FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No.

FINPREP
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Practice Problems Subject: Accounting

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

1.1. Definition of Accounting: I) Which definition of accounting is most appropriate now-a-days (a) Accounting involves only the recording of those business transactions which are of financial character. (b) Accounting is the art of recording, classifying, summarising, analysing and interpreting the business transactions which are of financial character. (c) Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of accounts. (d) Accounting is basically an art. Accounting covers only the following activities: (a) Recording and classifying (b) Recording, Classifying, Summarising and Analysing (c) Summarising, Analysing and Communication (d) Identifying, Measuring and Communication.

II)

1.2. Distinction between Transaction and Event: III) An economic event that involves transfer of money or moneys worth is(a) Financial Transaction (b) Barter (c) Settlement (d) Receipts/Payment Sale of goods to Ram for cash Rs.1,000 is a(a) Cash transaction (b) Credit transaction (c) Barter (d) Internal Event

IV)

1.3. Book keeping and Accounting Scope: V) Book-Keeping covers only the following activities: (a) Recording and classifying (b) Recording, Classifying, Summarising and Analysing (c) Summarising, Analysing and Interpreting (d) Identifying, Measuring and Communication Page 3 of 17

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

VI) The Basic objective of the Book-keeping is(a) To maintain systematic records of financial transactions (b) To ascertain financial performance (c) To ascertain financial position (d) All of above

1.4. Users of Accounting Information: VII) Internal users of accounting information include(a) Short-term-creditors (b) Customers (c) Long-Term-Lenders Shareholders External users of accounting information include(a) Shareholders (b) Customers (c) Management (d) None of these

VIII)

1.5. Branches of Accounting and their objectives: IX) Which of the following is not a sub-field/Branch of Accounting(a) Cost Accounting (b) Management Accounting (c) Social Responsibility Accounting (d) Book-Keeping The basic objective of accounting is(a) To maintain systematic records of financial transactions (b) To ascertain financial performance (c) To ascertain financial position (d) All of above Financial Statement are part of(a) Accounting (b) Book-Keeping (c) All of the above (d) None of the above

X)

XI)

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

1.6. Drawbacks of Accounting: XII) Limitations of accounting include(a) Ignores Qualitative Elements (b) Ignores price level changes (c) Involves subjectivity (d) All of above

1.7. Introduction of Basic Terms: Fixed Assets are those assets(a) Which cannot be converted into cash within 12 months. (b) Which can be converted into cash after 12 months. (c) Which can be converted into cash after expiry of operating cycle. (d) Which are not held for their conversion into cash within an operating cycle which normally does not exceed 12 months. XIV) Current Assets are those assets(a) Which can be converted into cash within 12 months (b) Which can be converted into cash within a period normally not exceeding 12 months (c) Which can be converted into cash within an operating cycle which normally does not exceed 12 months. (d) Which are held for their conversion into cash within an operating cycle which normally does not exceed 12 months. XV) Current Liabilities are those liabilities which(a) Fall due for payment within a period of not more than 6 months. (b) Fall due for payment within a period of more than 12 months. (c) Fall due for payment within a period of not more than 12 months. (d) None of these XVI) Long-terms liabilities are those liabilities which(a) Fall due for payment within a period of not more than 6 months. (b) Fall due for payment within a period of more than 12 months. (c) Fall due for payment within a period of not more than 12 months. (d) None of these XVII) Capital is the(a) Excess of external liabilities over the assets (b) Excess of assets over the external liabilities (c) Excess of external liabilities over fixed assets (d) Excess of assets of over internal liabilities For Private Circulation to registered students. Page 5 of 17 XIII)

FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

Drawing represent(a) Cash withdraw for office use (b) Cash withdrawn for personal use (c) Goods withdrawn for personal use (d) (b) & (c) XIX) Which one of the following is correct(a) The term Purchases include the purchase of fixed assets for cash as well as on credit. (b) The term Sales include the sales of fixed assets for cash as well as on credit. (c) The term Opening stock means the goods lying unsold at the end of previous accounting period (d) The term Closing Stock means the goods lying unsold at the beginning of current accounting period. XX) A person who owes money of the firm is(a) A creditor (b) A debtor (c) An investor (d) A lender XXI) A person to whom money is owed by the business(a) A creditor (b) A debtor (c) A borrower (d) A Customer XXII) Expenses are reflected in the form of(a) Inflow of assets or incurrence of liabilities (b) Outflow of assets or decrease of liabilities (c) Inflow of assets of decease of liabilities (d) Outflow of assets or incurrence of liabilities XXIII) Income is reflected in the form of(a) Inflow of assets or incurrence of liabilities (b) Outflow of assets or decrease of liabilities (c) Inflow of assets of decease of liabilities (d) Outflow of assets or incurrence of liabilities XXIV) Gains represent(a) All increase in equity (b) All increase in assets (c) Increase in equity from any transaction other than revenue or investment by equity participant (d) None of these For Private Circulation to registered students. Page 6 of 17 XVIII)

FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

XXV) Losses represent(a) All decrease in equity (b) All decrease in assets (c) Decrease in equity from any transaction other than from expenses or distribution of equity participant (d) None of these XXVI) These excess of income and gains over expenses and losses represents(a) Net Profit (b) Net Loss (c) Gross Profit (d) Gross Loss XXVII) These excess of Expenses and losses over Income and gains represents(e) Net Profit (f) Net Loss (g) Gross Profit (h) Gross Loss 1.8. GAAP: XXVIII) Match the following items from column A with column B S.No Column A Column B 1 Entry concept assumptions (a) Fundamental accounting concepts (b) Give the valuation criteria (c) Basic accounting concept Accrual (d) Is the procedural accounting concept realization concepts XXIX) A Proprietor, Mr. X has a reported a profit of Rs.1,00,000 at the end of the financial year after taking into consideration the following amounti. The cost of an asset of Rs.10, 000 has been taken as an expense. ii. Mr. X is anticipating a profit of Rs.50,000 on the future sale of a car shown as an asset in his books. iii. Salary of Rs.200 payable in the financial year has not been taken into account. iv. Mr. X purchased an asset for Rs.50,000 but its fair value on the date of purchase was Rs.60,000. Mr. X recorded the value of asset in his books at Rs.60,000. On the basis of the above facts answer the following questions from the given choices: (i) What is the correct amount of profit to be reported in the books? (a) Rs.1,10,000 (b) Rs.1,08,000 (c) Rs.1,03,000 (d) Rs.93,000 For Private Circulation to registered students. Page 7 of 17 2 3 4 Accrual concept Going concern, consistency and Going concern, cost and

FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

(ii) Which measurement base should be followed in the statement (iv)? (a) Historical cost (b) Current cost (c) Replacement cost (d) Present value (iii) Which concepts should be followed in the statement (ii)? (a) Conservatism (b) Materiality (c) Historical cost (d) Accrual (iv) Which concepts should be followed in the statement (iii)? (a) Materiality (b) Historical cost (c) Current cost (d) Accrual 1.8.1. Entity Concept: XXX) Personal transaction are distinguished from business transaction of an accounting period in accordance with(a) Accounting period principle (b) Accounting Entity Principle (c) Money measurement principle (d) None of these

1.8.2. Money Measurement Concept: XXXI) The principle which treats all rupees alike whether it is a rupee of 1957 or 2007(a) Money measurement principle (b) Periodicity principle (c) Consistency principle (d) Accounting entity principle

1.8.3. Periodicity Concept: XXXII) Economic life of an enterprise is artificially split into periodic intervals in accordance with(a) Going concern assumption (b) Revenue Recognition principle (c) Matching Principle (d) Periodicity principle

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

1.8.4. Matching Concept: XXXIII) X purchase merchandise worth Rs.1,00,000 and sold 60% for Rs.90,000 and 40% of the remaining sold for Rs.60,000 and met operating expenses of Rs.10,000. He counted operating profit as Rs.40,000. He has violated. (a) Cost concept (b) Consistency principle (c) Prudence principle (d) None of the above XXXIV) The determination of expenses for an accounting period is based on the principle of(a) Objectivity (b) Materiality (c) Matching (d) Periodicity 1.8.5. Cost Concept: XXXV) X Ltd. Purchased a machine for Rs.1,00,000 on 1st Jan. The market price of the machine was Rs.1,20,000 on 31st Dec. The accountant of X Ltd. Value machine for Rs.1,20,000 while finalizing the accounts. He has violated the(a) Realisation Principle (b) Prudence Principle (c) Consistency Principle (d) None of the above XXXVI) Objectivity is involved in(a) Cost Principle (b) Prudence Principle (c) Materiality Principle (d) None of these XXXVII) Fixed Assets are held in the business for the purpose of(a) Resale (b) Conversion into cash (c) Earning revenue (d) None of the above 1.8.6. Realisation Concept: No Practice Problems For Private Circulation to registered students.

