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Important Questions
Practice these important questions to strengthen your understanding
Question 1
Petty cash book is maintained under the imprest system. True or False?
Answer:
True
Explanation:
The petty cash book is maintained under the imprest system, where a fixed amount is given to the petty cashier to meet small expenses. At the end of the period, the petty cashier is reimbursed to restore the imprest amount. Therefore, the statement is true.
The petty cash book is maintained under the imprest system, where a fixed amount is given to the petty cashier to meet small expenses. At the end of the period, the petty cashier is reimbursed to restore the imprest amount. Therefore, the statement is true.
Question 2
Fill in the blank An example of an external economic event is a ________
Answer:
sale of merchandise to the customers
Explanation:
An external economic event involves transactions between the business and outsiders. For example, when a business sells merchandise to customers, it is an external event because it involves an exchange with an external party. This contrasts with internal events which occur within the business itself.
An external economic event involves transactions between the business and outsiders. For example, when a business sells merchandise to customers, it is an external event because it involves an exchange with an external party. This contrasts with internal events which occur within the business itself.
Question 3
Select the correct sequence of accounting standard components 1 Recognition 2 Measurement 3 Presentation 4 Disclosure
Answer:
1 Recognition 2 Measurement 3 Presentation 4 Disclosure
Explanation:
The components of accounting standards follow a logical sequence. First, recognition involves identifying and recording transactions. Next, measurement assigns monetary values to these transactions. Then, presentation refers to how financial data is displayed in the statements. Finally, disclosure involves providing additional relevant information in notes or footnotes. This sequence ensures clarity and completeness in financial reporting.
The components of accounting standards follow a logical sequence. First, recognition involves identifying and recording transactions. Next, measurement assigns monetary values to these transactions. Then, presentation refers to how financial data is displayed in the statements. Finally, disclosure involves providing additional relevant information in notes or footnotes. This sequence ensures clarity and completeness in financial reporting.
Question 4
When an addition is made to an existing asset, depreciation on the addition should be
Answer:
A) Charged from the date of addition
Explanation:
When an addition is made to an existing asset, the depreciation on the new addition should be charged starting from the date the addition is made. This is because the additional asset starts contributing to the business from that date and should be depreciated accordingly. Charging depreciation from the original purchase date of the asset or ignoring it until the asset is fully depreciated is incorrect. Depreciation is a systematic allocation of the cost of an asset over its useful life and must be accounted for accurately to reflect the asset's value.
When an addition is made to an existing asset, the depreciation on the new addition should be charged starting from the date the addition is made. This is because the additional asset starts contributing to the business from that date and should be depreciated accordingly. Charging depreciation from the original purchase date of the asset or ignoring it until the asset is fully depreciated is incorrect. Depreciation is a systematic allocation of the cost of an asset over its useful life and must be accounted for accurately to reflect the asset's value.
Question 5
What happens to the rights of a patent holder once the patent expires, and how does this impact innovation?
Answer:
Once a patent expires, the patent holder loses exclusive rights to the invention.
The invention enters the public domain, allowing others to freely use, produce, and sell it.
This can lead to increased competition and lower prices.
It encourages further innovation by enabling others to build upon the original invention without restrictions.
However, the original patent holder can no longer prevent others from using the invention.
The invention enters the public domain, allowing others to freely use, produce, and sell it.
This can lead to increased competition and lower prices.
It encourages further innovation by enabling others to build upon the original invention without restrictions.
However, the original patent holder can no longer prevent others from using the invention.
Explanation:
Patents provide temporary exclusive rights to incentivize innovation.
Expiration removes these rights, promoting wider use and development.
Teachers can illustrate how this balances rewarding inventors and benefiting society.
Students should grasp that patent expiration fosters competition and subsequent innovation.
Patents provide temporary exclusive rights to incentivize innovation.
Expiration removes these rights, promoting wider use and development.
Teachers can illustrate how this balances rewarding inventors and benefiting society.
Students should grasp that patent expiration fosters competition and subsequent innovation.
Question 6
How does the purchase of office furniture affect the financial statements?
Answer:
B It is capitalized and shown as a non-current asset in the balance sheet
Explanation:
Office furniture is a fixed asset that provides benefits over multiple accounting periods.
Hence, it is capitalized and recorded in the balance sheet as a non-current asset.
It is not recorded as a revenue expense in the profit and loss account at the time of purchase.
It is also not a liability or a current asset related to trading activities.
Office furniture is a fixed asset that provides benefits over multiple accounting periods.
