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

Which of the following items is not taken into account when computing current ratio?

  1. Sundry Creditors.

  2. Sundry Debtors.

  3. Bank Overdraft.

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

Current ratio = Current assets/ Current liabilities
Current assets include inventories, sundry debtors, cash and bank balances,receivables, loans and advances, disposable investments etc.
Current liabilities include creditors, short term loans, bank overdraft, cash credit, provisions, outstanding expenses etc.
Furniture is a fixed asset and it is not included in current assets. Hence while calculating the current ratio furniture is not taken into account.                  
Multiple choice elements of accounts ratio analysis liquidity ratios accounting ratio's accounting ratios

Purchase of inventory on credit will cause the quick ratio to               .

  1. increase

  2. decrease

  3. remain unchanged

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

Quick Ratio = [Current assets minus Inventory] / Current liabilities

Let Current assets = $Rs. 100000$, Inventory = $Rs. 20000$ and Current liabilities = $Rs. 40000$
 So Quick Ratio = [$100000-20000] / 40000$ = $2 : 1$
Now let inventory purchased on credit be $Rs. 20000$, so revised Inventory = $Rs. 60000$ and Current liabilities = $Rs. 60000$
Revised Quick Ratio =[$100000-60000] / 60000$ = $2 : 3$
So , Purchase of inventory on credit will cause the quick ratio to decrease.

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

The immediate solvency ratio is                 .

  1. quick ratio

  2. current ratio

  3. stock turnover ratio

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

Quick Ratio = [Current Assets- Inventory] / [Current liabilities - Bank Overdraft and Cash credit]

While calculating quick ratio we reduce the amount of inventory as it is less liquid than the other current assets. The reason to reduce the amount of bank overdraft and cash credit is that mostly these are secured against inventory. So quick ratio gives us an immediate solvency ratio and is a much more conservative ratio than current ratio.

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

Current ratio is increased by :
1) Issue of redeemable debentures.
2) Selling of old machine for cash.
3) Converting debentures into equity capital.
4) Cash received from debtors.

  1. 1, 2 and 4

  2. 3 and 4

  3. 1 and 2

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

Current ratio = Current assets/ Current liabilities

  1. When Redeemable debentures are issued, long term liabilities and the current assets increase,while  the current liabilities remain constant so  the current ratio would increase.
  2. When old machine is sold for cash, fixed assets would decrease and the current assets would increase, while  the current liabilities remain constant so  the current ratio would increase.
  3. When debentures are converted into equity capital there would be no changes in the current assets and the current liabilities and ultimately no change in the current ratio.
  4. When cash is received from debtors there would be no net changes on the current assets as the cash balance would increase and the debtors balance would decrease by the same amount and hence there would no change in the current ratio.

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

Collection of sundry debtors would _______________.

  1. Increase current ratio

  2. Decrease current ratio

  3. Have no effect on current ratio

  4. Increase debtors turnover
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Current ratio measures the liquidity of the firm and also checks the ability of an organisation to repay to current debts. The ratio is calculated by comparing the current assets with current liabilities. 

Collection of sundry debtors would increase cash inflow and reduce the amount of debtors and hence there is nil affect or say no change in the Current assets. Thereby, having no effect on the current ratio.  

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

To test the liquidity of a concern, which of the following ratios are useful?
I. Acid test ratio
II. Capital turnover ratio
III. Bad debts to sales ratio
IV. Inventory turnover ratio
Select the correct answer using the codes given.

  1. I and III

  2. I and IV

  3. II and IV

  4. II and III
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The ability of the business to pay its stakeholders when it is due is known as liquidity. And the ratios used to calculate are known as liquidity ratios and are essentially short term in nature. The following are the type of liquidity ratios:

  • Current ratio
  • Quick ratio or Acid test ratio
  • Cash Ratio or Absolute liquidity ratio
  • Net working capital ratio ( This can be further segregated into Inventory turnover ratio, Debtors turnover ratio and Creditors turnover ratio. So these $3$ ratios  can also be interpreted as liquidity ratios).

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 book keeping and accountancy adjustments in preparation of financial statements manager's commission on net profit preparation of final accounts preparation of financial statements

The capital of a sole trader would change as a result of ____________________.

  1. A creditor being paid his account by cheque.

  2. Raw materials being purchased on credit.

  3. Fixed asset being purchased on credit.

  4. Wages being paid in cash.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Wages paid in cash is an expense that reduces the net profit, which in turn reduces the owner's capital. The other options involve asset or liability changes that do not affect capital directly.

Multiple choice elements of book keeping and accountancy adjustments in preparation of financial statements manager's commission on net profit preparation of final accounts preparation of financial statements

Provision for discount on debtors shall be made on ____________________.

  1. Book debts before incurring bad debt and before providing for bad debt

  2. Book debts after incurring bad debt and after providing for bad debt

  3. Book debts before incurring bad debt and after providing for bad debt

  4. Book debts after incurring bad debt and before providing for bad debt
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Provision for discount on debtors is calculated on the amount expected to be collected from debtors, which is after accounting for bad debts and the provision for bad debts.

Multiple choice elements of book keeping and accountancy adjustments in preparation of financial statements manager's commission on net profit preparation of final accounts preparation of financial statements

The provision for discount on debtors is often provided in keeping with the concept of _______________.

  1. Conservatism

  2. Going Concern

  3. Materiality

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

Conservatism:
This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule 'anticipate no profit but provide for all possible losses'. Examples Making provisions for Bad Debts, Making General Reserve, Valuing the stock at lower of cost or market value etc.

Multiple choice elements of book keeping and accountancy adjustments in preparation of financial statements manager's commission on net profit preparation of final accounts preparation of financial statements

Making Provision for Discount on Debtors is an example of __________.

  1. Increase in Asset & Owner's Liability

  2. Decrease in Asset & Owner's Liability

  3. Increase in Liability & Owner's Liability

  4. Decrease in Liability & Increase in Owner's Liability

  5. Increase in Liability & Decrease in Owner's Liability
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

A provision for discount on debtors reduces the asset (debtors) and reduces owner's equity (as it is an expense).

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

When the required rate of return is equal to the coupon rate, value of the redeemable bond is equal to its _____________.

  1. Market value

  2. Face value

  3. Present value of the stream of interest inflows

  4. Average of par values and maturity value

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

When the required rate of return (market interest rate) equals the coupon rate of a bond, the bond is priced at par, meaning its value equals its face value.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

The essential features of a debenture includes __________.

  1. It is certificate of acknowledgement of debt

  2. It is issued under a common seal

  3. It is a part of long term borrowing

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

A debenture is a formal document acknowledging a debt, typically issued under a company seal, and represents a form of long-term borrowing.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

Which of the following statements is false?

  1. A company can issue convertible debentures.

  2. Debentures cannot be secured.

  3. A company can issue redeemable debentures.

  4. Debentures have no right to participate in profits over and above their fixed interest.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Debentures can indeed be secured (by assets) or unsecured. Therefore, the statement that 'Debentures cannot be secured' is false.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

Which of the following is true with regard to 10% Debentures issued at a discount of 20%?

  1. The carrying amount of debentures gets reduced each year at a rate of 20%.

  2. Issue price and the carrying amount of debentures are equal.

  3. At the time of redemption, the debenture holder will be paid the issue price.

  4. The face value and the carrying amount of debentures are equal.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The face value of a debenture represents the principal amount the company is obligated to repay. The carrying amount is the book value, which remains equal to the face value regardless of the issue price, as the discount is treated as a separate deferred charge.