JAIIB Paper 3 Module A, B, C, D Important Questions with Answers PYQ

. 1.“Debit the receiver” is the golden rule for _________ accounts.

Options:
- A. Real Account
- B. Personal Account
- C. Nominal Account
- D. None of the above
Answer: B. Personal Account
Explanation: According to the golden rules of accounting, “Debit the receiver and credit the giver” applies to personal accounts. This rule helps in identifying the correct accounting entries for transactions involving individuals or entities.

2. ‘Bills Receivable A/c’ and ‘Debt Receivable A/c’ are a part of ______ accounts.

Options:
- A. Nominal
- B. Personal Representative
- C. Real Tangible
- D. Personal Artificial
Answer: B. Personal Representative
Explanation: These accounts represent amounts owed to the business by customers or others, classifying them as personal representative accounts.

3. Which of the following is a cause of depreciation?

Options:
- A. Efflux of Time
- B. Mere passage of time
- C. Fall in demand
- D. Change in government rules
Answer: B. Mere passage of time
Explanation: Depreciation occurs due to the natural wear and tear of assets over time, even if they are not in use.

4. Which of the following is the need for depreciation?

Options:
- A. To make provision for replacement
- B. To know the correct profit
- C. To show the correct financial position
- D. All of the above
Answer: D. All of the above
Explanation: Depreciation ensures that the financial statements reflect the true value of assets, accounting for their usage and aging, which helps in accurate profit calculation and financial reporting.

5. Consider the following statements about the straight-line depreciation method and identify the incorrect one:

Options:
- A. It is also called the fixed percentage of the original cost or fixed installment method
- B. It is mentioned in the Income Tax Act of 1961
- C. In this method, the minimum tenure of depreciation should be 1 year
Answer: B. It is mentioned in the Income Tax Act of 1961
Explanation: The straight-line depreciation method is not explicitly mentioned in the Income Tax Act of 1961; instead, it provides guidelines for depreciation rates and methods.

6. Capital vs. Revenue Expenditure – Identify the correct statement

Question: Which of the following is a capital expenditure?
- A. Salary paid to employees
- B. Purchase of machinery
- C. Rent paid for office
- D. Repairs of furniture
Answer: B. Purchase of machinery
Explanation:
- Capital Expenditure (CapEx): Money spent to acquire or improve long-term assets that benefit the business beyond the current year. Example: Machinery, building.
- Revenue Expenditure (RevEx): Money spent on day-to-day operations or maintenance, benefiting only the current year. Examples: Salary, rent, repair.
- Rule of thumb: “If it increases asset value or life → Capital, else Revenue.”

7. Depreciation on Revalued Assets

Question: After revaluation of assets, which method is applied to calculate depreciation?
- A. On original cost
- B. On revalued amount
- C. On estimated salvage only
- D. No depreciation charged
Answer: B. On revalued amount
Explanation:
- If an asset is revalued (e.g., building value increased from ₹5,00,000 to ₹6,00,000), depreciation is charged on the updated value, not the original.
- Reason: Depreciation represents allocation of the asset’s value over its useful life, so the current book value matters.
- Formula: Depreciation=Revalued Cost – Salvage ValueRemaining Life\text{Depreciation} = \frac{\text{Revalued Cost – Salvage Value}}{\text{Remaining Life}}Depreciation=Remaining LifeRevalued Cost – Salvage Value

8. Straight-Line vs Written Down Value Method

Question: Which statement about WDV method is correct?
- A. Depreciation is same every year
- B. Depreciation reduces over time
- C. Only applied to land
- D. None of the above
Answer: B. Depreciation reduces over time
Explanation:
- WDV (Reducing Balance) Method: Depreciation is a fixed percentage of the current book value each year.
  - Example: Asset ₹1,00,000, Depreciation 10% → Year 1 = ₹10,000; Year 2 = 10% of ₹90,000 = ₹9,000, and so on.
- This contrasts with SLM, where depreciation is equal every year.
- WDV is commonly used for tax purposes as allowed by Income Tax Act.

9. Accrual vs Cash Accounting

Question: Which of the following follows the accrual system?
- A. Revenue is recorded when earned, not received
- B. Expenses recorded when paid, not incurred
- C. Both A and B
- D. None of the above
Answer: A. Revenue is recorded when earned, not received
Explanation:
- Accrual System: Transactions are recorded when they occur, not when cash is exchanged.
  - Example: Services provided in December → Revenue recorded in December, even if cash received in January.
- Cash System: Transactions recorded only when cash is received or paid.
- Most banks use accrual accounting, as it reflects true financial position.

10. Ledger Posting

Question: After journalizing transactions, the next step in accounting is:
- A. Trial Balance
- B. Ledger Posting
- C. Cash Book
- D. Balance Sheet
Answer: B. Ledger Posting
Explanation:
- Steps in accounting:
  1. Journal → Record transactions chronologically.
  2. Ledger Posting → Classify transactions under respective accounts (e.g., Cash A/c, Capital A/c).
  3. Trial Balance → Verify total debits = total credits.
  4. Financial Statements → Profit & Loss, Balance Sheet.

11. Bank Reconciliation Statement (BRS)

Question: Purpose of BRS is to:
- A. Identify differences between cash book and passbook
- B. Correct errors in bank statement
- C. Prepare final accounts
- D. None of the above
Answer: A. Identify differences between cash book and passbook
Explanation:
- Banks and company records often differ due to:
  - Outstanding cheques
  - Bank charges not recorded in cash book
  - Direct deposits by customers
- BRS helps reconcile cash book balance with bank passbook balance and ensures accuracy.

12. Trial Balance Errors

Question: Which error will not affect the trial balance?
- A. Debit an account, credit another correctly
- B. Wrong amount entered on both sides
- C. Completely omitted transaction
- D. Both B and C
Answer: A. Debit an account, credit another correctly
Explanation:
- Trial Balance checks total debits = total credits.
- If a transaction is recorded correctly in both debit & credit, totals match → Trial Balance is unaffected.
- Errors affecting TB: wrong amount, omission, posting only one side, arithmetic mistakes.

13. Nominal Account Transactions

Question: Which of the following is a nominal account?
- A. Machinery A/c
- B. Salaries A/c
- C. Cash A/c
- D. Debtors A/c
Answer: B. Salaries A/c
Explanation:
- Nominal Accounts record expenses, losses, incomes, and gains.
  - Example: Salary, Rent, Interest Received, Commission Earned.
- Real Accounts → Assets (Cash, Machinery, Land)
- Personal Accounts → Individuals or entities (Debtors, Creditors)
- Rule of thumb: Nominal → Profit & Loss A/c items

14. Closing Entries

Question: Closing entries are passed to:
- A. Balance Sheet
- B. Trial Balance
- C. Profit & Loss Account
- D. None of the above
Answer: C. Profit & Loss Account
Explanation:
- Purpose of closing entries: Transfer all nominal account balances (expenses & incomes) to Profit & Loss A/c to find net profit or loss.
- Example:
  - Debit Revenue → Profit
  - Credit Expenses → Loss
- After closing, nominal accounts start with zero in the new accounting period.

15. Capital Expenditure vs Revenue Expenditure

Question: Payment of insurance premium for one year is classified as:
- A. Capital Expenditure
- B. Revenue Expenditure
- C. Deferred Revenue Expenditure
- D. Prepaid Expense
Answer: D. Prepaid Expense
Explanation:
- Insurance paid in advance is a prepaid expense, an asset, not an immediate expense.
- At year-end, only the portion pertaining to current period is treated as expense; the rest is carried forward.

16. Depreciation on Fixed Assets

Question: Depreciation is charged on:
- A. Land
- B. Building
- C. Goodwill
- D. Shares
Answer: B. Building
Explanation:
- Depreciation applies to tangible assets (buildings, machinery, vehicles) with limited useful life.
- Land is not depreciated because it does not wear out.
- Intangible assets like goodwill may be amortized, not depreciated.

17. Bad Debts

Question: How are bad debts treated in accounts?
- A. Added to income
- B. Subtracted from income
- C. Shown as asset
- D. None of the above
Answer: B. Subtracted from income
Explanation:
- Bad debts = debts that cannot be recovered from debtors.
- They are expenses/losses → recorded in Profit & Loss A/c.
- Treatment: Debit P&L A/c, Credit Debtors A/c.

18. Provisions vs Reserves

Question: Which of the following is true about provisions?
- A. Part of capital
- B. Part of revenue expenditure
- C. Part of liabilities
- D. Part of income
Answer: C. Part of liabilities
Explanation:
- Provisions = liabilities of uncertain amount or timing (e.g., Provision for Bad Debts).
- Reserves = appropriation of profit (e.g., General Reserve).
- Difference: Provision → liability, Reserve → capital/equity

19. Accounting Principles

Question: Which principle states “Revenue should be recognized when earned and not when received”?
- A. Prudence
- B. Consistency
- C. Accrual
- D. Materiality
Answer: C. Accrual Principle
Explanation:
- Accrual Principle ensures revenue & expenses are recorded in the period they relate to, regardless of cash movement.
- Essential for true financial position of banks and companies.

20. Suspense Account

Question: When is a suspense account used?
- A. For missing cash
- B. When trial balance does not tally
- C. For depreciation
- D. For bad debts
Answer: B. When trial balance does not tally
Explanation:
- Suspense Account is a temporary account used to record discrepancies until errors are located.
- Example: TB shows debit ≠ credit → difference goes to suspense. Once errors corrected, suspense A/c balance becomes zero.

21. Bank Reconciliation Statement (BRS) – Outstanding Cheques

Question: How is an outstanding cheque treated in BRS?
- A. Added to cash book balance
- B. Deducted from passbook balance
- C. Ignored
- D. Added to passbook balance
Answer: B. Deducted from passbook balance
Explanation:
- Outstanding Cheques = issued cheques not yet cleared by the bank.
- Cash book shows the payment, but bank has not yet reduced it → deduct from passbook balance in BRS to reconcile with cash book.

22. Dishonoured Cheque

Question: How is a dishonoured cheque treated in accounting?
- A. Debit Bank A/c, Credit Customer A/c
- B. Debit Customer A/c, Credit Bank A/c
- C. Debit P&L, Credit Bank A/c
- D. Debit Bank, Credit P&L
Answer: B. Debit Customer A/c, Credit Bank A/c
Explanation:
- A dishonoured cheque means payment from customer failed.
- Bank reduces funds → Bank A/c is credited back.
- Customer now owes the bank → Customer A/c debited.

23. Types of Errors – Impact on Trial Balance

Question: Which error will not affect the trial balance?
- A. Omission of a transaction
- B. Wrong posting on both debit & credit sides
- C. Only one side recorded
- D. Total of debit ≠ credit
Answer: B. Wrong posting on both debit & credit sides
Explanation:
- Trial Balance checks total debits = total credits.
- If wrong amount posted equally on debit & credit, totals still match → TB unaffected.
- Errors affecting TB:
  1. One side not recorded
  2. Omission
  3. Arithmetical mistakes

24. Rectification of Errors

Question: If a wrong amount is posted to ledger A/c, correction is made by:
- A. Passing a journal entry
- B. Ignoring
- C. Reversing TB
- D. Directly in financial statements
Answer: A. Passing a journal entry
Explanation:
- Errors discovered after ledger posting are corrected through a rectification journal entry, specifying both debit and credit adjustments.
- Example: ₹5,000 posted instead of ₹500 → Journal entry debits/credits correct A/cs.

