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Important Questions
Practice these important questions to strengthen your understanding
Question 1
Fill in the blank The ________ voucher is prepared when cash is received by the business
Answer:
Receipt voucher
Explanation:
A receipt voucher is prepared to record cash received by the business. It serves as proof of cash inflow and contains details like date, amount, and source of cash received.
A receipt voucher is prepared to record cash received by the business. It serves as proof of cash inflow and contains details like date, amount, and source of cash received.
Question 2
Which stakeholder group would use accounting information to evaluate the sustainability and long-term financial position of a business? Explain.
Answer:
Long-term lenders and investors use accounting information to evaluate sustainability and long-term financial position.
They analyze financial statements to assess solvency, liquidity, and profitability over time.
This helps them determine the company’s ability to repay loans and generate returns in the future.
Such evaluation guides their decisions on lending money or investing capital.
They analyze financial statements to assess solvency, liquidity, and profitability over time.
This helps them determine the company’s ability to repay loans and generate returns in the future.
Such evaluation guides their decisions on lending money or investing capital.
Explanation:
Long-term lenders and investors are interested in the company’s future viability.
Accounting information provides insights into financial trends and risks.
Teachers would explain that this group uses accounting data to protect their investments and ensure that the business can sustain operations.
Understanding long-term financial health is crucial for making sound financial commitments.
Long-term lenders and investors are interested in the company’s future viability.
Accounting information provides insights into financial trends and risks.
Teachers would explain that this group uses accounting data to protect their investments and ensure that the business can sustain operations.
Understanding long-term financial health is crucial for making sound financial commitments.
Question 3
True or False: The purchase of inventory from an external supplier is an external economic event.
Answer:
True
Explanation:
An external economic event involves transactions between the business and outside parties.
Purchasing inventory from an external supplier involves exchange with an outside entity.
Therefore, it is classified as an external economic event.
This distinction is important for understanding the flow of transactions in accounting.
An external economic event involves transactions between the business and outside parties.
Purchasing inventory from an external supplier involves exchange with an outside entity.
Therefore, it is classified as an external economic event.
This distinction is important for understanding the flow of transactions in accounting.
Question 4
Given errors such as overcasting of sales book and wrong balancing of machinery account, prepare the suspense account after rectification.
Answer:
Step 1 Identify the amount by which sales book is overcast and reduce sales account accordingly.
Step 2 Identify the error in machinery account balance and adjust machinery account.
Step 3 Post these adjustments to suspense account.
Step 4 Calculate the difference in suspense account to ascertain trial balance difference.
Step 5 Balance the suspense account to complete rectification.
Step 2 Identify the error in machinery account balance and adjust machinery account.
Step 3 Post these adjustments to suspense account.
Step 4 Calculate the difference in suspense account to ascertain trial balance difference.
Step 5 Balance the suspense account to complete rectification.
Explanation:
Students learn to analyze errors affecting trial balance.
Overcasting sales book causes sales to be overstated; correcting this reduces sales.
Wrong balancing of machinery account affects asset valuation.
Suspense account is used to temporarily hold differences.
Preparing suspense account after rectification helps in understanding error correction and trial balance reconciliation.
Students learn to analyze errors affecting trial balance.
Overcasting sales book causes sales to be overstated; correcting this reduces sales.
Wrong balancing of machinery account affects asset valuation.
Suspense account is used to temporarily hold differences.
Preparing suspense account after rectification helps in understanding error correction and trial balance reconciliation.
Question 5
Which of the following is not a component of the depreciation calculation under the written down value method
Answer:
d) Accumulated depreciation
Explanation:
In the written down value method, depreciation is calculated based on the cost of the asset, the depreciation rate, and the residual (scrap) value. Accumulated depreciation is the total depreciation charged till date but is not a direct component used in the calculation of depreciation for the current period. Therefore, accumulated depreciation is not a component of the depreciation calculation itself.
