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Unit 1

Chapter 1.1: Overview of Accounting
Multiple Choice Questions
1) The prime function of accounting is to a) Record economic data b) Attain non-economic goals c) Classifying and recording business transactions d) Provide the informational basis for action The basic function of financial accounting is to a) Record all business transactions b) Interpret the financial data c) Assist the management in performing functions effectively d) None of these Management Accounting provides services to management in performing a) All management functions b) Controlling functions c) Interpret the financial data d) None of these invaluable

True or False
11) Accounting records qualitative aspect of business. 12) Accounting deals with the information which can be measured in money or money’s worth. 13) Accounting deals in recording only of business transactions. 14) Accounting is a service function. 15) Accounting deals with those events and transactions which are of financial nature. 16) Selling goods is a transaction of financial nature. 17) Identifying business transactions is the first step of accounting. 18) Fictitious assets do not have any real value. 19) Cash is liquid asset. 20) Profits increase capital. 21) All the assets in the possession of the business are its goods according to accounting conventions. F 22) An increase in assets is not due to profits. 23) Drawings increase capital. 24) Capital means total assets – total liabilities. 25) Losses are unwanted burden, whereas expenses are voluntarily incurred. 26) Book-keeping is the part of accounting. 27) Every accounting transaction must have documentary proof. 28) Biased error in accounting is possible. 29) Business has an authority to declare itself insolvent. 30) All transactions are events but all events are not transactions. 31) In recognizing sales as income, one should wait until the money is received. 32) Accounting assets in the collection of debts. 33) Accounting is the language of the business. 34) Accounting can be useful only for recording business transactions. 35) Accounting records only transactions which are of a financial character. 36) Book-keeping and accounting are synonymous terms. 37) Accounting is as old as money itself. Mark true if the following events are business transaction otherwise mark false: 38) Dismissal of an employee for committing theft. 39) Withdrawals by the proprietor for domestic use. 40) Purchase of goods on credit. 41) The death of the proprietor of the business. 42) Interviewing brilliant candidates. 43) Making promise to supply goods.




Book-keeping is mainly concerned with a) Recording of financial data relating to business operations b) Designing the systems in recording classifying, summarizing the recorded data c) Interpreting the data for internal and external end users d) None of these Accounts produced objectively will be unbiased and hence tend to be more a) Reliable b) Comparable c) Relevant d) All of the above A person who brings capital in the business is called _____ a) A debtor b) A creditor c) Proprietor d) None of these A person who supplies goods to the firm is known as a) A debtor b) A creditor c) The owner d) None of these A person who owes money to the firm is known as a) A debtor b) A creditor c) All of the above d) None of these Investment is taken as a) Current assets c) All of the above b) Fixed assets d) None of these







Sales are recognized as income a) At the point of sale or at the performance of a service b) After the expiry of the credit period allowed to debtors c) After the money collected from the debtors d) All of the above


44) Receiving orders for supply of goods. 45) Loss of goods by theft. 46) Expecting bumper orders from abroad for the supply of goods. 47) The marriage ceremony of Deepika, the managing director of Deepika enterprise.

Fill in the Blanks
48) Accounting is a language of _____. 49) _____ is recording of financial transactions of a business in a methodical manner. 50) _____ contains individual account heads under which all monetary transactions of similar nature are posted. 51) Outstanding expenditure is a _____ account. 52) In accounting transactions and events which are of _____ are recorded. 53) The objective of accounting information is to provide _____ view of the business. 54) Accounting information is used for _____, _____ and _____ the earning power and financial position of a business enterprise. 55) Where _____ ends, _____ begins. 56) Management accounting provides information for the _____ of management.

