Accounting & Auditing — Past Papers — Part 2 MCQs with Explanations

When a prepaid expense is recognized as an expense, the entry is: Expense A/C Dr. → Prepaid Expense A/C Cr . The Expense Account is debited because an expense is now recognized. The Prepaid Expense Account is credited because the prepaid asset decreases.

Bank charges are not disclosed in the Bank Reconciliation Statement . Bank charges are recorded in the Cash Book when the business becomes aware of them. They are treated as an expense and therefore affect the Profit and Loss Account . The BRS is prepared only to reconcile differences between the Cash Book and Bank Statement.

Capital gain divided by capital gain yield is used to determine the beginning or initial price . Capital gain is calculated as Ending Price − Beginning Price . Capital gain yield is calculated as Capital Gain ÷ Beginning Price .

In accounting, an economic event occurs when a transaction is recorded . An economic event is a business occurrence that has a financial effect. It can change the company’s assets, liabilities, or owner's equity . Examples include sales, purchases, payments, and receipts . Recording the transaction allows the event to be reflected in the accounting records.

The model that uses management, accounting, and econometrics is called a Management Science Model . Management science applies mathematical and analytical techniques to solve management problems. It uses quantitative information from areas such as management, accounting, and economics/econometrics . These models support planning, decision-making , and resource allocation .

A Profitability Index (PI) of 0.9 means the project's NPV is negative , and the project should be rejected . The Profitability Index (PI) compares the present value of future cash inflows with the initial investment. PI > 1: NPV is positive → Accept the project. PI = 1: NPV is zero → Indifferent between accepting and rejecting. PI < 1: NPV is negative → Reject the project.

Required return = Dividend Yield + Growth Rate = (4/100) + 5% = 4% + 5% = 9% .

For an ordinary annuity: PV = PMT × [1 − (1 + r)⁻ⁿ] / r PV = 4,000 × [1 − (1.08)⁻²⁰] / 0.08 ≈ Rs. 39,272 .

When a bond sells above its par value, its YTM is lower than its coupon rate . Par value is the face value of the bond. If market price > par value , the bond is trading at a premium. For a premium bond, the yield to maturity (YTM) < coupon rate. Therefore, P > Par Value and YTM < Coupon Rate .

Internal management accounting reports are not presented to external shareholders because they contain confidential information used for internal decision-making . Management accounting reports help managers with planning, budgeting, cost control , and performance evaluation. External shareholders generally receive financial accounting reports, such as financial statements . Financial accounting reports are prepared for external users and follow applicable accounting standards.

The normal balance of a Revenue account is a Credit . Revenue increases owner’s equity, and equity accounts normally have credit balances. Revenue is credited when earned and debited when reduced or closed. At the end of the accounting period, revenue accounts are closed to the Income Summary/retained earnings or capital account.

The perpetual inventory system commonly uses the moving weighted average method to value inventory. Under this system, inventory records are updated continuously after each purchase and sale. A new average cost is calculated after every purchase. The system provides real-time inventory information.

A broker deals in the buying and selling of shares and other securities on behalf of investors. Brokers act as intermediaries between buyers and sellers in the stock market. They execute trades through a stock exchange . Brokers earn income through brokerage commissions or fees . They may also provide investment advice, depending on their services.

According to IAS 23 , borrowing costs are capitalized when they are directly attributable to a qualifying asset . A qualifying asset is one that takes a substantial period of time to get ready for its intended use or sale . Capitalization begins when asset expenditures, borrowing costs, and preparation activities are in progress. It stops when the asset is substantially ready for use or sale.

Warehouse cost is generally classified as a distribution cost . It includes the cost of storing finished goods before they are delivered to customers. Warehouse expenses are incurred after production and before final delivery. These costs support the distribution and supply chain process . They are not treated as production or administrative costs.

Bank Reconciliation is the process of identifying differences between the cash book and the bank statement . It explains why the balances in the cash book and bank statement do not match. The reconciliation helps ensure the accuracy of financial records. It detects errors, omissions, and unrecorded transactions. It is usually prepared at the end of an accounting period.

The main purpose of an independent audit is to help detect frauds and errors by examining financial records and expressing an independent opinion . An audit enhances the reliability and credibility of financial statements. Detecting every fraud is not the primary objective, but auditors help identify material misstatements caused by fraud or error .