In the written down value method, depreciation is calculated based on the cost of the asset, the depreciation rate, and the residual (scrap) value. Accumulated depreciation is the total depreciation charged till date but is not a direct component used in the calculation of depreciation for the current period. Therefore, accumulated depreciation is not a component of the depreciation calculation itself.
Question 6
True or False: According to the objectivity concept, historical cost is preferred because it is verifiable and free from bias.
Answer:
True
Explanation:
Historical cost is preferred under the objectivity concept because it is based on the actual amount paid for an asset, which can be verified through documents.
Market values can vary and are subjective, making them less objective.
Using historical cost ensures that accounting records are based on unbiased and verifiable information.
Historical cost is preferred under the objectivity concept because it is based on the actual amount paid for an asset, which can be verified through documents.
Market values can vary and are subjective, making them less objective.
Using historical cost ensures that accounting records are based on unbiased and verifiable information.
Question 7
Which of the following statements correctly explains the 'permanent shrinkage' of an asset?
Answer:
Permanent shrinkage of an asset refers to the continuing and gradual decline in the book value of fixed assets due to use, passage of time, or obsolescence.
Explanation:
Permanent shrinkage means the asset loses value steadily over time and usage, not just temporarily. This concept is fundamental to depreciation, which spreads the cost of the asset over its useful life. It ensures the financial statements reflect the true value of assets and the expenses related to their usage.
Permanent shrinkage means the asset loses value steadily over time and usage, not just temporarily. This concept is fundamental to depreciation, which spreads the cost of the asset over its useful life. It ensures the financial statements reflect the true value of assets and the expenses related to their usage.
Question 8
Which of the following best describes a complete omission error in accounting records?
Answer:
A complete omission error occurs when a transaction is entirely left out from recording in the books of original entry, meaning it is neither recorded in the journal nor posted to the ledger.
Explanation:
A complete omission error happens when a transaction is not recorded at all in the accounting records. This means the transaction is completely missed out from the books of original entry such as the journal or subsidiary books. Because it is not recorded anywhere, it will not appear in the ledger accounts or trial balance. This type of error is important to detect as it affects the accuracy of financial statements.
A complete omission error happens when a transaction is not recorded at all in the accounting records. This means the transaction is completely missed out from the books of original entry such as the journal or subsidiary books. Because it is not recorded anywhere, it will not appear in the ledger accounts or trial balance. This type of error is important to detect as it affects the accuracy of financial statements.
Question 9
Arrange the following economic events in the order they typically occur in a business cycle:
1. Sale of goods
2. Purchase of raw materials
3. Payment of wages
4. Receipt of cash from customers
1. Sale of goods
2. Purchase of raw materials
3. Payment of wages
4. Receipt of cash from customers
Answer:
The typical order of economic events in a business cycle is as follows:
1. Purchase of raw materials
2. Payment of wages
3. Sale of goods
4. Receipt of cash from customers
1. Purchase of raw materials
2. Payment of wages
3. Sale of goods
4. Receipt of cash from customers
Explanation:
In a business cycle, the first step is to purchase raw materials needed for production. Then, wages are paid to employees who work to process these materials. After production, goods are sold to customers. Finally, cash is received from customers as payment for the goods sold. This sequence reflects the flow of operations and cash in a typical business.
In a business cycle, the first step is to purchase raw materials needed for production. Then, wages are paid to employees who work to process these materials. After production, goods are sold to customers. Finally, cash is received from customers as payment for the goods sold. This sequence reflects the flow of operations and cash in a typical business.
Question 10
Fill in the blank: The decision to capitalize or expense an item depends on its ___________ and its potential impact on users' decisions.
Answer:
materiality
Explanation:
The decision to capitalize or expense depends on whether the item is material.
If the item is material, it is capitalized as an asset; if immaterial, it is expensed.
This ensures financial statements reflect significant information for users.
Teachers can explain this by showing examples of small purchases expensed and large purchases capitalized.
The decision to capitalize or expense depends on whether the item is material.
If the item is material, it is capitalized as an asset; if immaterial, it is expensed.
This ensures financial statements reflect significant information for users.