25. Accrued Expenses

Question: Accrued expenses are:
- A. Expenses paid in advance
- B. Expenses due but not yet paid
- C. Capital expenditure
- D. Deferred revenue
Answer: B. Expenses due but not yet paid
Explanation:
- Example: Salary for December payable in January → Accrued Expense.
- Liability on balance sheet → increases current liabilities.
- Matches Accrual Principle, ensuring expenses are recorded in the correct period.

26. Deferred Revenue Expenditure

Question: Payment of huge advertisement cost for 5 years is treated as:
- A. Revenue expenditure
- B. Capital expenditure
- C. Deferred revenue expenditure
- D. Prepaid expense
Answer: C. Deferred revenue expenditure
Explanation:
- When a large expense benefits multiple periods, it is spread over those periods.
- Example: Advertisement or preliminary expenses → initially capitalized → amortized yearly.

27. Goodwill Accounting

Question: Goodwill is classified as:
- A. Asset
- B. Liability
- C. Expense
- D. None
Answer: A. Asset
Explanation:
- Goodwill = intangible asset representing reputation, customer base, or brand value.
- Appears under Assets on balance sheet, sometimes amortized over years if purchased.

28. Accounting Standard Relevance

Question: Which accounting standard deals with depreciation?
- A. AS 10
- B. AS 6
- C. AS 2
- D. AS 11
Answer: B. AS 6 (Depreciation Accounting)
Explanation:
- AS 6 mandates:
  - Depreciation based on useful life of asset
  - Regular review of method and rate
  - Disclosure in financial statements

29. Trial Balance Preparation

Question: Purpose of trial balance is:
- A. Detect all errors
- B. Verify arithmetical accuracy of ledger
- C. Prepare financial statements directly
- D. None of the above
Answer: B. Verify arithmetical accuracy of ledger
Explanation:
- Trial Balance = listing of all ledger balances.
- Ensures total debit = total credit.
- Some errors (like omission of both sides, compensating errors) won’t be detected.

30. Prepaid vs Accrued Income

Question: Interest received in advance is:
- A. Prepaid income
- B. Accrued income
- C. Deferred revenue expenditure
- D. None
Answer: A. Prepaid income
Explanation:
- If interest is received before it is earned, it is liability (income received in advance).
- Recorded as current liability, not as revenue in current period.

31. Accounting Concepts

Question: Which accounting concept assumes that business transactions are separate from the personal transactions of its owners?

A. Money Measurement Concept
B. Entity Concept
C. Going Concern Concept
D. Accrual Concept
Answer: B. Entity Concept
Explanation:
- The Entity Concept states that the business is a separate accounting entity distinct from its owners or other businesses.
- Hence, the transactions of the proprietor should not be mixed with those of the business.
- This ensures clarity in financial statements and accurate attribution of assets/liabilities to the business.

32. Objective of Accounting

Question: Which of the following is not an objective of accounting?

A. Systematic recording of transactions
B. Ascertainment of results for those transactions
C. Determination of financial position of business
D. Predicting future share-price movement
Answer: D. Predicting future share-price movement
Explanation:
- Accounting’s objectives include: recording, classifying, summarising, interpreting financial transactions.
- It is meant to provide information on performance (profit/loss) and financial position.
- Predicting future share price is outside the scope of accounting and moves into investment analysis or market speculation.

33. Golden Rule – Real Account

Question: According to the golden rule for real accounts:

A. Debit what comes in, Credit what goes out
B. Debit the receiver, Credit the giver
C. Debit all expenses and losses, Credit all incomes and gains
D. None of the above
Answer: A. Debit what comes in, Credit what goes out
Explanation:
- Real accounts represent assets (both tangible and intangible).
- When an asset comes into the business, it is debited; when an asset goes out, it is credited.
- For example, purchase of machinery for cash → Machinery A/c debited (asset coming in), Cash A/c credited (asset going out).
- Recognising this rule ensures accurate ledger postings.

34. Maintenance of Books – Cash Book

Question: A cash book serves the function of a journal and a ledger when:

A. It records only receipts
B. It records both receipts and payments and balances carried down
C. It records only payments
D. It has no column for bank transactions
Answer: B. It records both receipts and payments and balances carried down
Explanation:
- A cash book, when properly maintained (with both receipt and payment sides and periodic balancing), acts as both a journal (chronological recording) and a ledger (classified posting) because individual amounts are directly in the cash ledger.
- It helps simplify accounts when the volume of cash transactions is large.

35. Bank Reconciliation Statement – Bank Charges

Question: In preparing a Bank Reconciliation Statement (BRS), bank charges debited by the bank but not yet recorded in the cash book will:

A. Be added to the cash book balance
B. Be deducted from the cash book balance
C. Be added to the passbook balance
D. Be ignored
Answer: B. Be deducted from the cash book balance
Explanation:
- If the bank has debited charges (like service charges) in the bank passbook but the business’s cash book has not yet recorded them, the cash book balance is overstated compared to the passbook.
- To reconcile, you deduct those unrecorded charges from the cash book balance to arrive at correct adjusted book balance in BRS.

36. Trial Balance Limitations

Question: Which of these errors can a trial balance not detect?

A. Omission of a transaction altogether
B. Posting wrong amount to both debit & credit sides
C. Posting debit to credit and credit to debit reversed
D. Posting only on one side of the ledger
Answer: A. Omission of a transaction altogether
Explanation:
- A trial balance matches total debits against total credits in ledger balances.
- If a transaction is completely omitted (neither debit nor credit), the totals still balance — the error remains invisible to the trial balance.
- Similarly, if wrong amounts are posted equally on both sides, totals match → trial balance shows no discrepancy.
- Thus, trial balance cannot guarantee correctness of all ledger postings.

37. Adjusting Entries – Prepaid Expenses

Question: At the year-end, insurance premium paid in advance and intended for next year should be:

A. Expensed fully this year
B. Shown as prepaid expense (asset) and only current year portion expensed
C. Ignored
D. Capitalised
Answer: B. Shown as prepaid expense (asset) and only current year portion expensed
Explanation:
- Under accrual accounting, expenses must be matched to the period to which they relate.
- If insurance for the next year is paid now, only the portion that relates to the current year should be charged to Profit & Loss; the balance becomes Prepaid Expense, shown as current asset, to be expensed in next period.

38. Depreciation – WDV vs SLM

Question: Which method of depreciation will result in decreasing depreciation expense each year?

A. Straight-Line Method (SLM)
B. Written Down Value (WDV) Method
C. Both show same pattern
D. None
Answer: B. Written Down Value (WDV) Method
Explanation:
- In WDV, depreciation is calculated as a fixed percentage of the book value (reducing balance) each year. Hence, as book value declines, depreciation amount also declines.
- In SLM, depreciation is constant every year (based on original cost minus salvage value over life).
- Knowing this difference is often tested.

39. Capital vs Revenue Expenditure (Practical)

Question: Which of the following is a capital expenditure?

A. Paying salaries to factory workers
B. Painting the building for maintenance
C. Acquiring new delivery van
D. Payment of rent for premises
Answer: C. Acquiring new delivery van
Explanation:
- Capital expenditure involves acquiring or improving long-term assets that will benefit multiple accounting periods (e.g., delivery van).
- The others (salaries, maintenance painting, rent) are recurring and benefit only current period → revenue expenditures.

40. Intangible Assets – Goodwill Treatment

Question: When a business purchases another business and pays an excess amount over the fair value of its net assets, that excess is recorded as:

A. Depreciation
B. Amortisation
C. Goodwill
D. Contingent liability
Answer: C. Goodwill
Explanation:
- Goodwill is an intangible asset representing name, reputation, customer relations etc, when acquired by purchase of a business.
- The excess of purchase price over identifiable net assets = goodwill.
- Usually shown as an asset on balance sheet; may be amortised or tested for impairment depending on accounting policies.

41. Accounting Standards – Cash Flow Statement

Question: Which accounting standard deals with the treatment and presentation of the Statement of Cash Flows?

A. AS 2 – Valuation of Inventories
B. AS 3 – Cash Flow Statements
C. AS 4 – Contingencies & Events Occurring After Balance Sheet Date
D. AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
Answer: B. AS 3 – Cash Flow Statements
Explanation:
- Accounting Standard (AS) 3 specifically prescribes how to present a cash flow statement — classifying cash flows into operating, investing and financing activities.
- Understanding standards helps because many questions ask which standard covers which topic.

42. Double Entry System

Question: Under the double entry system of accounting:

A. Every transaction affects one account only
B. Every transaction affects at least two accounts, one debit and one credit
C. Revenues and expenses are ignored
D. Only assets and liabilities are affected
Answer: B. Every transaction affects at least two accounts, one debit and one credit
Explanation:
- The double entry system ensures accounting equation (Assets = Liabilities + Equity) remains balanced.
- Because each transaction has both a debit and credit effect, the total of all debits equals total of all credits.

43. Ledger vs Subsidiary Books

Question: Which of the following best describes the function of subsidiary books?

A. They show summary of ledger accounts
B. They record original entries of all transactions
C. They are used to record transactions of a similar nature before posting into the ledger
D. They replace the ledger entirely
Answer: C. They are used to record transactions of a similar nature before posting into the ledger
Explanation:
- Subsidiary books (like purchases book, sales book, cash book) categorize transactions of similar nature. Then totals are posted into the ledger.
- This improves efficiency and clarity in accounting.

44. Pass Book vs Cash Book in BRS

Question: In preparing a bank reconciliation statement, why might the bank pass-book show a higher balance than the cash book?

A. Outstanding cheques issued by the business
B. Bank interest credited but not yet recorded in cash book
C. Cheques deposited but not yet cleared
D. Bank charges debited but not yet recorded in cash book
Answer: B. Bank interest credited but not yet recorded in cash book
Explanation:
- If the bank (pass-book) has credited interest which the business hasn’t yet recorded in its cash book, then pass-book balance will be higher than what the cash book shows.
- Therefore in BRS you would add this interest to the cash book balance to reconcile to pass-book amount.

45. Suspense Account Usage

Question: A “Suspense Account” is created when:

A. A transaction is totally omitted
B. A trial balance does not tally and the difference is temporarily placed
C. An item is posted twice
D. A cheque is dishonoured
Answer: B. A trial balance does not tally and the difference is temporarily placed
Explanation:
- When the trial balance shows debit ≠ credit and the error location is not immediately found, the difference is placed in Suspense Account temporarily.
- Once errors are located and corrected, the Suspense Account is closed out.

46. Capital vs Revenue Expenditure – Example

Question: Which of the following is not a capital expenditure?

A. Purchase of a new machine for production
B. Installation cost of that machine
C. Regular maintenance cost of the machine
D. Upgrading additional capacity of the machine
Answer: C. Regular maintenance cost of the machine
Explanation:
- Capital expenditure relates to acquisition or enhancement of long-term assets (options A, B, D).
- Regular maintenance is a revenue expenditure because it’s about using the asset in current period rather than increasing its life or capacity.

47. Depreciation – Methods Comparison

Question: Which of the following is a disadvantage of the Straight Line Method of depreciation?

A. Depreciation amount remains constant over the life of the asset
B. It ignores the actual usage pattern of the asset
C. Book value never reaches zero
D. Might undervalue asset early and overvalue later
Answer: B. It ignores the actual usage pattern of the asset
Explanation:
- While SLM has simplicity, it doesn’t account for assets which may wear faster in early years or slower later on — thus usage pattern mismatch.
- This leads to potential mis-allocation of expense.

48. Bills of Exchange – Definition

Question: A “Bill of Exchange” is:

A. A cheque drawn by one person on another person to pay money
B. A promissory note made by one person promising to pay another
C. An unconditional order in writing by one person to another, to pay a certain sum to a named person or bearer
D. A payment instruction sent to the bank
Answer: C. An unconditional order in writing by one person to another, to pay a certain sum to a named person or bearer
Explanation:
- This is a standard definition of a bill of exchange under commercial law.

