FIN621 solved MCQs

BY ADNAN AWAN
FINALTERM EXAMINATION
Spring 2010
: 90 min
Marks: 69
Question No: 1 ( Marks: 1 ) - Please choose one
Which one of the following is NOT a type of adjusting entries?
► Entries to record accrued revenues
► Entries to record accrued expenses
► Entries to distribute un-earned revenue
► Entries to record revenues page 29
Question No: 2 ( Marks: 1 ) - Please choose one
Which one of the following statements is TRUE regarding distributions to
stockholders?
► The payment of dividends is not directly related to the profits of a given
period
► Shareholders can individually decide on their distributions
► To receive a corporate dividend, stock must be owned on the date of
declaration
► Corporate dividends reduce contributed capital and therefore, stockholders’
equity
Question No: 3 ( Marks: 1 ) - Please choose one
Cash flow relating to investing activities does NOT present the cash effects of which
of the following?
► Plant assets
► Intangible assets
► Investments
► Debt financing
Question No: 4 ( Marks: 1 ) - Please choose one
Office supplies are purchased on account. The company uses a perpetual inventory
system. What is the correct journal entry for this purchase of office supplies?
► Debit - Purchases; Credit - Cash
► Debit - Merchandise Inventory; Credit - Cost of Goods Sold
► Debit - Office Supplies; Credit - Accounts Payable
► Debit - Merchandise Inventory; Credit - Accounts Payable
Question No: 5 ( Marks: 1 ) - Please choose one
Which of the following is NOT true about the specific identification method?
► It requires a very detailed physical count
► This method allows management to easily manipulate ending inventory cost

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► This method is very hard to use on interchangeable goods
► This results in an overstated inventory account during the period of
inflation
Question No: 6 ( Marks: 1 ) - Please choose one
If sales revenues are Rs. 400,000, cost of goods sold is Rs. 310,000, and operating
expenses are Rs. 60,000, what is the gross profit?
► Rs. 30,000
► Rs. 90,000
► Rs. 340,000
► Rs. 400,000
G.P= SALES – C.O.G.S = 400000-310000= 90,000
Question No: 7 ( Marks: 1 ) - Please choose one
Which of the following statements best describes the nature of depreciation?
► Regular reduction of asset value to correspond to the decline in market value
as the asset ages
► A process of correlating the book value of an asset with its gradual decline in
physical efficiency
► Allocation of the cost in a manner that will ensure that plant and equipment
items are not carried on the balance sheet at amounts in excess of net realizable
value
► Allocation of the cost of a plant asset to the periods in which benefits are
received
Question No: 8 ( Marks: 1 ) - Please choose one
Warner Corporation reported net income in excess of its net cash flow from
operations. A possible explanation of this difference is:
► Depreciation expense
► Non operating gains
► A decrease in income tax rates
► A decrease in accounts receivable over the period
Question No: 9 ( Marks: 1 ) - Please choose one
In a statement of cash flows, the acquisition of land by issuing capital stock:
► Is not shown at all, since no cash was received or disbursed
► Is shown as an investing activity
► Is shown as a financing activity
► Is shown in a supplementary schedule as a non-cash investing and financing
transaction
Examples of cash flows from investing activities are: Cash payments and receipts
from acquisition and disposal of other than long term assets e.g.
Shares, debentures, TFC, long term loans given etc.
Question No: 10 ( Marks: 1 ) - Please choose one
Which of the following opinions state that the financial statements do not present
fairly the financial position, results of operations etc, in conformity with GAAP?
► Unqualified opinion
► Qualified opinion
► adverse opinion
► Disclaimer of opinion

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Question No: 11 ( Marks: 1 ) - Please choose one
Which one of the following is NOT a limitation of financial statements?
► They always present past
► They always present the monetary terms
► They help in assessment of future profitability
► They give no information about management and employee relations
Question No: 12 ( Marks: 1 ) - Please choose one
Which of the follwing business owner is personally liable for its debts?
► Corporations
► Sole proprietorship
► General partnership
► Limited liability company
Question No: 13 ( Marks: 1 ) - Please choose one
Which of the following characteristics is NOT generally regarded as right of common
shareholders?
► Preemptive right
► Voting rights
► Preference in liquidation
► Transferability of shares
Preferred stockholders have no voting rights. Preferred shares are callable or
redeemable at higher price by the company issuing these.
Question No: 14 ( Marks: 1 ) - Please choose one
What would be the journal entry to record the issue of 1,000 shares of Rs. 1
parvalue
common stock, which is issued for Rs. 4 per share?
► Debit Cash 4,000; Credit Common Stock 4,000
► Debit Cash 4,000; Credit Common Stock, 1,000, Credit Paid-in-Capital in
Excess of Par 3,000
► Debit Cash 4,000; Credit Common Stock, 1,000, Credit Retained
Earnings 3,000
► Debit Cash 4,000, Debit Paid-in-Capital in Excess of Par 3,000; Credit
Common Stock 4,000
Question No: 15 ( Marks: 1 ) - Please choose one
Suppose that an investor buys shares for Rs. 15per share from a company whose
stock's par value is stated at Rs. 10 per share, then what will be the value of paid in
capital for each share sold?
► Rs. 25
► Rs. 5
► Rs. 20
► Rs. 30
Question No: 16 ( Marks: 1 ) - Please choose one
In the vertical analysis of income statement, all the accounts are expressed as a
percentage of which of the following?
► Net sales
► Gross sales
► Net income

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► Total expenses
When using vertical analysis, the analyst calculates each item on a single financial
statement as a
percentage of a total.. The total used by the analyst on the income statement is net
sales revenue,
Question No: 17 ( Marks: 1 ) - Please choose one
The changes in the financial statement items from a base year to following years are
often expressed as which of the following?
► Trend percentages
► Component percentages
► Common percentages
► Both trend and component percentages
Trend percentages/ Horizontal Analysis/ Index Analysis: This analysis
considers changes in
items of financial statement from a base year to the following years to show the
direction of change.This is also called horizontal analysis.
Question No: 18 ( Marks: 1 ) - Please choose one
Which of the following indicates the relative size of each item included in a total?
► Trend percentages
► Component percentages
► Common percentages
► Both trend and component percentages
Component percentages/ Vertical Analysis/ Common- Size Analysis: This
type of analysis
indicates the relative size of each item in the Financial Statements as a percentage of
the total of that Statement i.e. Total Assets or total Liabilities & Shareholders equity
in Balance Sheet and Sales in Income Statement.
Question No: 19 ( Marks: 1 ) - Please choose one
If a firm has Rs. 100 in inventories, a current ratio equal to 1.2, and a quick ratio
equal to 1.1, what is the firm's Net Working Capital?
► Rs. 0
► Rs. 100
► Rs. 200
► Rs. 1,000
Question No: 20 ( Marks: 1 ) - Please choose one
A company can improve (lower) its debt-to-total asset ratio by doing which of the
following?
► Borrow more
► Shift short-term to long-term debt
► Shift long-term to short-term debt
► Sell common stock
Question No: 21 ( Marks: 1 ) - Please choose one
Krisle and Kringle's debt-to-total assets ratio is 4%. What is its debt-to-equity ratio?
► 2%
► 7%
► 6%
► 3%

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Since the debt-to-total assets ratio is.4, then equity-to-total assets ratio is.6. The
ratio of debt to equity is then .4/.6 or .667 (66.7%).
Question No: 22 ( Marks: 1 ) - Please choose one
Earnings per share, return on sales, and return on equity are all examples of which
of the following?
► Leverage ratios
► Liquidity ratios
► Turnover ratios
► Profitability ratios
Question No: 23 ( Marks: 1 ) - Please choose one
Which of the following could account for a company's gross profit ratio increasing
from one period to the next?
► An increase in the cost of sales which has not been accompanied by an
increase in the selling price of goods sold
► An increase in the selling price of goods sold which has not been
accompanied by an increase in the cost of sales
► A change in the mix of goods sold so that lower profit margin goods take a
greater proportion of total sales
► A change in stock valuation method at the year end which leads to a
decrease in the closing stock figure
Question No: 24 ( Marks: 1 ) - Please choose one
Which of the following is MOST likely to offer you the highest rate of return together
with the highest risk?
► Cash in a building society deposit account
► Preference shares
► Ordinary shares
► Government bonds
Question No: 25 ( Marks: 1 ) - Please choose one
Assume that a company total paid in capital of Rs. 57,160,000, Preferred shares Rs.
12,000,000 and commons tock Rs. 14,000,000. Calculate the amount of total legal
capital of the company.
► Rs. 26,000,000
► Rs. 2000,000
► Rs. 45,160,000
► Rs. 43,160,000
Question No: 26 ( Marks: 1 ) - Please choose one
ABC Company has cumulative preferred stock and three years of dividends are
owed. Using the following information, calculate the book value per share of the
preferred stock.
9% preferred stock, Rs. 100 par, 300 shares
authorized and issued
Rs. 3,000
Call price Rs. 109
Retained Earnings Rs. 28,000
► Rs. 109
► Rs. 202
► Rs. 211

