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 liquidity ratios accounting ratio's accounting ratios

The excess of current assets over current liabilities is called as ___________.

  1. Net tangible worth

  2. Net worth

  3. Gross working capital

  4. Net working capital
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The formula for calculation of "Net working capital" is as follows:

Net working capital = Total current assets - Total current liabilities
Net working capital is the aggregate amount of all current assets minus current liabilities. It is used to measure the short-term liquidity of a business, and can also be used to obtain a general impression of the ability of a company management to utilize assets in an efficient manner.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

What is the meaning of current ratio of less than one?

  1. Current liabilities < Current assets

  2. Fixed assets > Current assets

  3. Current assets < Current liabilities

  4. Share capital > Current assets
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Current ratio is the measure of liquidity of a company at the certain date. A high current ratio can be signs of problems in managing working capital. When current ratio is low and Current liabilities exceeds current assets, the company may have problems in meeting its short term obligations.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Which of the following is correct?
i.Liquidity ratios measure long term solvency of a concern.
ii.Inventory is a part of current assets.
iii.Rule of thumb for acid test ratio is 1 : 1.
iv.The amount of gross assets is equal to net capital employed.

  1. (i), (ii) and (iv)

  2. (ii), (iii) and (iv)

  3. (i), (ii), (iii) and (iv)

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
  1. The liquidity ratios measure the ability of a concern to pay off its short term obligations.
  2. Inventory is a part of current assets and not liquid assets.
  3. Rule of thumb for acid test ratio is $1:1$
  4. The amount of gross assets minus the current liabilities is equal to net capital employed. 
Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Which of the following transaction change the current ratio?

  1. Purchase of goods for cash

  2. Plant acquire on account

  3. Sold goods on credit

  4. Debentures converted into equity capital
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When plant is acquired on account the fixed asset would increase and there would be increase in the creditors amount, hence the current ratio would decrease. When goods are sold on credit the stock would decrease and the debtors would increase and hence there would be no effect on current ratio.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Formula for current ratio is                   .

  1. Current liabilities/current assets

  2. Current assets/current liabilities

  3. Fixed asset/ fixed liabilities

  4. Fixed liabilities/fixed assets
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Current ratio = Current Assets/Current liabilities

                       = [Inventories + Sundry Debtors + Cash and Bank balances + Receivables +
                          Loans and advances + Disposable Investments etc] /
                          [Creditors + Short term loans + Bank Overdraft + Cash credit+ 
                          Outstanding Expenses+ Provisions etc}

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

 The ability of the business to pay the amount due to stakeholders is calculated by ___________.

  1. Solvency ratios

  2. Activity ratios

  3. Liquidity ratios

  4. Profitability ratios
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Liquidity ratios calculate the ability of the business to pay its due to the stakeholders. Examples of liquidity ratios are Current asset ratio, Quick ratio, Cash ratio and Net working capital ratio

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Which of the following is normally treated as a satisfactory ratio of current assets to current liabilities?

  1. $1 : 1$
  2. $2 : 1$
  3. $3 : 1$
  4. $1 : 2$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The rule of thumb for a satisfactory current ratio is $2 : 1$. Let Current assets be $Rs. 100000$ and the Current liabilities be $Rs. 40000$

Now, Current ratio = Current assets/ Current liabilities
                                = $100000/40000$
                                = $2.5 : 1$ . 
This current ratio is satisfactory as it shows that the current assets available are $2.5$ times the amount of current liabilities.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Cash in hand is the __________asset.

  1. Least liquid

  2. Most liquid

  3. Fixed assets

  4. Intangible asset
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Quick ratio is the ratio of quick (or liquid) asset to current liabilties. It is expressed as:

                       Quick ratio = Quick Asset/Current Liabilities
The quick assets are defined as those assets which are quickly convertible into cash. While calculating quick assets we exclude the closing stock and prepaid expenses from the current assets. Because of exclusion liquid current asset, it is considered better than current ratio as a measure of liquidity position of the business. Cash on hand is the most liquid asset. It is also known as "Acid-Test Ratio".

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Sale of inventory for cash will cause the current ratio to __________.

  1. increase

  2. decrease

  3. remain unchanged

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

Current ratio = Current assets / Current liabilities

When inventory is sold for cash then, the amount of inventory decreases and simultaneously the cash balance increases and there would be no net effect on the current asset figure. And so the current ratio will remain unchanged.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Which of the following transactions will change the current ratio?

  1. Purchase of goods for cash.

  2. Plant acquired on account.

  3. Sold goods on credit.

  4. Debentures converted into equity capital.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
  1. When goods are purchased for cash the stock would increase and the cash balance would decrease and so there would be no effect on the current ratio.
  2. When plant is acquired on account the fixed asset would increase and there would be increase in the creditors amount, hence the current ratio would decrease.
  3. When goods are sold on credit the stock would decrease and the debtors would increase and hence there would be no effect on current ratio.
  4. When debentures are converted into equity capital there would be no changes in current assets and current liabilities  and so no change in current ratio.
Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Current ratio may be increased by                    .

  1. Overstating the current assets

  2. Overstating the current liabilities

  3. Understating current assets

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

Current ratio = Current assets/ current liabilities

So when current assets = $Rs 150000$ and current liabilities = $Rs. 100000$ then,
Current ratio = $100000 / 50000$
                       = $2 : 1$
Now if we overstate the current assets by $Rs. 50000$ then ,
Revised Current ratio = $150000/50000$
                                     = $3: 1 $
So, the current ratio may be increased if we overstate the current assets. 

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

For calculation of current ratio which of the following is relevant ?

  1. Current assets and Fixed liabilities.

  2. Current assets and Current liabilities.

  3. Fixed asset and Fixed liabilities.

  4. Fixed liabilities and Current liabilities.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It compares a firm's current assets to its current liabilities, and is expressed as follows: The current ratio is an indication of a firm's liquidity.

Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

When current ratio is $2 : 1$, an equal increase in current assets and current liabilities would                .

  1. Increase the current ratio

  2. Decrease the current ratio

  3. No change in current ratio

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

When the current ratio is $2 : 1$ , an equal increase in current assets and current liabilities would decrease the current ratio. Let us understand this through an example;

Current Assets = $Rs. 100000$ and Current Liabilities = $Rs. 50000$
Current ratio = Current assets/ Current liabilities
                       = $100000/50000$
                       = $2 : 1 $ 
Now let us increase the current assets and current liabilities by $Rs. 50000$ and calculate the new current ratio ;
 Current ratio = $150000/100000$
                        = $1.5 : 1$.