Current assets}}{\text {Current liabilities}}$
  2. $\dfrac {Sales}{\text {Capital employed}}$
  3. $\dfrac {\text {Fixed assets}}{\text {Long-term funds}}$
  4. $\dfrac {\text {Current assets}}{Sales}$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Turnover ratio is a measurement of the number of times a company's inventory is replaced during a given period of time. It is calculated by dividing cost of goods sold by capital employed during a given period of time. 

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

If the inventory turnover is high, the working capital requirements will be ___________.

  1. High

  2. Low

  3. Equal

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Inventory Turnover = [Cost of goods sold/Sales] / Average inventory.

A high inventory turnover is good from the point of liquidity position and vice versa. If the inventory turnover is high it means that the inventory is being used or sold in a short time, which means that the funds of the company are not being blocked and so the working capital requirements would be low.

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.