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► Rs. 118
Question No: 27 ( Marks: 1 ) - Please choose one
A company has a cost of goods sold of Rs. 530,000; the beginning inventory is Rs.
120,000, and ending inventory is Rs. 180,000. Calculate the number of days to sell
the inventory. (Round the figures to the nearest whole)
► 83 days
► 125 days
► 104 days
► 100 days
Question No: 28 ( Marks: 1 ) - Please choose one
Which one of the following statement indicates the Inventory turnover ratio?
► How quickly company prepared its inventory
► How quickly company converts its inventory into cash
► How quickly company purchases its inventory
► How quickly company sells its inventory
Question No: 29 ( Marks: 1 ) - Please choose one
Operating cycle belongs to which group of ratios?
► Leverage ratios
► Liquidity ratios
► Profitability ratios
► Activity ratios
Question No: 30 ( Marks: 1 ) - Please choose one
Which of the following is the ideal position of debt ratio?
► 30%
► 60%
► 50%
► 45%
Question No: 31 ( Marks: 1 ) - Please choose one
What will be effect of purchase of inventory on open account on quick ratio of the
company?
► Increase
► Decrease
► No effect
► Can not be found from the given information
Question No: 32 ( Marks: 1 ) - Please choose one
What will be the effect on the inventory turnover ratio of the company, if it changed
from FIFO to LIFO during the period of inflation?
► Increase
► Decrease
► No effect
► Can not be found from the given information
Question No: 33 ( Marks: 1 ) - Please choose one
What will be the effect on the EPS of the company, if it paid stock dividend on
common stock?

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► Increase
► Decrease
► No effect
► Can not be found from the given information
Question No: 34 ( Marks: 1 ) - Please choose one
Which of the following is essential to conduct business activity, particularly in times
of adversity?
► Profitability
► Liquidity
► Stability
► Solvency
Question No: 35 ( Marks: 1 ) - Please choose one
Failure to record the receipt of a utility bill for services already received will result in
which of the following?
► An overstatement of assets
► An overstatement of liabilities
► An overstatement of equity
► An understatement of assets
Question No: 36 ( Marks: 1 ) - Please choose one
Which of the following would be the proper journal entry to record Rs. 1,000 of
Dividends paid by ABC Corporation?
► Debit Dividends 1,000; Credit Cash 1,000
► Debit Accounts Payable 1,000; Credit Cash 1,000
► Debit Dividends Expense 1,000; Credit Cash 1,000
► Debit Dividends Expense 1,000; Credit Service Revenue 1,000
Question No: 37 ( Marks: 1 ) - Please choose one
How does the acid test ratio differ from the current ratio?
► It is concerned with future cash flows rather than historical cash flows
► It does not differ from the current ratio
► It excludes the value of stocks
► It excludes the trade debtors
Question No: 38 ( Marks: 1 ) - Please choose one
Which of the following provides the basis for the trial balance?
► Income statement
► Statement of cash flow
► Ledger
► Adjusting entries
Question No: 39 ( Marks: 1 ) - Please choose one
Which of the following is NOT normally required for revenue to be recognized
according to the revenue principle for accrual basis accounting?
► The price is fixed or determinable
► Services have been performed
► Cash that has already been collected
► Evidence of an arrangement for customer payment exists
Question No: 40 ( Marks: 1 ) - Please choose one

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If monthly financial statements are desired by management then:
► Journalizing and posting adjusting entries must be done each month
► Journalizing and posting closing entries must be done each month
► Monthly financial statements can be prepared from worksheets;
adjustments and closing entries need not be entered in the accounting
records
► Adjusting and closing entries must be entered in the accounting records
before preparation of interim financial statements
Question No: 41 ( Marks: 1 ) - Please choose one
ABC Company sold a plant asset that originally cost Rs. 50,000 for Rs. 22,000 cash.
If the company correctly reports a Rs. 5,000 gain on this sale, the accumulated
depreciation on the asset at the date of sale must be:
► Rs. 33,000
► Rs. 28,000
► Rs. 27,000
► Rs. 23,000
Question No: 42 ( Marks: 1 ) - Please choose one
Which of the following statements is CORRECT regarding depreciation methods?
► Accumulated depreciation represents a fund being accumulated fro the
replacement of assets
► The cost of a machine includes the cost of repairing damage to the machine
during the installation process
► A company may use different depreciation methods in its financial
statements and its income tax returns
► The use of an accelerated depreciation method causes an asset to wear out
more quickly than does the straight line method
Question No: 43 ( Marks: 1 ) - Please choose one
The actions taken by the management to make company appear as strong as
possible in its financial statements is termed as which of the following?
► Window dressing
► Understanding
► Comprehensiveness
► Materiality
Question No: 44 ( Marks: 1 ) - Please choose one
ABC Company selected ‘Abdullah and Ahmad Charted Accountants’ as its auditors /
accountancy firm. After audit the auditors stated company’s audit report as:
We have examined the accounts of ABC Company up to the year ended 30th June,
2009, and other record based on these accounts and we got all the information
required by us. In our opinion the financial statements and the accounts on which
they are based have been prepared in conformity with GAAP and present a true and
fair position of the affairs of ABC Company.
What do you think the above case is which type of following audit reports?
► Qualified Audit Opinion
► Un-qualified Audit Opinion
► Adverse Audit Opinion
► Disclaimer Audit Opinion
Question No: 45 ( Marks: 1 ) - Please choose one

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All of the following users are very much concerned with the ratio analysis EXCEPT?
► Credit analyst, including banks who want to know the credibility of
company
► Bond rating companies, who analyze ratios to help ascertain a company’s
ability to pay its debts
► Customers, who want to know the designs and quality of the products offered
► Managers, to analyze, control, and thus improve their working operations
Question No: 46 ( Marks: 1 ) - Please choose one
In order to know the percentage of assets financed by creditors, which of the
following ratio is calculated?
► Debt Ratio
► Equity Ratio
► Operating credit Ratio
► Quick Ratio
The creditors' equity ratio equals total liabilities divided by total assets. This
reflects the percentage of assets financed by creditors. In the event of corporate
liquidation, creditors are paid before
Question No: 47 ( Marks: 1 ) - Please choose one
Which of the following statement is the LEAST LIKELY to be correct?
► A firm that has a high degree of business risk is less likely to want to incur
financial risk
► There exists little or no negotiation with suppliers of capital
regarding the financing needs of the firm
► Financial ratios are relevant for making internal comparisons
► It is important to make external comparisons or financial ratios
A firm that has a high degree of business risk is much more likely to use equity
financing because there is no contractual responsibility to make interest payments.
Question No: 48 ( Marks: 1 ) - Please choose one
Which of the following is LEAST likely to be presented in Notes to financial
statements of a firm?
► Significant pending lawsuits
► Methods of Cost flow assumptions
► A firm’s capital resource needs and liquidity
► Sales by region or business segment
The process of recording the economic effects of business transactions in a book of
original entry
is knows as which of the following?
Double entry system
Debit
Journalizing
Posting
An entry that affects more than one accounts is knows as _____________.
Journal entry
Compound entry
Adjusting entry
Reversing entry

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In which of the following form of Income Statement, the total of all expenses is
deducted from
the total of all revenues?
Multiple-step form
Account form
Report form
Single-step form
Which one of the following statements is TRUE regarding distributions to
stockholders?
The payment of dividends is not directly related to the profits of a given period
Shareholders can individually decide on their distributions
To receive a corporate dividend, stock must be owned on the date of
declaration
Corporate dividends reduce contributed capital and therefore, stockholders equity
All of the following are true regarding the financing activity section of the ca
sh flow statement EXCEPT:
Financing activities require analysis of long-term liability and shareholders’ equity
accounts
The ability to issue large quantities of common shares usually signals investor
confidence
In the future of the company
Excessive borrowing has been the downfall of many companies
The declaration and payment of a large cash dividend may signal an
emergency
Which of the following would NOT be the cash inflow for the business?
Sale of land for cash
Issuance of long term bonds
The sale of common stock
Retirement of long term debt
Under which cost flow assumption, the ending inventory is composed of the earliest
purchased Merchandise?
FIFO
LIFO
Average cost
Specific identification
Which of the following would affect the gross profit rate if sales remain constant?
An increase in advertising expense
A decrease in depreciation expense
An increase in cost of goods sold
A decrease in insurance expense
Which of the following is NOT an advantage of a Sole proprietorship?
Easy to form and wind up
Direct motivation
Better control
Limited liability
Which of the following is a type of preferred stock that entitles the

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holder to a fixed dividend And, in addition, to the right to get any surplus profits
after payment of agreed levels of dividends to holders of common stock?
In arrears preferred shares
Call able preferred shares
Cumulative preferred shares
Participating preferred shares
I f a firm has Rs. 100 in inventories, a current ratio equal to 1.2, and a
quick ratio equal to 1.1, What is the firm's Net Working Capital?
Rs. 0
Rs. 100
Rs. 200
Rs. 1,000
To financial analysts, "working capital" means the same thing as which of the
following?
Total assets
Fixed assets
Current assets
Current assets minus current liabilities
Which of the following could account for a company's gross profit ratio increa
sing from one Period to the next?
An increase in the cost of sales which has not been accompanied by an increase in
the Selling price of goods sold
An increase in the selling price of goods sold which has
not been accompanied by an Increase in the cost of sales
A change in the
mix of goods sold so that lower profit margin goods take a greater
Proportion of total sales
A change in stock valuation method at the year end
which leads to a decrease in the Closing stock figure
Nestle Pakistan Limited is an example of which of the following types of businesses?
Manufacturing
Service
Merchandise
Whole seller
Which of the following represents the long term debt paying ability of the co
mpany as they Become due?
Liquidity
Solvency
Profitability
Stability
Which group of ratios relates the financial charges of a firm to its ability to service
them?
Debt ratios
Coverage ratios
Profitability ratios

