MCQs on Cash & Accrual accounting and Depreciation

1. Which of the following statements is associated with the accrual basis of accounting?
a) The timing of cash receipts and disbursements is emphasized. b) A minimum amount of record keeping is required. c) This method is used less frequently by businesses than the cash method of accounting. d) Revenues are recognized in the period they are earned, regardless of the time period the cash is received.

2. An accrued expense is an expense that:
a) Has been incurred but has not been paid. b) Has been paid but has not been incurred. c) Has been incurred for which payment has been made in installments. d) Will never be paid.

3. In reviewing some adjusting entries, you observe an entry which contains a debit to Prepaid Insurance and a credit to Insurance Expense. The purpose of this journal entry is to record a(n):
a) b) c) d) Accrued expense Deferred expense Expired Cost Prepaid Revenue

4. An adjusting entry to record an accrued expense involves a debit to a (n):
a) b) c) d) Expense account and a credit to a prepaid account Expense account and a credit to cash. Expense account and a credit to a liability account Liability account and a credit to an expense account.

5. The failure to properly record an adjusting entry to accrue an expense will result in an:
a) Understatement of expenses and an understatement of liabilities b) Understatement of expenses and an overstatement of liabilities c) Understatement of expenses and an overstatement of assets d) Overstatement of expenses and an understatement of assets

6. Which of the following properly describes a deferral?
a) b) c) d) Cash is received after revenue is earned. Cash is received before revenue is earned. Cash is paid after expense is incurred Cash is paid in the same period that an expense is incurred.

7. An adjusting entry to allocate a previously recorded asset to expense involves a debit to an:
a) Asset account and a credit to cash. b) Expense account and a credit to cash c) Expense account and a credit to an asset account. d) Asset account and a credit to an expense account.

8. Which of the following adjusting entries will cause an increase in revenues and a decrease in liabilities?
a) Entry to record an accrued expense b) Entry to record an accrued revenue c) Entry to record the consumed portion of an expense paid in advance and initially recorded as an asset. d) Entry to record the earned portion of revenue received in advance and initially recorded as unearned revenue.

9. The failure to properly record an adjusting entry to accrue a revenue item will result in an:
a) Understatement of revenues and a over statement of liabilities b) Overstatement of revenues and an overstatement of liabilities c) Overstatement of revenues and an overstatement of assets. d) Understatement of revenues and an understatement of assets.

10. The failure to properly record an adjusting entry for the expiration of insurance coverage will result in an (assume the account Prepaid Insurance was charged when the premiums were paid.):
a) Overstatement of assets and an overstatement of owners’ equity. b) Understatement of assets and an understatement of owners’equity. c) Overstatement of assets and an overstatement of liabilities d) Overstatement of liabilities and an understatement of owners’equity.

11. The omission of the adjusting entry to record depreciation expense will result in an:
a) Overstatement of assets and an overstatement of owners’ equity. b) Understatement of assets and an understatement of owners’ equity. c) Overstatement of assets and an overstatement of liabilities d) Overstatement of liabilities and an understatement of owners’ equity.

12. An auditor is examining an adjusting entry that reduces liabilities and increases owners’ equity. Which of the following adjusting entries could that be?
a) Entry to record an accrued revenue. b) Entry to record the earned portion of revenue received in advance and previously recorded as Unearned Rent Revenue. c) Entry to record an accrued expense. d) Entry to record the expired portion of expense paid in advance and previously recorded as Prepaid Expense. e) Entry to record bad debts expense.

13. The Office Supplies on Hand account had a balance at the beginning of year 3 of Rs. 1,600. Payments for acquisitions of office supplies during year 3 amounted to Rs. 10,000 and were recorded by a debit to the asset account. A physical count at the end of year 3 revealed supplies costing Rs. 1,900 were on hand. The required adjusting entry at the end of year 3 will include a debit to:
a) b) c) d) Office supplies expense for Rs. 300 Office supplies on hand for Rs. 300 Office supplies expense for Rs. 9,700 Office supplies on hand for Rs. 1,900

14. The book value of a piece of equipment is the:
a) b) c) d) Original cost of the equipment. Current replacement cost of the used equipment. Current market value of the used equipment. Difference between the original cost of the equipment and its related accumulated depreciation.

