Accounting & Auditing — Past Papers — Part 5 MCQs with Explanations

Interest coverage ratio = EBIT ÷ Interest Expense. It shows how easily a company can pay interest on outstanding debt .

The Current Ratio = Current Assets ÷ Current Liabilities. It evaluates a company’s liquidity and its ability to pay short-term debts .

The Matching Principle aligns expenses with the revenues they help produce. It ensures accurate profit measurement within a specific accounting period.

Asset turnover ratio shows how effectively a company uses its assets to generate sales. Higher ratio means better efficiency in asset utilization.

Cost accounting aims to achieve: Cost Ascertainment : Determining the actual cost of production. Cost Control : Managing and reducing costs to optimize resources. Price Fixation : Setting prices based on costs and market conditions to ensure profitability.

The Accrual Principle records expenses when they are incurred, regardless of payment timing. It ensures financial statements reflect true financial performance during a period.

Fixed costs do not change with the level of production (e.g., rent, salaries ). They remain the same whether a company produces nothing or at full capacity.

Marginal cost refers to the cost of producing one more unit of output. It helps in decision-making about increasing or decreasing production levels.

Net profit margin = Net profit ÷ Total revenue × 100. It shows how efficiently a company converts revenue into actual profit .

Intangible assets include items like patents, trademarks, and goodwill . They lack physical form but provide long-term economic benefits.

The P/E ratio compares a company’s stock price to its earnings per share (EPS). A higher P/E often reflects greater investor expectations for future growth and profitability.

A Monopoly exists when there is only one seller in the market. The product offered has no close substitutes , giving the seller full pricing power.

Sunk Cost refers to money already spent and cannot be recovered, regardless of future actions. It should not affect future business decisions, as it's irreversible .

Net Profit Margin = Net Profit ÷ Total Revenue × 100. It shows how much profit a company earns from each dollar of revenue after all expenses.

The Income Statement reports a company’s revenues, expenses, and net profit or loss over a specific period. It reflects the company's operational performance during that time.

Price Skimming targets early adopters willing to pay more at launch. The price is reduced later to attract a broader customer base .

Return on Equity (ROE) measures how effectively a company uses shareholders’ funds to generate profit. It is calculated as Net income divided by Shareholders’ equity.

The Balance Sheet presents assets, liabilities, and equity at a specific date. It gives a snapshot of the company’s financial health at that moment.

Gross Profit Margin shows the percentage of revenue that exceeds the cost of goods sold (COGS). It reflects how efficiently a company produces and sells its products.

An oligopoly is a market with few large firms dominating the industry. These firms often influence prices and market decisions due to limited competition. A Monopoly exists when there is only one seller in the market. The product offered has no close substitutes, giving the seller full pricing power.

Asset turnover ratio measures revenue generated per unit of assets. It shows how effectively a company utilizes its assets to produce sales.

The Consistency Principle ensures that the same accounting methods are used from period to period. This helps in comparing financial statements over time for accuracy and reliability.

The Balance Sheet shows assets, liabilities, and equity at a specific date. It reflects the financial position of a company at one point in time, unlike other statements that cover a period.

Debt-to-equity ratio compares a company's total liabilities to its shareholder equity. It shows how much debt the company uses to finance its assets relative to equity—key for assessing long-term financial stability.

A bid refers to an offer made by a buyer or contractor to purchase goods or services at a specific price. It is commonly used in auctions, contracts, and competitive business proposals.

Random sampling is a type of probability sampling , where each member of a population has an equal chance of being selected. It ensures unbiased results and represents the whole population accurately.

Tangible assets are physical items like buildings, machinery, and inventory that a company owns. They differ from intangible assets , which have no physical form, like patents or trademarks.

In most procurement and tendering processes, bids are opened publicly to ensure transparency and fairness. This practice helps prevent corruption and allows all participants to witness the process.

CPI stands for Consumer Price Index . It measures the average change over time in the prices paid by consumers for goods and services. It is often used to assess inflation and cost of living.

Supply chain management involves three key flows: material flow, information flow, and money flow (or financial flow). Money flow includes payments, credits, and financial transactions between suppliers, manufacturers, and customers.

When cash from operating activities is consistently greater than net income, it indicates strong cash flow and high-quality earnings . This suggests that the company's profits are backed by actual cash inflows , making them more reliable and sustainable.

Trade between two countries is beneficial when there is a difference in cost ratios, allowing each country to specialize in producing goods where they have a comparative advantage . This concept, explained by David Ricardo's theory of comparative advantage , leads to increased efficiency and mutual gains from trade.

Automation refers to using technology and machines to perform tasks previously done by humans, increasing efficiency and productivity. In manufacturing, automation replaces manual labor with robotic systems, AI, or computerized machinery to improve speed and accuracy.

Culture includes shared values, beliefs, customs, language, and social norms of a specific group. It influences behavior, communication, and societal structure.

Value Added Tax (VAT) is a consumption tax imposed at each stage of production based on the value added. It ensures tax is paid incrementally by producers, reducing tax evasion.

Disposable income is the income remaining after deducting income tax and other mandatory charges. It represents the money available for spending and saving.

Aggregate demand represents the total spending on goods and services within an economy. It includes consumption, investment, government spending, and net exports.

Public limited companies are legally required to conduct audits annually. This ensures transparency, accountability, and compliance with financial regulations.

Bookkeeping is the process of recording financial transactions systematically. It ensures accuracy in financial records and helps in preparing accounts.

To find the closing Written Down Value (WDV), add the cost of the machine to the opening WDV and then subtract the depreciation: Opening WDV = Rs. 3,75,000 Cost of machine = Rs. 50,000 Depreciation = Rs. 11,500 Closing WDV = Opening WDV + Cost of machine - Depreciation = Rs. 3,75,000 + Rs. 50,000 - Rs. 11,500 = Rs. 4,13,500