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Activity ratios
In isolation, which of the following is TRUE about a financial ratio?
Useless piece of information
Useful piece of information
Useful only for past performance
Useful only for future predictions
How is the accounts receivable turnover ratio calculated?
Net credit sales / Average total assets
Net credit sales /Operating income
Net credit sales /Average accounts receivables
Net credit sales /Cost of goods sold
Company A makes an operating profit margin of 5 % on sales of Rs. 2.5 million.
Company B has sales that are 20% higher than Company A and achieves
an operating profit margin of 3.5%. Which company makes the highest operating
profit?
Company B
Company A
Both make the same operating profit
Not possible to calculate
The DuPont Approach breaks down the earning power on shareholders' equity (ROE)
as which of the following?
Net profit margin × Total asset turnover × Equity multiplier
Total asset turnover × Gross profit margin × Debt ratio
Total asset turnover × Net profit margin
Total asset turnover × Gross profit margin × Equity multiplier
Which of the following statement best describes the operating profit margin?
It shows what portion of profits are being distributed to shareholders
It shows what return is being made on assets employed in the business
It shows how well a company is controlling its costs, including overheads
It shows how efficiently a company is turning profits into cash
Return on Sales is also known as which of the following?
Gross profit margin
Operating profit margin
Return on total assets
Return on investment
Which of the following is NOT a profitability measure?
Accounts receivable turnover ratio
Return on total assets
Return on sales
Dividend yield
Which of the following is formula to measure the return on total assets?
Average total assets by operating income
Average total assets by net income
Operating income by average total assets
Net income by average total assets

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Which of the following is NOT part of additional paid-in-capital of the company?
Preferred stocks
Common stocks
Retained earnings
Dividends distributed
Which of the following options indicate how quickly accounts receivables are c
onverted into cash?
Accounts receivable turnover
Days to collect accounts receivable
Working capital
Total assets turnover
Which one of the following statement indicates the Inventory turnover ratio?
How quickly company prepared its inventory
How quickly company converts its inventory into cash
How quickly company purchases its inventory
How quickly company sells its inventory
Assume that a company has current assets of Rs. 60,000, current liabilities of
Rs. 5,000 and prepaid expenses of Rs. 5,000. Calculate the quick ratio of the
company?
1.57
1.71
1.86
0.58
What will be the effect on the EPS of the company, if it paid stock dividend on
common stock?
Increase
Decrease
No effect
Can not be found from the given information
What will be the effect of appropriated retained earnings on the rate of return on
stockholder's equity?
Increase
Decrease
No effect
Can not be found from the given information
Which of the following is the basic purpose of an accounting system?
Develop financial statements in conformity GAAP
Provide as much useful information to decision makers as possible
Record changes in the financial position of an entity
Meet an organization's need for accounting information as efficiently as
possible
A complete set of financial statements for Hartman Company, at December 3
1, 1999, would include each of the following, EXCEPT:
Balance sheet as of December 31, 1999
Income statement for the year ended December 31, 1999
Statement of projected cash flows for 2000

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Notes containing additional information that is useful in interpreting the financ
ial statements
Which of the following equations properly represents a derivation of the
fundamental accounting equation?
Assets + liabilities = owner's equity
Assets = owner's equity
Cash = assets
Assets - liabilities = owner's equity
Which of the following is TRUE regarding Retained Earnings?
Increased by net income
Increased by revenues
Decreased by dividends declared
Decreased by gains and losses
What are the effects of an adjusting entry on the financial statements?
Match revenues and expenditures
Increase net income
Increase the accuracy of balance sheet and income statement
Match revenues and assets
The supplies account has a balance of Rs. 1,500 at year end. The actual amount of
supplies in hand at the end of period is Rs. 400. The necessary adjusting entry is:
Debit Supplies on Hand Rs. 1100; Credit Supplies Expense Rs. 1100
Debit Supplies Expense Rs. 400; Credit Supplies on Hand Rs. 400
Debit Supplies Expense Rs. 1100; Credit Supplies on Hand Rs. 1100
Debit Supplies on Hand Rs. 400; Credit Supplies Expense Rs. 400
Which of the following principle deals with the valuation and recording of the assets
at cost?
► Entity Principle
► Matching Principle
► Cost Principle
► Stable Currency principle
Which of the following is the acronym for GAAP?
► Generally Adopted Accounting Principles
► Generally Accepted Auditing Principles
► Generally Accepted Accounting Principles
► Generally Adapted American Principles
How much duration does an accounting period usually have?
► Three months
► Two years
► One year
► Five years
To determine the balance of a particular account, one should refer to which of the
following?
► Ledger
► Source document
► Chart of accounts
► Journal

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As transactions and events related to financial resources occur, they are analyzed
with respect to their effect on which of the following?
► Financial position of the company
► Accounting cycle
► Trial balance (doubted)
► Liquidity position of the company
Which of the following refers to the term “posting”?
► The system of giving numbers to the accounts
► Transferring the debits and credits to ledger
► Transferring the debits and credits to journal
► The recording of transactions
Which of the following is the next step after the preparation of trial balance?
► Adjusted trial balance
► Financial statements
► Adjusting entries
► Closing entries
Which of the following is TRUE regarding the income statement?
► The income statement reports only revenue for which cash was received at the
point of sale
► The income statement reports the financial position of a business at a particular
point in time
► The income statement is sometimes called the statement of operations
► The income statement reports revenues, expenses and liabilities
Which of the following principle is used for recording an expense?
► Matching Principle
► Cost Principle
► Realization Principle
► Objectivity Principle
The net income reported on the income statement is Rs. 90,000. However, adjusting
entries have not been made at the end of the period for supplies expense of Rs.
2,700 and accrued salaries of Rs. 1,300. Net income, as corrected, would be:
► Rs. 87,300
► Rs. 86,000
► Rs. 88,700
► Rs. 90,000
Prepaid Expense is a(n) _________ account and has a _________ normal balance.
► Revenue, credit
► Liability, credit
► Asset, debit
► Expense, debit
Company A owns a building. Which of the following statements regarding
depreciation is FALSE from an accounting perspective?
► As the market value of the building increases, depreciation should increase
► Depreciation is an estimated expense to be recorded each period during
the building’s life

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► As depreciation is recorded, stockholders’ equity is reduced
►As depreciation is recorded, total assets are reduced
A firm paid Rs. 800,000 in dividends over the last period. The beginning and ending
retained earnings account balances were Rs. 10,100,000 and Rs. 12,500,000
respectively. Assuming a 40% average tax rate, what was the firm's net income (net
profit after taxes)?
► Rs. 5,333,333
► Rs. 3,200,000
► Rs. 2,400,000(doubted)
► Rs. 1,600,000
Which of the following is the largest single expense of most merchandising firms?
► Cost of goods sold
► Rent Expense
► Amortization Expense
► Salaries Expense
Which of the following is NOT among the five main kinds of current assets?
► Cash and equivalents
► Deferred income
► Accounts receivable
► Prepaid expenses
When preparing a statement of cash flows under the indirect method, supplemental
disclosure should be made for which of the following?
► Net cash consumed by operating activities
► Cash dividend distributions
► Cash paid for interest and taxes
► Cash paid for wages
Which of the following items is included in the financing activities section of the
statement of cash flows?
► Cash effects of transactions involving making and collecting loans
► Cash effects of acquiring and disposing of investments and property, plant, and
equipment
► Cash effects of transactions obtaining resources from owners and providing them
with a return on their investment
► Cash effects of transactions that enter into the determination of net income
ABC Company has a cost of goods sold of Rs. 500,000. During the year the inventory
increased by Rs. 10,000 and accounts payable increased by Rs. 15,000. The interest
expense was Rs. 15,000 for the year and dividend of Rs. 11,000 were paid during
the year. What would be the cash payments for the purchase of the merchandise.
► Rs. 505,000
► Rs. 516,000
► Rs. 490,000
► Rs. 495,000
Which of the following arrangement is used to maintain the accounts?
► Sequentialy
► Alphabaticaly
► Monthly
► Orderly