49. Accrual Principle – Affect on Profit

Question: If closing stock is not shown in the financial statements, then profit will be:

A. Understated
B. Overstated
C. Correct
D. Cannot say
Answer: B. Overstated
Explanation:
- If closing stock is omitted, the cost of goods sold will be overstated (since closing stock is not deducted from current period cost) → Gross profit will be understated. But overall net profit will be overstated? Wait, check carefully: Actually if closing stock is omitted, expense is higher → profit lower, so profit is understated.
- Therefore correct answer is: A. Understated
- (This is an example of why careful reading matters in exam – many get confused.)
- The correct reasoning: closing stock should reduce current period cost; if omitted then cost rises → profit falls.
- This concept is part of adjusting & closing entries in Module A.

50. Replacement of Fixed Asset

Question: When a fixed asset is replaced, the difference between the cost of new asset and the trade-in value of old asset is treated as:

A. Capital expenditure
B. Revenue expenditure
C. Deferred expenditure
D. Intangible asset
Answer: A. Capital expenditure
Explanation:
- Replacing a fixed asset involves acquisition of a long-term asset or improvement; thus the extra amount spent is treated as capital expenditure.
- The trade-in value of the old asset reduces the cost of the new asset.

61. Accounting Equation

Question: A business starts with cash ₹50,000 and goods ₹25,000. It owes creditors ₹20,000. What is the capital?

A. ₹70,000
B. ₹55,000
C. ₹50,000
D. ₹75,000

✅ Answer: B. ₹55,000
Explanation:
According to the accounting equation:

Assets = Liabilities + Capital
So,
Assets = Cash (₹50,000) + Goods (₹25,000) = ₹75,000
Liabilities = ₹20,000
Therefore,
Capital = ₹75,000 − ₹20,000 = ₹55,000.
This concept tests your grasp of fundamental accounting relationships, which form the basis of double-entry bookkeeping.

62. Matching Concept

Question: The Matching Concept in accounting ensures that—

A. Assets = Liabilities + Capital
B. Revenue and related expenses are recognized in the same accounting period
C. All assets are recorded at cost price
D. Depreciation is ignored

✅ Answer: B. Revenue and related expenses are recognized in the same accounting period
Explanation:
The Matching Concept ensures that incomes earned and the expenses incurred to earn them are recognized in the same period.
Example: If rent for December is unpaid, it must still be recorded as expense in that year (accrued expense).
This concept underpins true and fair view of Profit & Loss.

63. Accounting Standard for Depreciation

Question: Which accounting standard deals with the accounting for depreciation?

A. AS 6
B. AS 3
C. AS 10
D. AS 2

✅ Answer: A. AS 6 – Depreciation Accounting
Explanation:
AS 6 specifies how depreciation should be charged, revised, and disclosed in financial statements.

It ensures systematic allocation of depreciable amount over an asset’s useful life.
It also provides guidance on change in method and disclosure requirements.
(Note: AS 6 is now merged into revised AS 10, but still asked in exams!)

64. Outstanding Expenses

Question: In final accounts, outstanding expenses are shown—

A. On debit side of Trading Account
B. On credit side of Profit & Loss Account
C. As current liability in Balance Sheet
D. As current asset in Balance Sheet

✅ Answer: C. As current liability in Balance Sheet
Explanation:
Outstanding expenses are expenses incurred but not yet paid.
They belong to current year but payment is pending — hence they are shown as liabilities in the balance sheet and added to respective expense in P&L account.

65. Rectification of Errors

Question: An amount of ₹1,000 received from Mohan was wrongly credited to Sohan. What will be the rectification entry?

A. Dr. Mohan ₹1,000; Cr. Cash ₹1,000
B. Dr. Suspense A/c ₹1,000; Cr. Mohan ₹1,000
C. Dr. Sohan ₹1,000; Cr. Mohan ₹1,000
D. Dr. Cash ₹1,000; Cr. Sohan ₹1,000

✅ Answer: C. Dr. Sohan ₹1,000; Cr. Mohan ₹1,000
Explanation:
Sohan’s account was wrongly credited; it should be debited to cancel that.
Mohan’s account was not credited; hence we credit it now.
This rectifies the error of commission between personal accounts.

66. Provision vs Reserve

Question: Which statement is correct about Provision and Reserve?

A. Both are created out of profit for unknown liabilities
B. Provision is charge against profit; Reserve is appropriation of profit
C. Both reduce profit before arriving at taxable income
D. Both are mandatory

✅ Answer: B. Provision is charge against profit; Reserve is appropriation of profit
Explanation:

Provision = created for known liability/asset loss (e.g., doubtful debts) → reduces profit.
Reserve = set aside from profit for strengthening financial position (e.g., general reserve).
This is a frequently asked conceptual question in JAIIB.

67. Accounting Standard for Fixed Assets

Question: AS 10 (revised) deals with—

A. Accounting for depreciation
B. Accounting for fixed assets
C. Valuation of inventories
D. Contingent liabilities

✅ Answer: B. Accounting for Fixed Assets
Explanation:
AS 10 specifies recognition, measurement, and disposal of tangible fixed assets.

Covers initial cost, subsequent expenditure, revaluation, and retirement.
Replaced earlier AS 6 & AS 10.
This standard is critical for bank balance sheet preparation.

68. Trial Balance Disagreement

Question: If the debit and credit sides of the trial balance don’t tally, what is the first step?

A. Post all entries again
B. Check balances of accounts
C. Put the difference to Suspense Account temporarily
D. Ignore and continue

✅ Answer: C. Put the difference to Suspense Account temporarily
Explanation:
When the reason for mismatch isn’t located quickly, difference is posted to Suspense A/c till errors are rectified.
After correction, Suspense Account is closed.
This concept often appears in case-based MCQs.

69. Deferred Revenue Expenditure

Question: Which of the following is an example of Deferred Revenue Expenditure?

A. Advertising campaign for 3 years
B. Purchase of machinery
C. Payment of salaries
D. Rent paid monthly

✅ Answer: A. Advertising campaign for 3 years
Explanation:
Deferred revenue expenditure gives benefit over multiple accounting periods but is not capital in nature.
Hence, it is initially treated as asset and written off gradually over future years.

70. Errors Revealed by Trial Balance

Question: Which of the following errors will be revealed by a Trial Balance?

A. Error of principle
B. Error of omission
C. Single-side entry
D. Compensating error

✅ Answer: C. Single-side entry
Explanation:
Trial balance ensures total debits = total credits.
If an entry is made only on one side, totals will differ — trial balance reveals it.
Other errors (like principle or omission) may not affect trial balance agreement.

71. Accrued Income

Question: Interest accrued but not received at the end of year is—

A. Added to assets
B. Added to liabilities
C. Ignored
D. Deducted from income

✅ Answer: A. Added to assets
Explanation:
Accrued income is income earned but not yet received.
It is shown as current asset and added to income in the Profit & Loss Account.

72. Contingent Liability

Question: A contingent liability is—

A. Always recorded in the books
B. Recorded as a liability in balance sheet
C. Shown as a note to accounts
D. Not disclosed

✅ Answer: C. Shown as a note to accounts
Explanation:
Contingent liabilities are possible obligations depending on future events (e.g., pending lawsuits, guarantees).
They are not recorded but disclosed in footnotes to financial statements.

73. Goods Withdrawn by Owner

Question: When the owner withdraws goods for personal use, which accounts are affected?

A. Drawings A/c Dr, Purchases A/c Cr
B. Cash A/c Dr, Drawings A/c Cr
C. Purchases A/c Dr, Drawings A/c Cr
D. Drawings A/c Dr, Sales A/c Cr

✅ Answer: A. Drawings A/c Dr, Purchases A/c Cr
Explanation:
Goods taken by owner are not for sale — they reduce business stock.
Hence, Purchases (nominal account) is credited and Drawings (personal account) debited.

74. Bank Reconciliation – Dishonoured Cheque

Question: A cheque received from a customer was deposited but later dishonoured. How is it treated in BRS?

A. Added to cash book balance
B. Deducted from pass book balance
C. Deducted from cash book balance
D. Added to pass book balance

✅ Answer: C. Deducted from cash book balance
Explanation:
If a cheque previously recorded as receipt is dishonoured, it reduces actual bank balance.
Hence, deduct it from cash book balance while reconciling.

75. Classification of Accounts

Question: “Outstanding Salary” is which type of account?

A. Real
B. Personal
C. Nominal
D. Fictitious

✅ Answer: B. Personal Account
Explanation:
Outstanding Salary represents an obligation payable to employees → a liability, which falls under Personal Account (representing persons or entities).

Q61. The trial balance of a bank does not agree. What is prepared to locate the errors?

A. Profit & Loss Account
B. Balance Sheet
C. Suspense Account ✅
D. Rectification Statement

Explanation:
When a trial balance does not tally, a suspense account is opened temporarily to balance it. After the errors are found and rectified, this account is closed. This is a key step in ensuring the accuracy of financial statements.

**Q62. Which of the following accounts is not a personal account?**

A. Capital Account
B. Outstanding Salary Account
C. Prepaid Rent Account
D. Sales Account ✅

Explanation:
Personal accounts relate to persons, firms, or institutions.
Sales Account is a nominal account, representing income — not a personal account.

Q63. Bank overdraft shown in the balance sheet is:

A. An asset
B. A liability ✅
C. An expense
D. A reserve

Explanation:
Bank overdraft means the amount withdrawn exceeds the deposit. It’s money owed to the bank → recorded under current liabilities.

Q64. Which concept assumes that business will continue indefinitely?

A. Money Measurement Concept
B. Going Concern Concept ✅
C. Dual Aspect Concept
D. Cost Concept

Explanation:
The Going Concern concept assumes the business will operate in the foreseeable future — this affects asset valuation and depreciation methods.

Q65. Which of the following is a real account?

A. Rent Account
B. Goodwill Account ✅
C. Salary Account
D. Discount Account

Explanation:
Real accounts relate to assets — tangible or intangible.
Goodwill is an intangible asset, hence a real account.

Q66. The process of recording transactions in the journal is called:

A. Balancing
B. Posting
C. Journalizing ✅
D. Reconciling

Explanation:
The first step in accounting is journalizing — recording financial transactions chronologically in the journal before posting them to ledger accounts.

Q67. The accounting equation is:

A. Assets + Liabilities = Capital
B. Assets = Liabilities + Capital ✅
C. Capital = Liabilities – Assets
D. Assets = Capital – Liabilities

Explanation:
Basic accounting principle:
➡️ Assets = Liabilities + Owner’s Equity (Capital)
It ensures every transaction maintains this balance.

Q68. The rule for nominal accounts is:

A. Debit what comes in, Credit what goes out
B. Debit all expenses & losses, Credit all incomes & gains ✅
C. Debit the receiver, Credit the giver
D. None of the above

Explanation:
Nominal accounts track expenses, losses, incomes, and gains.
Hence:

Debit → expenses & losses
Credit → incomes & gains.

Q69. Depreciation is charged on:

A. Fixed Assets ✅
B. Current Assets
C. Liabilities
D. None of these

Explanation:
Depreciation applies to fixed assets like machinery, buildings, etc., to reflect reduction in value due to use or passage of time.

Q70. What is the main purpose of preparing a trial balance?

A. To check the arithmetic accuracy of books ✅
B. To find net profit/loss
C. To prepare ledger accounts
D. To prepare a balance sheet

Explanation:
A trial balance is prepared to verify that total debits equal total credits — ensuring accuracy before preparing final accounts.

