Financial
Accounting Multiple Choice Questions (MCQS) Page 9. The Following Financial
Accounting Mcqs are Collected from different Past papers and from Accounting
Mcqs Bank. These Mcqs are very helpful for the Preparation of
various posts of Senior Auditor, Junior Auditor, Accountant and for
Cost Accountant.
MCQ FOR FINANCIAL ACCOUNTING
1. Which English alphabet is similar to the shape of an account?
(a) I
(b) T
(c) H
(d) None
2. Gross Profit is the difference between
(a) Net Sales and Cost of goods sold
(b) PAT and Dividends
(c) Net Sales and Cost of production
(d) Net Sales and Direct costs of productions
[Hints: (a) Trading account is prepared to find out the Gross Profit due to the operations of a
business. It is the difference between the Net Sales (i.e., Sales less sales return) and the Cost of
goods sold. Cost of goods sold= Opening Stock+ Net Purchases – Closing Stock + Direct expenses.
Hence option (a) is the right option. Option (c) is incorrect because cost of production does not
consider the opening stock and closing stock adjustment. Similarly option (d) ignores stock
balance adjustment.]
3. Recording of Capital contributed by the owner as liability ensures the adherence of principle of
(a) Double Entry
(b) Going Concern
(c) Separate Entry
(d) Materiality
[Hints: (c) Recording of capital contributed by the owner as liability ensures the adherence of
principle of the ―Separate entity or Business entity concept‖. The concept requires the business to
be treated as distinct from the persons who own it; then it becomes possible to record transactions
of the business with the proprietor also. Without such a distinction, the affairs of the firm will be
mixed up with the private affairs of the proprietor and the true picture of the firm will not be
available.
Under the Going Concern Concept, it is assumed that the business will exit for a long time and
transactions are recorded from this point of view. It is this that necessitates distinction between
expenditure that will render benefit over a long period and that whose benefit will be exhausted
quickly.
Under Double-entry or Dual aspect concept, each transaction has two aspects, if a business has
acquired an asset, it must have resulted in one of the following:
Some other asset has been given up.
The obligation to pay for it has arisen.
There has been a profit, leading to an increase in the amount that the business owes to the
proprietor.
The proprietor has contributed money for the acquisition of the asset.
The concept of Materiality requires all the material items to be recorded and disclosed
separately.]
4. The basic concepts related to Balance Sheet are
(a) Cost Concept
(b) Business Entity Concept
(c) Accounting Period Concept
(d) Both (a) and (b) above
[Hints: (d) Cost concept requires the transactions to be recorded in the books of accounts at the
amounts actually involved. Suppose a firm purchases a piece of land for ` 1,50,000 but considers its
worth ` 3,00,000. The purchase will be recorded at ` 1,50,000. Business entity concept requires the
business to be treated as distinct from the persons who own it; then it becomes possible to record
transactions of the business with the proprietor also. Without such a distinction, the affairs of the firm
will be mixed up with the private affairs of the proprietor and the true picture of the firm will not be
available. Accounting period concept is applicable to the Profit & Loss Account which is prepared
for the year ending and cannot be applied to Balance Sheet as it is a statement prepared as on a
particular date. Therefore, cost and entity concepts are related to Balance Sheet.]
5. The basic concepts related to P & L Account are
(a) Realization Concept
(b) Matching Concept
(c) Cost Concept
(d) Both (a) and (b) above
[Hints: (d) Under Realization concept, accounting is a historical record of transactions and unless
money has been realized – either cash has been received or a legal obligation to pay has been
assumed by the customer- no sale can be said to have taken place and no profit can be said to
have arisen. Matching concept requires that all the revenues must be matched with the expenses.
Therefore, the above concepts are related to the Profit & Loss Account.]
6. Which of the following is (are) characteristic(s) of Bad Debt?
(a) It is a definite loss to the business
(b) It must be shown in Profit & loss account
(c) No provision is necessary for it
(d) All of the given options
7. Only the significant events which affect the business must be recorded as per the principle of
(a) Separate Entity
(b) Accrual
(c) Materiality
(d) Going Concern
[Hints: (c) The concept of materiality requires that only the significant events that affect the
business must be recorded.]
8. P & L Account is prepared for a period of one year by following
(a) Consistency Concept
(b) Conservatism Concept
(c) Accounting Period Concept
(d) Cost Concept
[Hints: (c) P&L A/C is prepared for a period of one year by following the concept of Accounting
Period.]
9. If the Going Concern concept is no longer valid, which of the following is true?
(a) All prepaid assets would be completely written-off immediately
(b) Total contributed Capital and Retained Earnings would remain unchanged
(c) Intangible Assets would continue to be carried at net Amortized historical cost
(d) Land held as an Investment would be valued at its realizable value
[Hints: (d) Under the Going Concern Concept, it is assumed that the business will exit for a long
time and transactions are recorded from this point of view. It is this that necessitates distinction
between expenditure that will render benefit over a long period and that whose benefit will be
10. Under which of the following concepts are shareholders treated as creditors for the amount they
paid on the shares they subscribed to?
