Unit 01: Introduction to Financial Accounting
1. What is the primary purpose of financial accounting?
A) To prepare budgets
B) To provide information to internal users
C) To provide financial information to external users
D) To manage daily business operations
Answer: C
2. Which of the following is NOT a characteristic of financial accounting?
A) Historical in nature
B) Mandatory for publicly traded companies
C) Focused on future projections
D) Governed by accounting standards
Answer: C
3. Which statement is true about financial accounting?
A) It primarily serves management
B) It is not governed by legal requirements
C) It prepares financial statements for external users
D) It is only applicable for small businesses
Answer: C
4. What are the three primary financial statements?
A) Balance Sheet, Income Statement, and Cash Flow Statement
B) Trial Balance, Journal, and Ledger
C) Budget, Forecast, and Variance Report
D) Profit Statement, Loss Account, and Capital Account
Answer: A
5. Which of the following is an external user of financial accounting information?
A) Employees
B) Managers
C) Shareholders
D) Department heads
Answer: C
6. What does GAAP stand for?
A) General Accounting and Auditing Principles
B) Generally Accepted Accounting Principles
C) Global Accounting and Auditing Policies
D) General Agreement on Accounting Policies
Answer: B
7. Which accounting principle requires that revenue be recognized when it is earned and realizable?
A) Matching principle
B) Revenue recognition principle
C) Prudence principle
D) Consistency principle
Answer: B
8. The accounting equation is represented as:
A) Assets = Revenue – Expenses
B) Assets = Liabilities + Equity
C) Liabilities = Assets + Equity
D) Equity = Assets – Liabilities
Answer: B
9. What is a “ledger” in financial accounting?
A) A document summarizing a company’s transactions
B) A list of all accounts and their balances
C) A detailed record of individual transactions
D) A financial statement showing profits
Answer: B
10. Which concept ensures expenses are recorded in the same period as the revenues they helped to generate?
A) Matching principle
B) Revenue recognition principle
C) Cost principle
D) Materiality principle
Answer: A
11. What is the primary objective of preparing a trial balance?
A) To detect errors in journal entries
B) To ensure debits equal credits
C) To prepare financial statements
D) To calculate net profit
Answer: B
12. Which of the following accounts is classified as an asset?
A) Accounts Payable
B) Revenue
C) Accounts Receivable
D) Retained Earnings
Answer: C
13. The double-entry system of accounting means:
A) Each transaction is recorded in two accounts
B) Two transactions are recorded simultaneously
C) Transactions are recorded twice for verification
D) Transactions are split into assets and liabilities
Answer: A
14. What does IFRS stand for?
A) International Financial Reporting Standards
B) Integrated Financial Reporting System
C) International Framework for Reporting Standards
D) International Finance and Revenue Standards
Answer: A
15. Which of the following is a limitation of financial accounting?
A) Provides quantitative information
B) Focuses on external users
C) Ignores non-monetary information
D) Adheres to accounting standards
Answer: C
16. What is an “accounting period”?
A) A fixed length of time during which financial reports are prepared
B) The time taken to close accounts
C) The interval between audits
D) The time taken to settle liabilities
Answer: A
17. Which financial statement shows a company’s financial position at a specific point in time?
A) Balance Sheet
B) Income Statement
C) Cash Flow Statement
D) Statement of Equity
Answer: A
18. What type of account is “capital”?
A) Asset
B) Liability
C) Expense
D) Equity
Answer: D
19. Which principle requires financial statements to be prepared honestly and free from bias?
A) Prudence principle
B) Objectivity principle
C) Going concern principle
D) Consistency principle
Answer: B
20. Depreciation is an example of which accounting concept?
A) Matching principle
B) Going concern principle
C) Materiality principle
D) Cost principle
Answer: A
21. Which document is used to initially record a transaction?
A) Ledger
B) Journal
C) Trial Balance
D) Cash Flow Statement
Answer: B
22. What does the “going concern” principle imply?
A) The business will continue to operate in the foreseeable future
B) The business has financial difficulties
C) The business operations will stop shortly
D) The business will change ownership
Answer: A
23. What is the first step in the accounting cycle?
A) Preparing financial statements
B) Recording journal entries
C) Identifying transactions
D) Preparing a trial balance
Answer: C
24. In financial accounting, goodwill is classified as:
A) Current asset
B) Intangible asset
C) Liability
D) Equity
Answer: B
25. Which of the following represents “owner’s equity”?
A) Total liabilities – total assets
B) Total assets – total liabilities
C) Total revenue – total expenses
D) Cash in hand + retained earnings
Answer: B
26. What is the primary focus of the income statement?
A) Assets and liabilities
B) Revenues and expenses
C) Cash inflows and outflows
D) Owner’s equity
Answer: B
27. Which of the following is NOT a financial statement?
A) Statement of Cash Flows