Teachers can explain this by showing examples of small purchases expensed and large purchases capitalized.
Question 11
How does a trial balance help in identifying errors in the ledger accounts?
Answer:
A trial balance helps identify errors by verifying that the total of debit balances equals the total of credit balances. If the totals do not match, it indicates that there are errors such as incorrect postings, omission of entries, or calculation mistakes in ledger accounts. This prompts the accountant to investigate and locate the errors for correction.
Explanation:
The trial balance is a summary of all ledger account balances.
Its main purpose is to check the arithmetical accuracy of ledger postings under the double-entry system.
If the debit and credit totals differ, it signals that errors exist in the ledger accounts.
These errors could be due to incorrect postings, omissions, or miscalculations.
Thus, the trial balance acts as a diagnostic tool to locate and rectify such errors before preparing final accounts.
The trial balance is a summary of all ledger account balances.
Its main purpose is to check the arithmetical accuracy of ledger postings under the double-entry system.
If the debit and credit totals differ, it signals that errors exist in the ledger accounts.
These errors could be due to incorrect postings, omissions, or miscalculations.
Thus, the trial balance acts as a diagnostic tool to locate and rectify such errors before preparing final accounts.
Question 12
How does the grouping of assets and liabilities in a balance sheet enhance the understanding of a company's financial position?
Answer:
Grouping of assets and liabilities in a balance sheet involves putting together items of similar nature under common headings such as current assets, non-current assets, current liabilities, and long-term liabilities. This classification helps users to quickly identify the liquidity and permanence of assets and liabilities.
It enhances understanding by clearly showing which assets are expected to be converted into cash within a year and which liabilities are due in the short term versus long term.
This organization aids stakeholders in assessing the company's financial stability, operational efficiency, and ability to meet short-term and long-term obligations.
It enhances understanding by clearly showing which assets are expected to be converted into cash within a year and which liabilities are due in the short term versus long term.
This organization aids stakeholders in assessing the company's financial stability, operational efficiency, and ability to meet short-term and long-term obligations.
Explanation:
Grouping assets and liabilities logically helps in presenting financial information in a structured way.
It separates current and non-current items, making it easier to analyze liquidity and solvency.
For example, current assets like cash and debtors show what resources are readily available, while non-current assets like furniture indicate long-term investment.
Similarly, distinguishing current liabilities from long-term liabilities helps in understanding the company's immediate obligations versus future debts.
This clarity supports better decision-making by investors, creditors, and management.
Grouping assets and liabilities logically helps in presenting financial information in a structured way.
It separates current and non-current items, making it easier to analyze liquidity and solvency.
For example, current assets like cash and debtors show what resources are readily available, while non-current assets like furniture indicate long-term investment.
Similarly, distinguishing current liabilities from long-term liabilities helps in understanding the company's immediate obligations versus future debts.
This clarity supports better decision-making by investors, creditors, and management.
Question 13
Identify and explain two ways in which the Internet has transformed the dissemination of accounting information.
Answer:
1. Speed of Information Delivery: The Internet allows accounting information to be shared instantly with users worldwide, reducing delays in communication.
2. Accessibility and Convenience: Users can access financial reports and statements anytime and anywhere through online platforms, enhancing transparency and ease of use.
2. Accessibility and Convenience: Users can access financial reports and statements anytime and anywhere through online platforms, enhancing transparency and ease of use.
Explanation:
The Internet has revolutionized how accounting information is distributed.
Firstly, it enables real-time or near real-time sharing of financial data, which is crucial for timely decision-making.
Secondly, it provides easy access to accounting information for both internal and external users without geographical or time constraints.
Teachers can explain that these changes improve the relevance and usefulness of accounting information by making it more readily available and user-friendly.
The Internet has revolutionized how accounting information is distributed.
Firstly, it enables real-time or near real-time sharing of financial data, which is crucial for timely decision-making.
Secondly, it provides easy access to accounting information for both internal and external users without geographical or time constraints.
Teachers can explain that these changes improve the relevance and usefulness of accounting information by making it more readily available and user-friendly.