Hence, it is capitalized and recorded in the balance sheet as a non-current asset.
It is not recorded as a revenue expense in the profit and loss account at the time of purchase.
It is also not a liability or a current asset related to trading activities.
Question 7
What does a balanced trial balance indicate about the posting and balancing of ledger accounts?
Answer:
A balanced trial balance indicates that the total of debit balances equals the total of credit balances.
This suggests that the posting and balancing of ledger accounts are arithmetically correct.
It confirms that for every debit entry, a corresponding credit entry has been made.
However, it does not guarantee that there are no errors in the accounts, only that the totals match.
This suggests that the posting and balancing of ledger accounts are arithmetically correct.
It confirms that for every debit entry, a corresponding credit entry has been made.
However, it does not guarantee that there are no errors in the accounts, only that the totals match.
Explanation:
When the trial balance totals agree, it means that the double entry system has been followed correctly in terms of amounts.
Each debit has a matching credit, ensuring mathematical accuracy.
But some errors like wrong account entries or omitted transactions may still exist.
Therefore, a balanced trial balance is a necessary but not sufficient condition for error-free accounts.
When the trial balance totals agree, it means that the double entry system has been followed correctly in terms of amounts.
Each debit has a matching credit, ensuring mathematical accuracy.
But some errors like wrong account entries or omitted transactions may still exist.
Therefore, a balanced trial balance is a necessary but not sufficient condition for error-free accounts.
Question 8
What is the term for the original cost minus accumulated depreciation?
Answer:
Book value
Explanation:
The term 'Book value' refers to the net value of an asset after deducting accumulated depreciation from its original cost. It represents the carrying amount of the asset in the accounting records and reflects the asset's remaining value to the business.
The term 'Book value' refers to the net value of an asset after deducting accumulated depreciation from its original cost. It represents the carrying amount of the asset in the accounting records and reflects the asset's remaining value to the business.
Question 9
True or False Deferred revenue expenditure is initially recorded as an asset and gradually written off to the profit and loss account
Answer:
True
Explanation:
Deferred revenue expenditure is a type of revenue expenditure that is expected to benefit the business over more than one accounting period. Hence, it is initially recorded as an asset on the balance sheet and then systematically written off to the profit and loss account over its expected period of benefit. This treatment helps in matching the expense with the revenues it helps to generate.
Deferred revenue expenditure is a type of revenue expenditure that is expected to benefit the business over more than one accounting period. Hence, it is initially recorded as an asset on the balance sheet and then systematically written off to the profit and loss account over its expected period of benefit. This treatment helps in matching the expense with the revenues it helps to generate.
Question 10
In the context of accounting for provisions, what distinguishes a good debtor from a doubtful debtor?
Answer:
A good debtor is one from whom the collection of debt is certain.
A doubtful debtor is one from whom the collection of the full amount is uncertain, and there is a possibility of some loss.
Therefore, provision for doubtful debts is created to cover the expected loss from doubtful debtors.
A doubtful debtor is one from whom the collection of the full amount is uncertain, and there is a possibility of some loss.
Therefore, provision for doubtful debts is created to cover the expected loss from doubtful debtors.
Explanation:
In accounting, debtors are classified based on the likelihood of payment.
Good debtors are those whose payments are expected to be received fully and on time.
Doubtful debtors have some risk of non-payment, so businesses create provisions to anticipate potential losses.
This classification helps in accurate profit calculation and financial reporting.
In accounting, debtors are classified based on the likelihood of payment.
Good debtors are those whose payments are expected to be received fully and on time.
Doubtful debtors have some risk of non-payment, so businesses create provisions to anticipate potential losses.
This classification helps in accurate profit calculation and financial reporting.
Question 11
True or False The difference in annual depreciation charges between the two methods affects the timing of expense recognition but not the total depreciation over the asset's life
Answer:
True
Explanation:
Both methods depreciate the asset over its useful life down to its residual value.
The total depreciation charged over the asset's life remains the same regardless of method.
However, the timing differs: Straight Line Method charges equal amounts annually, Written Down Value charges higher amounts initially and less later.
This affects when expenses are recognized but not the total amount.
Therefore, the statement is true.
Both methods depreciate the asset over its useful life down to its residual value.
The total depreciation charged over the asset's life remains the same regardless of method.
However, the timing differs: Straight Line Method charges equal amounts annually, Written Down Value charges higher amounts initially and less later.
This affects when expenses are recognized but not the total amount.
Therefore, the statement is true.
Question 12
Why is the sale of goods considered an economic event?