57) Accounting is generally historical in nature and gives only _____ analysis of the past accounting information. 58) The person to whom goods are sold on credit is known as _____. 59) The person from whom goods are purchased on credit are known as _____. 60) Goods/money taken for personal use is termed as _____. 61) Accounting is a substitute of _____. 62) Whether an item is material or not is a matter of ____. 63) The objective of financial accounting is to ascertain _____ for a particular period. 64) Owners are the persons who provide ______ for the operations of a business. 65) _____ knowledge is based on experiments, observation and testing of facts and figures. 66) Under _____ basis both cash and accrual basis are taken into account. 67) A debt which cannot be recovered is called _____. 68) _____ refers to unsold goods lying in a business at the beginning of a given period. 69) Drawings are made by the proprietor in ____ of future profits in order to meet the personal requirements. 70) _____ are the assets which do not have any physical presence and which cannot be touched or felt. 71) The balance sheet is a _____ statement.

Chapter 1.2: Accounting Principles - Concepts and Convention
Multiple Choice Questions
72) The profitability and solvency of a business should be measured a) After each transaction b) At the end of the accounting period c) At the end of each month d) All of the above The system of recording transactions based on dual aspect concept is called a) Double account b) Double entry system system c) Single entry system d) All of these The practice of appending notes regarding contingent liabilities in accounting statements is in pursuant to a) Convention of consistency b) Convention of conservatism c) Convention of disclosure d) All of the above According to money measurement concept, the following will be recorded in the books of accounts of a business a) Health of Managing Director b) Quality of Company’s goods c) Value of plant and machinery d) All of the above The matching principle results from the a) Accounting period b) Historical cost principle principle c) Duality principle d) All of the above 77) The convention of conservatism is applicable a) In providing for discount on creditors b) In making provision for bad and doubtful debts c) In providing for depreciation d) None of the above The convention of conservatism when applied to Balance Sheet results in a) Understatement of assets b) Understatement of liabilities c) Overstatement of capital d) All of the above During the life-time of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting principle? a) Matching b) Periodicity c) Conservatism d) None of these The accounting principle which refers to tendency of accountants to resolve uncertainty and doubt in favor of understating assets and revenues and overstating the liabilities and expenses is known as a) Conservatism b) Materiality c) Consistency d) None of these The assumption that a business entity will not be sold or liquidated in the near future is known as a) Periodicity b) Going concern c) Materiality d) None of these Which of the following is not modifying principle? a) Cost benefit b) Timeliness c) Dual aspect d) None of these










Accounting and Financial Analysis (Unit 1)



Contingent liability is shown as a note to the Balance Sheet. It arises out of a) Convention of disclosure b) Convention of materiality c) Convention of consistency d) None of the above Revenue is generally recognized at the point of sale. Which principle is applied in such a case? a) Cost principle b) Revenue realization principle c) Matching principle d) None of these The policy “anticipate no profit and provide for all possible losses” arises due to a) Convention of consistency b) Convention of conservatism c) Convention of materiality d) None of these Revenue is generally recognized as being earned at the time of a) Sale is effected b) Production is completed c) Cash is received None of these Accounting principles are generally based on a) Practicability b) Subjectivity c) Convenience in d) None of these recording. Recording of capital contributed by the owner as liability ensures the adherence of principle of a) Double entry b) Going concern c) Separate entity d) Materiality The basic concepts related to balance sheet are a) Cost concept b) Business entity concept c) Accounting period concept d) Both (a) and (b) above The basic concepts related to P&L account are a) Realization concept b) Matching concept c) Cost concept d) Both (a) and (b) above Only the significant events which affect the business must be recorded as per the principle of a) Separate entity b) Accrual c) Materiality d) Going concern P&L account is prepared for a period of one year by following a) Consistency concept b) Conservatism concept c) Time period concept d) Cost concept If the going concern concept is no longer valid, which of the following is true a) All prepaid assets would be completely writtenoff immediately b) Total contributed capital and retained earnings would remain unchanged c) The allowance for uncollectible accounts would be eliminated d) Land held as an investment would be valued at