B) Income Statement
C) Trial Balance
D) Balance Sheet
Answer: C
28. The principle of “materiality” states that:
A) All expenses should be minimized
B) Only significant items must be reported
C) Financial data must be accurate
D) Revenue should exceed expenses
Answer: B
29. Which account would appear on the balance sheet?
A) Rent Expense
B) Sales Revenue
C) Accounts Payable
D) Interest Income
Answer: C
30. What does “consistency” in accounting mean?
A) Using the same accounting methods over time
B) Applying accounting standards rigidly
C) Ensuring profits are consistent
D) Using similar methods as competitors
Answer: A
Unit 02 : Accounting Principles, Concepts and Conventions
1. Which of the following is NOT an accounting principle?
A) Cost Principle
B) Matching Principle
C) Revenue Recognition Principle
D) Assumption Principle
Answer: D
2. The “going concern” concept assumes that a business will:
A) Operate for a limited time
B) Continue its operations indefinitely
C) Liquidate within a year
D) Prepare accounts on a cash basis
Answer: B
3. The principle that requires expenses to be matched with revenues is known as:
A) Consistency Principle
B) Matching Principle
C) Conservatism Principle
D) Revenue Recognition Principle
Answer: B
4. Which accounting convention requires understatement rather than overstatement of income and assets?
A) Consistency
B) Prudence
C) Matching
D) Materiality
Answer: B
5. The principle that transactions should be recorded at their original purchase price is known as the:
A) Historical Cost Principle
B) Revenue Recognition Principle
C) Realization Principle
D) Accrual Principle
Answer: A
6. Materiality in accounting implies that:
A) All transactions must be recorded
B) Insignificant items can be ignored
C) Financial statements must be precise
D) Only monetary transactions are recorded
Answer: B
7. The concept of consistency in accounting means:
A) Applying the same accounting methods across different companies
B) Following the same accounting policies over time
C) Ensuring equal profits each year
D) Recording transactions consistently in a journal
Answer: B
8. Which principle dictates that revenue should be recognized when it is earned?
A) Accrual Principle
B) Matching Principle
C) Revenue Recognition Principle
D) Cost Principle
Answer: C
9. Which convention ensures that all relevant financial information is disclosed?
A) Conservatism
B) Full Disclosure
C) Consistency
D) Matching
Answer: B
10. Which of the following is a qualitative characteristic of financial information?
A) Verifiability
B) Objectivity
C) Relevance
D) All of the above
Answer: D
11. The conservatism principle ensures:
A) Optimistic financial reporting
B) Overstating revenues
C) Preparing for potential losses
D) Ignoring liabilities
Answer: C
12. Which concept ensures the separation of personal transactions from business transactions?
A) Matching Concept
B) Business Entity Concept
C) Periodicity Concept
D) Cost Concept
Answer: B
13. Revenue is recognized when:
A) Cash is received
B) A sale is made
C) The work is substantially complete
D) All of the above
Answer: C
14. Which principle requires financial statements to be prepared based on objective evidence?
A) Verifiability
B) Objectivity Principle
C) Relevance
D) Matching Principle
Answer: B
15. The matching principle relates to:
A) Matching assets and liabilities
B) Matching revenues with expenses
C) Matching cash inflows with outflows
D) Matching revenues with profits
Answer: B
16. The periodicity assumption implies that:
A) Businesses must liquidate after a set time
B) Financial reports are prepared for specific periods
C) Transactions are recorded daily
D) Income is calculated at the end of the business’s lifetime
Answer: B
17. The accrual concept ensures that:
A) Income is recorded when cash is received
B) Income and expenses are recorded when they occur
C) Transactions are recorded only in journals
D) Financial statements are prepared monthly
Answer: B
18. Which concept implies the business will not cease in the near future?
A) Materiality
B) Going Concern
C) Conservatism
D) Entity Concept
Answer: B
19. The principle of “dual aspect” states that:
A) Every transaction has a single effect
B) Every transaction has two aspects—debit and credit
C) Transactions are recorded twice
D) Income and expenditure must balance
Answer: B
20. The substance over form concept implies:
A) Transactions are recorded based on their economic reality
B) Transactions are recorded based on legal form
C) Transactions are not reported unless complete
D) Financial statements prioritize appearance
Answer: A
21. Which of the following best defines the term “prudence”?
A) Ignoring liabilities
B) Ensuring profits are overstated
C) Preparing for future losses
D) Excluding all expenses
Answer: C
22. The accounting concept that avoids overstating or understating financial performance is:
A) Conservatism
B) Materiality
C) Consistency
D) Accrual
Answer: A
23. Which convention deals with presenting facts in a truthful and unbiased manner?
A) Consistency
B) Objectivity
C) Conservatism
D) Disclosure
Answer: B
24. The primary objective of accounting principles is to:
A) Maximize profits
B) Provide a framework for financial reporting
C) Avoid paying taxes
D) Simplify bookkeeping