Answer:
A Because it changes the financial position by increasing assets and revenue
Explanation:
The sale of goods is an economic event because it affects the financial position of the business. When goods are sold, the business usually receives cash or a receivable, which increases its assets. At the same time, it earns revenue, which affects profit and loss. This dual effect makes it a measurable financial transaction recorded in accounting. Options B, C, and D are incorrect because they either describe non-financial activities or misunderstand the impact of sales on accounting records.
The sale of goods is an economic event because it affects the financial position of the business. When goods are sold, the business usually receives cash or a receivable, which increases its assets. At the same time, it earns revenue, which affects profit and loss. This dual effect makes it a measurable financial transaction recorded in accounting. Options B, C, and D are incorrect because they either describe non-financial activities or misunderstand the impact of sales on accounting records.
Question 13
Explain the imprest system in petty cash management.
Answer:
The imprest system is a method of petty cash management where a fixed amount of money, called the imprest amount, is given to the petty cashier at the beginning of a period. The petty cashier makes small payments from this amount. When the cash is nearly exhausted, the petty cashier is reimbursed the amount spent to restore the imprest amount to its original level. This system ensures that the petty cash fund is always maintained at a fixed amount.
Explanation:
In the imprest system, a fixed sum is allocated to the petty cashier.
The petty cashier uses this money to make small payments.
When the money is nearly spent, the petty cashier submits a summary of expenses and gets reimbursed.
This reimbursement restores the petty cash fund to its original fixed amount.
This system helps in controlling petty cash and simplifies accounting.
In the imprest system, a fixed sum is allocated to the petty cashier.
The petty cashier uses this money to make small payments.
When the money is nearly spent, the petty cashier submits a summary of expenses and gets reimbursed.
This reimbursement restores the petty cash fund to its original fixed amount.
This system helps in controlling petty cash and simplifies accounting.
Question 14
Record the journal entry for creating provision for depreciation of $6,000 on furniture assets.
Answer:
Depreciation Account Dr. $6,000 To Provision for Depreciation Account $6,000 (Being provision for depreciation created on furniture assets)
Explanation:
Provision for depreciation is created by crediting the Provision for Depreciation Account and debiting the Depreciation Account.
This entry accumulates depreciation separately without reducing the asset's original cost.
It helps in showing the asset at cost and depreciation separately in the balance sheet.
Provision for depreciation is created by crediting the Provision for Depreciation Account and debiting the Depreciation Account.
This entry accumulates depreciation separately without reducing the asset's original cost.
It helps in showing the asset at cost and depreciation separately in the balance sheet.
Question 15
Assertion The trial balance helps to detect errors of omission and commission. Reason Trial balance totals of debit and credit sides must be equal for the accounts to be correct.
Answer:
The assertion is False because the trial balance does not detect all errors of omission and commission. The reason is also False because equal totals of debit and credit sides do not guarantee that all accounts are correct.
Explanation:
The trial balance is a tool to check the arithmetical accuracy of ledger postings by verifying that total debits equal total credits. However, some errors such as omission of entries or errors of commission (posting to wrong accounts) may not affect the equality of totals and hence remain undetected. Therefore, even if the debit and credit totals are equal, it does not ensure that the accounts are free from all errors. This question tests your understanding of the limitations of the trial balance.
The trial balance is a tool to check the arithmetical accuracy of ledger postings by verifying that total debits equal total credits. However, some errors such as omission of entries or errors of commission (posting to wrong accounts) may not affect the equality of totals and hence remain undetected. Therefore, even if the debit and credit totals are equal, it does not ensure that the accounts are free from all errors. This question tests your understanding of the limitations of the trial balance.
Question 16
Under the Full Disclosure Concept, why are footnotes considered an essential part of financial statements?
Answer:
Footnotes provide detailed explanations and additional information about the financial statements, including accounting policies, changes in methods, contingent liabilities, and other material facts that help users understand the true financial position and performance of the enterprise.
Explanation:
Footnotes enhance the transparency and completeness of financial statements by disclosing information that cannot be fully presented in the main statements. They help users make informed decisions by revealing significant details such as changes in accounting policies or potential liabilities.
Footnotes enhance the transparency and completeness of financial statements by disclosing information that cannot be fully presented in the main statements. They help users make informed decisions by revealing significant details such as changes in accounting policies or potential liabilities.