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Which of the following represents the main step(s) of accounting cycle?
► Recording the transactions
► Classifying the transactions
► Ordering, summarizing, counting the transactions
► Recording, classifying, summarizing transactions
Blankenship Company pays its employees every Friday for work rendered that week.
The payroll is typically Rs.10,000 per week. Which of the following journal entries
would Blankenship ordinarily record on the Friday payday?
► Salary expense Rs. 10,000 - Debit; Salary payable Rs. 10,000 - Credit
► Salary expense Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
► Salary payable Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
► Salary payable Rs. 10,000 - Debit; Salary expense Rs. 10,000 - Credit
Retained earnings change over time because of several factors. Which of the
following factors would explain an INCREASE in retained earnings?
► Net Income
► Dividends payment
► Investment by the stockholders
► Net Loss
Which one of the following statements is TRUE regarding distributions to
stockholders?
► The payment of dividends is not directly related to the profits of a given period
► Shareholders can individually decide on their distributions
► To receive a corporate dividend, stock must be owned on the date of declaration
► Corporate dividends reduce contributed capital and therefore,
stockholders’ equity
Which of the following is NOT the most common example of cash equivalents?
► Savings deposits
► Certificates of Deposit (CDs)
► Stocks of other companies
► Money market mutual funds
In perpetual inventory system, a return of defective merchandise is recorded by
crediting __________.
► Purchases
► Purchase Returns
► Purchase Allowance
► Merchandise Inventory
Which factor would NOT affect the gross profit rate?
► An increase in the cost of heating the store
► An increase in the price of inventory items
► An increase in the sale of luxury items
► An increase in the use of “discount pricing” to sell merchandise
Assets which have NO market value are called:
► Wasting assets
► Fictitious assets
► Quick assets
► Tangible assets

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Audit opinions can NOT be classified as which of the following?
►Adverse opinion
► Unqualified opinion
► Qualified opinion
► Disagreement of opinion
The audit is NOT a necessary requirement for which of the following companies?
► Listed companies
► Corporations
► Sole proprietorship
► Partnerships
Which of the following is NOT a part of the five-year summary of a company?
► Net income/Loss
► Total assets
► Discontinued operations
► Net sales
Which of the following is NOT a feature of preferred shares?
► Distributive
► Callable
► In arrears
► Cumulative
Which of the following is a type of preferred stock that entitles the holder to a fixed
dividend and, in addition, to the right to get any surplus profits after payment of
agreed levels of dividends to holders of common stock?
► In arrears preferred shares (doubted)
► Call able preferred shares
► Cumulative preferred shares
► Participating preferred shares
Which one of the following represents the value of shares in the market at any point
of time?
► Par value
► Book value
► Face value
► Market value
Which one of the following represents the value of shares iive balance sheets, which
of the following can NOT be found?
► The increasing items
► The decreasing items
► The unchanged items
► The future profitable items
Which of the following would NOT improve the current ratio?
► Issue long-term debt to buy inventory
► Sell common stock to reduce current liabilities
► Sell fixed assets to reduce accounts payable
► Borrow short term to finance additional fixed assets (doubted)
A company experiences a dramatic fall in its gross profit ratio. This could be the

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result of which of the following?
► An increase in competition in the company's main product market
► An increase in the incidence of bad debts
► An increase in overhead expenses
► An increase in demand for the company's products
Notes to financial statements are beneficial in meeting the disclosure requirements of
financial reporting. The note should not be used to:
► Correct an improper presentation in the financial statements
► Describe significant accounting policies
► Describe depreciation methods employed by the company
► Describe principles and methods peculiar to the industry
Which of the following feature is shown by the income statement for a merchandising
company?
► Gross profit
► Cost of goods sold
► A sales revenue section
► All of the given options
In a period of rising prices, all of the following statements regarding LIFO are true
EXCEPT:
► Net income is generally higher
► Ending inventory is generally undervalued(Doubted)
► It can be used to manipulate net income
► Most recent inventory costs are allocated to cost of goods sold
From the given data, calculate Cost of Goods Sold using the FIFO costing method:
Beginning inventory is 10 units . Rs. 10 each.
On January 20, purchased 10 units . Rs. 20 each
On January 30, purchased 5 units . Rs. 30 each
15 of the 25 units are sold.
► Rs. 200
► Rs. 150 `
► Rs. 350
► Rs. 450
In which of the following inventory pricing procedure, the oldest costs incurred rarely
have an effect on the ending inventory valuation?
► FIFO
►LIFO
► Retail
► Weighted-average
If beginning inventory is Rs. 60,000, cost of goods purchased is Rs. 380,000, and
ending inventory is Rs. 50,000, what is cost of goods sold under a periodic system?
► Rs. 390,000(formula : opening + purchases - ending)
► Rs. 370,000
► Rs. 330,000
► Rs. 420,000
The purpose of recording depreciation on productive assets is to:
► Reflect the decline in the market value of the assets each period

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► Reduce income when the company has an exceptionally profitable year
► Be in conformity with the revenue recognition principle
► Allocate the original cost of a productive asset to expense over its useful
life
In which of the following situations, a company should NOT record any depreciation
expense on asset described?
► Computer Airline is required by law to maintain its aircraft in “as good as new”
condition
► Metro Advertising owns an office building that has been increasing in value each
year
► Computer Sales Company has in inventory a new type of computers, designed
never to obsolete
► None of the given option is right as depreciation is applied on all assets
Which of the following is NOT the part of annual report?
► Financial statements
► Auditor’s report
► Five year summary
► Future investments report
In a statement of cash flows, the acquisition of land by issuing capital stock:
► Is not shown at all, since no cash was received or disbursed
► Is shown as an investing activity
► Is shown as a financing activity(Doubted)
► Is shown in a supplementary schedule as a non-cash investing and financing
transaction
Which of the following would represent an increase in Owner's Equity?
► Increase in net income
► Increase in assets
► Increase in accounts receivable
► Increase in cash
Which of the following steps of accounting cycle keep on occurring throughout the
period?
► Journalizing and posting the entries
► Making adjusting entries for the relevent accounts
► Preparing Trial Balance
► Preparing financial statements
Which one of the following items is NOT generally used in preparing a statement of
cash flows?
► Adjusted trial balance
► Comparative balance sheets(doubted)
► Current income statement
► Additional information
Which of the following is the most common item in adjusting entries of a
merchandising business?
► Un-earned revenue
► Pre-paid expense

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► Depreciation expense
► Accrued revenue
Closing entries result in net income being calculated in the income summary account
and then transferred to which of the following account?
► Revenue account
► Common Stock account
► Dividends account
► Owner's Capital account
Which of the following question is NOT addressed by cash flow statement?
► How much cash was generated by the company’s operations?
► Why is such a profitable company able to pay only small dividends?
► How much was spent for the new plants and equipment?
► How profitable the company’s current assets are?
Which of the following statements is CORRECT regarding depreciation methods?
► Accumulated depreciation represents a fund being accumulated fro the
replacement of assets
► The cost of a machine includes the cost of repairing damage to the machine during
the installation process
► A company may use different depreciation methods in its financial
statements and its income tax returns
► The use of an accelerated depreciation method causes an asset to wear out more quickly than does the
straight line method
How much duration does an accounting period usually have?
► Three months
► Two years
► One year
► Five years
Which of the following statement shows the effects of cash inflows and outflows?
► Balance Sheet
► Statement of Owner’s Equity
► Income Statement
► Statement of Cash Flows
To determine the balance of a particular account, one should refer to which of the
following?
► Ledger
► Source document
► Chart of accounts
► Journal
:4
A business has purchased a building on credit, how it would be recorded in the
journal?
► Building - Credit; Accounts payable - Debit
► Building - Debit; Notes payable -Credit
► Building - Debit; Owner’s equity- Credit
► Building - Debit; Accounts payable - Credit
:5
An entry that affects more than one accounts is knows as _____________.
► Journal entry
► Compound entry
► Adjusting entry

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► Reversing entry
:6
Which of the following is NOT true about the net income?
► It is a calculated figure and represents actual cash
► It can be distributed among holders of common stock as a dividend
► It can be held by the firm as retained earnings
► It is obtained by subtracting expenses from the revenues
:7
What would be the adjusting entry to record depreciation if the estimated amount of
depreciation on equipment for a period is Rs. 2,000?
► Depreciation expense - Debit; Equipment - Credit
► Depreciation expense - Debit; Accumulated depreciation - Credit
► Equipment - Debit; Depreciation expense - Credit
► Accumulated depreciation - Debit; Depreciation expense - Credit
:8
The trial balance shows Supplies of Rs.1,350 and Supplies Expense of Rs.0. If Rs.600
of supplies are on hand at the end of the period, the adjusting entry would be:
► Supplies, Rs. 600 - Debit; Supplies Expense, Rs. 600 - Credit
► Supplies, Rs. 750 - Debit; Supplies Expense, Rs. 750 - Credit
► Supplies Expense, Rs. 750 - Debit; Supplies, Rs. 750 - Credit
► Supplies Expense, Rs. 600 Debit; Supplies, Rs. 600 - Credit
:9
Which of the following accounts would NOT be included in a post-closing trial
balance?
► Cash
► Accumulated depreciation
► Owner’s equity
► Fees earned
: 10
After the closing entries are posted to the ledger, each expense account will have?
► A debit balance
► A negative balance
► A credit balance
► A zero balance
: 11
Current assets are those assets which management intends to convert into cash or
consume within:
► The operating cycle
► One year
► The longer of operating cycle or one year
► The shorter of operating cycle or one year
: 12
Which of the following is NOT the most common example of cash equivalents?
► Savings deposits
► Certificates of Deposit (CDs)
► Stocks of other companies
► Money market mutual funds
: 13
In preparing the statement of cash flows, how should non-cash investing/financing
activities be reported?
► In the financing activities section of the statement of cash flows
► In a separate schedule accompanying the statement of cash flows
► In the investing activities section of the statement of cash flows

