Banking Financial Awareness · Commerce Accountancy

Credit, Debt, and Finance

1,382 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

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 is an expense that reduces net profit. Decreasing this provision reduces the expense, thereby increasing net profit. It's important to note that this is an accounting estimate, not an actual cash transaction.

Multiple choice

Provision for doubtful debts is

  1. debited to Sundry Debtors Account

  2. credited to Sundry Debtors Account

  3. debited to Bad Debts Account

  4. debited to Profit & Loss Account
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Provision for doubtful debts is created by debiting the Profit & Loss Account, which reduces the net profit. It is not directly debited to the Sundry Debtors Account or Bad Debts Account. The provision is shown as a deduction from debtors in the balance sheet.

Multiple choice

Under the liquidity approach

  1. the most liquid assets are presented at the bottom of the balance sheet

  2. the least urgent payments are presented at the top of the balance sheet

  3. the most urgent payments are presented at the bottom of the balance sheet

  4. the least liquid assets are presented at the top of the balance sheet
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The liquidity approach presents assets in order of decreasing liquidity - most liquid at the bottom (cash), least liquid at the top (fixed assets like land and buildings). This ordering helps assess a company's ability to meet short-term obligations quickly. Option D correctly states this principle.

Multiple choice

Which of the following is non-current liability?

  1. Long term loans

  2. Current liabilities

  3. Bank overdraft

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

Non-current liabilities are obligations due after more than 12 months. Long-term loans (debentures, term loans) are typically payable over several years, making them non-current. Options B, C, and D are all current liabilities due within 12 months. Option A is correct.

Multiple choice

Interest received in advance account is

  1. personal A/c

  2. real A/c

  3. nominal A/c

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

Interest received in advance represents an obligation to provide service or return the amount. In traditional accountancy classification, this is a Personal Account because it represents the person who paid in advance. However, its nature is that of a liability.

Multiple choice

Which account is the odd one out?

  1. Provision for doubtful debts A/c

  2. Provision for discount on debtors A/c

  3. Reserve for discount creditors A/c

  4. Provision for depreciation account
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Provision for doubtful debts, Provision for discount on debtors, and Reserve for discount on creditors are all contra asset/liability accounts related to debtors and creditors. Provision for depreciation is the odd one as it relates to fixed assets, not debtors/creditors.

Multiple choice

What according to the passage is the crux of the matter?

Directions: Read the following passage and answer the question.
Without getting carried away by the wide-eyed protestations of innocence by the modern day Shylocks, there is increasingly lesser doubt that banks have been complicit in precipitating the present imbroglio and what’s more, the trail of evidence points towards sins not only of omission, which can be perhaps taken lightly, but explicit sins of commission which cannot be taken lightly. There is also perhaps an increasingly evident undercurrent of resentment against the money lenders within large sections of the population because even though the banks have almost certainly planted the nation head first in this bog of fiscal quagmire, so far they have been appearing to be getting away almost scot-free for their misdemeanors.
That could change pretty soon if the picture emerging from the darkness of the shadows of banking, mortgage sellers, buyers and evaluators is true, and, from the looks of it, it seems that the case is pretty water-tight. The regulators have smelt something fishy and have gone in for in-depth investigation and no, this is not the same as the sub-prime mortgage quicksand but a spin-off of the same with deeper legal ramifications. Despicable, as it may seem, banks are well within their rights to lend to sub-prime borrowers and to go in for foreclosure when regulatory obligations are fulfilled. What cooks the goose is the fact that many home mortgage lenders have resold the loans that they had granted to third and fourth parties through a bidding process. The loans are clubbed together in a common document which contains the salient characteristics of each loan. The document is then circulated and the loans are sold to the highest bidder. In the current rip-off, the successful bidders evidently got the loans evaluated during the due diligence period and found that many of the loans sanctioned by the primary lender did not pass muster the benchmark and the guidelines set by the merchant himself and instead of bringing it to the notice of the concerned regulators, they preferred to negotiate for lower purchasing prices with the merchant. The howler was that the secondary buyers did not bring the material information, which could have and would have affected the decision of the investors to park their money in these assets, to the notice of the investors who were buying into these loans and now we have a situation where everyone involved has tried in some manner or the other to keep the next link in the chain in the dark. Here we are, with loans granted without due diligence, being sold to investors who don’t have complete information about the same. Had it been based on pure ethical considerations, it might have slid past with just a rap on the knuckles for the offenders but something’s got to give in here.

  1. Unsecured consumer loans palmed off as secured mortgages.

  2. Housing loans sanctioned without completing due diligence.

  3. Failure of authorities in being vigilant during economic boom.

  4. Collusion of bankers in hoodwinking the system.

  5. Overstepping and breach of ethical protocol.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Correct; the fact that bankers first gave loans that didn't satisfy their guidelines and then neglected to inform subsequent investors into these loans of the same is the root problem.

Multiple choice

The lender of last resort means

  1. the govt. coming to the rescue of poor farmers

  2. the central bank coming to the rescue of other banks in financial crisis

  3. commercial banks in coming to the rescue of small industrial units

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

The lender of last resort is the central bank that provides emergency liquidity to commercial banks facing financial crises or temporary liquidity shortages. This prevents bank failures and maintains financial stability. It does not refer to government aid to farmers or commercial bank lending.

Multiple choice

Long term creditors are also interested for

  1. Net Profit ratio

  2. Operating ratio

  3. Shereholder Fund

  4. Gross Profit ratio.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Right answer because long term creditors depend upon the Net Profit ratio in a company.

Multiple choice

Which of the following is true about Non Banking Financial Companies (NBFC's)?

  1. The maturity period ranges from few months to six years.

  2. The limit for acceptance of deposit has been based on the credit rating of the company.

  3. NBFC's offer lower interest rate than the commercial banks.

  4. Security of the deposits are higher than the deposits with the banks.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The limit for acceptance of deposit has been based on the credit rating of the company, the NBFC's not having net owned funds of Rupees 25 lakh are not entitled to accept deposits.

Multiple choice

Dear money policy means

  1. money available with difficulty

  2. money available at high interest rate

  3. both (1) & (2)

  4. neither (1) nor (2)

Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Dear money policy refers to a tight monetary policy where credit is restricted and expensive. Money becomes available with difficulty (due to restrictions) and at high interest rates (due to policy-induced rate increases). This is contrasted with cheap money policy where credit is easily available at low rates. Both conditions - difficulty in access and high cost - characterize dear money.

Multiple choice

In banking terminology, CRR means.

  1. Credit Reserve Ratio

  2. Cash Reserve Ratio

  3. Credit Rating Ratio

  4. Cash Rating Ratio
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

CRR stands for Cash Reserve Ratio - the percentage of deposits banks must maintain with the Central Bank (RBI in India). It is a monetary policy tool used to control money supply and inflation. Credit Reserve Ratio and other variations are incorrect terms.