Q71. Depreciation is charged because of which accounting concept?

A. Money Measurement Concept
B. Matching Concept ✅
C. Cost Concept
D. Realisation Concept

Explanation:
Under the Matching Concept, all expenses related to a period must be matched with the revenues of the same period. Depreciation is an expense for using fixed assets; hence, it is charged every year.

Q72. Bank reconciliation statement (BRS) is prepared by:

A. Auditor
B. Banker
C. Customer (Account Holder) ✅
D. Tax Department

Explanation:
BRS is prepared by the account holder to reconcile the difference between the bank balance as per cash book and as per bank statement.

Q73. If cheque issued by the customer is not presented for payment, what will be the impact on bank reconciliation?

A. Balance as per bank statement will be more than cash book ✅
B. Balance as per bank statement will be less
C. Both will be equal
D. None of these

Explanation:
Unpresented cheques reduce cash book balance but not the bank’s record until presented — so bank statement shows a higher balance.

Q74. Which of the following errors will affect the trial balance?

A. Error of Omission
B. Error of Commission ✅
C. Compensating Error
D. Error of Principle

Explanation:
Error of Commission (e.g., posting to wrong amount) affects the totals of debit or credit sides, hence disturbing the trial balance.

Q75. Prepaid expense is shown in balance sheet as:

A. Liability
B. Asset ✅
C. Expense
D. Reserve

Explanation:
Prepaid expense is a current asset, because it represents payment made for benefits to be received in the future.

Q76. Outstanding expenses are shown under:

A. Assets
B. Liabilities ✅
C. Income
D. Reserves

Explanation:
Outstanding expenses are obligations for payments due — shown as current liabilities.

Q77. Goods withdrawn by owner for personal use is adjusted through:

A. Purchase Account
B. Drawings Account ✅
C. Sales Account
D. Expense Account

Explanation:
Personal use of goods is treated as drawings, reducing both capital and stock in accounts.

Q78. Income received in advance is classified as:

A. Asset
B. Liability ✅
C. Expense
D. Reserve

Explanation:
It represents a future obligation (service or goods yet to be provided), so it is recorded as current liability.

Q79. Rent outstanding for March 2025 should be:

A. Added to rent paid ✅
B. Ignored
C. Deducted from rent paid
D. Treated as income

Explanation:
According to the Accrual Concept, all expenses related to the accounting period must be recognized even if unpaid — hence added to rent paid.

Q80. The capital of the proprietor is shown under:

A. Liabilities side of balance sheet ✅
B. Assets side
C. Both sides
D. None

Explanation:
Capital represents owner’s claim on the business; hence shown under liabilities (since business owes it to owner).

Q81. Which of the following errors cannot be detected by trial balance?

A. Error of Omission ✅
B. Error in Totals
C. Posting wrong side
D. Recording wrong amount

Explanation:
If a transaction is completely omitted from books, both debit and credit are missing — trial balance still tallies.

Q82. The cost of a fixed asset minus depreciation is called:

A. Market Value
B. Written Down Value (WDV) ✅
C. Realizable Value
D. Book Cost

Explanation:
WDV = Original Cost – Accumulated Depreciation, used for presenting assets in the balance sheet.

Q83. Goods purchased for cash is recorded in:

A. Journal Proper
B. Purchase Book ✅
C. Cash Book
D. Ledger

Explanation:
All goods purchased (cash or credit) are recorded in the Purchase Book; only payment details reflect in Cash Book.

Q84. If a debtor becomes insolvent, the loss is recorded in:

A. Capital Account
B. Bad Debts Account ✅
C. Provision Account
D. Suspense Account

Explanation:
When a debtor fails to pay, the amount is written off as Bad Debt, shown as an expense in the P&L account.

Q85. Which of the following represents an accounting cycle?

A. Journal → Ledger → Trial Balance → Final Accounts ✅
B. Ledger → Journal → Trial Balance
C. Balance Sheet → Ledger → Journal
D. None of these

Explanation:
The correct order of accounting process is:
Record → Classify → Summarize → Report.
Hence, Journal → Ledger → Trial Balance → Final Accounts.

Q86. Cash book serves the purpose of:

A. Journal only
B. Ledger only
C. Both journal and ledger ✅
D. None of these

Explanation:
Cash book records transactions (like a journal) and also acts as a ledger for cash and bank accounts.

Q87. The total of debit side of trial balance is ₹2,50,000 and credit side is ₹2,45,000. The difference will be:

A. Shown in Suspense Account (Credit Side ₹5,000) ✅
B. Ignored
C. Added to Capital
D. None

Explanation:
When debit side exceeds credit side, difference is temporarily placed on credit side of Suspense Account.

Q88. Revenue is recognized when:

A. Cash is received
B. Sale is made (ownership transferred) ✅
C. Order is received
D. None

Explanation:
According to the Realisation Concept, revenue is recognized when ownership or risk transfers, not when cash is received.

Q89. The amount spent on whitewashing a new building is:

A. Capital Expenditure ✅
B. Revenue Expenditure
C. Deferred Revenue Expenditure
D. None

Explanation:
Whitewashing of a new building is part of making the asset ready for use, hence capital expenditure.

Q90. Which account is prepared to find out profit or loss?

A. Trading Account
B. Profit & Loss Account ✅
C. Balance Sheet
D. Cash Book

Explanation:
Profit & Loss Account shows net results (profit or loss) from operations after all incomes and expenses.

Q91. Bank reconciliation statement is prepared as on:

A. Year end only
B. Month end ✅ (usually monthly)
C. Quarterly
D. Whenever needed

Explanation:
Banks typically prepare or advise monthly statements, hence BRS is generally prepared at the end of each month.

Q92. Discount allowed is shown as:

A. Expense ✅
B. Income
C. Liability
D. Reserve

Explanation:
Discount allowed (to customers) reduces income — treated as expense in Profit & Loss Account.

Q93. Discount received is shown as:

A. Expense
B. Income ✅
C. Liability
D. Asset

Explanation:
Discount received from suppliers reduces cost — hence treated as income.

Q94. Bank charges are recorded on which side of the cash book?

A. Debit Side
B. Credit Side ✅
C. Both sides
D. None

Explanation:
Bank charges reduce bank balance — therefore, entered on credit side of the bank column in the cash book.

Q95. Which account is affected when goods are sold for cash?

A. Sales and Cash Account ✅
B. Cash and Purchase Account
C. Sales and Creditors Account
D. Cash and Debtors Account

Explanation:
Cash increases (Debit Cash Account) and Sales increases (Credit Sales Account).

Q96. When trial balance totals agree, it proves that:

A. There is no error
B. Arithmetical accuracy is ensured ✅
C. Accounts are correct
D. All errors are rectified

Explanation:
Trial balance agreement ensures only arithmetical accuracy, not correctness of all entries (errors of omission, principle may still exist).

Q97. Drawings by owner reduce:

A. Capital ✅
B. Profit
C. Liabilities
D. Assets

Explanation:
Drawings reduce the owner’s capital, as they represent personal withdrawals.

Q98. A transaction that increases both assets and liabilities is:

A. Purchase of asset on credit ✅
B. Payment of expenses
C. Cash sales
D. Owner’s drawings

Explanation:
When asset is purchased on credit → Assets (increase) and Liabilities (increase).

Q99. The accounting standard dealing with Depreciation Accounting is:

A. AS-6 ✅
B. AS-2
C. AS-10
D. AS-11

Explanation:
AS-6 (now merged with AS-10 Revised) earlier dealt with Depreciation Accounting, specifying methods and disclosure.

Q100. Which concept assumes all transactions are recorded in monetary terms?

A. Cost Concept
B. Money Measurement Concept ✅
C. Realisation Concept
D. Dual Aspect Concept

Explanation:
Under Money Measurement Concept, only measurable events (in money) are recorded in books — non-monetary events are ignored.

Module B: Financial Statements and Ratios

Q101. Financial statements include which of the following?

A. Trading and Profit & Loss Account
B. Balance Sheet
C. Cash Flow Statement
D. All of the above ✅

Explanation:
Complete financial statements consist of P&L Account, Balance Sheet, and Cash Flow Statement (as per Accounting Standards). Together, they show profitability, liquidity, and financial position.

Q102. The main purpose of preparing a Balance Sheet is to show:

A. Profitability
B. Financial Position ✅
C. Cash Flow
D. Assets Turnover

Explanation:
The Balance Sheet depicts the financial position of a business — i.e., assets, liabilities, and owner’s equity on a particular date.

Q103. Which account shows operating results of the business?

A. Balance Sheet
B. Profit & Loss Account ✅
C. Cash Flow Statement
D. Trading Account

Explanation:
The P&L Account summarizes all revenues and expenses to determine net profit or loss for the accounting period.

Q104. Net profit is transferred to which account?

A. Capital Account ✅
B. Drawing Account
C. Cash Account
D. Suspense Account

Explanation:
Net profit belongs to the owner and is therefore transferred to Capital Account (increases owner’s equity).

**Q105. Which of the following is a liquidity ratio?**

A. Debt-Equity Ratio
B. Current Ratio ✅
C. Proprietary Ratio
D. Return on Investment

Explanation:
The Current Ratio (Current Assets ÷ Current Liabilities) measures the firm’s ability to meet short-term obligations. Ideal ratio ≈ 2 : 1.

Q106. Quick Ratio excludes which of the following?

A. Cash
B. Bills Receivable
C. Inventories ✅
D. Debtors

Explanation:
The Quick Ratio (Liquid Assets ÷ Current Liabilities) excludes Inventories and Prepaid Expenses, as they are not readily convertible into cash.

Q107. Ideal Quick Ratio is:

A. 1 : 1 ✅
B. 2 : 1
C. 3 : 1
D. 0.5 : 1

Explanation:
A 1 : 1 Quick Ratio indicates sufficient liquid assets to pay current liabilities without relying on stock.

Q108. Debt-Equity Ratio measures:

A. Short-term solvency
B. Long-term solvency ✅
C. Profitability
D. Efficiency

Explanation:
Debt-Equity Ratio = Long-term Debt ÷ Shareholder’s Equity, showing reliance on external borrowings.
A high ratio → higher financial risk.

Q109. The ratio that measures the ability to earn profit on capital employed is:

A. Net Profit Ratio
B. Return on Capital Employed (ROCE) ✅
C. Current Ratio
D. Operating Ratio

Explanation:
ROCE = (Net Profit + Interest) / Capital Employed × 100.
Shows efficiency in using capital to generate profit.

Q110. Gross Profit Ratio formula:

A. Gross Profit ÷ Sales × 100 ✅
B. Net Profit ÷ Sales × 100
C. Operating Profit ÷ Sales × 100
D. Cost of Goods Sold ÷ Sales × 100

Explanation:
It indicates the margin of profit after deducting the cost of goods sold from net sales.

Q111. A higher Operating Ratio indicates:

A. Higher efficiency
B. Lower efficiency ✅
C. Better liquidity
D. Strong solvency

Explanation:
Operating Ratio = (Cost of Goods Sold + Operating Expenses) ÷ Sales.
Higher ratio → More expenses → Lower operational efficiency.

Q112. Capital Employed is equal to:

A. Fixed Assets + Working Capital ✅
B. Current Assets + Current Liabilities
C. Total Assets – Liabilities
D. None

Explanation:
Capital Employed can be computed as:
→ Fixed Assets + Working Capital (CA – CL), or
→ Total Assets – Current Liabilities.

Q113. The ratio that indicates profitability in relation to sales is:

A. Gross Profit Ratio ✅
B. Debt-Equity Ratio
C. Current Ratio
D. Proprietary Ratio

Explanation:
Gross Profit Ratio and Net Profit Ratio measure profitability with respect to sales.