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► Shoud not to be reported
: 14
Which of the following items are NOT added back to the net income figure (which is
found on the Income Statement) to arrive at cash flows from operations?
► Depreciation
► Deferred tax
► Amortization
► Investments
: 15
Which of the following activities convert the income statement items from the accrual
basis of accounting to cash?
► Operating activities
► Investing activities
► Financing activities
► Non cash activities
: 16
Which one of the following items is specifically included in the body of a statement of
cash flows?
► Operating and non-operating cash flow information
► Conversion of debt to equity
► Acquiring an asset through a capital leases
► Purchasing a building by giving a mortgage to the seller
: 17
ABC Company has a cost of goods sold of Rs. 500,000. During the year the inventory
increased by Rs. 10,000 and accounts payable increased by Rs. 15,000. The interest
expense was Rs. 15,000 for the year and dividend of Rs. 11,000 were paid during
the year. What would be the cash payments for the purchase of the merchandise.
► Rs. 505,000
► Rs. 516,000
► Rs. 490,000
► Rs. 495,000
: 18
The cash flow from investing activities shows the cash effects of which of the
following?
► Income statement items
► Long term assets items
► Long term liability & stockholder’s equity
► Long term liability and long term assets
: 19
Which of the following must be included in a company's summary of significant
accounting policies in the notes to the financial statements?
► Description of current year equity transactions
► Summary of long-term debt outstanding
► Schedule of fixed assets
► Revenue recognition policies
: 20
Gross profit is:
► Excess of sales over cost of goods sold
► Sales less Purchases
► Cost of goods sold + Opening stock
► Net profit less expenses of the period
: 21
An inventory error affects ___________ accounting periods.

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► Only current
► Two
► Three
► Four
: 22
From the given data, calculate Cost of Goods Sold using the FIFO costing method:
Beginning inventory is 10 units @ Rs. 10 each.
On January 20, purchased 10 units @ Rs. 20 each
On January 30, purchased 5 units @ Rs. 30 each
15 of the 25 units are sold.
► Rs. 200
► Rs. 150
► Rs. 350
► Rs. 450
: 23
Under which cost flow assumption, the ending inventory is composed of the most
recently purchased merchandise?
► FIFO
► LIFO
► Average cost
► Specific identification
: 24
If sales revenues are Rs. 400,000, cost of goods sold is Rs. 310,000, and operating
expenses are Rs. 60,000, what is the gross profit?
► Rs. 30,000
► Rs. 90,000
► Rs. 340,000
► Rs. 400,000
: 25
Which cost flow assumption most closely matches the actual physical flow of
inventory in most retailing businesses?
► FIFO
► LIFO
► Average cost
► Specific identification
: 26
The sale of a depreciable asset resulting in a loss indicates that the proceeds from
the sale were:
► Less than current market value
► Greater than cost
► Greater than book value
► Less than book value
: 27
The purpose of recording depreciation on productive assets is to:
► Reflect the decline in the market value of the assets each period
► Reduce income when the company has an exceptionally profitable year
► Be in conformity with the revenue recognition principle
► Allocate the original cost of a productive asset to expense over its useful
life
: 28
Which depreciation method allocates an equal portion of depreciation expense to
each period of asset’s useful life?
► Straight-line method

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► Double-declining balance method
► Sum-of-the-year digit method
► Accelerated depreciation method
:2
Which of the following is NOT an example of accelerated depreciation method?
► Straight-line method
► Sum-of-the-years digit method
► Double-declining balance method
► Modified Accelerated Cost Recovery System
The Drawing account is closed by which of the following entry?
► Capital – Debit; Drawing - Credit
► Drawing – Debit; Capital - Credit
► Income Summary – Debit; Drawing - Crediting
► Drawing – Debit; Income Summary - Crediting
Which of the following account would be classified as a current asset on the balance
sheet?
► Accumulated depreciation
► Accounts receivable
► Office equipment
► Land
An adjusting entry would NOT be required for which of the following account?
► Salaries
► Past due expense
► Income tax expense
► Accounts receivable
Which of the following accounts will be debited, when increased?
► Liabilities and expenses
► Assets and equity
► Assets and expenses
► Equity and revenues
Accounting Cycle is a series of activities that begins with ___________ and ends
with ___________.
► Closing of books, transactions
► Transaction, After closing Trial Balance
► Journal, ledger account
► Transactions, financial statements
The income statement of ABL shows other operating expenses of Rs. 30 million;
prepaid insurance expense increased by Rs. 4 million; and accrued utilities payable
decreased by Rs. 7 million. How much did the company pay in other operating
expenses?
► Rs. 41 million
► Rs. 33 million
► Rs. 27 million
► Rs. 19 million

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The statement of cash flows does NOT report the:
► Sources of cash in the current period
► Amount of checks outstanding at the end of the period
► Uses of cash in the current period
► Change in the cash balance for the current period
Which of the following is NOT normally required for revenue to be recognized
according to the revenue principle for accrual basis accounting?
► The price is fixed or determinable
► Services have been performed
► Cash that has already been collected
► Evidence of an arrangement for customer payment exists
Which of the following balances does the Contra-Asset account show typically?
► Credit
► Debit
► Negative
► Positive
Which one of the following would lead to the decrease in the owner’s equity?
► Purchasing a piece of land
► Paying dividends to shareholders
► Purchasing equipment on account
► Paying back the principal of a loan
The users of a statement of cash flows are mostly interested in:
► Net cash flow from operating activities
► Net cash flow from investing activities
► Net cash flow from financing activities
► Net cash flow from non-cash transactions
Final term MCQS
In order to know the percentage of assets financed by creditors, which of the
following ratio is calculated?
► Debt Ratio
► Equity Ratio
► Operating credit Ratio
► Quick Ratio

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The creditors' equity ratio equals total liabilities divided by total assets. This
reflects the percentage of assets financed by creditors. In the event of corporate
liquidation, creditors are paid before
Which of the following statement is the LEAST LIKELY to be correct?
► A firm that has a high degree of business risk is less likely to want to incur
financial risk
► There exists little or no negotiation with suppliers of capital
regarding the financing needs of the firm
► Financial ratios are relevant for making internal comparisons
► It is important to make external comparisons or financial ratios
A firm that has a high degree of business risk is much more likely to use equity
financing because there is no contractual responsibility to make interest payments.
Which of the following is LEAST likely to be presented in Notes to financial
statements of a firm?
► Significant pending lawsuits
► Methods of Cost flow assumptions
► A firm’s capital resource needs and liquidity
► Sales by region or business segment
ABC Company selected ‘Abdullah and Ahmad Charted Accountants’ as its auditors /
accountancy firm. After audit the auditors stated company’s audit report as:
We have examined the accounts of ABC Company up to the year ended 30th June,
2009, and other record based on these accounts and we got all the information
required by us. In our opinion the financial statements and the accounts on which
they are based have been prepared in conformity with GAAP and present a true and
fair position of the affairs of ABC Company.
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What do you think the above case is which type of following audit reports?
► Qualified Audit Opinion
► Un-qualified Audit Opinion
► Adverse Audit Opinion
► Disclaimer Audit Opinion
All of the following users are very much concerned with the ratio analysis EXCEPT?
► Credit analyst, including banks who want to know the credibility of
company
► Bond rating companies, who analyze ratios to help ascertain a company’s
ability to pay its debts
► Customers, who want to know the designs and quality of the products offered
► Managers, to analyze, control, and thus improve their working operations
If monthly financial statements are desired by management then:
► Journalizing and posting adjusting entries must be done each month
► Journalizing and posting closing entries must be done each month
► Monthly financial statements can be prepared from worksheets;
adjustments and closing entries need not be entered in the accounting
records
► Adjusting and closing entries must be entered in the accounting records
before preparation of interim financial statements
ABC Company sold a plant asset that originally cost Rs. 50,000 for Rs. 22,000 cash.
If the company correctly reports a Rs. 5,000 gain on this sale, the accumulated
depreciation on the asset at the date of sale must be:
► Rs. 33,000
► Rs. 28,000

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► Rs. 27,000
► Rs. 23,000
Which of the following statements is CORRECT regarding depreciation methods?
► Accumulated depreciation represents a fund being accumulated fro the
replacement of assets
► The cost of a machine includes the cost of repairing damage to the machine
during the installation process
► A company may use different depreciation methods in its financial
statements and its income tax returns
► The use of an accelerated depreciation method causes an asset to wear out
more quickly than does the straight line method
How does the acid test ratio differ from the current ratio?
► It is concerned with future cash flows rather than historical cash flows
► It does not differ from the current ratio
► It excludes the value of stocks
► It excludes the trade debtors
Which of the following provides the basis for the trial balance?
► Income statement
► Statement of cash flow
► Ledger
► Adjusting entries

