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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 2 of 7

21. Which statement primarily reports a business's revenues and expenses for an accounting period?

  • A. Income statement
  • B. Statement of financial position
  • C. Statement of changes in equity
  • D. Statement of cash flows

Explanation: The income statement measures financial performance by reporting revenues, expenses and resulting profit or loss for a period.

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Correct answer: Income statement

22. A bank loan is repayable in 18 months from the reporting date. How is the unpaid loan normally classified in the statement of financial position?

  • A. Current liability
  • B. Non-current liability
  • C. Current asset
  • D. Non-current asset

Explanation: A loan due after more than twelve months is normally presented as a non-current liability.

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Correct answer: Non-current liability

23. An asset has a carrying amount of Rs. 400,000 and is depreciated at 25% per year using the reducing-balance method. What is its carrying amount after two years?

  • A. Rs. 200,000
  • B. Rs. 225,000
  • C. Rs. 250,000
  • D. Rs. 300,000

Explanation: First-year depreciation is Rs. 100,000, leaving Rs. 300,000. Second-year depreciation is Rs. 75,000, so the carrying amount becomes Rs.

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Correct answer: Rs. 225,000

24. Inventory has a cost of Rs. 180,000 and a net realisable value of Rs. 165,000 at year-end. At what amount should it normally be reported?

  • A. Rs. 15,000
  • B. Rs. 165,000
  • C. Rs. 180,000
  • D. Rs. 345,000

Explanation: Inventory is normally measured at the lower of cost and net realisable value. Therefore, it is reported at Rs. 165,000 and the Rs.

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Correct answer: Rs. 165,000

25. A business reports revenue of Rs. 450,000. Trade receivables are Rs. 60,000 at the beginning and Rs. 85,000 at the end of the year. How much cash was collected from customers, assuming no bad debts?

  • A. Rs. 365,000
  • B. Rs. 425,000
  • C. Rs. 475,000
  • D. Rs. 510,000

Explanation: Cash collected equals revenue plus the opening receivables balance minus the closing receivables balance. Thus, Rs. 450,000 plus Rs.

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Correct answer: Rs. 425,000

26. Under IAS 7, dividends paid by a company are normally classified in the statement of cash flows as which type of activity?

  • A. Operating activity
  • B. Investing activity
  • C. Financing activity
  • D. Non-cash activity

Explanation: Dividends paid represent a distribution of finance to the company's owners and are normally shown as financing cash flows.

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Correct answer: Financing activity

27. An owner withdraws Rs. 20,000 cash for personal use from a sole proprietorship. What is the immediate accounting effect?

  • A. Cash and profit both decrease
  • B. Cash and owner's equity decrease
  • C. Expenses and liabilities increase
  • D. Revenue and owner's equity increase

Explanation: A withdrawal reduces the business's cash and the owner's equity. It is treated as drawings, not as a business expense, so it does not…

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Correct answer: Cash and owner's equity decrease

28. At year-end, which type of account is normally closed to determine the period's profit or loss?

  • A. Revenue account
  • B. Asset account
  • C. Liability account
  • D. Capital account

Explanation: Revenue accounts are temporary accounts and are closed along with expense accounts at the end of the accounting period.

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Correct answer: Revenue account

29. If depreciation expense is completely omitted from the year-end accounts, which combination is normally shown?

  • A. Assets understated and profit understated
  • B. Assets overstated and profit overstated
  • C. Assets understated and liabilities overstated
  • D. Assets overstated and liabilities understated

Explanation: Omitting depreciation leaves the asset carrying amount higher than it should be and avoids recording an expense.

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Correct answer: Assets overstated and profit overstated

30. A business has current assets of Rs. 240,000 and current liabilities of Rs. 160,000. What is its current ratio?

  • A. 0.67:1
  • B. 1.25:1
  • C. 1.50:1
  • D. 2.00:1

Explanation: The current ratio is calculated by dividing current assets by current liabilities. Rs. 240,000 divided by Rs.

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Correct answer: 1.50:1

31. A business has opening inventory of Rs. 40,000, purchases of Rs. 150,000 and closing inventory of Rs. 30,000. What is its cost of goods sold?

