Banking Financial Awareness · Commerce Accountancy

Credit, Debt, and Finance

1,435 Questions

This topic covers essential concepts of credit, debt, and finance including bankruptcy, debt recovery, and financial acts. These questions are frequently asked in banking and IBPS exams. Test your knowledge of financial terminology and loan classifications.

Debt recovery actsBankruptcy filing proceduresFinancial classificationsMedium term financeCredit loss management

Credit, Debt, and Finance Questions

Multiple choice accountancy provisions and reserves reserves provisions provision and reserves

A decrease in the provision for doubtful debts would result in ______________.

  1. an increase in liabilities

  2. a decrease in working capital

  3. a decrease in net profit

  4. an increase in net profit
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Provision for Doubtful Debts means the expense reported on the income statement or profit and loss A/c. If Provision for Doubtful Debts is the current period expense associated with the losses from normal credit sales, it will appear as an operating expense usually as part of Selling, General and Administrative Expenses (SG&A). If a provision for doubtful debts would decrease then debit balance of profit and loss A/c would decrease and ultimately net profit would increase.

Multiple choice accountancy provisions and reserves reserves provisions provision and reserves

The entry for creating a provision for bad debts is ___________.

  1. debit provision for bad debts a/c and credit debtors a/c

  2. debit debtors a/c and credit provision for bad debts a/c

  3. debit provision for bad debts a/c and credit profit and loss a/c

  4. debit profit and loss a/c and credit provision for bad debts a/c
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

simple reason that out of the credit sales made during the particular year, some debts are likely to become bad in the next year due to non- payments. The correct accounting is to make provision for such likely bad debts every year 

The entry for creating a provision is :
  profit and loss A/C Dr.
  To Provision for Doubtful debts.

Multiple choice accountancy provisions and reserves reserves provisions provision and reserves

While preparing final account, to make provision for discount on debtors. which of the following adjustment entry will be passed?

Provision for Discount on Debtors A/cTo Debtors A/c Dr.
Profit & Loss A/cTo Provision for Discount on Debtors A/c Dr.
Provision for Discount on Debtors A/cTo Trading A/c Dr.
Debtors A/cTo provision for Discount on Debtors A/c Dr.

  1. A

  2. B

  3. C

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

To create or increase a provision for discount on debtors, the Profit & Loss account is debited and the Provision for Discount on Debtors account is credited.

Multiple choice accountancy provisions and reserves reserves provisions provision and reserves

Which of the following statement is/are NOT correct?

  1. Provision for bad debts appears as a liability on the balance sheet

  2. The provision for bad debts is owed to the proprietor

  3. Bad debts could be less than the provision for bad debts

  4. Bad debts could exceed the provision for bad debts
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

A provision for bad debts is a contra-asset account, not a liability. It is an estimate of uncollectible accounts and is not owed to the proprietor, making statement B the incorrect one.

Multiple choice accountancy provisions and reserves reserves provisions provision and reserves

Pick the odd one ________.

  1. Reserve for discount on creditors is credited to profit & loss account.

  2. Provision for discount on creditors is always made.

  3. Discount on creditors should be deducted from Sunday creditors in balance sheet.

  4. Both A & C.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Provision for Discount on Creditors. When the business makes prompt payments of its debts, it is bound to receive Discounts from its creditors.  A Provision for such discount is made in the current year itself so that that the discounts thus earned may be credited to the Profit and Loss Account of the current year.

Multiple choice accountancy provisions and reserves reserves provisions provision and reserves

The Provision for discount on debtors is calculated _______________________.

  1. Before deducting additional Bad Debts

  2. Before deducting additional discount

  3. Before deducting provision for doubts from debtors

  4. After deducting provision for doubtful debts from debtors
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The provision for doubtful debts is the estimated amount of bad debt that will arise from accounts receivable that have been issued but not yet collected. Later, when you identify a specific customer invoice that is not going to be paid, eliminate it against the provision for doubtful debts.