WACC stands for Weighted Average Cost of Capital . It is the average rate of return a company must pay to finance its assets through debt, equity, and other capital sources . WACC is widely used in financial management, investment decisions, business valuation, and capital budgeting. Additional information : NPV : Net Present Value IRR : Internal Rate of Return EPS : Earnings Per Share ROI : Return on Investment

The process of costing is relevant to cement industry . Process costing is used where products are produced continuously in large quantities and each unit is identical . It is commonly applied in industries like cement, chemicals, oil refining , and textiles .

The audit of a bank is generally conducted through routine checking . Routine checking involves regular examination and verification of banking transactions and records . It helps ensure accuracy, reliability , and detection of errors .

Stratified audit sample means selecting items from each group (stratum) of the population . In stratified sampling, the population is divided into different groups based on common characteristics. Samples are then selected from each group to ensure proper representation . Additional information : Random sampling : Items are selected randomly from the whole population.

Non-cash items are excluded from the cash budget . A cash budget records only cash receipts and cash payments . It helps estimate the cash available during a specific period. Non-cash expenses do not involve actual cash movement , so they are excluded.

The Quick Ratio (Acid-Test Ratio) measures a company's ability to pay its short-term liabilities using its most liquid assets. It excludes inventory and prepaid expenses because they cannot be converted into cash quickly . A higher quick ratio indicates better short-term financial strength.

Father of Double-Entry Bookkeeping (Father of Modern Accounting): Luca Pacioli Nationality: Italian Famous Book Published: Summa de Arithmetica , Geometria, Proportioni et Proportionalità Publication Year: 1494 Accounting Rule: Every transaction has two entries – Debit and Credit

An employee email should be in a professional and formal format only . It reflects the identity of the organization and employee . It is used for official communication in offices and companies. It avoids informal words or personal nicknames. It maintains professionalism and trust in communication.

Human Resource Development (HRD) focuses on improving employee skills and knowledge. It includes training, education, and career development programs . The goal is to enhance individual and organizational performance . It builds a skilled and motivated workforce.

Revenue income refers to earnings generated during normal business operations . It includes income earned from projects, services, or sales . It is regular and recurring in nature. It is used to meet day-to-day business expenses.

Financial management is the process of handling an organization’s financial resources. It includes planning, organizing, directing, and controlling funds. The main goal is to achieve organizational objectives efficiently. It ensures proper use of money for profit and growth.

Maturity date is the day when the bond issuer must repay the principal amount. Interest is paid periodically, but principal is returned on maturity . Determines the investment horizon for bondholders. Important in financial planning and fixed-income investments.

Debt-to-Equity ratio measures a company’s financial leverage. High ratio means the company depends more on borrowed money than its own capital. Indicates higher financial risk due to obligations to lenders. Helps investors and creditors assess company stability.

Verisys is a tool provided by NADRA to verify CNICs . Ensures the identity of individuals and prevents fraud . Used by banks, government departments, and businesses . Helps in KYC (Know Your Customer) compliance.

A double crossed cheque combines features of a demand draft and a pay order. Can only be deposited into a bank account , not cashed directly. Provides higher security for fund transfers. Used for safe and guaranteed payments.

A special crossing mentions a specific bank between two parallel lines on the cheque. It directs the cheque to be deposited only through that bank. Provides additional security compared to a general crossing. Common in banking for controlled fund transfers .

A crossed cheque has two parallel lines on it. Cannot be cashed over the counter; must be deposited into a bank account . Provides extra security against theft or misuse. Commonly used for safe transactions .

A salary slip shows the regular income of an individual. It serves as proof of the source of funds for account opening. Required for compliance with banking and anti-money laundering rules.

A letter of thanks is sent to show appreciation to the customer . Strengthens customer-bank relationship and trust. Focus is on courtesy and goodwill after account opening.

An inoperative deposit is one with no transactions for 10 years . Banks cannot hold it indefinitely and must transfer it to the State Bank of Pakistan. Ensures proper regulation and safety of dormant funds. Protects customers’ rights while maintaining banking accountability.

A walk-in customer uses banking services without holding an account . They can deposit or encash cheques, pay bills , or use teller services. Not a debtor or creditor , since no account is maintained. Common in daily banking for non-account holders . Helps banks serve occasional or temporary clients efficiently.

A sub-branch provides basic banking services to customers. Functions include cash deposits and withdrawals, group lending, and handling remittances . Issuing a Letter of Credit (LC) is a complex trade finance function, done by main branches only .

Agents act as intermediaries between banks and customers in branchless banking. Their main task is handling deposits (cash-in) and withdrawals (cash-out) . They do not usually approve loans or make policies. Helps provide banking services in areas without physical branches .