Q114. Proprietary Ratio measures:

A. Efficiency
B. Solvency ✅
C. Profitability
D. Liquidity

Explanation:
Proprietary Ratio = Shareholders’ Funds ÷ Total Assets.
Higher ratio → Strong financial base and solvency.

Q115. A low Current Ratio indicates:

A. Strong liquidity
B. Weak liquidity ✅
C. High profitability
D. High solvency

Explanation:
Low Current Ratio (< 1) implies insufficient current assets to pay short-term liabilities.

Q116. Working Capital means:

A. Fixed Assets – Fixed Liabilities
B. Current Assets – Current Liabilities ✅
C. Total Assets – Total Liabilities
D. None

Explanation:
Working Capital reflects liquidity and operational efficiency.
Positive working capital → good short-term health.

Q117. What does “Operating Profit Ratio” indicate?

A. Operating Profit ÷ Net Sales × 100 ✅
B. Net Profit ÷ Capital Employed
C. Gross Profit ÷ Sales
D. Operating Expenses ÷ Sales

Explanation:
Operating Profit Ratio shows how efficiently the company converts sales into operating profit.

**Q118. Which of the following ratios is a solvency ratio?**

A. Debt-Equity Ratio ✅
B. Current Ratio
C. Quick Ratio
D. Operating Ratio

Explanation:
Solvency Ratios measure long-term stability; Debt-Equity and Interest Coverage are key solvency ratios.

Q119. The ratio that measures how quickly receivables are collected is:

A. Debtors Turnover Ratio ✅
B. Creditors Turnover Ratio
C. Working Capital Ratio
D. Stock Turnover Ratio

Explanation:
Debtors Turnover = Credit Sales ÷ Average Debtors.
It shows how efficiently credit is managed.

Q120. High Debtors Turnover Ratio means:

A. Efficient collection ✅
B. Inefficient collection
C. Poor credit control
D. None

Explanation:
Higher ratio → Debtors are collected faster → Better liquidity and credit management.

Module B: Financial Statements and Ratios

Q101. Financial statements include which of the following?

A. Trading and Profit & Loss Account
B. Balance Sheet
C. Cash Flow Statement
D. All of the above ✅

Q102. The main purpose of preparing a Balance Sheet is to show:

A. Profitability
B. Financial Position ✅
C. Cash Flow
D. Assets Turnover

Explanation:
The Balance Sheet depicts the financial position of a business — i.e., assets, liabilities, and owner’s equity on a particular date.

Q103. Which account shows operating results of the business?

A. Balance Sheet
B. Profit & Loss Account ✅
C. Cash Flow Statement
D. Trading Account

Explanation:
The P&L Account summarizes all revenues and expenses to determine net profit or loss for the accounting period.

Q104. Net profit is transferred to which account?

A. Capital Account ✅
B. Drawing Account
C. Cash Account
D. Suspense Account

Explanation:
Net profit belongs to the owner and is therefore transferred to Capital Account (increases owner’s equity).

**Q105. Which of the following is a liquidity ratio?**

A. Debt-Equity Ratio
B. Current Ratio ✅
C. Proprietary Ratio
D. Return on Investment

Explanation:
The Current Ratio (Current Assets ÷ Current Liabilities) measures the firm’s ability to meet short-term obligations. Ideal ratio ≈ 2 : 1.

Q106. Quick Ratio excludes which of the following?

A. Cash
B. Bills Receivable
C. Inventories ✅
D. Debtors

Explanation:
The Quick Ratio (Liquid Assets ÷ Current Liabilities) excludes Inventories and Prepaid Expenses, as they are not readily convertible into cash.

Q107. Ideal Quick Ratio is:

A. 1 : 1 ✅
B. 2 : 1
C. 3 : 1
D. 0.5 : 1

Explanation:
A 1 : 1 Quick Ratio indicates sufficient liquid assets to pay current liabilities without relying on stock.

Q108. Debt-Equity Ratio measures:

A. Short-term solvency
B. Long-term solvency ✅
C. Profitability
D. Efficiency

Explanation:
Debt-Equity Ratio = Long-term Debt ÷ Shareholder’s Equity, showing reliance on external borrowings.
A high ratio → higher financial risk.

Q109. The ratio that measures the ability to earn profit on capital employed is:

A. Net Profit Ratio
B. Return on Capital Employed (ROCE) ✅
C. Current Ratio
D. Operating Ratio

Explanation:
ROCE = (Net Profit + Interest) / Capital Employed × 100.
Shows efficiency in using capital to generate profit.

Q110. Gross Profit Ratio formula:

A. Gross Profit ÷ Sales × 100 ✅
B. Net Profit ÷ Sales × 100
C. Operating Profit ÷ Sales × 100
D. Cost of Goods Sold ÷ Sales × 100

Explanation:
It indicates the margin of profit after deducting the cost of goods sold from net sales.

Q111. A higher Operating Ratio indicates:

A. Higher efficiency
B. Lower efficiency ✅
C. Better liquidity
D. Strong solvency

Explanation:
Operating Ratio = (Cost of Goods Sold + Operating Expenses) ÷ Sales.
Higher ratio → More expenses → Lower operational efficiency.

Q112. Capital Employed is equal to:

A. Fixed Assets + Working Capital ✅
B. Current Assets + Current Liabilities
C. Total Assets – Liabilities
D. None

Explanation:
Capital Employed can be computed as:
→ Fixed Assets + Working Capital (CA – CL), or
→ Total Assets – Current Liabilities.

Q113. The ratio that indicates profitability in relation to sales is:

A. Gross Profit Ratio ✅
B. Debt-Equity Ratio
C. Current Ratio
D. Proprietary Ratio

Explanation:
Gross Profit Ratio and Net Profit Ratio measure profitability with respect to sales.

Q114. Proprietary Ratio measures:

A. Efficiency
B. Solvency ✅
C. Profitability
D. Liquidity

Explanation:
Proprietary Ratio = Shareholders’ Funds ÷ Total Assets.
Higher ratio → Strong financial base and solvency.

Q115. A low Current Ratio indicates:

A. Strong liquidity
B. Weak liquidity ✅
C. High profitability
D. High solvency

Explanation:
Low Current Ratio (< 1) implies insufficient current assets to pay short-term liabilities.

Q116. Working Capital means:

A. Fixed Assets – Fixed Liabilities
B. Current Assets – Current Liabilities ✅
C. Total Assets – Total Liabilities
D. None

Explanation:
Working Capital reflects liquidity and operational efficiency.
Positive working capital → good short-term health.

Q117. What does “Operating Profit Ratio” indicate?

A. Operating Profit ÷ Net Sales × 100 ✅
B. Net Profit ÷ Capital Employed
C. Gross Profit ÷ Sales
D. Operating Expenses ÷ Sales

Explanation:
Operating Profit Ratio shows how efficiently the company converts sales into operating profit.

**Q118. Which of the following ratios is a solvency ratio?**

A. Debt-Equity Ratio ✅
B. Current Ratio
C. Quick Ratio
D. Operating Ratio

Explanation:
Solvency Ratios measure long-term stability; Debt-Equity and Interest Coverage are key solvency ratios.

Q119. The ratio that measures how quickly receivables are collected is:

A. Debtors Turnover Ratio ✅
B. Creditors Turnover Ratio
C. Working Capital Ratio
D. Stock Turnover Ratio

Explanation:
Debtors Turnover = Credit Sales ÷ Average Debtors.
It shows how efficiently credit is managed.

Q120. High Debtors Turnover Ratio means:

A. Efficient collection ✅
B. Inefficient collection
C. Poor credit control
D. None

Explanation:
Higher ratio → Debtors are collected faster → Better liquidity and credit management.

Q121. Stock Turnover Ratio indicates:

A. Liquidity
B. Inventory management efficiency ✅
C. Solvency
D. Profitability

Explanation:
Stock Turnover Ratio = Cost of Goods Sold ÷ Average Stock
A higher ratio → inventory sold quickly → better efficiency and less capital locked in stock.

Q122. A low Stock Turnover Ratio indicates:

A. Fast-moving goods
B. Slow-moving or overstocking ✅
C. Good sales performance
D. None of the above

Explanation:
Low turnover means stock is not being sold efficiently, which may lead to obsolescence or carrying cost increase.

Q123. Creditors Turnover Ratio measures:

A. Credit collection period
B. Credit payment efficiency ✅
C. Liquidity position
D. Inventory control

Explanation:
Creditors Turnover Ratio = Credit Purchases ÷ Average Creditors
It shows how quickly the firm pays its suppliers.

Q124. The average payment period can be calculated as:

A. 12 ÷ Creditors Turnover Ratio ✅
B. 365 ÷ Creditors Turnover Ratio ✅ (if calculated annually)
C. 30 ÷ Turnover Ratio
D. None

Explanation:
Payment Period = 365 / Creditors Turnover (days) or 12 / Turnover (months).
It measures how long the business takes to pay suppliers.

**Q125. Which of the following is not a profitability ratio?**

A. Gross Profit Ratio
B. Net Profit Ratio
C. Operating Ratio
D. Current Ratio ✅

Explanation:
Current Ratio measures liquidity, not profitability.

Q126. Cash Flow from Operating Activities includes:

A. Sale of Fixed Assets
B. Issue of Shares
C. Interest Paid & Taxes Paid ✅
D. Dividend Received

Explanation:
Operating activities involve day-to-day business operations — cash inflows from sales and outflows for interest, wages, taxes, etc.

Q127. Sale of Fixed Asset is shown under which section of Cash Flow Statement?

A. Operating Activities
B. Investing Activities ✅
C. Financing Activities
D. None

Explanation:
Cash inflow or outflow from purchase/sale of fixed assets is part of investing activities.

Q128. Issue of Shares or Debentures is classified as:

A. Investing Activity
B. Financing Activity ✅
C. Operating Activity
D. None

Explanation:
Raising capital through shares/debentures → cash inflow from financing activity, as it changes capital structure.

Q129. Dividend Paid is shown under:

A. Operating Activity
B. Financing Activity ✅
C. Investing Activity
D. None

Explanation:
Dividend payment is a cash outflow from financing activities because it affects owners’ capital.

Q130. Which statement shows the movement of cash and cash equivalents?

A. Income Statement
B. Cash Flow Statement ✅
C. Fund Flow Statement
D. Trial Balance

Explanation:
The Cash Flow Statement (as per AS 3) shows how cash was generated and used in operating, investing, and financing activities.

Q131. Fund Flow Statement shows:

A. Change in working capital ✅
B. Cash transactions only
C. Profit or loss
D. Fixed assets position

Explanation:
Fund Flow focuses on sources and application of funds and the change in working capital during a period.

Q132. Increase in Current Assets leads to:

A. Increase in working capital ✅
B. Decrease in working capital
C. No change
D. Decrease in fixed capital

Explanation:
When current assets rise, total working capital (CA – CL) increases.

Q133. Decrease in Current Liabilities results in:

A. Decrease in working capital
B. Increase in working capital ✅
C. No effect
D. None

Explanation:
If liabilities fall, working capital rises because less short-term obligation exists.

Q134. Increase in Fixed Assets (by purchase) will cause:

A. Source of funds
B. Application (use) of funds ✅
C. No change
D. Increase in working capital

Explanation:
Buying fixed assets consumes funds, so it’s application (use) of funds.

Q135. Issue of Debentures will cause:

A. Source of funds ✅
B. Use of funds
C. No effect
D. Decrease in liability

Explanation:
Debenture issue increases long-term liabilities → inflow of funds → source of finance.

