Free Financial Statements MCQs with Answers
128 Financial Statements MCQs from Accounting, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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128 questions · page 1 of 7
- A. Profit decreases and liabilities increase
- B. Profit increases and liabilities decrease
- C. Assets increase and profit increases
- D. Liabilities decrease and expenses decrease
Explanation: The unpaid wages are an accrued expense, so they must be debited as an expense and credited as a liability.
Correct answer: Profit decreases and liabilities increase- A. Profit is overstated and assets are overstated
- B. Profit is understated and assets are understated
- C. Profit is understated and liabilities are overstated
- D. Profit is overstated and liabilities are understated
Explanation: Closing inventory is deducted when calculating cost of goods sold and is also reported as a current asset.
Correct answer: Profit is understated and assets are understated- A. Rs. 80,000
- B. Rs. 90,000
- C. Rs. 100,000
- D. Rs. 110,000
Explanation: Straight-line depreciation equals depreciable cost divided by useful life. The calculation is (Rs. 500,000 minus Rs.
Correct answer: Rs. 90,000- A. Expense Rs. 20,000 and prepaid Rs. 100,000
- B. Expense Rs. 30,000 and prepaid Rs. 90,000
- C. Expense Rs. 90,000 and prepaid Rs. 30,000
- D. Expense Rs. 120,000 and prepaid nil
Explanation: Three months have expired by 31 December, so the expense is Rs. 120,000 multiplied by 3/12, or Rs. 30,000.
Correct answer: Expense Rs. 30,000 and prepaid Rs. 90,000- A. Cash paid to purchase machinery
- B. Cash received from customers
- C. Cash paid to employees
- D. Cash received from issuing shares
Explanation: The purchase of machinery involves acquiring a long-term non-current asset and is therefore an investing cash flow.
Correct answer: Cash paid to purchase machinery- A. is a non-cash expense charged against profit
- B. creates an additional cash receipt
- C. represents a financing cash inflow
- D. is recorded only when an asset is sold
Explanation: Depreciation reduces accounting profit but does not require a cash payment in the current period.
Correct answer: is a non-cash expense charged against profit- A. Payment of a supplier's invoice
- B. Recognition of depreciation expense
- C. Declaration of a dividend to owners
- D. Purchase of inventory on credit
Explanation: A dividend distribution reduces retained earnings and is shown as a movement in equity.
Correct answer: Declaration of a dividend to owners- A. Debit rent expense and credit accrued rent
- B. Debit accrued rent and credit rent income
- C. Debit cash and credit rent income
- D. Debit rent income and credit accrued rent
Explanation: The landlord has earned income and has a right to receive the amount, so accrued rent is debited as a receivable and rent income is…
Correct answer: Debit accrued rent and credit rent income- A. Profit and receivables increase by Rs. 75,000
- B. Cash and profit increase by Rs. 75,000
- C. Liabilities and cash increase by Rs. 75,000
- D. Profit decreases and receivables increase by Rs. 75,000
Explanation: Under accrual accounting, revenue is recognized when earned rather than when cash is collected.
Correct answer: Profit and receivables increase by Rs. 75,000- A. Rs. 135,000
- B. Rs. 175,000
- C. Rs. 215,000
- D. Rs. 265,000
Explanation: Begin with profit of Rs. 200,000 and add back non-cash depreciation of Rs. 40,000.
Correct answer: Rs. 175,00011. Which financial statement reports a business's assets, liabilities and equity at a specific date?
- A. Income statement
- B. Statement of financial position
- C. Statement of cash flows
- D. Statement of changes in equity
Explanation: The statement of financial position presents the accounting equation at a particular date: assets equal liabilities plus equity.
Correct answer: Statement of financial position- A. Rs. 450,000
- B. Rs. 550,000
- C. Rs. 1,250,000
- D. Rs. 3,150,000
Explanation: Equity is calculated as assets minus liabilities. Therefore, Rs. 900,000 minus Rs. 350,000 gives equity of Rs. 550,000.
Correct answer: Rs. 550,000- A. Rs. 5,000
- B. Rs. 13,000
- C. Rs. 18,000
- D. Rs. 23,000
Explanation: Supplies used during the year equal the recorded supplies balance less the unused supplies, or Rs. 18,000 minus Rs. 5,000.
Correct answer: Rs. 13,000- A. Profit increases and liabilities decrease
- B. Profit decreases and liabilities increase
- C. Assets increase and profit increases
- D. Cash decreases and liabilities decrease
Explanation: The unpaid electricity cost is an expense of the current year, so it reduces profit.
Correct answer: Profit decreases and liabilities increase- A. Rs. 120,000
- B. Rs. 300,000
- C. Rs. 480,000
- D. Rs. 620,000
Explanation: Gross profit is Rs. 800,000 minus Rs. 500,000, which equals Rs. 300,000. Deducting operating expenses of Rs.
Correct answer: Rs. 120,000- A. Rs. 153,000
- B. Rs. 163,000
- C. Rs. 173,000
- D. Rs. 183,000
Explanation: Begin with profit of Rs. 150,000 and add depreciation of Rs. 20,000. Subtract the receivables increase of Rs.
Correct answer: Rs. 163,000- A. Operating activity
- B. Investing activity
- C. Financing activity
- D. Non-cash activity
Explanation: Purchasing equipment changes the business's long-term resources, so it is normally an investing cash flow.
Correct answer: Investing activity- A. Rs. 180,000
- B. Rs. 210,000
- C. Rs. 270,000
- D. Rs. 330,000
Explanation: Annual depreciation is 10% of Rs. 300,000, or Rs. 30,000. Three years produce accumulated depreciation of Rs.
Correct answer: Rs. 210,000- A. Rs. 215,000
- B. Rs. 305,000
- C. Rs. 375,000
- D. Rs. 395,000
Explanation: Closing retained earnings equal opening retained earnings plus profit less dividends. Thus, Rs. 250,000 plus Rs. 90,000 minus Rs.
Correct answer: Rs. 305,000- A. Income statement
- B. Statement of financial position
- C. Statement of cash flows
- D. Statement of changes in equity
Explanation: The statement of changes in equity reconciles opening and closing balances by showing items such as profit, losses, owner contributions…
Correct answer: Statement of changes in equityFinancial Statements MCQs: common questions
Are these Financial Statements MCQs free?
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There are 128 Financial Statements MCQs in the Accounting bank, shown 20 to a page with the correct answer and an explanation on each.
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Yes. Each Financial Statements question shows the correct option and a written explanation of why it is correct, so a wrong answer teaches you something rather than just being marked wrong.
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