its realizable value Under which of the following concepts are shareholders treated as creditors for the amount they paid on the shares they subscribed to a) Cost concept b) Duality concept c) Business entity d) Going concern concept concept The underlying accounting principle(s) necessitating amortization of intangible asset(s) is/are a) Cost concept b) Realization concept c) Matching concept d) Both (a) and (c) above The accounting measurement that is not consistent with the going concern concept is a) Historical cost b) Realization c) The transaction d) Liquidation value approach Recording of fixed assets at cost ensures adherence of a) Conservatism b) Going concern concept concept c) Cost concept d) Both (a) and (b) above Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. Which of the following are not fundamental assumptions specified under Accounting Standard-1 a) Going Concern b) Consistency concept concept c) Accrual concept d) Materiality concept Omission of paise and showing the round figures in financial statements is based on a) Conservatism b) Consistency concept concept c) Materiality concept d) Realization concept X Ltd., purchased goods for Rs. 5 lakh and sold 9/10th of the value of goods for Rs. 6 lakh. Net expenses during the year were Rs. 25,000. The company reported its net profit as Rs. 75,000. Which of the following concept is violated by the company a) Realization b) Conservation c) Matching d) Accrual Accounting does not record non-financial transactions because of a) Entity concept b) Accrual concept c) Cost concept d) Money measurement concept Fixed assets and current assets are categorized as per concept of a) Separate entity b) Going concern c) Contingency d) Consistency Capital is shown under liabilities because of the a) Conservatism b) Revenue recognition






















concept concept c) Entity concept d) Accrual concept The expenses and incomes pertaining to full trading period are taken to the Profit and Loss account of a business, irrespective of their payment or receipt. This is in recognition of a) Time period concept b) Accrual concept c) Going concern d) Business entity concept concept Which of the following is an example of capital expenditure a) Insurance premium b) Taxes and legal expenses c) Depreciation on machinery d) Customs duty on import of machinery Which of the following concept is not considered as basic principle of accounting a) Materiality concept b) Cost concept c) Consistency d) Logical concept concept In contract accounting, the percentage completion method is an exception to the a) Matching principle b) Going concern principle c) Historical cost principle d) Revenue recognition principle of


Money measurement concept takes into account changes in the value of monetary unit.





Which of the following concepts assumes that a business will last indefinitely a) Business entity b) Going concern c) Periodicity d) Conservatism

True or False
109) Accounting principles are rules of actions or conduct which are adopted by the accountants universally while recording transactions. The generally accepted accounting principles prescribe a uniform accounting practice. The conservatism concept leads to the exclusion of all unrealized profits. The materiality concept refers to the state of ignoring small items and values from accounts. It is on the basis of going concern concept that the assets are always valued at market price. The convention of disclosure implies that all material information should be disclosed in the accounts. The convention of conservatism takes into account all prospective profits but leaves all possible losses. In accounting all business transactions are recorded as having a dual aspect. The entity concept of accounting is not applicable to sole trading and partnership firms. The dual aspect concept results in accounting equation: Capital + Liabilities − Assets. Assets are to be shown in Balance Sheet at the values realizable on liquidation. The convention of conservatism has usually the effect of overstating losses and understating the incomes.

110) 111) 112) 113) 114)

115) 116) 117) 118) 119) 120)

Accounting and Financial Analysis (Unit 1)


122) 123) 124) 125)

126) 127) 128) 129) 130) 131) 132) 133)

The going concern concept arises from the periodicity concept. The materiality concept is expressed as: “Recognize all losses and anticipate no gains”. Assets will be equal to capital, if there are no liabilities. It is binding upon every business to adopt basic assumption in accounting, while maintaining their books of accounts. ‘Timeliness’ is the basic assumption of accounting. ‘Verifiable objectivity’ is the basic principle of accounting. Income = Revenue − Expense. Amount received in cash is an income. Every accounting record must be based on documentary evidence. Basic assumptions bring uniformity in accounting. According to business entity concept the existence of business and proprietors is one and the same. Valuation of stock at cost price or market price whichever is lower does not observe the modifying principle of consistency. Since the life of the business is assumed to be indefinite, the financial statements of the business should be prepared only when it goes into liquidation.