Question 17
Match the following voucher types with their characteristics:
1. Cash Voucher
2. Debit Voucher
3. Credit Voucher
4. Compound Voucher
5. Accounting Voucher Elements
a. Used for recording cash payments
b. Contains multiple debit or credit entries
c. Includes date and amount
d. Used for recording cash receipts
e. Used to record debit transactions
1. Cash Voucher
2. Debit Voucher
3. Credit Voucher
4. Compound Voucher
5. Accounting Voucher Elements
a. Used for recording cash payments
b. Contains multiple debit or credit entries
c. Includes date and amount
d. Used for recording cash receipts
e. Used to record debit transactions
Answer:
1 - d
2 - e
3 - a
4 - b
5 - c
2 - e
3 - a
4 - b
5 - c
Explanation:
This question tests knowledge of voucher types and their defining characteristics.
Step 1 Cash Voucher is used for recording cash receipts, matching d.
Step 2 Debit Voucher is used to record debit transactions, matching e.
Step 3 Credit Voucher is used for recording cash payments, matching a.
Step 4 Compound Voucher contains multiple debit or credit entries, matching b.
Step 5 Accounting Voucher Elements include date and amount, matching c.
Understanding these characteristics helps students correctly identify voucher types.
This question tests knowledge of voucher types and their defining characteristics.
Step 1 Cash Voucher is used for recording cash receipts, matching d.
Step 2 Debit Voucher is used to record debit transactions, matching e.
Step 3 Credit Voucher is used for recording cash payments, matching a.
Step 4 Compound Voucher contains multiple debit or credit entries, matching b.
Step 5 Accounting Voucher Elements include date and amount, matching c.
Understanding these characteristics helps students correctly identify voucher types.
Question 18
Assertion Technological obsolescence can be reversed by upgrading existing products Reason Upgrades allow older products to meet current technological standards
Answer:
The assertion is true because technological obsolescence occurs when a product becomes outdated due to new technology. Upgrading existing products can restore their usefulness by incorporating new features or improvements. The reason is true as upgrades help older products meet current technological standards, thus reversing obsolescence. Therefore, both assertion and reason are true and the reason correctly explains the assertion.
Explanation:
Technological obsolescence happens when products become outdated due to advances in technology.
Upgrading products by adding new features or improving performance can reverse this obsolescence.
This means older products can be made relevant again by meeting current standards.
Hence, the assertion that technological obsolescence can be reversed by upgrading is correct.
The reason explains that upgrades allow older products to meet current technological standards, which supports the assertion.
Both statements are true and the reason correctly explains the assertion.
Technological obsolescence happens when products become outdated due to advances in technology.
Upgrading products by adding new features or improving performance can reverse this obsolescence.
This means older products can be made relevant again by meeting current standards.
Hence, the assertion that technological obsolescence can be reversed by upgrading is correct.
The reason explains that upgrades allow older products to meet current technological standards, which supports the assertion.
Both statements are true and the reason correctly explains the assertion.
Question 19
A difference of ₹15,000 appears in the trial balance due to omission of a sales book entry. How should this difference be treated initially?
Answer:
B Debit the suspense account with ₹15,000
Explanation:
When a difference arises in the trial balance due to omission of a sales book entry, it causes an imbalance.
The difference must be temporarily recorded in the suspense account to allow the trial balance to agree.
Since sales is a credit account and the omission causes an excess debit, the suspense account is debited with the difference amount.
This treatment holds the difference temporarily until the error is located and corrected.
Therefore, the correct initial treatment is to debit the suspense account with ₹15,000.
When a difference arises in the trial balance due to omission of a sales book entry, it causes an imbalance.
The difference must be temporarily recorded in the suspense account to allow the trial balance to agree.
Since sales is a credit account and the omission causes an excess debit, the suspense account is debited with the difference amount.
This treatment holds the difference temporarily until the error is located and corrected.
Therefore, the correct initial treatment is to debit the suspense account with ₹15,000.
Question 20
True or False: Tax authorities use accounting information to ensure companies comply with tax laws and regulations.
Answer:
True
Explanation:
Tax authorities rely on accounting information to verify that companies accurately report their taxable income.
This ensures companies pay the correct amount of taxes as per laws and regulations.
Accounting records provide evidence for assessing tax liabilities and detecting any discrepancies.
Therefore, accounting information is crucial for tax compliance and enforcement.
Tax authorities rely on accounting information to verify that companies accurately report their taxable income.
This ensures companies pay the correct amount of taxes as per laws and regulations.
Accounting records provide evidence for assessing tax liabilities and detecting any discrepancies.
Therefore, accounting information is crucial for tax compliance and enforcement.