15. The purpose of recording closing entries in the books of account is to:
a) Reduce the number of nominal accounts. b) Enable the accountant to prepare the raw trial balance. c) Enable the accountant to work out cost of goods sold. d) Establish new balances in some asset and liability accounts.

16. If ending accounts receivable exceeds beginning accounts receivable:
a) Cash collections during the period exceed the amount of revenue earned. b) Net income for the period is less than the amount of cash basis income. c) No cash was collected during the period. d) Cash collections during the year are less than the amount of revenue earned

17. The Camp. & Company made cash sales of services of Rs. 5,000 and credit sales of services of Rs. 4,200 during the month of July. The company incurred expenses of Rs. 6,000 during July of which Rs. 2,000 was paid in cash and the remainder was expected to be paid in August. Using the accrual method of accounting, net income for July amounts to:
a) b) c) d) Rs. 7,200 Rs. 5,200 Rs. 3,200 Rs. 3,000

18. Dr. Handa keeps his accounting records on the cash basis. During 2012, Dr. Handa collected Rs. 660,000 in fees from his patients. At December 31, 2012, the doctor had accounts receivable of Rs. 50,000 and unearned fees of Rs. 6,000. At December 31, 2011, he had accounts receivable of Rs. 68,000 and unearned fees of Rs. 4,000. The amount of fees earned on the accrual basis by Dr. Handa during 2012 was:
a) b) c) d) Rs. 640,000 Rs. 680,000 Rs. 724,000 Rs. 676000

19. Which of the following facts regarding the statement of financial position would not be true?
a) It is unnecessary to make any estimates or judgements when preparing a statement of financial position. b) The statement of financial position reveals how a business is funded. c) intangible assets are often missing from the statement of financial position. d) The statement of financial position separately identifies long-term and short-term assets and liabilities

20. For an asset owned for more than one year, the depreciation charge for the year, calculated using the reducing-balance basis at the rate of 35%, would be arrived at as follows:
a) b) c) d) 35% x cost of the asset. 35% x (cost of the asset - accumulated depreciation). 35% x accumulated depreciation. 35% x (cost of the asset + accumulated depreciation).

21. Misha bought a machine for Rs.39,000, which she expects to have a useful life of four years and a residual value of Rs.4,000 at the end of that time. If depreciation is to be provided on the straight-line basis, the net book value after two years will be:
a) b) c) d) Rs. 17,500. Rs.19,500. Rs.21,500. Rs.30,250.

22. Brun & Co. buys two motor vans costing Rs.41,000 in total. They are depreciated on the reducing-balance basis at the rate of 40% per annum. Which of the following statements is not true?
a) The WDV of the vans after one year will be Rs.24,600. b) The WDV of the vans after two years will be Rs.14,760. c) The charge to the income statement for depreciation in Year 2 will be Rs.26,240. d) The charge to the income statement for depreciation in Year 3 will be Rs.5,904.

23. Mattil & Associates bought a delivery van for Rs. 14,000 on 1 July 2012. It is expected to have a useful life of 4 years and a value at the end of that time of Rs. 3,000. If depreciation is to be provided at 30% on the reducing-balance basis, the depreciation charge for the year ended 30 June 2014 will be:
– – – – a) Rs. 2,940. b) Rs. 1,260. c) Rs. 4,200. d) Rs. 2,310.

24. Which of the following interpretations of the prudence concept is not true: • a) The prudence concept requires preparers of accounts to anticipate all income. • b) The prudence concept requires preparers of accounts to anticipate all costs. • c) The prudence concept requires preparers of accounts to take a cautious approach to accounts preparation. • d) The prudence concept underpins the need for businesses to create a provision for doubtful debts.

25. Dilip's account balances at the business year end show a figure for trade receivables of Rs. 103,100. Included in this figure is an amount of Rs. 6,500 owed by Reece, which will not be received. Dilip usually creates a provision for doubtful debts of 2% of trade receivables. The figure for trade receivables on the statement of financial position at the year end should be: • a) Rs. 94,538. • b) Rs. 101,038. • c) Rs. 107,408. • d) Rs. 94,668.

