"Accounting and Auditing" — Practice

Question 1

Under the accrual basis of accounting, revenue is recognised:
(a) Only when cash is actually received from the customer  (b) When it is earned, regardless of when the related cash is actually received  (c) Only at the very end of the accounting year, irrespective of when it was earned  (d) Only once the customer has been sent a formal invoice, even before the goods or services are delivered

Accepted Answer

The accrual basis recognises revenue when it is earned — that is, when the goods or services underlying it have genuinely been delivered — regardless of the timing of the associated cash receipt, in direct contrast to cash-basis accounting.

Answer: (b). Trap (a) describes cash-basis accounting, the opposite convention. Trap (c) invents an arbitrary year-end-only recognition rule not part of the accrual concept. Trap (d) wrongly ties recognition to invoicing alone rather than to the underlying earning event, which may occur before or after an invoice is raised.

Question 2

The going concern assumption in accounting means that:
(a) The business is expected to be sold or liquidated within the next accounting year  (b) All assets must always be recorded at their current market value rather than at cost  (c) The business is assumed to continue operating for the foreseeable future, justifying the recording of assets at historical cost rather than forced-liquidation value  (d) Profits earned in a year must be distributed in full as dividends before the year closes

Accepted Answer

Going concern assumes the business will continue operating for the foreseeable future, which is precisely why assets are carried at historical cost rather than at the (typically much lower) value they would fetch in a forced liquidation.

Answer: (c). Trap (a) describes the opposite assumption — an entity expected to be wound up soon would not qualify for going-concern treatment. Trap (b) confuses going concern with a fair-value measurement basis, which is a separate and different accounting choice. Trap (d) invents a dividend-distribution requirement unrelated to the going-concern assumption.

Question 3

The matching concept in accounting requires that:
(a) All expenses be recorded strictly in the year the related cash is actually paid  (b) Revenue and expenses be recorded only once confirmed by an external bank statement  (c) Assets always be matched against liabilities in exactly equal proportion on the balance sheet  (d) Expenses be recognised in the same accounting period as the revenue they helped to generate

Accepted Answer

The matching concept ties expense recognition to the period in which the related revenue is generated — this is precisely why an asset's cost is spread as depreciation across its useful life rather than expensed entirely in its year of purchase.

Answer: (d). Trap (a) describes cash-basis timing, not the matching concept. Trap (b) invents an external-confirmation requirement unrelated to the matching principle. Trap (c) confuses matching (a revenue-expense timing rule) with the accounting equation (an entirely different balance-sheet identity).

Question 4

The conservatism (prudence) concept in accounting advises that:
(a) Anticipated losses should be recorded as soon as they are foreseeable, while anticipated gains should not be recorded until they are actually realised  (b) All anticipated gains and anticipated losses should be recorded at exactly the same point in time  (c) A loss should never be recorded in the books until it is fully and finally certain  (d) Assets should always be recorded at the highest value a firm can reasonably justify

Accepted Answer

Conservatism is a deliberately asymmetric rule — recognise probable losses early, but hold off on recognising gains until they are actually realised — designed to avoid overstating a firm's financial position, not a rule that treats gains and losses symmetrically.

Answer: (a). Trap (b) wrongly claims symmetry, which is the opposite of what conservatism actually prescribes. Trap (c) overstates the rule into requiring absolute certainty, when in fact conservatism calls for recording losses once merely probable/foreseeable, not only once fully certain. Trap (d) directly contradicts conservatism, which would push toward more cautious, not higher, asset valuations.

Question 5

As per AS 1 (Disclosure of Accounting Policies) and its Ind AS successor, which three assumptions are treated as 'fundamental accounting assumptions' that need not be separately disclosed if they are followed?
(a) Materiality, full disclosure, and matching  (b) Going concern, consistency, and accrual  (c) Conservatism, realisation, and dual aspect  (d) Historical cost, revenue recognition, and matching

Accepted Answer

AS 1 and its Ind AS successor identify going concern, consistency, and accrual as the three fundamental accounting assumptions — considered so basic that no separate disclosure is needed if followed, though any departure from one of them must be disclosed.

Answer: (b). Trap (a), (c), and (d) each list genuine and important accounting principles from this chapter, but none matches the specific, standard-defined three-item 'fundamental assumptions' list that AS 1 names.