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Which of the following is NOT normally required for revenue to be recognized
according to the revenue principle for accrual basis accounting?
► The price is fixed or determinable
► Services have been performed
► Cash that has already been collected
► Evidence of an arrangement for customer payment exists
Which of the following is essential to conduct business activity, particularly in times
of adversity?
► Profitability
► Liquidity
► Stability
► Solvency
Failure to record the receipt of a utility bill for services already received will result in
which of the following?
► An overstatement of assets
► An overstatement of liabilities
► An overstatement of equity
► An understatement of assets
Which of the following would be the proper journal entry to record Rs. 1,000 of
Dividends paid by ABC Corporation?
► Debit Dividends 1,000; Credit Cash 1,000
► Debit Accounts Payable 1,000; Credit Cash 1,000

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► Debit Dividends Expense 1,000; Credit Cash 1,000
► Debit Dividends Expense 1,000; Credit Service Revenue 1,000
Which of the following is the ideal position of debt ratio?
► 30%
► 60%
► 50%
► 45%
What will be effect of purchase of inventory on open account on quick ratio of the
company?
► Increase
► Decrease
► No effect
► Can not be found from the given information
What will be the effect on the inventory turnover ratio of the company, if it changed
from FIFO to LIFO during the period of inflation?
► Increase
► Decrease
► No effect
► Can not be found from the given information
ABC Company has cumulative preferred stock and three years of dividends are
owed. Using the following information, calculate the book value per share of the
preferred stock.
9% preferred stock, Rs. 100 par, 300 shares Rs. 3,000

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authorized and issued
Call price Rs. 109
Retained Earnings Rs. 28,000
► Rs. 109
► Rs. 202
► Rs. 211
► Rs. 118
Which one of the following statement indicates the Inventory turnover ratio?
► How quickly company prepared its inventory
► How quickly company converts its inventory into cash
► How quickly company purchases its inventory
► How quickly company sells its inventory
Suppose that an investor buys shares for Rs. 15per share from a company whose
stock's par value is stated at Rs. 10 per share, then what will be the value of paid in
capital for each share sold?
► Rs. 25
► Rs. 5
► Rs. 20
► Rs. 30
In the vertical analysis of income statement, all the accounts are expressed as a
percentage of which of the following?
► Net sales

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► Gross sales
► Net income
► Total expenses
When using vertical analysis, the analyst calculates each item on a single financial
statement as a
percentage of a total.. The total used by the analyst on the income statement is net
sales revenue,
Which of the follwing business owner is personally liable for its debts?
► Corporations
► Sole proprietorship
► General partnership
► Limited liability company
Which of the following characteristics is NOT generally regarded as right of common
shareholders?
► Preemptive right
► Voting rights
► Preference in liquidation
► Transferability of shares
Preferred stockholders have no voting rights. Preferred shares are callable or
redeemable at higher price by the company issuing these.
In a statement of cash flows, the acquisition of land by issuing capital stock:
► Is not shown at all, since no cash was received or disbursed
► Is shown as an investing activity

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► Is shown as a financing activity
► Is shown in a supplementary schedule as a non-cash investing and financing
transaction
Examples of cash flows from investing activities are: Cash payments and receipts
from acquisition and disposal of other than long term assets e.g.
Shares, debentures, TFC, long term loans given etc.
Which of the following opinions state that the financial statements do not present
fairly the financial position, results of operations etc, in conformity with GAAP?
► Unqualified opinion
► Qualified opinion
► adverse opinion
► Disclaimer of opinion
If sales revenues are Rs. 400,000, cost of goods sold is Rs. 310,000, and operating
expenses are Rs. 60,000, what is the gross profit?
► Rs. 30,000
► Rs. 90,000
► Rs. 340,000
► Rs. 400,000
G.P= SALES – C.O.G.S = 400000-310000= 90,000
Which of the following statements best describes the nature of depreciation?
► Regular reduction of asset value to correspond to the decline in
market value as the asset ages

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► A process of correlating the book value of an asset with its gradual decline in
physical efficiency
► Allocation of the cost in a manner that will ensure that plant and equipment
items are not carried on the balance sheet at amounts in excess of net realizable
value
► Allocation of the cost of a plant asset to the periods in which benefits are
received
Cash flow relating to investing activities does NOT present the cash effects of which
of the following?
► Plant assets
► Intangible assets
► Investments
► Debt financing
Office supplies are purchased on account. The company uses a perpetual inventory
system. What is the correct journal entry for this purchase of office supplies?
► Debit - Purchases; Credit - Cash
► Debit - Merchandise Inventory; Credit - Cost of Goods Sold
► Debit - Office Supplies; Credit - Accounts Payable
► Debit - Merchandise Inventory; Credit - Accounts Payable
Which of the following is NOT true about the specific identification method?
► It requires a very detailed physical count
► This method allows management to easily manipulate ending inventory cost

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► This method is very hard to use on interchangeable goods
► This results in an overstated inventory account during the period of
inflation
Which one of the following is NOT a type of adjusting entries?
► Entries to record accrued revenues
► Entries to record accrued expenses
► Entries to distribute un-earned revenue
► Entries to record revenues page 29
Which one of the following statements is TRUE regarding distributions to
stockholders?
► The payment of dividends is not directly related to the profits of a given
period
► Shareholders can individually decide on their distributions
► To receive a corporate dividend, stock must be owned on the date of
declaration
► Corporate dividends reduce contributed capital and therefore, stockholders’
equity
What will be the effect of conversion of a portion of bonds payable into common
stock on the interest coverage ratio of the company?
Increase ► 
Decrease ► 
No effect ► 

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Can not be found from the given information ► (marina) 

What will be the effect on the current ratio of the company, if company purchased
factory supplies on open account?
Increase ► 
Decrease ► 
No effect ► 
Can not be found from the given information ► 
Which of the following is NOT an example of liquid assets?
Cash ► 
Accounts receivable ► 
Marketable securities ► 
Prepaid expenses ►
It shows how quickly inventory is sold and is determined by Inventory Turnover
Ratio
Operating cycle belongs to which group of ratios?
Leverage ratios ► 
Liquidity ratios ► 
Profitability ratios ► 
Activity ratios ► 

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The period of time required to convert inventory into cash is known as which of the
following?
Operating cycle ► 
Accounting cycle ► 
Cash conversion cycle ► 
None of the above ► 
Page 43: assets capable of being converted into cash within one year or operating
cycle, whichever is longer. Operating cycle is the time required to purchase or
manufacture inventory, sell the product and collect cash i.e.
What will be the effect on the day’s sales in accounts receivables of a company if it
uses a natural business year?
Accounts receivables will be understated ► 
Accounts receivables will be understated for service firms ► 
Accounts receivables will be overstated ► 
Accounts receivables will be have no effect ► 
Which of the following is NOT a goal of analysis of financial statement?
Assess the past performance ► 
Asses the current financial position ► 
Predict the future performance of the company ► 
Asses the working of management in the future ► 
Which of the following is the percentage change if a negative amount appears in the
base year?
Misleading 

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Positive 
Can not be computed 
Negative
What will be the affect of dividends paid on the book value of a company?
No effect on book value ► 
Increase in book value ► 
Decrease in book value ► 
Depends upon the situation ► 
The amount of current assets that varies with seasonal requirements is referred to as
which of the following?
Permanent Working Capital ► 
Net Working Capital ► 
Temporary Working Capital ► 
Gross Working Capital ►
The audit is NOT a necessary requirement for which of the following companies?
► Listed companies
► Corporations
► Sole proprietorship
► Partnerships

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Which of the follwing business owner is personally liable for its debts?
► Corporations
► Sole proprietorship
► General partnership
► Limited liability company
The rules of GAAP are applicable to all types of companies EXCEPT:
► Sole proprietorship
► Corporations
► Partnerships
► None of the given option
The process of recording the economic effects of business transactions in a book of
original entry
is knows as which of the following?
Double entry system
Debit
Journalizing
Posting
An entry that affects more than one accounts is knows as _____________.
Journal entry
Compound entry
Adjusting entry
Reversing entry
In which of the following form of Income Statement, the total of all expenses is
deducted from
the total of all revenues?
Multiple-step form
Account form

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Report form
Single-step form
Which one of the following statements is TRUE regarding distributions to
stockholders?
The payment of dividends is not directly related to the profits of a given period
Shareholders can individually decide on their distributions
To receive a corporate dividend, stock must be owned on the date of
declaration
Corporate dividends reduce contributed capital and therefore, stockholders equity
All of the following are true regarding the financing activity section of the ca
sh flow statement EXCEPT:
Financing activities require analysis of long-term liability and shareholders’ equity
accounts
The ability to issue large quantities of common shares usually signals investor
confidence
In the future of the company
Excessive borrowing has been the downfall of many companies
The declaration and payment of a large cash dividend may signal an
emergency
Which of the following would NOT be the cash inflow for the business?
Sale of land for cash
Issuance of long term bonds
The sale of common stock
Retirement of long term debt
Under which cost flow assumption, the ending inventory is composed of the earliest
purchased Merchandise?
FIFO
LIFO
Average cost
Specific identification
Which of the following would affect the gross profit rate if sales remain constant?
An increase in advertising expense

