Accounting & Auditing — Past Papers — Part 4 MCQs with Explanations

The Quick Ratio (also called acid-test ratio ) excludes inventory as it is less liquid. It focuses on assets that can quickly cover short-term liabilities .

Keeping savings in banks is beneficial because: - It is safe – protected against theft or loss. - Earns interest – helps your money grow over time. - Can be withdrawn anytime – offers liquidity and convenience

When the real interest rate is high, it generally leads to higher overall interest rates in the economy Because lenders demand higher returns to compensate for inflation and opportunity costs.

The State Bank of Pakistan (SBP) regulates money supply, controls interest rates, and lends to commercial banks. Preparing the annual federal budget is the responsibility of the government , not the central bank.

The NAFTA was signed by Canada, Mexico, and the United States in 1992. North American Free Trade Agreement full form of NAFTA. This agreement created one of the largest free-trade zones.

GAAP (Generally Accepted Accounting Principles) is a set of accounting standards used for financial reporting . It ensures consistency, transparency, and accuracy in the preparation of financial statements.

FIFO (First In, First Out) means that the oldest inventory items are sold or used first . It is commonly used in inventory management to prevent obsolescence and spoilage, especially in perishable goods.

The press is referred to as " The Fourth Estate ". Due to its role in influencing public opinion and holding other branches of government accountable. This role complements the functions of the judiciary, executive, and legislature , which are considered the three main estates of government.

1 million is equal to 10,00,000 ( 10 Lac ) 1 billion = 1,000 million. 1 billion = 100 crores. 1 billion has 9 zeroes 1 billion means ایک ارب

Interest, in financial terms, is the extra amount paid or earned on borrowed or invested money; it's the fee charged for borrowing money or the money earned on a deposit in a savings account.

Entrepreneurs are individuals who: Start and run their own businesses Take financia risks in the hope of making a profit Innovate by creating new products, services, or ways of doing things Often solve problems and bring new ideas to life

Current liabilities are obligations a company must settle within one year, such as accruals, notes payable, and accounts payable. They reflect short-term financial commitments.

Real Accounts relate to assets like machinery, buildings, or goods —hence, they record dealings in commodities . These accounts carry balances into the next accounting period .

The formula for pricing preferred stock is: Price = Dividend / Required Rate of Return Since preferred dividends are usually fixed , there's no growth rate involved.

Retained earnings involve no flotation or issuance costs, making them cheaper than raising funds through external equity. External equity includes underwriting and administrative expenses, increasing its cost.

Cash equivalents are short-term, highly liquid investments easily convertible to cash. They have minimal risk of value change and are recorded at book value .

A price floor sets a minimum price to support farmers’ incomes. It prevents prices from falling below a certain level , helping stabilize agricultural markets.

Debenture holders receive fixed-rate interest as creditors. They do not have voting rights or profit-sharing like shareholders.

Standard costing, decision accounting, and budgetary control are important tools of management accounting. Human Resources Accounting is generally considered separate from management accounting tools.

When fixed capital accounts are maintained, profits are credited to partners’ current accounts , not their fixed capital accounts. This keeps the capital accounts unchanged while tracking profit shares separately.

A trial balance verifies the mathematical accuracy of ledger accounts by ensuring total debits equal total credits . It helps detect posting or calculation errors before preparing final accounts.

In accounting , transactions are recorded in the journal on the same day they occur. This ensures accuracy and timely financial tracking.

The bowed-out shape shows that as more of one good is produced, more units of the other must be given up. This illustrates increasing opportunity costs due to resource specialization.

Taking goods for personal use reduces business inventory, so purchases are credited. It’s a personal expense of the owner, so drawings account is debited.

Debentures are a form of long-term debt instrument used by companies to raise capital. They are repayable after a fixed period and carry a fixed interest rate .

Common equity includes common stock and retained earnings, representing shareholders’ ownership. It reflects the residual interest in the assets after deducting liabilities .

Debenture holders lend money to the company and receive interest , making them creditors. They do not have ownership rights like shareholders .

A Bill of Exchange must be accepted by the drawee to become legally binding. Acceptance indicates the drawee's agreement to pay the specified amount on the due date.

Patents, copyrights, and trademarks are non-physical assets that provide long-term value. They are classified as intangible assets because they lack a physical form but hold economic benefits.

A trial balance is prepared by taking the balances from ledger accounts . It helps check the arithmetic accuracy of bookkeeping entries.

The law of demand states that as the price of a commodity rises, the quantity demanded usually falls, and vice versa . It defines an inverse relationship between price and quantity demanded.

Gross National Product (GNP) includes the total domestic production plus net income earned from abroad. It measures the economic output of a country's residents regardless of location.

Intangible assets are long-term assets that do not have a physical form but hold value, like patents or trademarks . They provide future economic benefits to a business without physical existence.

A Sales Journal is a specialized accounting journal used to record all credit sales of goods. It helps in organizing sales transactions systematically before posting them to the ledger.

Demand in economics refers not just to desire, but to the ability and willingness to purchase at given prices. It includes a time element and is dependent on price variations .

Stock taking is a physical count and valuation of inventory at the end of the financial year. It provides an accurate measure of closing stock, essential for preparing final accounts.

Financial asset valuation is primarily based on the present value of expected future cash flows, such as interest or dividends. This approach discounts future income to reflect its value in today's terms, helping investors assess true worth .

The cost-benefit approach evaluates whether the benefits of an action or investment outweigh the associated costs. It is commonly used in accounting and economics for decision-making to ensure efficiency and value.

ROE = Net Income ÷ Shareholders’ Equity. It shows how efficiently a company uses shareholders' funds to generate profit .

Inventory turnover ratio = Cost of Goods Sold ÷ Average Inventory. It shows how effectively a company sells and replaces inventory during a period.