Recording business transactions on the basis of documents is to observe accounting assumptions of _____.


Fill in the Blanks
135) The term _____ refers to fundamental belief or a general truth, which once established does not change. Generally accepted accounting principle is a set of _____ accepted rules. Business is a _____ entity. Only such transactions are recorded which are _____ in money. There is no _____ list of concepts but most of the concepts have fairly general support. _____ are the customs, usage or practices followed by accountants as a guide in the preparation of financial statements. _____ concepts has its own identity as distinguished from the person or persons who owns or controls it. _____ and events, which cannot be expressed in monetary terms, are not recorded in accounting. A business has a reasonable expectation of continuing business for an _____ period of time. As far as possible, every transaction should be supported by enough _____ evidence. The accounting rules, practices and conventions should be _____ to and should not change from year to year. “Make a provision for all possible losses but anticipate no profits” is a _____ concept. Accounting concepts are established by _____. The periodicity concept arises from the ____ concept.

136) 137) 138) 139) 140)


142) 143) 144) 145)

146) 147) 148)


150) 151)

152) 153) 154)

Treatment of capital in the books of the firm as liability observes the accounting assumption of ____. The qualitative aspect of the business is not recorded in the books of accounts according to the basic assumption of ____. According to companies act, every company must close its books of accounts on ____ of the year. Accounting period consists of ____. _____ of accounting can never be ignored.

155) 156) 157) 158)

In construction works, revenue is identified on the basis of _____. Revenue is identified on the basis of cash realized in case of ___ system. Expenses are ____ incurred but losses are ____ burden. Disclosing important information in accounting observes the principles of ____.

Chapter 1.3: Accounting Standards - Indian and International
Multiple Choice Questions
159) The accounting standards are intended to apply only to items which are a) Material b) Insignificant c) Measured in terms d) All of the above of money Which of the following standards are not applicable to small scale companies 1) AS-3, Cash Flow Statements 2) AS-17, Segment Reporting 3) AS-19, Leases 4) AS-18, Related Party Disclosures a) 1 and 2 b) 1, 2 and 4 c) 1, 2 and 3 d) 1, 3 and 4 Accounting standard for inventory valuation is not applicable to a) Textile industry b) Construction project c) Leather industry d) None of these Accounting to AS-2 historical cost of inventory include a) Cost of purchase b) Cost of conversion c) Other costs incurred to bring inventory to the present position d) All of the above Which of the following is not mentioned in the accounting standard as a cause of depreciation? a) Physical wear and b) Legal limit on use of tear asset c) Fall in market price d) Obsolescence Consider the following pairs of accounting standards? 1) AS-11: Effects of changing in foreign exchange rates 2) AS-17: Segment reporting 3) AS-20: Earning per share 4) AS-25: Interim financial reporting Which of the above pairs are correctly matched? a) 1, 2 and 3 b) 1, 3 and 4 c) 2 and 4 d) 1, 2, 3 and 4 165) Which of the following method of inventory valuation is recognized in AS-2? a) LIFO b) FIFO c) Simple average d) All of the above method 167) 166) Which of the following standards are not issued by the IASC? a) IAS-2: Inventories b) IAS-4: Depreciation Accounting c) IAS-5: Information to be disclosed in financial statements d) IAS-9: Cash flow statements Which of the following pair is not correctly matched? a) AS-13: Accounting for investments b) AS-14: Accounting for fixed assets c) AS-25: interim financial reporting d) AS-26: Intangible assets The Accounting Standard on Revenue Recognition (AS-9) deals with a) Revenue obtained from execution of construction contracts b) Revenue from sale under hire purchase and lease agreements c) Interest, royalties and dividends obtained from other concerns using the resources of the enterprise d) Revenues from government grants and subsidies Which of the following is treated as a ‘contingency’ as per AS-4 a) Commitments on long-term lease contracts b) Providing for depreciation of a fixed asset c) Arrears of fixed cumulative dividends or uncalled liability on shares partly paid d) Liability under retirement benefit plans Accounting policies may differ from one firm to another firm in respect of one of the following a) Deciding credit and debit aspects of transactions b) Classification of assets and liabilities c) Classification of revenue and expense d) Classification of revenue and capital expenditure Accounting Standard for Research and Development (AS-8) identified all of the following costs as R&D cost except a) Costs of materials and services consumed in the course of R&D b) Costs incurred to promote sales of existing products c) Payment to outside agencies for R&D projects related to the enterprise d) Depreciation building, equipment and other facilities used for R&D