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A decrease in depreciation expense
An increase in cost of goods sold
A decrease in insurance expense
Which of the following is NOT an advantage of a Sole proprietorship?
Easy to form and wind up
Direct motivation
Better control
Limited liability
Which of the following is a type of preferred stock that entitles the
holder to a fixed dividend And, in addition, to the right to get any surplus profits
after payment of agreed levels of dividends to holders of common stock?
In arrears preferred shares
Call able preferred shares
Cumulative preferred shares
Participating preferred shares
I f a firm has Rs. 100 in inventories, a current ratio equal to 1.2, and a quick ratio
equal to 1.1, What is the firm's Net Working Capital?
Rs. 0
Rs. 100
Rs. 200
Rs. 1,000
To financial analysts, "working capital" means the same thing as which of the
following Total assets
Fixed assets
Current assets
Current assets minus current liabilities
Which of the following could account for a company's gross profit ratio increa
sing from one Period to the next?
An increase in the cost of sales which has not been accompanied by an increase in
the Selling price of goods sold
An increase in the selling price of goods sold which has
not been accompanied by an Increase in the cost of sales

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A change in the
mix of goods sold so that lower profit margin goods take a greater
Proportion of total sales
A change in stock valuation method at the year end
which leads to a decrease in the Closing stock figure
Nestle Pakistan Limited is an example of which of the following types of businesses?
Manufacturing
Service
Merchandise
Whole seller
Which of the following represents the long term debt paying ability of the co
mpany as they Become due?
Liquidity
Solvency
Profitability
Stability
Which group of ratios relates the financial charges of a firm to its ability to service
them?
Debt ratios
Coverage ratios
Profitability ratios
Activity ratios
In isolation, which of the following is TRUE about a financial ratio?
Useless piece of information
Useful piece of information
Useful only for past performance
Useful only for future predictions
How is the accounts receivable turnover ratio calculated?
Net credit sales / Average total assets
Net credit sales /Operating income
Net credit sales /Average accounts receivables
Net credit sales /Cost of goods sold

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Company A makes an operating profit margin of 5 % on sales of Rs. 2.5 million.
Company B has sales that are 20% higher than Company A and achieves
an operating profit margin of 3.5%. Which company makes the highest operating
profit?
Company B
Company A
Both make the same operating profit
Not possible to calculate
The DuPont Approach breaks down the earning power on shareholders' equity (ROE)
as which of the following?
Net profit margin × Total asset turnover × Equity multiplier
Total asset turnover × Gross profit margin × Debt ratio
Total asset turnover × Net profit margin
Total asset turnover × Gross profit margin × Equity multiplier
Which of the following statement best describes the operating profit margin?
It shows what portion of profits are being distributed to shareholders
It shows what return is being made on assets employed in the business
It shows how well a company is controlling its costs, including overheads
It shows how efficiently a company is turning profits into cash
Return on Sales is also known as which of the following?
Gross profit margin
Operating profit margin
Return on total assets
Return on investment
Which of the following is NOT a profitability measure?
Accounts receivable turnover ratio
Return on total assets
Return on sales
Dividend yield
Which of the following is formula to measure the return on total assets?
Average total assets by operating income
Average total assets by net income

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Operating income by average total assets
Net income by average total assets
Which of the following is NOT part of additional paid-in-capital of the company?
Preferred stocks
Common stocks
Retained earnings
Dividends distributed
Which of the following options indicate how quickly accounts receivables are c
onverted into cash?
Accounts receivable turnover
Days to collect accounts receivable
Working capital
Total assets turnover
Which one of the following statement indicates the Inventory turnover ratio?
How quickly company prepared its inventory
How quickly company converts its inventory into cash
How quickly company purchases its inventory
How quickly company sells its inventory
Assume that a company has current assets of Rs. 60,000, current liabilities of
Rs. 5,000 and prepaid expenses of Rs. 5,000. Calculate the quick ratio of the
company?
1.57
1.71
1.86
0.58
What will be the effect on the EPS of the company, if it paid stock dividend on
common stock?
Increase
Decrease
No effect
Can not be found from the given information

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What will be the effect of appropriated retained earnings on the rate of return on
stockholder's equity?
Increase
Decrease
No effect
Can not be found from the given information
Which of the following is the basic purpose of an accounting system?
Develop financial statements in conformity GAAP
Provide as much useful information to decision makers as possible
Record changes in the financial position of an entity
Meet an organization's need for accounting information as efficiently as
possible
A complete set of financial statements for Hartman Company, at December 3
1, 1999, would include each of the following, EXCEPT:
Balance sheet as of December 31, 1999
Income statement for the year ended December 31, 1999
Statement of projected cash flows for 2000
Notes containing additional information that is useful in interpreting the financ
ial statements
Which of the following equations properly represents a derivation of the fundamental
accounting equation?
Assets + liabilities = owner's equity
Assets = owner's equity
Cash = assets
Assets - liabilities = owner's equity
Which of the following is TRUE regarding Retained Earnings?
Increased by net income
Increased by revenues
Decreased by dividends declared
Decreased by gains and losses
What are the effects of an adjusting entry on the financial statements?

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Match revenues and expenditures
Increase net income
Increase the accuracy of balance sheet and income statement
Match revenues and assets
The supplies account has a balance of Rs. 1,500 at year end. The actual amount of
supplies in hand at the end of period is Rs. 400. The necessary adjusting entry is:
Debit Supplies on Hand Rs. 1100; Credit Supplies Expense Rs. 1100
Debit Supplies Expense Rs. 400; Credit Supplies on Hand Rs. 400
Debit Supplies Expense Rs. 1100; Credit Supplies on Hand Rs. 1100
Debit Supplies on Hand Rs. 400; Credit Supplies Expense Rs. 400
Which of the following principle deals with the valuation and recording of the assets
at cost?
► Entity Principle
► Matching Principle
► Cost Principle
► Stable Currency principle
Which of the following is the acronym for GAAP?
► Generally Adopted Accounting Principles
► Generally Accepted Auditing Principles
► Generally Accepted Accounting Principles
► Generally Adapted American Principles
How much duration does an accounting period usually have?
► Three months
► Two years
► One year
► Five years
To determine the balance of a particular account, one should refer to which of the
following?
► Ledger
► Source document
► Chart of accounts
► Journal

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As transactions and events related to financial resources occur, they are analyzed
with respect to their effect on which of the following?
► Financial position of the company
► Accounting cycle
► Trial balance (doubted)
► Liquidity position of the company
Which of the following refers to the term “posting”?
► The system of giving numbers to the accounts
► Transferring the debits and credits to ledger
► Transferring the debits and credits to journal
► The recording of transactions
Which of the following is the next step after the preparation of trial balance?
► Adjusted trial balance
► Financial statements
► Adjusting entries
► Closing entries
Which of the following is TRUE regarding the income statement?
► The income statement reports only revenue for which cash was received at the
point of sale
► The income statement reports the financial position of a business at a particular
point in time
► The income statement is sometimes called the statement of operations
► The income statement reports revenues, expenses and liabilities
Which of the following principle is used for recording an expense?
► Matching Principle
► Cost Principle
► Realization Principle
► Objectivity Principle
The net income reported on the income statement is Rs. 90,000. However, adjusting
entries have not been made at the end of the period for supplies expense of Rs.
2,700 and accrued salaries of Rs. 1,300. Net income, as corrected, would be:
► Rs. 87,300
► Rs. 86,000
► Rs. 88,700
► Rs. 90,000
Prepaid Expense is a(n) _________ account and has a _________ normal balance.
► Revenue, credit
► Liability, credit
► Asset, debit
► Expense, debit
Company A owns a building. Which of the following statements regarding
depreciation is FALSE from an accounting perspective?
► As the market value of the building increases, depreciation should increase
► Depreciation is an estimated expense to be recorded each period during
the building’s life

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► As depreciation is recorded, stockholders’ equity is reduced
►As depreciation is recorded, total assets are reduced
A firm paid Rs. 800,000 in dividends over the last period. The beginning and ending
retained earnings account balances were Rs. 10,100,000 and Rs. 12,500,000
respectively. Assuming a 40% average tax rate, what was the firm's net income (net
profit after taxes)?
► Rs. 5,333,333
► Rs. 3,200,000
► Rs. 2,400,000(doubted)
► Rs. 1,600,000
Which of the following is the largest single expense of most merchandising firms?
► Cost of goods sold
► Rent Expense
► Amortization Expense
► Salaries Expense
Which of the following is NOT among the five main kinds of current assets?
► Cash and equivalents
► Deferred income
► Accounts receivable
► Prepaid expenses
When preparing a statement of cash flows under the indirect method, supplemental
disclosure should be made for which of the following?
► Net cash consumed by operating activities
► Cash dividend distributions
► Cash paid for interest and taxes
► Cash paid for wages
Which of the following items is included in the financing activities section of the
statement of cash flows?
► Cash effects of transactions involving making and collecting loans
► Cash effects of acquiring and disposing of investments and property, plant, and
equipment
► Cash effects of transactions obtaining resources from owners and providing them
with a return on their investment
► Cash effects of transactions that enter into the determination of net income
ABC Company has a cost of goods sold of Rs. 500,000. During the year the inventory
increased by Rs. 10,000 and accounts payable increased by Rs. 15,000. The interest
expense was Rs. 15,000 for the year and dividend of Rs. 11,000 were paid during
the year. What would be the cash payments for the purchase of the merchandise.
► Rs. 505,000
► Rs. 516,000
► Rs. 490,000
► Rs. 495,000
Which of the following arrangement is used to maintain the accounts?
► Sequentialy
► Alphabaticaly
► Monthly