26. If the trial balance at Laurie's year end shows trade receivables of Rs. 19,900 and bad debts of Rs. 600 written off during the year, which of the following statements is true? • a) The income statement should include a bad debt expense of Rs. 600 and trade receivables of Rs. 19,300 should be included on the statement of financial position. • b) The income statement should include no bad debt expense and trade receivables of Rs. 19,900 should be included on the statement of financial position. • c) The income statement should include no bad debt expense and trade receivables of Rs. 19,300 should be included on the statement of financial position. • d) The income statement should include a bad debt expense of Rs. 600 and trade receivables of Rs. 19,900 should be included on the statement of financial position.

27. If an asset cost Rs. 27,000 with salvage value Rs. 10125 and the annual depreciation charge calculated using the straight-line method is Rs. 6,750 per annum, then depreciation is being charged at the rate of: • a) 67.5%. • b) 25%. • c) 6.75%. • d) 40%.

28. Eva & Co. has purchased a machine for Rs. 300,000. The company will depreciate it either at 20% on the straightline basis or at 30% on the reducing-balance basis. Which method will lead to the highest combined profits in the first two years that the machine is owned? • a) The straight-line basis will lead to the highest combined profits. • b) The reducing-balance basis will lead to the highest combined profits. • c) The choice of depreciation method will not affect the combined profit figures. • d) Both the straight line basis at 20% per annum and the reducing balance basis at 30% per annum will lead to the same combined profit figure for the first two years.

29. Eva &Co. has purchased a machine for Rs. 300,000. The Company will depreciate it at 20% on the straight-line basis in the books of account and at 30% on the reducing-balance basis based on Income Tax. The In come Statement and Balance Sheet at the end first year will report:
a) Positive Deferred Tax and Deferred Tax Asset in the Income Tax and Balance Sheet respectively b) Negative Deferred Tax and Deferred Tax Asset in the Income Tax and Balance Sheet respectively c) Positive Deferred Tax and Deferred Tax Liability in the Income Tax and Balance Sheet respectively d) Negative Deferred Tax and Deferred Tax Liability in the Income Tax and Balance Sheet respectively

30. Amit Private Limited purchased a machinery of 1.01.2012 for Rs. 12,00,000/-. Installation expenses incurred to operate it from 1.01.2012 was Rs. 100000/- and the residual value of Rs. 50000/- was estimated with useful life ten years. In July 2012, Rs. 20000/- was spent on repair of the machinery. Depreciation during 2012 under SLM is:
a) b) c) d) Rs. 127000/Rs. 135000/Rs. 130000/Rs. 125000/-

31. If a concern is no longer going concern in the year 2012, the balance sheet as of 31st Dec 2012 should indicate the assets at their:
a) b) c) d) Historical cost Net realisable value Cost less depreciation Cost price or market value, whichever is lower.

32. The portion of the acquisition cost of the asset, yet to be charged off to the income statement is known as:
a) b) c) d) Written Down Value Accumulated value Salvage Value Realisable value

33. In the year 2011, there is a timing difference of Rs. 10000/- in Current Tax and Tax Expense resulting therein DTL of Rs. 10000/-. What should be the Tax Expense as per GAAP if actual tax payable is Rs. 340000/- during 2012.
a) b) c) d) Rs. 10000/Rs. 340000/Rs. 350000/Rs. 330000/-

34. Deferred tax should be accounted for in relation to certain differences between taxable profit and accounting profit. The differences which require an enterprise to account for deferred tax are:
a) b) c) d) Temporary Differences Permanent differences Both temporary and permanent differences Neither temporary differences nor permanent differences

35. A company’s financial statements for the year 31st March 2012 show a pretax profit after charging depreciation of Rs 100000/- is Rs. 500000/-. Depreciation for the tax purposes is Rs. 170000/- Assuming the that the tax rate for the company is 30%, the required transfer to the company’ deferred tax account is:
a) b) c) d) A debit of Rs. 21000/- to the deferred tax account A credit of Rs. 21000/- to the deferred tax account A debit of Rs. 51000/- to the deferred tax account A credit of Rs. 51000/- to the deferred tax account