Question 6

A machine costs ₹3,60,000, has an estimated scrap value of ₹30,000, and a useful life of 5 years. Using the Straight-Line Method, what is the annual depreciation charge?
(a) ₹60,000  (b) ₹72,000  (c) ₹66,000  (d) ₹75,000

Accepted Answer

SLM depreciation = (Cost − Scrap Value) ÷ Useful Life = (3,60,000 − 30,000) ÷ 5 = 3,30,000 ÷ 5 = ₹66,000 per year.

Answer: (c) ₹66,000. Trap (a) results from dividing the full cost of ₹3,60,000 by 6 instead of correctly subtracting scrap value and dividing by 5. Trap (b) results from omitting the scrap-value deduction and simply dividing ₹3,60,000 by 5. Trap (d) results from an arithmetic slip that overstates the numerator before dividing.

Question 7

An asset has an opening book value of ₹80,000 at the start of the year and is depreciated at 25% per annum under the Written-Down-Value method. What is the depreciation charge for that year?
(a) ₹16,000  (b) ₹18,000  (c) ₹22,000  (d) ₹20,000

Accepted Answer

WDV depreciation = Rate × Opening Book Value = 25% × 80,000 = ₹20,000.

Answer: (d) ₹20,000. Trap (a), (b), and (c) all apply an incorrect rate or an incorrect base to the calculation, producing figures close to but not matching the correct 25%-of-₹80,000 computation.

Question 8

Applicability of Ind AS (Indian Accounting Standards) to a company is primarily determined by:
(a) The company's net worth and listing status, applied in a phased roadmap starting from the 2016-17 financial year  (b) The company's total number of employees alone  (c) Whether the company operates only within a single Indian state  (d) The number of years the company has been incorporated

Accepted Answer

Ind AS applicability in India was rolled out in a phased manner, starting from the 2016-17 financial year, with net worth and listing status as the primary determining criteria — larger listed and unlisted companies crossing specified net-worth thresholds were phased in first.

Answer: (a). Trap (b), (c), and (d) each invent a plausible-sounding but incorrect applicability criterion; none of employee count, single-state operation, or years since incorporation determines Ind AS applicability.

Question 9

Opening stock is 80 units at ₹15 each; a subsequent purchase adds 120 units at ₹18 each. If 130 units are issued during the period, what is the value of the closing stock under the FIFO method?
(a) ₹1,200  (b) ₹1,260  (c) ₹1,350  (d) ₹1,440

Accepted Answer

Total units available = 80 + 120 = 200; total cost = (80 × 15) + (120 × 18) = 1,200 + 2,160 = ₹3,360. Under FIFO, the 130 units issued are drawn from the oldest layers first: all 80 opening units (@₹15) plus 50 units from the purchase (@₹18) = (80 × 15) + (50 × 18) = 1,200 + 900 = ₹2,100 (cost of goods sold). Closing stock is the remaining 70 units from the purchase, valued at 70 × 18 = ₹1,260. Cross-check: 2,100 + 1,260 = 3,360 ✓.

Answer: (b) ₹1,260. Trap (a) undervalues the closing stock by using the opening stock's older ₹15 rate instead of the correct ₹18 rate for the remaining purchase units. Trap (c) and (d) both overstate the number or rate of units remaining in closing stock.

Question 10

Opening stock is 100 units at ₹10 each; a subsequent purchase adds 100 units at ₹14 each. If 150 units are sold during the period, what is the value of the closing stock under the weighted average method?
(a) ₹500  (b) ₹550  (c) ₹600  (d) ₹650

Accepted Answer

Total units available = 100 + 100 = 200; total cost = (100 × 10) + (100 × 14) = 1,000 + 1,400 = ₹2,400. Weighted average cost per unit = 2,400 ÷ 200 = ₹12. Closing stock = 200 − 150 = 50 units, valued at 50 × 12 = ₹600. Cross-check: cost of goods sold = 150 × 12 = ₹1,800, and 1,800 + 600 = 2,400 ✓.

Answer: (c) ₹600. Trap (a) and (b) both understate the closing stock using an incorrectly computed average cost per unit. Trap (d) overstates it by applying a rate above the correctly computed ₹12 weighted average.

Question 11

A firm has fixed costs of ₹1,20,000, a selling price of ₹40 per unit, and a variable cost of ₹25 per unit. What is the break-even point in units?
(a) 6,000 units  (b) 7,000 units  (c) 7,500 units  (d) 8,000 units

Accepted Answer

Contribution per unit = Selling Price − Variable Cost = 40 − 25 = ₹15. BEP (units) = Fixed Costs ÷ Contribution per unit = 1,20,000 ÷ 15 = 8,000 units.