Question 14
Match the following items to their accounting categories:
1. Fire loss
2. Furniture
3. Sales
4. Creditors
5. Stationery
a. Expense
b. Fixed Asset
c. Revenue
d. Liability
e. Current Asset
1. Fire loss
2. Furniture
3. Sales
4. Creditors
5. Stationery
a. Expense
b. Fixed Asset
c. Revenue
d. Liability
e. Current Asset
Answer:
1. Fire loss - a. Expense
2. Furniture - b. Fixed Asset
3. Sales - c. Revenue
4. Creditors - d. Liability
5. Stationery - e. Current Asset
2. Furniture - b. Fixed Asset
3. Sales - c. Revenue
4. Creditors - d. Liability
5. Stationery - e. Current Asset
Explanation:
In accounting, items are classified based on their nature and role in business.
Fire loss represents a loss or expense incurred, so it is classified as Expense.
Furniture is a long-term asset used in business operations, thus a Fixed Asset.
Sales represent income earned from business activities, classified as Revenue.
Creditors are parties to whom the business owes money, hence a Liability.
Stationery is a consumable item held for use or sale within a year, so it is a Current Asset.
In accounting, items are classified based on their nature and role in business.
Fire loss represents a loss or expense incurred, so it is classified as Expense.
Furniture is a long-term asset used in business operations, thus a Fixed Asset.
Sales represent income earned from business activities, classified as Revenue.
Creditors are parties to whom the business owes money, hence a Liability.
Stationery is a consumable item held for use or sale within a year, so it is a Current Asset.
Question 15
Prepare a trial balance from the following ledger balances:
Rent Expense ₹2,000 debit
Accounts Receivable ₹5,000 debit
Accounts Payable ₹3,000 credit
Capital ₹10,000 credit
Sales ₹7,000 credit
Utilities Expense ₹1,000 debit
Rent Expense ₹2,000 debit
Accounts Receivable ₹5,000 debit
Accounts Payable ₹3,000 credit
Capital ₹10,000 credit
Sales ₹7,000 credit
Utilities Expense ₹1,000 debit
Answer:
Trial Balance as at the date:
Account Title | Debit Balance ₹ | Credit Balance ₹
Rent Expense | 2,000 |
Accounts Receivable | 5,000 |
Utilities Expense | 1,000 |
Accounts Payable | | 3,000
Capital | | 10,000
Sales | | 7,000
Total Debit ₹8,000, Total Credit ₹20,000
Account Title | Debit Balance ₹ | Credit Balance ₹
Rent Expense | 2,000 |
Accounts Receivable | 5,000 |
Utilities Expense | 1,000 |
Accounts Payable | | 3,000
Capital | | 10,000
Sales | | 7,000
Total Debit ₹8,000, Total Credit ₹20,000
Explanation:
To prepare the trial balance, list all ledger accounts with their debit or credit balances.
Expenses and assets like Rent Expense, Accounts Receivable, and Utilities Expense have debit balances.
Liabilities and capital accounts like Accounts Payable, Capital, and Sales have credit balances.
Sum the debit balances and credit balances separately and verify if they tally.
This exercise helps students practice classification of accounts and preparation of trial balance.
To prepare the trial balance, list all ledger accounts with their debit or credit balances.
Expenses and assets like Rent Expense, Accounts Receivable, and Utilities Expense have debit balances.
Liabilities and capital accounts like Accounts Payable, Capital, and Sales have credit balances.
Sum the debit balances and credit balances separately and verify if they tally.
This exercise helps students practice classification of accounts and preparation of trial balance.
Question 16
Which statement correctly distinguishes capital receipts from revenue receipts?
Answer:
Option C Capital receipts do not affect profit and loss, revenue receipts do
Explanation:
Capital receipts are generally non-recurring and relate to financing activities like loans or capital introduced. They do not affect the profit and loss account because they are not income or expenses. Revenue receipts arise from normal business operations like sales and affect the profit and loss account by increasing revenue. This distinction is crucial for accurate financial reporting and profit calculation.