36. A company’s financial statements for the year 31st March 2012 show a pretax profit after charging depreciation of Rs 170000/- is Rs. 500000/-. Depreciation for the tax purposes is Rs. 100000/- Assuming the that the tax rate for the company is 30%, the required transfer to the company’ deferred tax account is:
a) b) c) d) A debit of Rs. 21000/- to the deferred tax account A credit of Rs. 21000/- to the deferred tax account A debit of Rs. 51000/- to the deferred tax account A credit of Rs. 51000/- to the deferred tax account

37. Unpaid expenses are shown in the company’s statement of financial position as a current liability of Rs. 30000/-. These expenses have already been deducted when computing accounting profit but will not be deducted for tax purposes until they are paid. Assuming that the company pays tax @ 20%, the resulting deferred tax is:
a) b) c) d) Deferred Tax Asset of Rs 30000/Deferred tax asset of Rs. 6000/Deferred tax liability of Rs. 6000/Rs. 0/-

38. The same rate of depreciation charged under SLM and RM on a fixed asset with same cost and same salvage value would result into:
a) The same estimated useful life b) The estimated useful life in SLM works out higher then that in RM c) The estimated useful life in SLM works out lower then that in RM d) Can’t say in the absence of adequate details

39. Which of accounting standard is applied for inventory valuation:
a) b) c) d) AS 2 AS 6 AS 10 AS 22

40. Which of accounting standards is applied for Accounting for Income Tax:
a) b) c) d) AS 2 AS 6 AS 10 AS 22

41. Which of accounting standards is applied for Accounting for Fixed assets:
a) b) c) d) AS 2 AS 6 AS 10 AS 22

42. Which of accounting standards is applied for Depreciation?:
a) b) c) d) AS 2 AS 6 AS 10 AS 22

43. If Deferred Tax Liability of Rs. 500 lakhs as of 31st March 2012 is to be reduced in the subsequent years because of timing difference, the deferred tax of Rs. 45 lakhs pertaining to the year 2013 would be:
a) b) c) d) Added to arrive at accounting taxes Deducted to arrive at accounting taxes No change in the accounting taxes None of the above

44. The company has disposed of the fixed asset for Rs. One lac (which has the original cost of Rs. 25 lacs & the accumulated depreciation till 2013 of Rs. 22 lacs). What is the amount of loss/profit from the sale of fixed asset?
a) b) c) d) Loss of Rs. 2 lakhs Profit of Rs. 2 Lakhs Profit of Rs. 1 Lakh Loss of Rs. 1 lakh

45. A company estimated that 2% of their credit sales of Rs. 550 lakhs is likely to be nonrecoverable as of 31st March 2012 and the same has been accounted for in the books under the principle of prudence. In 2013, Rs. 9.50 lakhs has actually not been recovered and the remaining has been collected. What is the impact of this event in the Income statement of 2013 if the company is profit making?
a) b) c) d) Profit has been reduced by Rs. 9.50 lakhs Profit has been reduced by Rs. 2 lakhs Profit has been increased by Rs. 11.00 lakhs Profit has been increased by Rs. 2 lakhs

46. As at 31st March 2013 M Limited has issued 100 million equity shares of Rs. 10 each, Rs. 8/- called and paid up. On that day, Tarun paid Rs. 12 per share to buy 4,000 equity shares from Lohan. In the event M Limited becomes insolvent and is unable to meet in full its debts, what is the maximum amount Tarun may be required to pay from his personal resources?
a) b) c) d) Rs80000 Rs. Nothing Rs.40000 Rs.8000

47 Rs. 120,000 recorded in the Cash Book, upon issuing 100,000 equity shares of Re 1/- each, should be credited to which account or accounts: a) To the share premium account b) Rs. 100,000 to share capital account and Rs. 20,000 to the share premium account c) To a suspense account d) To the share capital account

48. Rs. 360,000 being the proceeds of issuing 600,000 equity shares of 50p each, has been posted from the cash book to the credit of the share capital account. How should this error be corrected?
a) Dr cash account Rs. 360,000, Cr share capital account Rs. 300,000 and Cr share premium Rs. 60,000 b) Dr share capital account Rs. 300,000, Cr share premium account Rs. 360,000 c) Dr share capital account Rs. 60,000, Cr share premium Rs. 60,000 d) Dr suspense account Rs. 360,000 Cr Share Capital a/c Rs. 300,000 and Cr Share premium Rs. 60,000