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► Orderly
Which of the following represents the main step(s) of accounting cycle?
► Recording the transactions
► Classifying the transactions
► Ordering, summarizing, counting the transactions
► Recording, classifying, summarizing transactions
Blankenship Company pays its employees every Friday for work rendered that week.
The payroll is typically Rs.10,000 per week. Which of the following journal entries
would Blankenship ordinarily record on the Friday payday?
► Salary expense Rs. 10,000 - Debit; Salary payable Rs. 10,000 - Credit
► Salary expense Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
► Salary payable Rs. 10,000 - Debit; Cash Rs. 10,000 - Credit
► Salary payable Rs. 10,000 - Debit; Salary expense Rs. 10,000 - Credit
Retained earnings change over time because of several factors. Which of the
following factors would explain an INCREASE in retained earnings?
► Net Income
► Dividends payment
► Investment by the stockholders
► Net Loss
Which one of the following statements is TRUE regarding distributions to
stockholders?
► The payment of dividends is not directly related to the profits of a given period
► Shareholders can individually decide on their distributions
► To receive a corporate dividend, stock must be owned on the date of declaration
► Corporate dividends reduce contributed capital and therefore,
stockholders’ equity http://www.vustudents.net/
Which of the following is NOT the most common example of cash equivalents?
► Savings deposits
► Certificates of Deposit (CDs)
► Stocks of other companies
► Money market mutual funds

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In perpetual inventory system, a return of defective merchandise is recorded by
crediting __________.
► Purchases
► Purchase Returns
► Purchase Allowance
► Merchandise Inventory
Which factor would NOT affect the gross profit rate?
► An increase in the cost of heating the store
► An increase in the price of inventory items
► An increase in the sale of luxury items
► An increase in the use of “discount pricing” to sell merchandise
Assets which have NO market value are called:
► Wasting assets
► Fictitious assets
► Quick assets
► Tangible assets
Audit opinions can NOT be classified as which of the following?
►Adverse opinion
► Unqualified opinion
► Qualified opinion
► Disagreement of opinion
The audit is NOT a necessary requirement for which of the following companies?
► Listed companies
► Corporations
► Sole proprietorship
► Partnerships
Which of the following is NOT a part of the five-year summary of a company?
► Net income/Loss
► Total assets
► Discontinued operations
► Net sales

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Which of the following is NOT a feature of preferred shares?
► Distributive
► Callable
► In arrears
► Cumulative
Which of the following is a type of preferred stock that entitles the holder to a fixed
dividend and, in addition, to the right to get any surplus profits after payment of
agreed levels of dividends to holders of common stock?
► In arrears preferred shares (doubted)
► Call able preferred shares
► Cumulative preferred shares
► Participating preferred shares
Which one of the following represents the value of shares in the market at any point
of time?
► Par value
► Book value
► Face value
► Market value
Which one of the following represents the value of shares iive balance sheets, which
of the following can NOT be found?
► The increasing items
► The decreasing items
► The unchanged items
► The future profitable items
Which of the following would NOT improve the current ratio?
► Issue long-term debt to buy inventory
► Sell common stock to reduce current liabilities
► Sell fixed assets to reduce accounts payable
► Borrow short term to finance additional fixed assets (doubted)
A company experiences a dramatic fall in its gross profit ratio. This could be the
result of which of the following?
► An increase in competition in the company's main product market

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► An increase in the incidence of bad debts
► An increase in overhead expenses
► An increase in demand for the company's products
Notes to financial statements are beneficial in meeting the disclosure requirements of
financial reporting. The note should not be used to:
► Correct an improper presentation in the financial statements
► Describe significant accounting policies
► Describe depreciation methods employed by the company
► Describe principles and methods peculiar to the industry
Which of the following feature is shown by the income statement for a merchandising
company?
► Gross profit
► Cost of goods sold
► A sales revenue section
► All of the given options
In a period of rising prices, all of the following statements regarding LIFO are true
EXCEPT:
► Net income is generally higher
► Ending inventory is generally undervalued(Doubted)
► It can be used to manipulate net income
► Most recent inventory costs are allocated to cost of goods sold
From the given data, calculate Cost of Goods Sold using the FIFO costing method:
Beginning inventory is 10 units . Rs. 10 each.
On January 20, purchased 10 units . Rs. 20 each
On January 30, purchased 5 units . Rs. 30 each
15 of the 25 units are sold.
► Rs. 200
► Rs. 150 `
► Rs. 350
► Rs. 450
In which of the following inventory pricing procedure, the oldest costs incurred rarely
have an effect on the ending inventory valuation?
► FIFO
►LIFO
► Retail
► Weighted-average
If beginning inventory is Rs. 60,000, cost of goods purchased is Rs. 380,000, and
ending inventory is Rs. 50,000, what is cost of goods sold under a periodic system?
► Rs. 390,000(formula : opening + purchases - ending)
► Rs. 370,000
► Rs. 330,000
► Rs. 420,000
The purpose of recording depreciation on productive assets is to:
► Reflect the decline in the market value of the assets each period
► Reduce income when the company has an exceptionally profitable year
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► Be in conformity with the revenue recognition principle
► Allocate the original cost of a productive asset to expense over its useful
life
In which of the following situations, a company should NOT record any depreciation
expense on asset described?
► Computer Airline is required by law to maintain its aircraft in “as good as new”
condition
► Metro Advertising owns an office building that has been increasing in value each
year
► Computer Sales Company has in inventory a new type of computers, designed
never to obsolete
► None of the given option is right as depreciation is applied on all assets
Which of the following is NOT the part of annual report?
► Financial statements
► Auditor’s report
► Five year summary
► Future investments report
In a statement of cash flows, the acquisition of land by issuing capital stock:
► Is not shown at all, since no cash was received or disbursed
► Is shown as an investing activity
► Is shown as a financing activity(Doubted)
► Is shown in a supplementary schedule as a non-cash investing and financing
transaction
Which of the following would represent an increase in Owner's Equity?
► Increase in net income
► Increase in assets
► Increase in accounts receivable
► Increase in cash
Which of the following steps of accounting cycle keep on occurring throughout the
period?
► Journalizing and posting the entries
► Making adjusting entries for the relevent accounts
► Preparing Trial Balance
► Preparing financial statements
Which one of the following items is NOT generally used in preparing a statement of
cash flows?
► Adjusted trial balance
► Comparative balance sheets(doubted)
► Current income statement
► Additional information
From the given information, calculate the Cost of Goods Sold using the weightedaverage
cost method:
Beginning inventory 10 units . Rs. 10 each
On January 20, purchased 10 units . Rs. 20 each
On January 30, purchased 5 units . Rs. 30 each
15 of the 25 units are sold

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► Rs. 200
► Rs. 270
► Rs. 300
► Rs. 350
Which of the following is the most common item in adjusting entries of a
merchandising business?
► Un-earned revenue
► Pre-paid expense
► Depreciation expense
► Accrued revenue
Closing entries result in net income being calculated in the income summary account
and then transferred to which of the following account?
► Revenue account
► Common Stock account
► Dividends account
► Owner's Capital account
Which of the following question is NOT addressed by cash flow statement?
► How much cash was generated by the company’s operations?
► Why is such a profitable company able to pay only small dividends?
► How much was spent for the new plants and equipment?
► How profitable the company’s current assets are?
Which of the following statements is CORRECT regarding depreciation methods?
► Accumulated depreciation represents a fund being accumulated fro the
replacement of assets
► The cost of a machine includes the cost of repairing damage to the machine during
the installation process
► A company may use different depreciation methods in its financial
statements and its income tax returns
1. Which one of the following is a temporary account?
a. Cash
b. Accounts Receivables
c. Insurance Expense
d. Accounts payable
2. The term used for the difference between fair value of a company and the
purchase
price is:
a. Trade Mark
b. Market Value
c. Good Will
d. Purchase Price
3. Financial statement (s) that has all temporary accounts is:
a. Balance Sheet
b. Income Statement
c. Cash Flow Statement
d. Statement of Owner’s Equity
The accounting cycle runs in the sequence

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a. Analyze, journalize, post, adjust, and prepare statements, close
b. Post, journalize, analyze, prepare statements, close, adjust
c. Prepare statements, journalize, post, adjust, close, analyze
d. Journalize, post, close, prepare statements, adjust, analyze
Which one is TRUE about Post-Closing trial balance?
a. Be prepared before closing entries are posted to the ledger
b. Contain both income statement and balance sheet accounts
c. Contain only balance sheet accounts
d. Contain only income statement accounts
Revenue from services is classified as:
a. Investing Inflow
b. Operating Inflow
c. Investing Outflow
d. Operating Outflow
. If the cost of a building is Rs. 90, 000 and its estimated useful life is 30 years. The
depreciation expense for one month is:
a. Rs. 600
b. Rs. 250
c. Rs. 300
d. Rs. 500
d. Loss of $25,000

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