Capital receipts are generally non-recurring and relate to financing activities like loans or capital introduced. They do not affect the profit and loss account because they are not income or expenses. Revenue receipts arise from normal business operations like sales and affect the profit and loss account by increasing revenue. This distinction is crucial for accurate financial reporting and profit calculation.
Question 17
True or False: The Matching Principle requires that revenues and related expenses be recorded in the same accounting period.
Answer:
True
Explanation:
The Matching Principle is a fundamental accounting concept that requires expenses to be recorded in the same accounting period as the revenues they help to generate.
This ensures that financial statements accurately reflect the profitability of a business during a specific period.
By matching revenues and expenses, the principle provides a clear picture of financial performance and avoids misleading results.
Therefore, the statement is True.
The Matching Principle is a fundamental accounting concept that requires expenses to be recorded in the same accounting period as the revenues they help to generate.
This ensures that financial statements accurately reflect the profitability of a business during a specific period.
By matching revenues and expenses, the principle provides a clear picture of financial performance and avoids misleading results.
Therefore, the statement is True.
Question 18
Which of the following best describes the term 'depletion' in accounting?
Answer:
B) The process of allocating the cost of natural resources as they are extracted or used
Explanation:
Depletion refers to the allocation of the cost of natural resources, such as mines or quarries, as they are extracted or consumed. It is similar to depreciation but specifically applies to natural resources. Option A describes amortisation of intangible assets, option C describes depreciation of tangible assets, and option D is not a correct accounting treatment.
Hence, option B best describes depletion in accounting.
Depletion refers to the allocation of the cost of natural resources, such as mines or quarries, as they are extracted or consumed. It is similar to depreciation but specifically applies to natural resources. Option A describes amortisation of intangible assets, option C describes depreciation of tangible assets, and option D is not a correct accounting treatment.
Hence, option B best describes depletion in accounting.
Question 19
Match the following concepts to their relevance in the context of Straight Line Method limitations:
1. Equal utility
2. Repair expenses
3. Depreciation pattern
4. Asset wear
5. Maintenance cost
a. Typically ignored
b. Assumed constant
c. Uniform over time
d. Varies with usage
e. Increases with age
1. Equal utility
2. Repair expenses
3. Depreciation pattern
4. Asset wear
5. Maintenance cost
a. Typically ignored
b. Assumed constant
c. Uniform over time
d. Varies with usage
e. Increases with age
Answer:
1 - b
2 - a
3 - c
4 - d
5 - e
2 - a
3 - c
4 - d
5 - e
Explanation:
In the Straight Line Method, the assumption of equal utility means that the asset provides the same benefit every year, so it is assumed constant (b).
Repair expenses are typically ignored (a) in this method, which is a limitation.
Depreciation pattern is uniform over time (c) because the same amount is charged each year.
Asset wear varies with usage (d), but the method does not account for this variation.
Maintenance cost increases with age (e), but the method assumes it is constant or ignores it.
In the Straight Line Method, the assumption of equal utility means that the asset provides the same benefit every year, so it is assumed constant (b).
Repair expenses are typically ignored (a) in this method, which is a limitation.
Depreciation pattern is uniform over time (c) because the same amount is charged each year.
Asset wear varies with usage (d), but the method does not account for this variation.
Maintenance cost increases with age (e), but the method assumes it is constant or ignores it.
Question 20
Which of the following is a primary advantage of the straight line depreciation method?
Answer:
Explanation:
The straight line method is widely favored because of its simplicity.
It involves straightforward calculations and applies a consistent depreciation expense each year.
Unlike other methods, it does not accelerate depreciation or vary charges over time.
This makes it easy to understand and implement, especially for assets with consistent usage.
The straight line method is widely favored because of its simplicity.
It involves straightforward calculations and applies a consistent depreciation expense each year.
Unlike other methods, it does not accelerate depreciation or vary charges over time.
This makes it easy to understand and implement, especially for assets with consistent usage.