49. X YZ Limited offered for issue ten million equity share of Rs. 1 each at Rs. 1.20p per share. Application were received, however for only nine million shares and the directors proceeded to allot the shares applied for. Expenses of the issue amounted to Rs. 3,00,000. What will be the balance in the share premium account, after these transactions are accounted from?
a) b) c) d) Rs. 1,997,000 Rs. 1,797,000 Rs. 2,000,000 Rs. 1,800,000

50. Rs. 15,000 still to be received, by the year end, out of the total amount receivable from a share issue should be reported on that company’s financial statements, as:
a) b) c) d) An asset on the statement of financial position A loss on the statement of income An income in the statement of income A liability on the statement of financial position

51. You are holding a Financial Asset for trade purposes at Rs. 2500/- as of 31/3/2011. What accounting entry would you process in the year ending 13/03/2013, assuming the fair market values as of 31/03/12 & 31/03/2013 are Rs. 2400/and Rs. 2650/- respectively using FVTPL method? a) Debit Financial asset with Rs. 250/- and credit P & L Account with the same amount. b) Debit Financial asset with Rs. 150/- and credit P & L Account with the same amount. c) Credit Financial asset with Rs. 250/- and debit P & L Account with the same amount. d) Credit Financial asset with Rs. 150/- and debit P & L Account with the same amount.

52. The calendar year-end trial balance of QT Limited
reports Rs. 400,000 at 8% Loan Notes (issued 2006) and Rs. 16,000 as interest paid. In this regard identify the amounts to be reported as expense in the Statement of income for the year ended 31.12.2013 and as current liability on the Statement of financial position
Interest expense: Rs.48,000; Current liability: Rs. 16,000 b) Interest expense: Rs.32,000; Current liability: Rs. 16,000 c) Interest expense: Rs.32,000; Current liability: Rs.32,000 d) Interest expense: Rs. 16,000; Current liability: Rs. 32,000
a)

53. The commercial exploitation of a coal mine commenced on 1st January 2009. The remaining development cost relating to that mine, amortised over five years from that date using the sum of the year’s digits method, was reported as Rs. 360,000 as at 31st December 2010. What is the amortisation in the year ended 31st December 2011.

a) Rs. 96,000
b) Rs. 180,000 c) Rs. 120,000 d) Rs. 72,000

54. Accounting Standard for “Cash Flow Statement” is:
a) b) c) d) AS 12 AS 3 AS 13 AS 31

55. Cash & Cash Equivalent includes as per AS 3:

a) b) c) d) e)

Cash & Bank Balance Marketable Securities Overdraft in Bank Account (a) & (b) (a), (b) and (c)

56. Dividend paid by a manufacturing firm is considered in Cash Flow Statement as :
a) b) c) d) Operating Activity Investing Activity Financing Activity All the above

57. Interest paid on borrowed fund by a manufacturing firm is considered in Cash Flow Statement as :
a) b) c) d) Operating Activity Investing Activity Financing Activity All the above

58. Bad debt written off by a manufacturing company is considered in Cash Flow Statement as:
a) b) c) d) Operating Activity Investing Activity Financing Activity None of the above

59. Positive opening ‘Cash & cash equivalent’ and negative closing ‘Cash & cash equivalent’ implies that:
a) b) c) d) The surplus cash generated during the period There is a cash deficit during the period Either (a) or (b) The information given in the question is inadequate

60. For a recent year a corporation's financial statements reported the following: – Net Income Rs. 100,000 – Depreciation Expense Rs. 10,000 – Increase in Accounts Receivable Rs. 30,000 – Decrease in Accounts Payable Rs. 15,000 Based on the above information, what amount will the corporation report as Cash Provided by Operating Activities on the cash flow statement?
a) b) c) d) Rs. 75000/Rs. 115000/Rs. 85000/Rs. 65000/-

61. A corporation reported the following information for the past year:
– – – – – Net Income Rs. 200,000 Depreciation Expense Rs. 30,000 Gain on Sale of Truck Rs. 5,000 Proceeds from Sale of Truck Rs. 8,000 Decrease in Accounts Receivable Rs.10,000

