CBSE Class 11 Accountancy Financial Statements - I MCQs Set A

MCQs

Question : The term ‘Financial Statement’ covers
a) Profit & Loss Statement
b) Balance sheet and Profit & Loss Statement appropriation account
c) Profit & Loss Statement and Balance sheet
d) All of above are false

Answer : C

Question : Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities?
a) Depreciation expense for the period.
b) The change in deferred taxes.
c) The amount by which equity income recognized exceeds cash received.
d) All of the above.

Answer : D 

Question : A financial statement that summarizes company revenue and expenses is?
a) Balance sheet
b) Statement of owner equity
c) Income statement
d) Cash flow statement

Answer : C 

Question : How would revenue from sales of goods and services be classified?
a) Operating outflow.
b) Operating inflow.
c) Investing inflow.
d) Financing inflow.

Answer : B

Question : What is a limitation common to both the current and quick ratio?
a) Accounts receivable may not be truly liquid.
b) Inventories may not be truly liquid.
c) Marketable securities are not liquid.
d) Prepaid expenses are potential sources of cash.

Answer : A 

Question : What is Form 10-K?
a) A document filed with the AICPA, containing supplementary schedules showing management remuneration and elaborations of financial statement disclosures.
b) A document filed with the Securities and Exchange Commission by companies selling securities to the public, containing much of the same information as the annual report as well as additional detail.
c) A document filed with the Securities and Exchange Commission containing key business ratios and forecasts of earnings.
d) A document filed with the Securities and Exchange Commission containing nonpublic information.

Answer : B

Question : What does an increasing collection period for accounts receivable suggest about a firm’s credit policy?
a) The credit policy is too restrictive.
b) The firm is probably losing qualified customers.
c) The credit policy may be too lenient.
d) The collection period has no relationship to a firm’s credit policy.

Answer : C

Question : What type of accounts are accounts receivable and inventory?
a) Cash accounts.
b) Operating accounts.
c) Financing accounts.
d) Investing accounts.

Answer : B

Question : Subtracting all expenses from revenues yields?
a) Net profit/Loss
b) Carrying value
c) Long-term assets
d) Net liabilities

Answer : A

Question : What information does the auditor’s report contain?
a) The results of operations.
b) An unqualified opinion.
c) An opinion as to the fairness of the financial statements.
d) A detailed coverage of the firm’s liquidity, capital resources, and operations.

Answer : C 

Question : The primary source of revenue for a wholesaler is?
a) Investment income
b) Service fees
c) The sale of merchandise
d) The sale of fixed assets the company owns

Answer : C

Question : How would short-term investments in marketable securities be classified?
a) Cash.
b) Operating activities.
c) Financing activities.
d) Investing activities.

Answer : A

Question : What information can be gained from sources such as Industry Norms and Key Business Ratios, Annual Statement Studies, Analyst’s Handbook, and Industry Surveys?
a) The general economic condition.
b) Forecasts of earnings.
c) Elaboration’s of financial statement disclosures.
d) A company’s relative position within its industry.

Answer : D 

Question : How is the balance sheet linked to the other financial statements?
a) The beginning retained earnings balance on the statement of retained earnings becomes the amount of retained earnings reported on the balance sheet
b) Retained earnings is added to total assets and reported on the balance sheet
c) Net income increases retained earnings on the statement of retained earnings, which ultimately increases retained earnings on the balance sheet
d) There is no link between the balance sheet and the other statements

Answer : C

Question : Profit and loss Account discloses:
a) Gross profit
b) Gross profit or Gross loss
c) Gross profit or Gross loss
d) None of these

Answer : B

Question : Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders?
a) Gross profit margin and net profit margin.
b) Return on investment.
c) Total asset turnover and operating profit margin.
d) Return on investment and return on equity.

Answer : D

Question : Which of the following is not required to be discussed in Management’s Discussion and Analysis of the Financial Condition and Results of Operations?
a) Liquidity.
b) Capital resources.
c) Operations.
d) Earnings projections.

Answer : D

Question : What do the asset turnover ratios measure?
a) The liquidity of the firm’s current assets.
b) Management’s effectiveness in generating sales from investments in assets.
c) The overall efficiency and profitability of the firm.
d) The distribution of assets in which funds are invested.

Answer : B

Question : An inflow of cash would result from which of the following?
a) The increase in an asset account other than cash.
b) The decrease in an asset account other than cash.
c) The decrease in an equity account.
d) The decrease in a liability account.

Answer : B

Question : What is the first step in an analysis of financial statements?
a) Check the auditor’s report.
b) Check references containing financial information.
c) Specify the objectives of the analysis.
d) Do a common size analysis.

Answer : C 

Question : Why is the quick ratio a more rigorous test of short-term solvency than the current ratio?
a) The quick ratio considers only cash and marketable securities as current assets.
b) The quick ratio eliminates prepaid expenses for the numerator.
c) The quick ratio eliminates prepaid expenses for the denominator.
d) The quick ratio eliminates inventories from the numerator.

Answer : D

Question : How would the repayment of debt principal be classified?
a) Operating outflow.
b) Operating inflow.
c) Investing outflow.
d) Financing outflow.