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

1.8.7. Dual aspect Concept: XXXVIII) Mr. X Purchased a car for Rs.4,00,000 making a down payment of Rs.50,000 and signing a Rs.3,50,000 bill payable due in 60 days. As a result of this transaction(a) Total assets increase by Rs.4,00,000 (b) Total Liabilities increased by Rs.3,50,000 (c) Total asset increased by Rs.3,50,000 (d) Total asset increased by Rs.3,50,000 with corresponding increase in liabilities

XXXIX) Purchase of machinery for cash(a) Decreases total assets (b) Increases total assets (c) Retains total assets unchanged (d) Decreases total liabilities 1.8.8. Conservatism: XL) Mr. X has a closing stock costing Rs.10,000 but its Market value is Rs.9,000. He shows this stock at Rs.10,000 in the financial statements. He has violated(a) Conservatism Principle (b) Materiality Principle (c) Cost Principle (d) Consistency Principle Mr. X has a sundry debtors of Rs.1,00,000. Creating a provision for discount @2% on sundry debtors is an accordance with(a) Conservatism Principle (b) Materiality Principle (c) Cost Principle (d) Consistency Principle A businessman purchased goods for Rs.15,00,000 and sold 80% of such goods during the accounting year ended 31st March, 2007. The market value of the remaining goods was Rs.2,50,000. He valued the closing stock at Rs.3,00,000. He violated the concepts of(a) Money measurement (b) Conservatism (c) Cost (d) Periodicity Page 10 of 17

XLI)

XLII)

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

XLIII) The concept of conservatism when applied to the balance sheet results in(a) Understatement of assets (b) Overstatement of assets (c) Overstatement of capital (d) Understatement of capital

1.9. Fundamental Accounting Assumption: XLIV) Fundamental Accounting Assumptions as per AS-1 are(a) Going concern, Consistency, Conservatism (b) Going concern, Consistency, Accrual (c) Going concern, Money Measurement, Conservatism (d) Going concern, Accounting period, Accrual

1.9.1. Going Concern: XLV) The assets are classified as current assets and fixed assets in accordance with(a) Accounting period Assumption (b) Matching Principle (c) Consistency Principle (d) Going concern principle Economic life of an enterprise is split into the periodic interval as per(a) Periodicity (b) Matching (c) Going concern (d) Accrual

XLVI)

1.9.2. Consistency: XLVII) As per AS-I, the fact need not be disclosed in the financial statements if the following concept if followed (a) Money measurement principle (b) Periodical principle (c) Consistency principle (d) Accounting Entity Principle XLVIII) X Ltd. Follows the written down value method of depreciating machinery year after year due to For Private Circulation to registered students. Page 11 of 17

FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

(a) Comparability (b) Convenience (c) Consistency (d) All of the above 1.9.3. Accrual: XLIX) Accrual means(a) Recognition of revenue as it is earned and of costs as they are paid (b) Recognition of revenue as it is received and of costs as they are incurred (c) Recognition of revenue and costs on payment basis (d) Recognition of revenue as it is earned and of costs as they are incurred. Mr. X purchased goods for Rs.40,000 of which 25% for cash, incurred expenses Rs.10,000 of which Rs.2,000 still outstanding and sold 80% of the goods for Rs.80,000 of which 75% on credit. He calculated his profit at Rs.30,000. He has violated(a) Prudence principle (b) Accrual principle (c) Cost principle (d) Consistency The concept which calls for adjustment to be made in respect of prepaid and outstanding expenses and accrued and unaccrued revenues(a) Prudence principle (b) Accrual principle (c) Cost principle (d) Consistency

L)

LI)

1.10. LII)

Qualitative characteristics of Financial Statements: Two primary qualitative characteristics of financial statement are (a) Understandability and materiality (b) Relevance and reliability (c) Relevance and understandability (d) Materiality and reliability

1.10.1. Understandability: No Practice Problems For Private Circulation to registered students. Page 12 of 17

FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

1.10.2. Relevance: 1.10.2.1. Materiality: LIII) Materiality principle is an exception to the(a) Consistency principle (b) Accounting period Assumption (c) Prudence principle (d) Full Disclosure principle

1.10.3. Reliability: 1.10.3.1. Faithful representation:

No Practice Problems 1.10.3.2. Substance over form:

No Practice Problems 1.10.3.3. Neutrality: No Practice Problems 1.10.3.4. LIV) Prudence: When stock is valued at cost in one accounting period and at lower of cost and net realizable value in another accounting period(a) Prudence principle conflicts with consistency principle (b) Matching principle conflicts with consistency principle (c) Consistency principle conflicts with Accounting period Assumption (d) None of the above Prudence is a concept to recognize(a) All losses and not profits (b) Unrealised profits and not losses (c) Realised losses and not profits (d) None of the above Valuation of the crops at market value is in accordance with(a) Matching principle (b) Revenue Recognition principle (c) Cost principle (d) None of the above Page 13 of 17

LV)

LVI)

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

1.10.3.5. Completeness:

1.10.4. Comparability: No Practice Problems 1.11. Accounting Standards: Accounting standards in India are issued by(a) The Central Govt. (b) The State Govt. (c) The Institute of Chartered Accountants of India. (d) The Reserve Bank of India. How many Accounting standards have been issued so far by ICAI? (a) 26 (b) 27 (c) 28 (d) 29 It is essential to standardize the accounting principle and polities in order to ensure(a) Transparency (b) Consistency (c) Comparability (d) All of the above

LVII)

LVIII)

LIX)

1.12. LX)

Accounting policy Definition: Accounting policies refer to specific accounting (a) Principles (b) Method of applying those principles (c) Both (a) and (b) (d) Standard

1.12.1. Considerations while selecting Accounting policies: The major consideration governing the selection and application of accounting policies are(a) Prudence, Consistency and Materiality (b) Prudence, Going Concern and Materiality (c) Accrual, Substance over form and materiality (d) Prudence, Substance over form and materiality For Private Circulation to registered students. Page 14 of 17 LXI)

FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

LXII) Which accounting principle is followed in adopting accounting policy of treating the cost of calculation as an expense: (a) Prudence (b) Substance over form (c) Materiality (d) All of these Accounting policy for inventories of X Ltd. States that inventories are valued at the lower of cost determined on weighted average basis or net realizable value. Which accounting principle is followed in adopting the above policy? (a) Materiality (b) Prudence (c) Substance over form (d) All of the above

LXIII)

1.12.2. Disclosure of Accounting policies: No Practice Problems 1.12.3. Areas where different Accounting policies are adopted: LXIV) The areas wherein different accounting policies can be adopted are: (a) Providing depreciation (b) Valuation of inventories (c) Valuation of investment (d) All of the above

1.12.4. Change in Accounting policy: LXV) A Change in accounting policy is justified(a) To comply with accounting standard. (b) To ensure more appropriate presentation of the financial statement of the enterprise. (c) To comply with law (d) All of the above

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1

1.13. Measurement bases: All of the following are valuation principle except (a) Historical cost (b) Current cost (c) Realized value (d) Future value

LXVI)

1.13.1. Historical cost basis: No Practice Problems 1.13.2. Current cost basis: No Practice Problems 1.13.3. Realisable value basis: LXVII) Cost of machinery purchased on 1st April, 2006 Rs.5,00,000 Market value as on 31st March, 2007 Rs.6,00,000 As on 31st March,2007, if the company values the machinery at Rs.6,00,000 Which of the following valuation principle is being followed? (a) Historical cost (b) Present value (c) Realized value (d) Current cost 1.13.4. Present value basis: No Practice Problems

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FINPREP Practice Problems Chapter Name Theoretical Framework Chapter No. 1 Answer Key:
I) II) III) IV) V) VI) VII) VIII) IX) X) XI) XII) XIII) XIV) XV) XVI) XVII) XVIII) XIX) XX) XXI) XXII) XXIII) XXIV) XXV) XXVI) XXVII) XXVIII) C D A A A A D B D D A D D D C B B D C B A D C C C A B 1) C 2) D 3) A 4) B i) D ii) A iii) A iv) D XXX) B XXXI) A XXXII) D XXXIII) D XXXIV) C XXXV) D XXXVI) A XXXVII) C XXXVIII) D XXXIX) C XL) A XLI) A XLII) B XLIII) A XLIV) B XLV) D XLVI) C XLVII) C XLVIII) C XLIX) D L) B LI) B LII) B LIII) D LIV) A LV) D LVI) D LVII) C LVIII) D LIX) D LX) C LXI) D LXII) C LXIII) B LXIV) D LXV) D LXVI) D LXVII) C

XXIX)

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