Accounting and Financial Analysis (Unit 1)




Which of the following is not a contingent liability a) Claims against the company not acknowledged as debts b) Debts included on debtors which are doubtful in nature c) Uncalled liability on partly paid shares d) Arrears of cumulative fixed dividends Accounting Standard-4 deals with a) Prior period and extraordinary items b) Contingencies and events occurring after the balance sheet date c) Depreciation accounting d) Valuation of inventories Events occurring after balance sheet which have no bearing on the balance sheet and are of substantial interest/amount should be disclosed in the a) Balance sheet b) Notes on accounts c) Director’s report d) Auditor’s report Which of the following is not classified as research and development costs a) Salaries of individuals engaged in the research b) Cost of materials used in the course of research and development c) Allocated overhead costs apportioned to research and development department d) Costs incurred to maintain production Which of the following is not treated as ‘unusual item’ by AS-5 a) Sale of significant part of the business b) Sale of investment acquired without an intention of re-sale c) Write-off of inventory due to obsolescence d) Liability arising on account of legislative changes Which of the following areas of accounting does not encounter multiplicity of accounting policies a) Valuation of inventories b) Treatment of contingent liabilities c) Treatment of goodwill d) None of these


180) 181) 182)


183) 184)

Accounting records all types of transactions including quarrels between the management and workers, etc. Accounting Standard 1, deals with depreciation. Accounting Standard 2, is mandatory. The Institute of Chartered Accountants of India is a member of the International Accounting Standards Committee. Financial statements are prepared using accounting standards. Accounting standards issued are reviewed regularly and are subject to revisions.


Fill in the Blanks
185) 186) 187) 188) _____ are like rules of accounting issued by an apex accounting body. There are _____ accounting Standards in India. Compliance with accounting standard is the duty of the _____. ______ are defined as the policy documents issued by a recognized expert accounting body relating to various aspects of measurement, treatment and disclosure of accounting transactions and events. In India ______ has the authority of issuing Accounting Standards. AS-21 is mandatory if an enterprise presents consolidated _____. Accounting standards are ______ in nature. ______ are mandatory for those enterprises whose equity or debt securities are listed on a recognized stock exchange in India. To formulate the accounting standards, they have established a committee called ______ in 1973. AS-2 – Valuation of Inventions is _____ accounting standard. AS-3 – Cash flow statement is _____ accounting standard. Accounting Standard 6 relates to _____. International Accounting Standard on accounting for lease is dealt by _____. The Accounting Standard (AS-1) ______ issued by ICAI.


189) 190) 191) 192)


193) 194) 195) 196) 197) 198)


True or False
178) Accounting standards are issued by the Chairman, Board of Studies of the Institute of Chartered Accountants of India.

Chapter 1.4: Accounting Equations
Multiple Choice Questions
199) Point out the correct equation a) Assets = Liabilities − Capital b) Assets = Liabilities + Capital c) Liabilities = Assets + Capital d) Capital = Assets + Liabilities Point out the incorrect Accounting Equation a) Assets = Liabilities + Capital b) Assets = Capital + Liabilities c) Liabilities = Assets + Capital d) Capital = Assets − Liabilities 201) Payment of salary to Anil, the manager will ___. a) Decrease assets and capital b) Increase assets and decrease capital c) Decrease assets and increase capital d) Decrease assets and liability Mohan spent Rs. 2,000 as repair on purchases of machine from scrap dealer. The transactions will _____. a) Increase and decrease assets b) Decrease assets and capital c) Increase and decrease capital d) Increase and decrease liability



Accounting and Financial Analysis (Unit 1)

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Purchasing pocket transistor for proprietor’s son will ____. a) Increase assets and decrease capital b) Increase assets and decrease liability c) Decrease assets and decrease capital d) Decrease assets and decrease liability

206) 207) 208) 209) 210) 211) 212)

True or False
204) 205) Accounting Equation states that assets equal liabilities plus capital. Capital is increased by profits and is decreased by losses.

