Accounting & Auditing — Past Papers — Part 6 MCQs with Explanations

Conversion Cost Formula = Direct Labor Cost + Manufacturing Overhead Cost Given: Direct Labor Cost = Rs. 50,000 Manufacturing Overhead Cost = Rs. 60,000 Conversion Cost = 50,000 + 60,000 = Rs. 110,000

After the admission of a new partner, any amount to be written off is adjusted according to the new profit-sharing ratio among all partners. This ensures that all partners, including the new one , bear the expense in proportion to their updated ownership share .

In a cash transaction , a personal account may or may not be involved because payments can be made directly in cash without any credit. In a credit transaction , a personal account is definitely involved as the transaction is recorded in the name of a debtor or creditor.

A Suspense Account is used to temporarily record transactions when there are discrepancies or unidentified amounts in the Trial Balance . It helps in locating and correcting undetected errors before finalizing the accounts.

Current liabilities are debts or obligations a company must pay within one year , such as accounts payable and short-term loans. They are different from current assets , which represent resources expected to be converted into cash within a year.

Reserves are created from retained profits to strengthen a company’s financial position. They are not dividends or bonuses , as those are distributions to shareholders or employees.

The Board of Directors is responsible for approving financial statements, including abridged statements , to ensure accuracy and compliance. While accountants and finance managers prepare reports, final approval is a governance function of the Board.

Kurtosis measures whether a distribution has heavy tails (leptokurtic) or light tails (platykurtic) compared to a normal distribution. A high kurtosis value indicates more extreme outliers, while a low value suggests fewer outliers.

Refinancing means replacing an existing loan with a new one, usually with better terms like lower interest rates or extended repayment periods. It is commonly used in mortgages, business loans, and personal loans to reduce financial burden.

In monopolistic competition, a firm maximizes its profit where marginal revenue (MR) equals marginal cost (MC). This is the fundamental profit-maximization rule in economics.

To find the market equilibrium, set QD = QS: 12 - 2P = 3 + P Rearrange the equation: 3P = 9 P = 3 Now, substitute P = 3 into either QD or QS: QS = 3 + P = 3 + 3 = 6 So, the market equilibrium is at P = 3 and Q = 6.

A Gantt Chart is a horizontal bar chart used for project scheduling, showing tasks against time. It helps in tracking progress and dependencies in project management.

Closing stock refers only to unsold goods and not all resources of a business. Resources of a business include assets, liabilities, and other elements, not just stock.

Internal Audit is a continuous process where an organization’s employees evaluate risk management, governance, and control practices. It ensures compliance with policies, identifies risks, and improves operational efficiency.

In auditing , an independent opinion is given by an auditor to assess the accuracy and fairness of financial statements. This opinion ensures that financial reports comply with accounting standards and regulations.

To find the value of closing stock using FIFO: Initial stock: 10 units @ Rs. 2 = Rs. 20 Purchases: 30 units @ Rs. 3 = Rs. 90 Total stock: 40 units Issues: 12 units (from initial stock) = 10 units @ Rs. 2 + 2 units @ Rs. 3 Remaining stock: 28 units (2 units @ Rs. 3 + 30 - 2 = 28 units @ Rs. 3) Issues: 8 units (from purchases) = 8 units @ Rs. 3 Remaining stock (closing stock): 20 units @ Rs. 3 Value of closing stock: 20 units @ Rs. 3 = Rs. 60

Net book value (NBV) represents the asset's original cost minus any depreciation or impairment. It reflects the asset’s current accounting value, not its market value or replacement cost.

A decrease in the provision for doubtful debts would increase net profit. This is because the provision for doubtful debts is a liability, and a decrease in a liability results in an increase in profit.

Working capital = Current Assets - Current Liabilities Increase in stock (Rs. 250) → Increases current assets Decrease in bank balance (Rs. 400) → Decreases current assets Increase in creditors (Rs. 1200) → Increases current liabilities Net impact on working capital: (250 - 400 - 1200) = -1350 Thus, there is a decrease of Rs. 1,350 in working capital.