Assuming these are the only facts, what amount will the corporation report as the Cash Provided by Operating Activities on the cash flow statement?
a) b) c) d) Rs. 240000/Rs. 235000/Rs. 190000/Rs. 205000/-

62. A corporation reported the following information for the past year:
– – – – – Net Income Rs. 200,000 Depreciation Expense Rs. 30,000 Gain on Sale of Truck Rs. 5,000 Proceeds from Sale of Truck Rs. 8,000 Decrease in Accounts Receivable Rs.10,000

Assuming these are the only facts, what amount will the corporation report as the Cash flow from operating activities on the cash flow statement?
a) b) c) d) Rs. 3000/Rs. 13000/Rs. 5000/Rs. 8000/-

63. XYZ Ltd made a profit in 2012 but has increased its borrowing during the year. Which of the following factors could explain this:
(a) Taking extended periods of credit from its suppliers. (b) Additional investment in purchased fixed assets. (c) Reducing its depreciation charge for the year. (d) Reducing the period of credit allowed to its customers.

64. Which of the following statements is correct?
– (a) Accounting profit is the difference between cash receipts and cash paid in a period. – (b) Accounting profit is the total of cash sales in the year less the expenses for the period. – (c) Accounting profit is the difference between revenue income and expenses for the period. – (d) Accounting profit is the difference between revenue income and cash payments for the period.

65. A business has the following items in its accounts at its year end 31 December 2012
• • • • • Opening stock at 1 January 2012 = Rs. 5 lakhs Purchases for 2012 = Rs. 90 lakhs Purchase returns in 2012 = Rs. 2 lakhs Cost of goods sold without considering sales return = 80 lakhs Sales Returns in 2012 (Cost 5 lakhs) = 8 lakhs

Which is the correct figure for closing inventory as of 31st Dec. 2012? • (a) Rs. 15 lakhs • (b) Rs. 23 lakhs • (c) Rs. 18 lakhs • (d) Rs. 13 lakhs

66. A business has the following items in its accounts at its year end 31 December 2012
• • • • • Opening stock at 1 January 2012 = Rs. 5 lakhs Purchases for 2012 = Rs. 90 lakhs Purchase returns in 2012 = Rs. 2 lakhs Cost of goods sold net of sales return = 80 lakhs Sales Returns in 2012 (Cost 5 lakhs) = 8 lakhs

Which is the correct figure for closing inventory as of 31st Dec. 2012? • (a) Rs. 15 lakhs • (b) Rs. 23 lakhs • (c) Rs. 18 lakhs • (d) Rs. 13 lakhs

67. A business receives a cheque from a customer for Rs. 256 in full agreed settlement of an account which showed a debit balance of Rs.270. Which of the following entries correctly records this transaction?
– (a) Credit bank Rs.256, credit discount received Rs.14, debit debtor £270. – (b) Debit bank Rs.256, debit discount received Rs.14, credit debtor Rs.270. – (c) Debit bank Rs.256, debit discount allowed Rs.14, credit debtor Rs.270. – (d) Debit bank Rs.256, debit discount allowed Rs.14, credit creditor Rs.270.

68. A business has the following items in its accounts at its year end 31 December 2012
• • • • Opening stock at 1 January 2012 = Rs. 5 lakhs Purchases for 2012 = Rs. 90 lakhs Purchase returns in 2012 = Rs. 2 lakhs Closing stock as of 31st Dec 2012 without considering sales return = 18 lakhs • Sales Returns in 2012 (Cost 5 lakhs) = 8 lakhs

Which is the correct figure for cost of goods sold in 2012? • (a) Rs. 70 lakhs • (b) Rs. 75 lakhs • (c) Rs. 65 lakhs • (d) Rs. 80 lakhs

69. A business has prepared its accounts for a financial year and these show a profit of Rs. 500 000. The accounts do not include the following items:
– a likely loss on a contract of Rs. 25 000 – a possible Court ruling in favour of the company which is likely to increase profits by Rs. 10 000 – a possible Court ruling against the company which could result in damages of between Rs. 5 000 to Rs. 15 000.

Having regard to the fundamental accounting concepts, which of the following revised profit figures is correct when the above factors are taken in to account?
a) b) c) d) Rs. 480 000. Rs. 460 000. Rs. 510 000. Rs. 475 000.

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