A transaction which increases the capital is called ‘Income’. Amount owed to outsiders (other than proprietor) is called capital. Drawings reduce capital. Capital means assets minus external liabilities. An increase in assets is not necessarily due to profits. The value of human resources is shown as an asset in the Balance sheet. Profit/Loss = Closing Capital + Additional Capital – Drawings − Opening.

Chapter 1.1: Overview of Accounting
1) c 2) 8) a 9) 15) T 16) 22) T 23) 29) F 30) 36) F 37) 43) F 44) 49) Book-keeping 53) True and fair Accounting 56) 59) creditor 63) Profit/Loss 68) Opening stock 71) Position a a T F T T F Internal use 3) 10) 17) 24) 31) 38) 45) 50) 54) 57) 60) 64) 69) a 4) a 5) a 11) F 12) T 18) T 19) T 25) T 26) F 32) T 33) F 39) T 40) T 46) F 47) Classification 51) Predicting, Comparing, Evaluating Postmortem 58) Drawings 61) Memory 62) Capital 65) Scientific 66) Anticipation 70) a T T T T T F Personal 6) 13) 20) 27) 34) 41) 48) 52) 55) c 7) b F 14) T T 21) F T 28) T F 35) T F 42) F Business Financial nature Book-keeping,

debtor Judgment Mixed 67) Bad debt Intangible assets

Chapter 1.2: Accounting Principles – Concepts and Convention
72) b 73) b 79) b 80) a 86) a 87) a 93) d 94) c 100) c 101) d 107) d 108) b 114) T 115) F 121) F 122) F 128) T 129) F 135) Principle 136) Commonly 140) Conventions 143) Indefinite 144) Documentary 147) Law 148) Going concern 151) Money Measurement 155) Production 156) Hire Purchase 74) c 75) c 76) a 77) b 78) a 81) b 82) c 83) a 84) b 85) b 88) c 89) d 90) d 91) c 92) c 95) c 96) d 97) c 98) d 99) c 102) b 103) c 104) b 105) d 106) d 109) F 110) F 111) T 112) F 113) F 116) T 117) F 118) T 119) F 120) T 123) F 124) T 125) T 126) F 127) F 130) T 131) T 132) F 133) F 134) F 137) Separate 138) Measured 139) Authoritative 141) Business entity 142) Transactions 145) Strictly adhered 146) Conservatism 149) Verifiable objectivity 150) Business Entity 152)31st March 153) 12 Months 154) Basic assumptions 157) Voluntarily, unwanted 158)Materiality

Chapter 1.3: Accounting Standards - Indian and International
159) a 160) b 166) d 167) b 173) b 174) c 180) F 181) F standards 186)Twenty nine standards Board (ASB) 192) AS-3 and AS-17 194) Mandatory 195) Not Mandatory 198) Disclosure of Accounting Policies 161) b 162) d 163) c 164) d 165) b 168) c 169) c 170) d 171) b 172) b 175) d 176) c 177) d 178) F 179) F 182) T 183) T 184) T 185) Accounting187) Auditor 188) Accounting standards 189) Accounting190) Financial Statements 191) Mandatory 193) The International Accounting Standards Committee 196) Depreciation accounting 197) IAS-17

Chapter 1.4: Accounting Equations
199) b 206) F 200) c 207) F 201) a 208) T 202) a 209) T 203) c 210) T 204) T 211) F 205) T 212) F

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