Free Financial Statements MCQs with Answers

• A. Balance Sheet
• B. Directors' report
• C. Notes on account to Balance Sheet
• D. Chairman's report

Explanation: Contingent liabilities are not normally recognized as actual liabilities because their existence or amount depends on an uncertain future…

• A. Shown as a deduction from contract work-in-progress on asset side
• B. Shown as a liability
• C. Credited to P&L A/c
• D. Either A or B above

Explanation: An advance received before contract work is performed represents an obligation to provide goods or services, so it may be presented as a…

• A. Current assets and current liabilities
• B. Profit and loss A/C and Balance sheet
• C. Current assets and non-current liabilities
• D. Current liabilities and non-current liabilities

Explanation: In funds-flow analysis, “fund” generally means net working capital, calculated as current assets minus current liabilities.

• A. No flow
• B. Sources
• C. Uses
• D. Gain

Explanation: Cash collected from debtors changes one current asset, receivables, into another, cash.

• A. Balance Sheet
• B. Profit and Loss appropriation A/c
• C. Manufacturing A/c
• D. Trading and Profit and Loss A/c

Explanation: Revenue receipts arise from the ordinary operating activities or recurring income of the business, so they are transferred to the Trading…

• A. Balance Sheet
• B. Profit and Loss A/c
• C. Trading A/c
• D. None of these

Explanation: Capital expenditure provides a benefit beyond the current period, so it is recorded as an asset in the balance sheet and allocated later…

• A. Added, Reduced
• B. Added, Added
• C. Deducted, Added
• D. Deducted, Deducted

Explanation: Funds from operations removes non-operating items from accounting profit: a gain on sale of a non-current asset is deducted, while a loss…

• A. All the significant events after the Balance Sheet date
• B. The events after Balance Sheet date but before submitting it to the Registrar of Companies
• C. The events after Balance Sheet date but before its approval by the board
• D. All changes after Balance Sheet date before its approval

Explanation: Events after the reporting date are considered up to the date on which the financial statements are authorised for issue, normally when…

• A. Sales
• B. Purchases
• C. Inward returns
• D. Closing stock

Explanation: Sales, purchases and inward returns are transferred to the Trading Account and their balances close at year-end.

• A. 17,000 (overstated.
• B. 12,000 (understated.
• C. 7,000 (overstated.
• D. 7,000 (understated.

Explanation: An overstated opening inventory increases cost of goods sold and understates profit by 5,000, while an overstated closing inventory…

• A. Previous year's profit is overstated and current year's profit is also overstated.
• B. Previous year's profit is understated and current year's profit is overstated.
• C. Previous year's profit is overstated and current year's profit is understated.
• D. There will be no impact on the profit of either the previous year or the current year.

Explanation: Overstating closing inventory increases the previous year’s profit by 50,000.

• A. Add income received in advance to respective income and show it as a liability
• B. Deduct income received in advance from respective income and show it as a liability
• C. Add income received in advance to respective income and show it as asset
• D. Deduct income received in advance from respective income and show it as an asset in the Balance Sheet

Explanation: Income received in advance has not yet been earned, so it is deducted from the recorded income and shown as a liability until the related…

• A. The cost of goods sold was overstated during 2011-2012 and income will be understated during 2012-2013
• B. The income was overstated during 2011-12 and closing inventory will be overstated during 2012-2013
• C. The retained earnings was overstated during 2011-2012 and retained earnings will be understated during 2012-2013
• D. The cost of goods sold was understated during 2011-2012 but retained earnings will not be affected during 2012-2013

Explanation: Overstated closing inventory makes cost of goods sold lower and current-year income and retained earnings higher by 25,000.

• A. Delivery method
• B. Percentage-of-completion method
• C. Production method
• D. Moving average method

Explanation: Delivery, production, and percentage-of-completion methods are revenue-recognition approaches in appropriate circumstances.

• A. Goodwill
• B. Inventories
• C. Investments
• D. Both B. and C. above.

Explanation: Inventories are generally measured at the lower of cost and net realisable value to prevent unrealised gains from being reported.

• A. Cost Price
• B. Market Price
• C. Cost price or Market price whichever is higher
• D. Cost price or Market price whichever is lower

Explanation: Closing inventory is traditionally valued at cost or net realisable value, whichever is lower, so that expected losses are recognised but…

• A. Capital
• B. Absorbed capital
• C. Net assets
• D. Net working capital

Explanation: Net working capital measures the short-term financial cushion available for operations.

• A. Decrease net income
• B. Decrease liabilities
• C. Increase net income
• D. Increase liabilities

Explanation: An increased provision for bad debts is recognized as an expense, reducing reported profit or net income.

• A. Liabilities
• B. Cash
• C. Bank
• D. Capital

Explanation: Depreciation is an expense that reduces profit, and the resulting lower profit reduces the owner's capital or equity.

• A. Cash flow statement
• B. Income statement
• C. Statement of changes in equity
• D. Statement of financial position

Explanation: The statement of financial position presents assets, liabilities and equity at a specific date, making the accounting equation visible in…