Answer : D 

Question : What is the most widely used liquidity ratio?
a) Quick ratio.
b) Current ratio.
c) Inventory turnover.
d) Debt ratio.

Answer : B

Question : How would payments for taxes be classified?
a) Operating outflow.
b) Operating inflow.
c) Investing outflow.
d) Financing outflow.

Answer : A

Question : Which of the following statements are true?
A) Financial statements are only interim report.
B) Financial statements are also known as annual records.
C) Financial statements are historic.
a) Both A and B
b) Both A and C
c) Both B and C
d) A, B, C

Answer : C

Question : What is a creditor’s objective in performing an analysis of financial statements?
a) To decide whether or not the borrower has the ability to repay interest and principal on borrowed funds.
b) To determine the firm’s capital structure.
c) To determine the company’s future earnings stream.
d) To decide whether or not the firm has operated profitably in the past.

Answer : A

Question : Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, non-cash, and non-operating expenses?
a) The direct method.
b) The indirect method.
c) The inflow method.
d) The outflow method.

Answer : B

Question : How is it possible for a firm to be profitable and still go bankrupt?
a) Earnings have increased more rapidly than sales.
b) The firm has positive net income but has failed to generate cash from operations.
c) Net income has been adjusted for inflation.
d) Sales have not improved even though credit policies have been eased.

Answer : B 

Question : Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities?
a) Accounts receivable.
b) Inventory.
c) Prepaid expenses.
d) All of the above

Answer : D

Question : What is an investor’s objective in financial statement analysis?
a) To determine if the firm is risky.
b) To determine the stability of earnings.
c) To determine changes necessary to improve future performance.
d) To determine whether or not an investment is warranted by estimating a company’s future earnings stream.

Answer : D

Question : Which profit margin measures the overall operating efficiency of the firm?
a) Gross profit margin.
b) Operating profit margin.
c) Net profit margin.
d) Return on equity.

Answer : B

Question : The statement of cash flows segregates cash inflows and outflows by:
a) Operating and financing activities.
b) Financing, and investing activities.
c) Operating and investing activities.
d) Operating, financing, and investing activities.

Answer : D

Question : What type of accounts are notes payable and current maturities of long-term debt?
a) Cash accounts.
b) Operating accounts.
c) Financing accounts.
d) Investing accounts.

Answer : C

Question : Which of the following is true regarding the income statement?
a) The income statement is sometimes called the statement of operations
b) The income statement reports revenues, expenses, and liabilities
c) The income statement reports only revenue at the point of sale
d) It shows financial position of a business at a particular period of time

Answer : A

Question : How would the sale of a building be classified?
a) Operating outflow.
b) Operating inflow.
c) Investing inflow.
d) Financing inflow.

Answer : C

Question : Which of the following could lead to cash flow problems?
a) Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.
b) Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers.
c) Obsolete inventory, increasing notes payable, easing of credit by suppliers.
d) Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers.

Answer : B

Question : A company has, by the end of its financial period, paid out more Tax than it has to pay. How would this be shown in the balance sheet?
a) As an accrual Revenue
b) As a Prepaid within current assets
c) As a 'creditor due within one year'
d) As a creditor due after more than one year'

Answer : B

Question : What are external sources of cash?
a) Cash inflows from operating activities.
b) Cash inflows from investing activities.
c) Cash inflows from financing activities.
d) Both (b) and (c).

Answer : D

Question : What is a serious limitation of financial ratios?
a) Ratios are screening devices.
b) Ratios can be used only by themselves
c) Ratios indicate weaknesses only.
d) Ratios are not predictive.

Answer : D

Question : What are internal sources of cash?
a) Cash inflows from operating activities.
b) Cash inflows from investing activities.
c) Cash inflows from financing activities.
d) All of the above.

Answer : A

Question : The change in retained earnings is affected by which of the following?
a) Net income and common stock.
b) Net income and paid-in capital.
c) Net income and payment of dividends.
d) Payment of dividends and common stock.

Answer : C  

Question : An outflow of cash would result from which of the following?
a) The decrease in an asset account other than cash.
b) The increase in a liability account.
c) The decrease in a liability account.
d) The increase in an equity account.

Answer : C

Question : P&L statement is also known as
a) Statement of operations
b) Statement of income
c) Statement of earnings
d) All of the above

Answer : B

Question : What are common size financial statements?
a) Statements that express each account on the balance sheet as a percentage of total assets and each account on the income statement as a percentage of net sales.
b) Statements that standardize financial data in terms of trends.
c) Statements that relate the firm to the industry in which it operates.
d) Statements based on common sense and judgment.

Answer : A

Question : The financial statements consist of:
a) Trial balance
b) Profit and Loss account
c) Balance sheet
d) (a) & (c)
e) (b) & (c)
Answer : E

Question : While calculating operating profit, the following are not taken into account.
a) Normal transactions
b) Abnormal items
c) Expenses of a purely financial nature
d) (b) & (c)
e) (a) & (c)
Answer : C

Question : Match the items given under ‘A’ with the correct items under ‘B’

Answer :