Economic value represents the difference between an investment's market value and its original cost , reflecting its actual worth in the market. It helps in assessing profitability and decision-making for investments.

A sole proprietorship is the least regulated business form since it is owned and controlled by a single individual with minimal legal formalities. Unlike corporations and partnerships , it does not require complex registration, reporting, or compliance with extensive regulations.

Liquidity refers to how quickly and easily an asset can be converted into cash without significant loss in value. Higher liquidity means the firm can meet short-term obligations more efficiently.

A public company must obtain a Certificate of Commencement of Business after incorporation before legally starting operations. This requirement ensures that the company has met necessary legal and financial conditions before conducting business.

The dual aspect concept states that every financial transaction affects two accounts, ensuring accuracy in bookkeeping. The double-entry system records each transaction with equal debits and credits, maintaining the accounting equation ( Assets = Liabilities + Equity ).

Share premium money is the extra amount received over the face value of shares and can be used for specific purposes under company law. It can be used to issue fully paid bonus shares to existing shareholders but cannot be used for dividend payments or writing off goodwill.

Debentures and Term Finance Certificates (TFCs) are debt instruments commonly issued by listed companies to raise capital from the public. Listed companies have better credibility and regulatory compliance, making it easier for them to issue such securities in financial markets.

Book Value Formula → Cost of Asset – Total Accumulated Depreciation. Calculation → 12,500 – (4,200 + 2,500) = 5,800 .

Gross profit is the difference between sales revenue and the cost of goods sold (COGS) in an accounting period. It represents the profit before deducting operating expenses, taxes, and other indirect costs.

Sales less operating expenses – Net profit is calculated after deducting all operating expenses from total sales. Gross profit less operating expenses – Gross profit is derived from sales minus the cost of sales, and deducting operating expenses from it gives net profit.

Section 226 (1) and section 226 (2) sections define the qualifications required for an individual or firm to be appointed as an auditor of a company. They ensure that only qualified and competent professionals conduct audits in compliance with legal standards.

Analytical procedures involve comparing financial and non-financial data to identify trends, inconsistencies, or unusual variations. These tests help auditors detect potential misstatements and assess the reasonableness of financial information.

Quality control policies help auditors assess the integrity and reliability of a client’s management before accepting or continuing an engagement. Ensuring client integrity reduces audit risk and maintains the credibility of the auditing process.

Preference shareholders have a priority claim over equity shareholders when it comes to receiving dividends. In case of liquidation , preference shareholders are paid their capital before equity shareholders.

Goodwill represents a company's reputation, brand value, and customer loyalty , which are non-physical assets . Since it cannot be touched or measured directly , it is classified as an intangible asset in accounting.

Process costing is used for mass production of identical products, such as food processing, chemicals, or textiles . A maker of frozen orange juice follows a continuous production process, making it suitable for process costing rather than job costing.

Debt ratio measures a company's financial leverage, not its short-term liquidity. Short-term liquidity is better assessed using Current Ratio, Quick Ratio, and Cash Flows from operating activities since they reflect a company's ability to meet short-term obligations.

Income taxes expense is a temporary account closed at the end of the accounting period. Accumulated depreciation is a permanent account and appears in the post-closing trial balance, so it would not be included in this answer.

Debentures are a type of long-term debt that a company borrows and must repay with interest. They appear under liabilities on the balance sheet since they represent a financial obligation.

Financing activities in a cash flow statement relate to obtaining or repaying capital, such as issuing shares, borrowing, or repaying loans . Long-term deposits involve financing decisions, as they relate to investment and funding arrangements.

If profit = 1/4 of sales , then sales = cost price + profit . Let cost price be X and sales be S , then S = X + (1/4)S . Solving for X , cost price = 3/4 of sales , so profit = (1/4) / (3/4) = 1/3 of the cost price .