Answer: (d) 8,000 units. Trap (a), (b), and (c) all result from using an incorrect contribution-per-unit figure (for instance, mistakenly using the full selling price, or an incorrectly computed variable cost) in the denominator.

Question 12

A firm's Current Assets are ₹4,50,000, including Inventory of ₹90,000 and Prepaid Expenses of ₹10,000, against Current Liabilities of ₹2,00,000. What is the firm's Quick (Acid-Test) Ratio?
(a) 1.75:1  (b) 2:1  (c) 1.5:1  (d) 2.25:1

Accepted Answer

Quick Ratio = (Current Assets − Inventory − Prepaid Expenses) ÷ Current Liabilities = (4,50,000 − 90,000 − 10,000) ÷ 2,00,000 = 3,50,000 ÷ 2,00,000 = 1.75:1.

Answer: (a) 1.75:1. Trap (d) 2.25:1 is actually the firm's plain Current Ratio (4,50,000 ÷ 2,00,000 = 2.25:1) — the figure a candidate gets by forgetting to exclude Inventory and Prepaid Expenses at all, confusing the quick ratio with the current ratio. Trap (b) and (c) both result from excluding only one of Inventory or Prepaid Expenses instead of both, landing close to but short of the correct 1.75:1.

Question 13

A company's Net Profit is ₹3,60,000; its Shareholders' Equity is ₹12,00,000 and its long-term Debt is ₹6,00,000. What is the company's Return on Investment (ROI)?
(a) 15%  (b) 20%  (c) 18%  (d) 24%

Accepted Answer

Capital Employed = Shareholders' Equity + Long-term Debt = 12,00,000 + 6,00,000 = ₹18,00,000. ROI = Net Profit ÷ Capital Employed × 100 = 3,60,000 ÷ 18,00,000 × 100 = 20%.

Answer: (b) 20%. Trap (a), (c), and (d) all result from either omitting long-term debt from capital employed (using only equity, which would give a different, higher figure) or from a computational slip in the division.

Question 14

Which financial statement is mandatory under Ind AS 7 / AS 3, and strictly classifies all cash movements into operating, investing, and financing activities?
(a) Fund Flow Statement  (b) Statement of Changes in Equity  (c) Cash Flow Statement  (d) Trial Balance

Accepted Answer

The Cash Flow Statement, governed by Ind AS 7 (and AS 3), classifies all cash inflows and outflows into operating, investing, and financing activities and is a mandatory statement under the Companies Act framework — unlike the Fund Flow Statement, which is built around working-capital changes and is not separately mandated by current Indian accounting standards.

Answer: (c) Cash Flow Statement. Trap (a) names a related but distinct, non-mandatory statement built on a different (working-capital) basis. Trap (b) names a genuine financial statement, but one tracking equity movements, not cash classification. Trap (d) names a basic accounting worksheet unrelated to cash-flow classification.

Question 15

Which type of audit is legally mandatory for every company registered under the Companies Act, 2013, conducted by an independent chartered accountant appointed by the shareholders and reporting to them?
(a) Internal audit  (b) Cost audit  (c) Tax audit  (d) Statutory audit

Accepted Answer

Statutory audit is the audit legally mandated for every company under the Companies Act, 2013, conducted by an independent chartered accountant appointed by and reporting to the shareholders — distinct from internal audit, which is appointed by and reports to management and is mandatory only for specified classes of companies.

Answer: (d) Statutory audit. Trap (a) names an audit type reporting to management, not shareholders, and applicable only to specified companies. Trap (b) and (c) both name real, specialised statutory audits, but neither is the universally mandatory audit the question describes.

Question 16

The audit procedure of examining documentary evidence such as invoices and receipts to confirm that individual recorded transactions actually occurred and were correctly entered in the books is known as:
(a) Vouching  (b) Verification  (c) Internal check  (d) Test checking

Accepted Answer

Vouching is precisely the examination of documentary evidence — invoices, receipts, contracts — supporting individual recorded transactions, verifying their accuracy, completeness, and authorisation; this is distinct from verification, which confirms the existence, ownership, and valuation of balance-sheet items, typically at year-end.

Answer: (a) Vouching. Trap (b) names the balance-sheet-item confirmation procedure carried out at year-end, not the transaction-level documentary check described here. Trap (c) and (d) both name genuine but different audit/control concepts unrelated to the specific transaction-vouching procedure described.

Practice — "Accounting and Auditing"

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