Financial Statements of a Company (12 Accountancy)
Practise chapter-wise MCQs for Class 12 Accountancy — Financial Statements of a Company. Every question comes with the correct answer and an explanation.
TL;DR: Practise chapter-wise MCQs for Class 12 Accountancy — Financial Statements of a Company. Every question comes with the correct answer and an explanati…
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Practise chapter-wise MCQs for Class 12 Accountancy — Financial Statements of a Company. Every question comes with the correct answer and an explanation.
Financial Statements of a Company MCQs with Answers & Explanations
Q1. If a company's 'Inventory Turnover Ratio' is very low, what does it generally indicate?
- High customer demand
- Efficient inventory management
- Poor sales or overstocking of inventory ✓ (correct)
- Effective use of working capital
Explanation: A low Inventory Turnover Ratio suggests that inventory is not selling quickly, which could be due to poor sales, overstocking, or inefficient inventory management.
Q2. Which of the following is considered a disclosure requirement under 'Contingent Liabilities' in a company's financial statements?
- Outstanding expenses
- A provision for doubtful debts
- Accrued income
- A claim against the company not acknowledged by the company ✓ (correct)
Explanation: A claim against the company not acknowledged by the company is a contingent liability and is disclosed in the notes to the financial statements, not recognized as a liability in the Balance Sheet.
Q3. In the context of Ratio Analysis, what does the 'Current Ratio' primarily measure?
- The company's ability to meet its short-term obligations ✓ (correct)
- The company's profitability
- The company's operational efficiency
- The company's long-term solvency
Explanation: The Current Ratio (Current Assets / Current Liabilities) is a liquidity ratio that assesses a company's ability to pay off its short-term debts using its short-term assets.
Q4. Under which activity would the purchase of machinery for the company's factory be classified in the Cash Flow Statement?
- Operating Activities
- Investing Activities ✓ (correct)
- Financing Activities
- It is not disclosed in the Cash Flow Statement
Explanation: The purchase of long-term assets like machinery is considered an investing activity, as it relates to the acquisition or disposal of long-term assets and investments.
Q5. A company has purchased its own shares. This transaction will be classified under which of the following heads in the Balance Sheet?
- Share Capital
- Reserves and Surplus
- Share Application Money Pending Allotment
- None of the above ✓ (correct)
Explanation: Purchase of own shares (Buy-back) is generally treated as a reduction from Shareholder's Funds. It is not Share Capital, Reserves and Surplus, or Share Application Money. It is often shown as a deduction from 'Equity' or disclosed in notes.
Q6. The 'Extraordinary Items' as per Accounting Standard (AS) 5 are events or transactions that are unusual in nature and occur infrequently. Where are these items presented in the Statement of Profit and Loss?
- As part of Revenue from Operations
- As part of Other Income
- Disclosed separately after Profit before Extraordinary Items and Tax ✓ (correct)
- Not disclosed in the financial statements
Explanation: Extraordinary items are disclosed separately in the Statement of Profit and Loss after profit/loss before tax and extraordinary items, to provide clarity on the company's core operating performance.
Q7. Which of the following items would be classified as a 'Cash Equivalent' for the purpose of preparing the Cash Flow Statement?
- Patents and copyrights
- Buildings owned by the company
- Shares of another company held for long-term investment
- A 3-month fixed deposit with a bank ✓ (correct)
Explanation: Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. A 3-month fixed deposit fits this description.
Q8. When preparing a Cash Flow Statement using the indirect method, what is the first step taken from the Statement of Profit and Loss?
- Start with Net Profit before tax and extraordinary items ✓ (correct)
- Start with Net Sales
- Start with Net Loss
- Start with Gross Profit
Explanation: The indirect method of preparing the Cash Flow Statement begins with the Net Profit (or Net Loss) before tax and extraordinary items, and then adjusts for non-cash items and changes in working capital.
Q9. Which of the following is NOT a component of a company's Statement of Profit and Loss as per Schedule III of the Companies Act, 2013?
- Other Income
- Sales Returns ✓ (correct)
- Depreciation
- Revenue from Operations
Explanation: Sales Returns is a deduction from Revenue from Operations and is not shown as a separate item in the main Statement of Profit and Loss. It is usually presented as a note or within the Revenue from Operations.
Q10. Which of the following is a mandatory disclosure in the Notes to Accounts as per Schedule III of the Companies Act, 2013 regarding employee benefits?
- Details of salaries paid to directors
- Amount paid for employee welfare activities
- Total amount paid to employees as wages and salaries ✓ (correct)
- Total expenses incurred on staff training
Explanation: Schedule III requires disclosure of the total amount paid to employees as wages and salaries, which includes the cost of all employees, whether deployed by the company or by third parties.
More 12 Accountancy MCQs
- Accounting for Partnership: Basic Concepts
- Goodwill: Nature and Valuation
- Reconstitution of a Partnership Firm - Change in Profit Sharing Ratio
- Reconstitution of a Partnership Firm - Admission of a Partner
- Reconstitution of a Partnership Firm - Retirement and Death of a Partner
- Dissolution of Partnership Firm
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