In other words, the amount of the provision for discount is calculated after deducting bad debts and provision for doubtful debts from sundry debtors. Suppose, sundry debtors total Rs. 20, 000; provision for doubtful debts is required at 5% and provision for discounts at 2 ½ %.

Multiple choice accountancy provisions and reserves reserves provisions provision and reserves

Give journal entry for:
For creating provision for doubtful debts.

  1. Provision for doubtful debts A/c Dr.

    To Profit and Loss A/c

  2. Profit and Loss A/c Dr.

    To Provision for doubtful debts A/c

  3. Bad debts A/c Dr.

    To Sundry debtors A/c

  4. Profit & Loss A/c Dr.

    To Bad debts A/c
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Provision for doubtful debt is created for the anticipated loss due to non recovery of the debtors amount. It is a charge to the profit & loss account. 

Following journal entry will be passed:

Profit & Loss A/c                                      Dr.
  To Provision for doubtful debts A/c

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

Which of the following liabilities are taken into account for acid test ratio?
(i) Trade creditors
(ii) Bank overdraft
(iii) Cash credit
(iv) Outstanding expenses

  1. i & ii

  2. i & iv

  3. i, ii, iii & iv

  4. ii, iii & iv
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Acid test ratio = quick assets / current liabilities. All current liabilities are considered while calculating acid test ratio.

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

The current ratio is _________________________.

  1. $\cfrac { Current\quad assets }{ Current\quad liabilities } $
  2. $\cfrac { Cash+near\quad cash+debtors }{ Current\quad liabilities } $
  3. $\cfrac { Liquid\quad assets }{ Current\quad liabilities } $
  4. $\cfrac { Current\quad liabilities }{ Current\quad assets } $
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Using the Balance Sheet, the current ratio is calculated by dividing current assets by current liabilities:

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

The appropriate ratio for indicating liquidity crisis is_________.

  1. Operating ratio

  2. Sales turnover ratio

  3. Current ratio

  4. Acid test ratio
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Acid test ratio or Quick ratio = Quick Assets/ Current Liabilities

                                                = [Current Assets minus Inventory]/Current Liabilities
The Quick ratio is a much more conservative measure of short term liquidity than the Current ratio. We reduce the amount of funds held up in inventory  form the current assets ,so that we can get a clear picture of how much fund can we mobilize for payment of dues in case of a cash crunch or a liquidity crisis.

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

Current ratio is chiefly used to assess the                   .

  1. effective utilization of capital

  2. application of debt

  3. liquidity position

  4. levels of inventory piled up in different forms.

  5. prompt payment of long-term liabilities.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Current ratio is chiefly used to assess the liquidity position of a company. Let us look at the following example.


Let Current asset = $Rs.100000$ and Current liability = $Rs. 50000$

Current ratio = Current asset/Current liability
                       = $100000/50000$
                       = $2$
So, if at any given point of time if there is a liquidity crisis then the company has twice the amount of  assets to liquidate and pay off the dues. 

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

Which of the following statement(s) is/are true?

  1. Average collection period evaluates all aspects of credit policy

  2. All other things remaining the same, issue of new shares for cash will improve the current ratio.

  3. Ratio analysis is technique of planning and control

  4. All of the above

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

Issuing new shares for cash increases the cash balance (a current asset), which increases the current ratio, assuming the ratio was previously greater than 1.

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

If a firm has realized its debtors and has paid off its creditors to the same extent then                       .

  1. The current ratio will increase if it was less than 1 previously

  2. The current ratio will decrease if it was more than 1 previously

  3. The current ratio will remain the same if it was equal to 1 previously

  4. All of the above

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

If the firm has realized its debtors and paid-off its creditors to same extent then the current assets will increase and the current liabilities will decrease by the same amount and consequently the current ratio will remain unchanged.

Let Current Asset be $Rs. 500000$ and Current liabilities be $Rs.500000 $
So, Current ratio = Current asset/ Current liabilities

                             =$500000/500000$
                              =$1$
Now, if the amount realized from debtors = $Rs .100000$ and the amount paid off to creditors is $Rs. 100000$ then,
New Current ratio = $[500000-100000]/[500000-100000]$
                                = $1$.