Accounting MCQ Questions and Solutions with Explanations | Commerce

When a debtor pays his dues there is no change in total assets or total liabilities because debtor in current assets decrease and cash & bank in current assets increase.

Acid test ratios indicate the short-term liquidity of a business. The acid-test ratio uses a firm's balance sheet data as an indicator of whether it has sufficient short-term assets to cover its short-term liabilities.

The maximum amount beyond which a company is not allowed to raise funds by issue of shares is Nominal capital. Nominal capital, also known as authorized capital, represents the securities that are designated for shareholders.

Based on Business entity concept, share capital account shown on the liability side of a balance sheet. The business entity concept also explains why owners' equity appears on the liability side of a balance sheet (i.e. credit side).

Legal work on patent application is not considered as Research & Development costs. Research and development (R&D) expenses are associated with the research and development of a company's goods or services.

Amortization of unidentified intangible assets is in terms of Matching concept. In the Matching Concept of Accounting, all the expenses matched with the revenue of an accounting period should only be taken into consideration.

Declared dividend should be classified in the balance sheet as a Current liability. Dividends payable are dividends that a company's board of directors has declared to be payable to its shareholders. Until such time as the company actually pays the shareholders, the cash amount of the dividend is recorded within a dividends payable account as a current liability.

What is Opening Inventory?

Opening inventory is the value of goods a business has at the beginning of an accounting period. These goods are available for sale during that period.

What does Undercasting mean?

Undercasting means recording the opening inventory at a lower value than its actual amount.

How it Affects Gross Profit:

Gross Profit = Revenue – COGS

COGS = Opening Inventory + Purchases – Closing Inventory

If opening inventory is undercast, then COGS will be shown as lower.

Lower COGS → Higher Gross Profit.

How it Affects Net Profit:

Net Profit = Gross Profit – Operating Expenses

Since Gross Profit is overstated due to lower COGS, Net Profit will also be overstated.

Why the Other Options are Incorrect:

Option A: Incorrect, because net profit does not decrease in this case.

Option B: Incorrect, because both gross profit and net profit do not decrease; they increase.

Option C: Incorrect, because undercasting opening inventory does not directly increase the value of assets.

Correct Effect:

Both Gross Profit and Net Profit increase when opening inventory is undercast.

Therefore, the correct answer is Option D.

Trial Balance is not a financial statement. Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting of financial statements.

Provision for bad debts is made as per the Conservatism concept. The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received.