Q136. Repayment of Loan is:

A. Source of funds
B. Application of funds ✅
C. Operating activity
D. None

Explanation:
Repaying a loan reduces long-term funds → application (outflow) in Fund Flow Statement.

Q137. Which ratio measures efficiency in using fixed assets to generate sales?

A. Fixed Asset Turnover Ratio ✅
B. Working Capital Ratio
C. Return on Equity
D. Current Ratio

Explanation:
Fixed Asset Turnover = Net Sales ÷ Net Fixed Assets
Higher ratio → better utilization of assets for revenue.

Q138. Vertical Analysis means:

A. Comparing figures of different years
B. Analyzing each item as % of a base item in same year ✅
C. Studying trend over time
D. None

Explanation:
In Vertical Analysis, items are expressed as % of a base (e.g., sales or total assets) to analyze internal structure for one period.

Q139. Horizontal Analysis means:

A. Comparison of items across different periods ✅
B. Studying internal ratios
C. Expressing items as % of base figure
D. None

Explanation:
Horizontal (Trend) Analysis compares financial performance across multiple years to identify growth or decline patterns.

Q140. Common-size statement is prepared for:

A. Ratio computation
B. Vertical analysis ✅
C. Trend analysis
D. Cash flow analysis

Explanation:
A common-size statement expresses each item as a % of total (e.g., total sales or total assets), facilitating vertical analysis.

Q141. A high Debt-Equity Ratio implies:

A. More owner’s funds
B. More borrowed funds ✅
C. Low risk
D. None

Explanation:
High ratio = dependence on borrowed capital, indicating high leverage and risk.

Q142. Interest Coverage Ratio formula:

A. EBIT ÷ Interest Expense ✅
B. EBT ÷ Interest Expense
C. Net Profit ÷ Interest
D. EBIT ÷ Total Liabilities

Explanation:
ICR = EBIT / Interest — shows how easily a company can pay interest from its operating profits.

Q143. A higher Interest Coverage Ratio means:

A. Better ability to service debt ✅
B. Lower ability
C. Higher risk
D. Poor liquidity

Explanation:
Higher ratio → more profit available for interest → strong solvency and low default risk.

Q144. Gross Profit Margin can improve if:

A. Selling price increases ✅
B. Purchase cost increases
C. Operating expenses rise
D. Sales volume drops

Explanation:
Higher selling prices or lower cost of goods improve the gross margin.

Q145. Net Profit Ratio improves when:

A. Operating expenses are reduced ✅
B. Interest cost increases
C. Depreciation increases
D. Cost of goods sold increases

Explanation:
Reducing overheads and interest costs enhances net profit margin.

Q146. The statement showing reconciliation of net profit and funds from operations is:

A. Fund Flow Statement ✅
B. Cash Flow Statement
C. Income Statement
D. Trial Balance

Explanation:
Fund Flow shows adjustments from net profit to fund from operations, reflecting non-cash and non-fund items.

Q147. Cash Flow Statement is prepared under which Accounting Standard?

A. AS-3 ✅
B. AS-2
C. AS-10
D. AS-18

Explanation:
AS-3 (Revised) governs preparation of Cash Flow Statements, dividing activities into operating, investing, and financing.

Q148. Dividend received by a financial enterprise is classified as:

A. Operating Activity ✅
B. Investing Activity
C. Financing Activity
D. None

Explanation:
For financial enterprises, interest/dividend received or paid forms part of operating cash flows, as it’s core business.

Q149. In ratio analysis, inter-firm comparison means:

A. Comparison of same firm over years
B. Comparison among different firms in same industry ✅
C. Comparison of budgets
D. None

Explanation:
Inter-firm comparison evaluates performance by comparing with competitors or industry benchmarks.

Q150. Which of the following is a limitation of ratio analysis?

A. Ignores qualitative factors ✅
B. Considers inflation
C. Predicts future accurately
D. None

Explanation:
Ratios are based on historical financial data and ignore qualitative aspects (brand reputation, staff quality, etc.). They must be interpreted cautiously.

Module C — Cost Accounting (Q151–Q200)

Q151. What are the three elements of cost?

Answer: Materials, Labour, Overheads.
Explanation: The basic elements used to compile a cost sheet and calculate product/service cost.

Q152. Prime cost is:

Answer: Direct Materials + Direct Labour + Direct Expenses.
Explanation: Prime cost includes directly traceable costs to a product.

Q153. Works (Factory) Cost = ?

Answer: Prime Cost + Factory/Production Overheads.
Explanation: Adds manufacturing overheads to prime cost.

Q154. Cost of production = ?

Answer: Works Cost ± Opening/Closing Work-in-Progress.
Explanation: WIP adjustments are included to arrive at cost of goods produced.

Q155. Cost of goods sold (COGS) = ?

Answer: Cost of Production + Opening Finished Goods – Closing Finished Goods.
Explanation: Standard cost flow for matching production with sold goods.

Q156. Which costing method is best for homogeneous products produced in continuous process?

Answer: Process Costing.
Explanation: Suited for industries like chemicals, textiles — cost per process/period.

Q157. Job costing is used when:

Answer: Products are distinct / made to order.
Explanation: Cost accumulated per job or contract (e.g., shipbuilding, custom orders).

Q158. Batch costing differs from job costing because:

Answer: Batch comprises multiple identical units — cost per unit computed over batch.
Explanation: Useful when production in batches with similar cost behavior.

Q159. Which overheads are apportioned on machine hours?

Answer: Machine-intensive overheads (depreciation, power, repairs).
Explanation: Machine-hour rate better reflects usage-based consumption.

Q160. Formula: Break-even point (units)

Answer: BEP = Fixed Costs ÷ Contribution per unit.
Explanation: Contribution = Selling price − Variable cost per unit.

Q161. If fixed costs = ₹2,00,000, SP ₹50, variable cost ₹30 per unit → BEP units?

Answer & Steps:
Contribution = 50 − 30 = ₹20.
BEP = 200,000 ÷ 20 = 10,000 units.

Q162. Margin of Safety (MOS) definition

Answer: MOS = Actual (or Budgeted) Sales − BEP Sales.
Explanation: Measures margin by which sales can fall before losses begin.

Q163. If Budgeted sales = ₹8,00,000; BEP = ₹6,00,000 → MOS %?

Answer & Steps:
MOS = 800,000 − 600,000 = 200,000.
MOS% = (200,000 ÷ 800,000) × 100 = 25%.

Q164. Contribution Margin Ratio (CMR) formula

Answer: CMR = (Contribution ÷ Sales) × 100.
Explanation: Useful for profit planning and sensitivity analysis.

Q165. If SP ₹120, VC ₹90 → CMR%?

Answer & Steps:
Contribution = 120 − 90 = 30.
CMR% = (30 ÷ 120) × 100 = 25%.

Q166. Marginal Costing vs Absorption Costing — main difference

Answer: Marginal charges only variable costs to product; fixed overheads treated as period costs. Absorption includes fixed overheads in product cost.
Explanation: Affects inventory valuation and profit between periods.

Q167. Semi-variable cost (mixed cost) contains:

Answer: Fixed + Variable components.
Explanation: Use methods like high-low to separate components for analysis.

Q168. High-Low Method example — given two activity levels:

Activity A: 1,000 hours cost ₹10,000; Activity B: 2,000 hours cost ₹16,000 → variable cost per hour = ?
Answer & Steps:
Change in cost = 16,000 − 10,000 = 6,000.
Change in hours = 2,000 − 1,000 = 1,000.
Variable cost/hour = 6,000 ÷ 1,000 = ₹6/hr.
Fixed cost = Total cost − (VC × hours) = 10,000 − (6 × 1,000) = 4,000.

Q169. Economic Order Quantity (EOQ) formula

Answer: EOQ = √[(2 × Demand × Ordering Cost) ÷ Carrying Cost per unit].
Explanation: Minimises total inventory cost (ordering + holding).

Q170. If annual demand = 12,000 units; order cost ₹50; carrying cost ₹2/unit/year → EOQ?

Answer & Steps:
EOQ = √[(2×12,000×50)/2] = √[(1,200,000)/2] = √600,000 = 774.597… ≈ 775 units.
(rounded to whole unit)

Q171. Overhead absorption rate (OAR) formula

Answer: OAR = Budgeted Overheads ÷ Budgeted Activity (e.g., machine-hours) (×100 or per unit).
Explanation: Used to apply overheads to jobs/products.

Q172. If factory overheads ₹3,00,000; machine hours 30,000 → OAR per machine-hour?

Answer & Steps:
OAR = 300,000 ÷ 30,000 = ₹10 per machine-hour.

Q173. Labour turnover rate formula (simple)

Answer: Labour Turnover = (No. of employees leaving during period ÷ Average No. of employees) × 100.
Explanation: Indicates stability of workforce.

Q174. Idle time is treated as:

Answer: Either charged to production (if attributable) or shown as a separate idle time loss — depends on cause (normal/abnormal).
Explanation: Abnormal idle time is charged to P&L as loss.

Q175. Standard Costing — purpose

Answer: Setting standards (benchmarks) for costs & using variances to control performance.
Explanation: Helps management by highlighting deviations.

Q176. Material Price Variance (MPV) formula

Answer: MPV = (Standard Price − Actual Price) × Actual Quantity Purchased.
Explanation: Favourable if actual price < standard.

Q177. Material Usage (Quantity) Variance (MUV) formula

Answer: MUV = (Standard Quantity for output − Actual Quantity used) × Standard Price.
Explanation: Measures efficiency in material usage.

Q178. Labour Rate Variance (LRV) formula

Answer: LRV = (Standard Rate − Actual Rate) × Actual Hours.
Explanation: Favourable if actual wage rate < standard.

Q179. Labour Efficiency Variance (LEV) formula

Answer: LEV = (Standard Hours for actual output − Actual Hours) × Standard Rate.
Explanation: Indicates efficiency of workforce.

Q180. Overhead Volume Variance meaning

Answer: Difference between budgeted overhead absorption (based on standard hours) and overhead absorbed on actual production — indicates capacity utilisation.
Explanation: Favourable if actual production > budgeted for given overhead.

Q181. Example: Standard cost per unit ₹80, actual cost ₹85 → Material variance?

Question simplified: If material component difference of ₹5 per unit for 1,000 units, is that adverse or favourable?
Answer & Steps:
Actual > Standard → Adverse variance of 5 × 1,000 = ₹5,000 adverse.

Q182. Activity-Based Costing (ABC) allocates overheads based on:

Answer: Activities (cost drivers) — e.g., setups, inspections, machine setups.
Explanation: More accurate than single blanket overhead rate for diverse products.

Q183. Which is NOT a cost center?

Answer: Sales revenue center (since cost center only controls cost, not revenue).
Explanation: Cost center controls costs; profit and investment centers have revenue or investments targets.

Q184. Cost driver definition

Answer: Cause of change in overheads — measure used to allocate activity costs (e.g., machine-hours, setups).
Explanation: Used in ABC and absorption pricing.

Q185. Reconciliation of Cost and Financial Accounts — why needed?

Answer: Because costing profit differs from financial profit due to valuation methods, overhead treatments, and inclusions/exclusions.
Explanation: Reconciliation explains differences like depreciation method, notional costs, etc.

Q186. Treatment of research costs in cost accounting

Answer: Usually treated as revenue expense unless capitalised under accounting policy.
Explanation: Research often doesn’t create identifiable long-term asset.

Q187. Joint costing — by-product vs joint product

Answer: Joint products have significant relative value; by-products have relatively small value and treated differently in cost apportionment.
Explanation: By-product proceeds often credited to production or treated as other income.