(a) Cost Concept
(b) Duality Concept
(c) Business Entity Concept
(d) Since the shareholders own the business, they are not treated as creditors
[Hints: (c) Under business entity concept, the shareholders are treated as creditors of the company.
It is also known as separate entity concept.]
Answers:
1 b 2 a 3 c 4 d 5 d 6 d 7 c 8 c 9 d 10 c
11. The underlying accounting principle(s) necessitating amortization of intangible asset(s) is/are
(a) Cost Concept
(b) Realization Concept
(c) Matching Concept
(d) Both (a) and (c) above
[Hints: (c) The matching concept requires that all the revenues must be matched with the
expenses incurred during the accounting period. The expenses relating to intangible assets are
amortized over the periods in which the benefit from intangible assets accrue and therefore the
underlying principle is the matching concept.]
12. Which of the following practices is not in consonance with the convention of conservatism?
(a) Creating Provision for Bad debts
(b) Creating Provision for Discount on Creditors
(c) Creating Provision for Discount on Debtors
(d) Creating Provision for tax
[Hints: (b) The principle of conservatism seeks provisions for all the probable losses. Creating
provision for discount on creditors tantamount to recognition of probable gain in the form of
discount and hence it is not in consonance with conservatism.]
13. The accounting measurement that is not consistent with the Going Concern concept is
(a) Historical Cost
(b) Realization
(c) The Transaction Approach
(d) Liquidation Value
[Hints: (d) Liquidation value is the value of the business when the business is wound up and is under
liquidation whereas the going concern concept assumes that the business will continue over a
long time and therefore the accounting measurement ―Liquidation Value‖ is inconsistent with
going concern concept.]
14. Recording of Fixed Assets at cost ensures adherence of
(a) Conservatism Concept
(b) Going Concern Concept
(c) Cost Concept
(d) Both (a) and (b) above
[Hints: (c) Cost concept requires the transactions to be recorded in the books of accounts at the
amounts actually involved. Suppose a firm purchases a piece of land for ` 1,50,000 but considers its
worth ` 3,00,000. The purchase will be recorded at ` 1,50,000. Therefore, recording of fixed assets at
cost ensures the adherence of cost concept.]
15. Omission of paise and showing the round figures in financial statements is based on
(a) Conservatism Concept
(b) Consistency Concept
(c) Materiality Concept
(d) Realization Concept
[Hints: (c) Omission of paise and showing the round figure in financial statements is based on the
concept of materiality.]
16. X Ltd., purchased goods for ` 5 lakh and sold 9/10th of the value of goods for ` 6 lakh. Net expenses
during the year were ` 25, 000. The company reported its net profit as ` 75,000. Which of the
following concept is violated by the company?
(a) Realization
(b) Conservation
(c) Matching
(d) Accrual
[Hints: (c) Matching concept requires the expenses must relate to the goods and services sold
during that period to arrive at the net profits of the enterprise. Hence matching concept requires
the recognition of revenue and expenses on a comparable basis. In the above question that
amount of ` 75,000 as net profit was arrived at by deducting ` 5,00,000 ( being cost of purchases )
+ ` 25,000 expenses from the sale proceeds of ` 6,00,000. This does not follow matching concept
since the cost of goods sold is to be deducted and not the cost of purchases, since some
purchases have been left in stock. So the net profit using matching concept is ` 6,00,000 less cost
of goods ` 4,50,000 (i.e. ` 5,00,000 x 9/10) less expenses of ` 25,000 = ` 1,25,000.]
17. Accounting does not record non- financial transactions because of
(a) Entity Concept
(b) Accrual Concept
(c) Cost Concept
(d) Money Measurement Concept
[Hints: (d) The money measurement concept: Accounting records only those transactions which
are expressed in monetary value, though quantitative records are kept. Hence, accounting does
not record non – financial transactions.]
18. Mr. Rohit, owner of Rohit Furniture Ltd., owns a personal residence that cost ` 6,00,000, but has a market value of ` 9,00,000. During preparation of the financial statement for the business, the entire value of property was ignored and was not shown in the financial statements. The principle that
was followed was
(a) The concept of the Business Entity
(b) The concept of the Cost Principle
(c) The concept of Going Concern Principle
(d) The concept of Duality Principle
[Hints: (a) Business entity concept requires the business to be treated as a separate entity.]
19. Provision for bad debt is made as per the
(a) Entity Concept
(b) Conservatism Concept
(c) Cost Concept
(d) Going Concern Concept
[Hints: (b) Provision for bad debts is made as per the concept of conservatism.]
20. Fixed Assets and Current Assets are categorized as per concept of
(a) Separate Entity
(b) Going Concern
(c) Consistency
(d) Time
Answers:
11 c 12 b 13 d 14 c 15 c 16 c 17 d 18 a 19 b 20
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