  • A. Rs. 140,000
  • B. Rs. 160,000
  • C. Rs. 170,000
  • D. Rs. 220,000

Explanation: Cost of goods sold equals opening inventory plus purchases less closing inventory. Therefore, Rs. 40,000 + Rs. 150,000 - Rs.

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Correct answer: Rs. 160,000

32. A company records the purchase of a machine as an expense instead of as a non-current asset. What is the immediate effect, ignoring depreciation?

  • A. Profit and assets are overstated
  • B. Profit and assets are understated
  • C. Profit is overstated and assets are understated
  • D. Profit is understated and assets are overstated

Explanation: A machine purchase is capital expenditure and should be recognised as an asset.

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Correct answer: Profit and assets are understated

33. Under IAS 7, cash received from issuing ordinary shares is normally classified as which type of cash flow?

  • A. Operating activity
  • B. Investing activity
  • C. Financing activity
  • D. Non-cash activity

Explanation: Issuing shares changes the entity's equity financing and creates a cash inflow from owners.

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Correct answer: Financing activity

34. Under IAS 7, which condition normally supports classifying an investment as a cash equivalent?

  • A. It is held for resale as inventory
  • B. It is readily convertible to a known cash amount
  • C. It has a maturity of more than one year
  • D. It is expected to earn a high return

Explanation: Cash equivalents are short-term, highly liquid investments that can be converted readily into known amounts of cash with insignificant…

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Correct answer: It is readily convertible to a known cash amount

35. A business pays Rs. 25,000 to a trade creditor in cash. What is the immediate effect on the accounting equation?

  • A. Assets and liabilities both decrease
  • B. Assets and equity both decrease
  • C. Liabilities and equity both decrease
  • D. Assets increase and liabilities decrease

Explanation: Cash, an asset, decreases by Rs. 25,000, while the amount owed to the creditor, a liability, also decreases by the same amount.

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Correct answer: Assets and liabilities both decrease

36. A machine costs Rs. 260,000, has a residual value of Rs. 20,000 and is expected to produce 120,000 units. If it produces 30,000 units in the first year, what depreciation is charged under the units-of-production method?

  • A. Rs. 50,000
  • B. Rs. 60,000
  • C. Rs. 65,000
  • D. Rs. 80,000

Explanation: Depreciable cost is Rs. 240,000, calculated as Rs. 260,000 less Rs. 20,000. Depreciation per unit is Rs.

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Correct answer: Rs. 60,000

37. A business reports sales of Rs. 900,000, sales returns of Rs. 50,000 and cost of goods sold of Rs. 500,000. What is its gross profit?

  • A. Rs. 350,000
  • B. Rs. 400,000
  • C. Rs. 450,000
  • D. Rs. 550,000

Explanation: Net sales are Rs. 850,000 after deducting sales returns. Gross profit is net sales less cost of goods sold, so Rs. 850,000 - Rs.

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Correct answer: Rs. 350,000

38. Which statement best explains why a business can report accounting profit while experiencing a cash shortage?

  • A. Profit includes only cash sales
  • B. Profit may include revenue not yet collected
  • C. Cash payments are excluded from accounting
  • D. Non-current assets are treated as liabilities

Explanation: Under accrual accounting, revenue is recognised when earned even if the customer has not yet paid.

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Correct answer: Profit may include revenue not yet collected

39. An owner purchases office furniture for the business using personal cash. How should the business record the transaction?

  • A. Increase furniture and decrease capital
  • B. Increase furniture and increase owner's capital
  • C. Increase expenses and increase owner's capital
  • D. Increase cash and decrease owner's capital

Explanation: The business receives furniture, so its assets increase. Because the owner has provided personal funds for a business asset, owner's…

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Correct answer: Increase furniture and increase owner's capital

40. Which item is normally presented in the statement of financial position rather than as an expense in the income statement?

  • A. Accumulated depreciation
  • B. Sales commission
  • C. Cost of goods sold
  • D. Office electricity

Explanation: Accumulated depreciation is a contra-asset balance that reduces the carrying amount of the related non-current asset in the statement of…

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Correct answer: Accumulated depreciation
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