Q188. Split-off point meaning

Answer: Stage in joint process where products become separately identifiable.
Explanation: Costs up to split-off are joint costs, allocated thereafter.

Q189. Cost Sheet structure — top five items

Answer: Direct Material → Direct Labour → Direct Expenses → Factory Overheads → Works Cost.
Explanation: Then add administration, selling & distribution to reach Cost of Sales.

Q190. Treatment of abnormal loss in process costing

Answer: Charged to costing P&L (separately disclosed) and not apportioned to good units.
Explanation: Normal loss apportioned; abnormal loss charged as loss.

Q191. Example numerical — Process Costing with normal loss

Given: Input 10,000 units; normal loss 5% (at no sale value); output after process 9,500 units; total process cost ₹1,90,000. Cost per unit?
Answer & Steps:
Normal loss = 5% of 10,000 = 500 units (absorbed). Good units = 9,500.
Cost per unit = 190,000 ÷ 9,500 = ₹20 per unit.

Q192. Treatment of spoilage sold scrap

Answer: Proceeds from scrap usually credited to production account or reduce overheads; depends on policy.
Explanation: If spoilage is normal, scrap value reduces cost; abnormal spoilage treated as loss.

Q193. Cost plus pricing method

Answer: Selling price = Cost + Markup (%)
Explanation: Common in contracts; markup covers profit and contingencies.

Q194. Target costing idea

Answer: Set market-driven target price then derive allowable cost to achieve target profit; manage design & processes to meet it.
Explanation: Used in competitive markets to control costs early in product design.

Q195. Labour productivity formula

Answer: Output ÷ Labour input (hours or number).
Explanation: Key operational KPI.

Q196. Over and Under absorption of overheads — effect on profit

Answer: Under-absorbed overheads increase cost (reduce profit) unless adjusted; over-absorption increases profit.
Explanation: Requires year-end reconciliation and adjustment to P&L.

Q197. Example — Overhead absorption

Given: Budgeted overheads ₹6,00,000; Budgeted machine-hours 40,000; Actual hours 50,000; Actual overheads ₹7,50,000. Find over/under absorbed.
Answer & Steps:
OAR = 600,000 ÷ 40,000 = ₹15 per mh.
Absorbed overheads = 15 × 50,000 = 7,50,000.
Actual overheads = 7,50,000 → No over/under-absorption (exact match).

Q198. Contribution per machine hour = ?

Given: Selling price/unit ₹400; variable cost/unit ₹250; machine time/unit = 2 hours.
Answer & Steps:
Contribution/unit = 400 − 250 = ₹150.
Contribution per machine-hour = 150 ÷ 2 = ₹75 per mh.

Q199. Key advantages of marginal costing

Answer: Simplicity, useful for short-term decisions (pricing, make-or-buy), break-even analysis.
Explanation: Highlights contribution and flexible for managerial decisions.

Q200. Limitation of marginal costing

Answer: Ignores fixed costs in product costing, unsuitable for long-term pricing/valuation under GAAP.
Explanation: Cannot be used for external financial statements where absorption costing required.

MODULE D — FINANCIAL MANAGEMENT (Q201–Q250)

Q201. Time Value of Money means:

Answer: Value of money today is more than its value in the future due to earning potential.
Explanation: A rupee today can be invested to earn interest, hence future money must be discounted to present value.

Q202. Present Value (PV) formula:

Answer:PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}PV=(1+r)nFV

where FV = Future Value, r = interest rate, n = periods.

Q203. Future Value (FV) formula:

Answer:FV=PV×(1+r)nFV = PV \times (1 + r)^nFV=PV×(1+r)n

Q204. Find PV of ₹10,000 receivable after 3 years at 10% p.a.

Answer & Steps:
PV = 10,000 ÷ (1.10)³ = 10,000 ÷ 1.331 = ₹7,514 approx.

Q205. Find FV of ₹5,000 invested for 4 years @ 8% p.a.

Answer & Steps:
FV = 5,000 × (1.08)⁴ = 5,000 × 1.3605 = ₹6,802.5.

Q206. Annuity means:

Answer: A series of equal payments made at regular intervals.
Explanation: Examples — loan EMIs, pension, SIPs.

Q207. Ordinary Annuity vs Annuity Due:

Answer:

Ordinary annuity → payments at end of period.
Annuity due → payments at beginning of period.
Explanation: Rent or lease often an annuity due.

Q208. PV of an Annuity formula:

PV=A×1−(1+r)−nrPV = A \times \frac{1 – (1 + r)^{-n}}{r}PV=A×r1−(1+r)−n

where A = amount per period.

Q209. FV of an Annuity formula:

FV=A×(1+r)n−1rFV = A \times \frac{(1 + r)^n – 1}{r}FV=A×r(1+r)n−1

Q210. Find PV of ₹5,000 received every year for 3 years @ 10%.

Answer & Steps:
PV = 5,000 × [(1 − (1.10)⁻³)/0.10] = 5,000 × (0.2487 / 0.10)? Wait — recalc:
(1 − 0.7513)/0.10 = 2.487.
PV = 5,000 × 2.487 = ₹12,435 approx.

Q211. What is the Payback Period?

Answer: Time required to recover the initial investment from project cash inflows.
Explanation: Simpler method — ignores time value of money.

Q212. Project cost ₹60,000, annual inflow ₹15,000 → Payback period = ?

Answer: ₹60,000 ÷ ₹15,000 = 4 years.

Q213. What is Net Present Value (NPV)?

Answer:
NPV = PV of cash inflows − Initial investment.
If NPV > 0 → Accept; NPV < 0 → Reject.

Q214. Find NPV: Investment ₹1,00,000; inflow ₹30,000 for 5 years @ 10%; PV factor (5 years) = 3.791

Answer & Steps:
PV = 30,000 × 3.791 = ₹1,13,730
NPV = 1,13,730 − 1,00,000 = ₹13,730 (Positive → Accept) ✅

Q215. What is IRR (Internal Rate of Return)?

Answer: The discount rate that makes NPV = 0.
Explanation: It’s the project’s actual return rate — compare with required rate of return.

Q216. Profitability Index (PI) formula:

PI=PV of inflowsInitial InvestmentPI = \frac{PV \, of \, inflows}{Initial \, Investment}PI=InitialInvestmentPVofinflows

Rule: PI > 1 → Accept; PI < 1 → Reject.

Q217. Project A: PV inflows ₹1,20,000; Cost ₹1,00,000 → PI = ?

Answer: 1,20,000 / 1,00,000 = 1.2 → Accept.

Q218. Which method considers time value of money?

Answer: NPV, IRR, PI ✅
Explanation: Payback does not.

Q219. Weighted Average Cost of Capital (WACC) formula:

WACC=∑(wi×ki)WACC = \sum (w_i \times k_i)WACC=∑(wi×ki)

where wiw_iwi = weight (proportion), kik_iki = cost of each capital component.

Q220. Cost of Debt after tax formula:

Kd=I(1−T)K_d = I (1 – T)Kd=I(1−T)

where I = interest rate, T = tax rate.
Explanation: Interest is tax-deductible, reducing effective cost.

Q221. Cost of Preference Shares formula:

Kp=DpP0K_p = \frac{D_p}{P_0}Kp=P0Dp

where DpD_pDp = annual preference dividend, P0P_0P0 = issue price.

Q222. Cost of Equity (Ke) using Dividend Discount Model:

Ke=D1P0+gK_e = \frac{D_1}{P_0} + gKe=P0D1+g

where D1D_1D1 = expected dividend next year, ggg = growth rate.

Q223. Example:

Dividend ₹6; Market price ₹120; Growth 5%. → Ke=6/120+0.05=0.05+0.05=10%K_e = 6/120 + 0.05 = 0.05 + 0.05 = 10\%Ke=6/120+0.05=0.05+0.05=10%. ✅

Q224. Capital Structure means:

Answer: Proportion of debt and equity used for financing.

Q225. Optimal capital structure occurs when:

Answer: Company’s cost of capital is minimum and value of firm is maximum.

Q226. Financial Leverage measures:

Answer: Effect of fixed financial charges (interest) on EPS.Financial Leverage=EBITEBTFinancial \, Leverage = \frac{EBIT}{EBT}FinancialLeverage=EBTEBIT

Q227. If EBIT ₹2,00,000, Interest ₹50,000 → Financial leverage = ?

EBT = 2,00,000 − 50,000 = 1,50,000.
Leverage = 2,00,000 ÷ 1,50,000 = 1.33×

Q228. Operating Leverage measures:

Answer: Effect of fixed operating costs on EBIT.Operating Leverage=ContributionEBITOperating \, Leverage = \frac{Contribution}{EBIT}OperatingLeverage=EBITContribution

Q229. If Sales ₹1,00,000; Variable cost ₹60,000; Fixed cost ₹20,000 → DOL?

Contribution = 40,000; EBIT = 20,000.
DOL = 40,000 / 20,000 = 2×

Q230. Combined Leverage = ?

Combined Leverage=Operating×FinancialCombined \, Leverage = Operating \times FinancialCombinedLeverage=Operating×Financial

Q231. If Operating leverage = 2, Financial leverage = 1.5 → Combined = ?

Answer: 2 × 1.5 = 3×

Q232. Degree of Leverage (DOL/DFL) indicates:

Answer: The % change in profits for a given % change in sales.%ΔEBIT=DOL×%ΔSales\%\Delta EBIT = DOL \times \%\Delta Sales%ΔEBIT=DOL×%ΔSales

Q233. Working Capital means:

Answer: Current Assets − Current Liabilities.
Explanation: Indicates liquidity and short-term solvency.

Q234. Gross Working Capital:

Answer: Total Current Assets.

Q235. Net Working Capital:

Answer: Current Assets − Current Liabilities.

Q236. Factors affecting working capital:

Answer: Nature of business, production cycle, credit policy, seasonality, operating efficiency.

Q237. Permanent vs Temporary Working Capital:

Permanent: Always required (base level).
Temporary: Fluctuates with seasons or activity.

Q238. Conservative policy of working capital financing:

Answer: Use long-term funds even for temporary current assets → low risk, low profitability.

Q239. Aggressive policy:

Answer: Use short-term funds for long-term or fluctuating needs → high risk, high return.

Q240. Current Ratio formula:

CurrentRatio=CurrentAssetsCurrentLiabilitiesCurrent Ratio = \frac{Current Assets}{Current Liabilities}CurrentRatio=CurrentLiabilitiesCurrentAssets

Ideal: 2:1 ✅

Q241. Quick Ratio formula:

QuickRatio=QuickAssetsCurrentLiabilitiesQuick Ratio = \frac{Quick Assets}{Current Liabilities}QuickRatio=CurrentLiabilitiesQuickAssets

Ideal: 1:1 ✅
Quick Assets = Current Assets − Inventory − Prepaid Expenses.

Q242. If CA ₹4,00,000; CL ₹2,00,000 → Current Ratio = ?

= 4,00,000 / 2,00,000 = 2:1 ✅

Q243. Working Capital Turnover Ratio formula:

WCT=SalesWorking CapitalWCT = \frac{Sales}{Working \, Capital}WCT=WorkingCapitalSales

Measures efficiency of working capital utilization.

Q244. Dividend Policy means:

Answer: Decision regarding distribution of profits between dividend and retained earnings.

Q245. Stable Dividend Policy:

Answer: Paying fixed dividend regularly, sometimes with small changes.

Q246. Walter Model (Dividend Relevance):

P=D+(r/k)(E−D)kP = \frac{D + (r/k)(E – D)}{k}P=kD+(r/k)(E−D)

where r = internal return, k = cost of equity, E = EPS, D = dividend.
Relevance: If r > k → growth firms should retain profits.

Q247. Modigliani–Miller (MM) Model:

Answer: Dividend is irrelevant — firm value depends only on earnings and risk, not dividend policy.

Q248. Retained Earnings:

Answer: Internal source of finance (ploughing back profits).
Advantage: No floatation cost; increases shareholders’ funds.

Q249. Capital Budgeting importance:

Answer: Long-term investment decision affecting profitability, liquidity, and risk.

Q250. Risk in financial management can be mitigated by:

Answer: Diversification, hedging, insurance, and proper capital structure planning.

✅ Summary: Key Formulas to Memorize for JAIIB AFM Module D

Concept	Formula / Ideal Ratio
PV	FV / (1+r)ⁿ
FV	PV × (1+r)ⁿ
NPV	PV inflows − Cost
PI	PV inflows / Cost
IRR	Rate at which NPV=0
Payback	Cost / Annual Inflow
Ke	D₁/P₀ + g
Kd (after tax)	i(1−T)
Current Ratio	2:1
Quick Ratio	1:1
Leverage	EBIT/EBT etc.

Q251. Present Value of ₹50,000 receivable after 5 years at 8% p.a.

Solution:PV=FV(1+r)n=50,000(1.08)5=50,000/1.4693≈₹34,034PV = \frac{FV}{(1+r)^n} = \frac{50,000}{(1.08)^5} = 50,000 / 1.4693 \approx ₹34,034PV=(1+r)nFV=(1.08)550,000=50,000/1.4693≈₹34,034

Q252. Future Value of ₹25,000 invested for 3 years at 10% p.a.

FV=25,000×(1.10)3=25,000×1.331=₹33,275FV = 25,000 \times (1.10)^3 = 25,000 \times 1.331 = ₹33,275FV=25,000×(1.10)3=25,000×1.331=₹33,275

Q253. PV of ₹10,000 per year for 4 years @ 12%

PV=A×1−(1+r)−nr=10,000×1−(1.12)−40.12PV = A \times \frac{1 – (1+r)^{-n}}{r} = 10,000 \times \frac{1-(1.12)^{-4}}{0.12} PV=A×r1−(1+r)−n=10,000×0.121−(1.12)−4

(1.12)−4=0.636(1.12)^{-4} = 0.636(1.12)−4=0.636 → PV factor = 1-0.636 /0.12 = 0.364/0.12=3.033
PV = 10,000 × 3.033 ≈ ₹30,330

Q254. FV of ₹8,000 per year for 5 years @ 10%

FV=A×(1+r)n−1r=8,000×(1.10)5−10.10=8,000×(1.6105−1)/0.10=8,000×6.105=₹48,840FV = A \times \frac{(1+r)^n -1}{r} = 8,000 \times \frac{(1.10)^5 -1}{0.10} = 8,000 × (1.6105 -1)/0.10 = 8,000 × 6.105 = ₹48,840FV=A×r(1+r)n−1=8,000×0.10(1.10)5−1=8,000×(1.6105−1)/0.10=8,000×6.105=₹48,840

Q255. Payback period:

Project cost ₹1,20,000; Annual cash inflow ₹30,000 → Payback period = 120,000 / 30,000 = 4 years

Q256. NPV Calculation:

Investment ₹2,00,000; annual inflows ₹50,000 for 5 years @ 10%; PV factor = 3.791
PV of inflows = 50,000 × 3.791 = ₹1,89,550
NPV = 1,89,550 − 2,00,000 = −₹10,450 (Reject)

Q257. PI Calculation:

PV inflows = 2,40,000; Cost = 2,00,000 → PI = 2,40,000 / 2,00,000 = 1.2 → Accept

Q258. IRR determination (trial method):

Investment ₹50,000; Cash inflows ₹12,000 p.a. for 5 years.

Try rate 10% → PV = 12,000 × 3.791 = 45,492 → NPV = 50,000 − 45,492 = 5,508
Try 8% → PV = 12,000 × 3.993 = 47,916 → NPV = 2,084
IRR ≈ 8.5% (NPV ≈ 0)

Q259. Contribution per unit & BEP:

SP/unit ₹60; VC/unit ₹40; FC = ₹1,00,000
Contribution/unit = 60−40=₹20
BEP units = 1,00,000/20 = 5,000 units

Q260. Margin of Safety:

Sales = ₹3,00,000; BEP = ₹2,00,000 → MOS = 3,00,000 − 2,00,000 = 1,00,000 → 33.33%

Q261. WACC Calculation:

Equity = ₹3,00,000 @ 12%
Debt = ₹2,00,000 @ 8% (after tax 6%)

WACC=35×12+25×6=7.2+2.4=9.6%WACC = \frac{3}{5}×12 + \frac{2}{5}×6 = 7.2 + 2.4 = 9.6\%WACC=53×12+52×6=7.2+2.4=9.6%

Q262. Cost of Debt:

Loan ₹5,00,000 @ 10% interest; Tax 30% → Kd = 10×(1−0.3)=7%

Q263. Cost of Preference Share:

Preference shares ₹1,00,000; Dividend 10% → Kp = 10,000 / 1,00,000 = 10%

Q264. Cost of Equity (D₁ = ₹6, P₀ = ₹100, g=5%)

Ke=6/100+0.05=0.06+0.05=11%Ke = 6/100 + 0.05 = 0.06 + 0.05 = 11\%Ke=6/100+0.05=0.06+0.05=11%

Q265. DOL Calculation:

Sales ₹2,00,000; VC ₹1,20,000; FC ₹50,000
Contribution = 80,000; EBIT = 30,000 → DOL = 80,000 / 30,000 = 2.667

Q266. DFL Calculation:

EBIT = 1,00,000; Interest = 20,000 → DFL = 1,00,000 / (1,00,000−20,000)=1.25

Q267. Combined leverage:

DOL = 2; DFL = 1.25 → DCL = 2 × 1.25 = 2.5

Q268. Current ratio calculation:

CA = ₹3,00,000; CL = ₹1,50,000 → 3,00,000/1,50,000 = 2:1

Q269. Quick ratio:

CA = ₹3,00,000; Inventory = ₹80,000; CL = ₹1,50,000
Quick assets = 3,00,000 − 80,000 = 2,20,000
Quick ratio = 2,20,000/1,50,000 ≈ 1.47:1

Q270. Working Capital Turnover:

Sales = ₹10,00,000; Working Capital = ₹2,00,000
WCT = 10,00,000 / 2,00,000 = 5×

Q271. Dividend payout ratio:

Dividend ₹2,00,000; Net Profit ₹5,00,000 → DPR = 2/5 = 40%

Q272. Retention Ratio:

Retention = 1 − DPR = 1 − 0.4 = 60%

Q273. Target EPS after dividend increase:

EPS = ₹10; Retention ratio = 50%; Expected growth g = 5% → New EPS = 10 × (1+0.05)=₹10.5

Q274. Project NPV using unequal inflows:

Investment ₹1,00,000; inflows Year1=₹30,000, Y2=₹35,000, Y3=₹40,000; Discount 10%
PV = 30,000/1.1 + 35,000/1.21 + 40,000/1.331
= 27,273 + 28,926 + 30,064 = 86,263
NPV = 86,263 − 1,00,000 = −13,737 → Reject

Q275. Cost of Retained Earnings = Cost of Equity (Ke) if no flotation cost

D₁ = ₹5; P₀ = ₹50; g = 6% → Ke = 5/50 + 0.06 = 0.1 + 0.06 = 16%

Q276. Payback for uneven cash flows:

Investment ₹1,00,000; inflows Year1=₹25,000, Y2=₹30,000, Y3=₹35,000, Y4=₹20,000
Cumulative: 25+30=55, 55+35=90, 90+20=110 → BEP between Year3–4
Exact = 3 + (10,000/20,000) = 3.5 years

Q277. Dividend yield:

Dividend ₹4; Market price ₹80 → DY = 4/80 = 5%

Q278. EPS Calculation:

Net profit ₹3,00,000; Shares 1,00,000 → EPS = 3,00,000 / 1,00,000 = ₹3/share

Q279. ROE Calculation:

Net profit ₹50,000; Equity ₹2,00,000 → ROE = 50,000 / 2,00,000 = 25%

Q280. ROCE (Return on Capital Employed):

EBIT ₹1,00,000; Capital Employed ₹4,00,000 → ROCE = 1,00,000/4,00,000 = 25%

Q281. If sales increase 10%, calculate % change in EBIT using DOL = 2.5

ΔEBIT% = DOL × ΔSales% = 2.5 × 10 = 25%

Q282. Interest Coverage Ratio:

EBIT ₹1,50,000; Interest ₹50,000 → ICR = 1,50,000/50,000 = 3×

Q283. Debt-Equity Ratio:

Debt ₹2,00,000; Equity ₹4,00,000 → D/E = 2/4 = 0.5:1

Q284. Cost of Capital of 50% debt @10% (after tax 7%) and 50% equity @12%

WACC = 0.5×7 + 0.5×12 = 3.5 +6 = 9.5%

Q285. Break-even sales in ₹:

FC = 50,000; CMR = 25% → BEP Sales = FC / CMR = 50,000 / 0.25 = ₹2,00,000

Q286. MOS in sales ₹3,00,000; BEP ₹2,00,000 → MOS%

MOS% = (3,00,000 − 2,00,000)/3,00,000 ×100 = 33.33%

Q287. Total capital employed =

Equity ₹5,00,000 + Debt ₹2,00,000 = ₹7,00,000

Q288. Dividend per share (DPS) =

Total Dividend ₹2,00,000; Shares 1,00,000 → DPS = 2,00,000 / 1,00,000 = ₹2

Q289. Capital gearing ratio =

Long-term debt ₹3,00,000; Equity ₹7,00,000 → 3/7 = 0.43

Q290. Weighted cost of debt (two loans):

Loan1 ₹1,00,000 @10%, Loan2 ₹2,00,000 @8%; Tax 30%
Kd1 after tax = 10×0.7=7%; Kd2=8×0.7=5.6%
WACC = (1/3×7) + (2/3×5.6) = 2.33+3.73=7.97%

Q291. Target Capital Structure:

Equity 60%, Debt 40%, Total Capital = ₹5,00,000 → Debt = 5,00,000×0.4=₹2,00,000

Q292. Cash inflow for NPV

Project cost ₹50,000; inflows ₹15,000/year × 4 years; discount 10% → PV = 15,000 × 3.169 = 47,535
NPV = 47,535 − 50,000 = −2,465 → Reject

Q293. Capital budgeting decision: Accept if NPV>0, PI>1, IRR>required return.

Q294. EBIT-EPS analysis for financial leverage:

EBIT = 1,50,000; Interest = 50,000; Shares = 1,00,000 → EPS = (EBIT−I)/Shares = (1,50,000−50,000)/1,00,000 = ₹1/share

Q295. DOL = 1.8; Sales increase 12% → EBIT change?

ΔEBIT% = 1.8×12=21.6%

Q296. Degree of Financial Leverage (DFL)

EBIT = 2,00,000; Interest = 50,000 → DFL = 2,00,000 / (2,00,000−50,000) = 1.333

Q297. Combined leverage (DOL × DFL)

DCL = 1.8 × 1.333 = 2.4

Q298. If Contribution = ₹1,20,000; FC = ₹50,000 → BEP units for unit contribution ₹20

BEP units = 50,000 / 20 = 2,500 units

Q299. ROI (Return on Investment)

Net profit = 1,50,000; Capital invested = 5,00,000 → ROI = 1,50,000 / 5,00,000 = 30%

Q300. Dividend policy decision:

If ROE > required return → retain profits; if < required → pay dividends.