Answer: B
25. The historical cost principle is criticized because:
A) It overstates asset values
B) It does not reflect current market values
C) It is too complex to implement
D) It ignores the accrual concept
Answer: B
26. The entity concept implies that:
A) Business and personal accounts are combined
B) Business is a separate legal entity from its owner
C) The entity must prepare accounts monthly
D) Financial statements focus on owners’ wealth
Answer: B
27. Which principle ensures revenue and expense recognition regardless of cash flows?
A) Accrual Principle
B) Matching Principle
C) Conservatism Principle
D) Disclosure Principle
Answer: A
28. The periodicity assumption divides financial information into:
A) Segments based on geography
B) Equal time periods
C) Cash flows and accruals
D) Segments based on ownership
Answer: B
29. The concept of “relevance” in financial information ensures:
A) Information is accurate and complete
B) Only material and useful information is included
C) Irrelevant data is highlighted
D) Accounting methods are consistent
Answer: B
30. Which principle ensures uniform accounting methods over time?
A) Conservatism
B) Consistency
C) Matching
D) Disclosure
Answer: B
Unit 3: Recording of Transactions
- What is the first step in the accounting cycle?
- A) Trial balance
- B) Preparation of financial statements
- C) Journalizing transactions
- D) Ledger posting
Answer: C
- Which document is used to record daily business transactions in chronological order?
- A) Ledger
- B) Trial balance
- C) Journal
- D) Balance sheet
Answer: C
- A journal entry is composed of how many main parts?
- A) Two
- B) Three
- C) Four
- D) Five
Answer: C (Date, Accounts involved, and Amounts)
- Which principle requires every debit to have an equal credit?
- A) Revenue Recognition Principle
- B) Matching Principle
- C) Dual Aspect Principle
- D) Accrual Principle
Answer: C
- What is the book where transactions are first recorded?
- A) Ledger
- B) Journal
- C) Cash book
- D) Trial balance
Answer: B
- Which account is debited when cash is received from a customer?
- A) Sales Account
- B) Cash Account
- C) Accounts Payable
- D) Capital Account
Answer: B
- If machinery is purchased for cash, which account is credited?
- A) Cash Account
- B) Machinery Account
- C) Purchase Account
- D) Capital Account
Answer: A
- What is recorded in the “Particulars” column of a journal?
- A) Account names involved in the transaction
- B) Monetary value of the transaction
- C) Debit or credit totals
- D) Balance sheet items
Answer: A
- When goods are purchased on credit, which account is credited?
- A) Purchases Account
- B) Cash Account
- C) Creditors Account
- D) Sales Account
Answer: C
- A transaction that involves both cash and a non-cash account is called a:
- A) Compound entry
- B) Simple entry
- C) Cash entry
- D) Contra entry
Answer: A
- What is the process of transferring journal entries to ledger accounts called?
- A) Journalizing
- B) Posting
- C) Trial balancing
- D) Closing accounts
Answer: B
- In ledger posting, the debit side of the journal entry is recorded on which side of the ledger?
- A) Debit side
- B) Credit side
- C) Both sides
- D) None of the above
Answer: A
- Which account typically appears in the ledger for business income?
- A) Expense Account
- B) Revenue Account
- C) Asset Account
- D) Liability Account
Answer: B
- What is the balance called when the debit side of a ledger account exceeds the credit side?
- A) Credit balance
- B) Debit balance
- C) Neutral balance
- D) None of the above
Answer: B
- A ledger account is closed when:
- A) The accounting period ends
- B) Debit and credit totals are balanced
- C) The journal entry is made
- D) Financial statements are prepared
Answer: B
- The cash book is a type of:
- A) Journal
- B) Ledger
- C) Trial balance
- D) Balance sheet
Answer: A
- Which of the following is NOT a subsidiary book?
- A) Purchases book
- B) Sales book
- C) Cash flow statement
- D) Returns inward book
Answer: C
- The sales book records:
- A) Cash sales
- B) Credit sales
- C) Both cash and credit sales
- D) None of the above
Answer: B
- Which book records goods returned by customers?
- A) Sales book
- B) Sales returns book
- C) Purchase book
- D) Cash book
Answer: B
- A purchase of office furniture on credit is recorded in:
- A) Purchases book
- B) Journal proper
- C) Cash book
- D) Furniture account
Answer: B
- A trial balance is prepared to:
- A) Identify the profit or loss
- B) Ensure the accuracy of ledger balances
- C) Prepare the cash flow statement
- D) Record transactions
Answer: B
- Which of the following errors will NOT affect the trial balance?
- A) An error of omission
- B) An error of commission
- C) An error of principle
- D) A complete omission of a transaction
Answer: D
- What is the purpose of preparing a trial balance?
- A) To balance the cash book
- B) To ensure that debits equal credits
- C) To prepare the profit and loss statement
- D) To identify accounting principles
Answer: B
- Which of the following accounts typically has a debit balance?
- A) Capital account
- B) Cash account
- C) Sales account
- D) Bank overdraft
Answer: B
- Which of the following errors will affect the trial balance?
- A) Posting an entry to the wrong account but on the correct side
- B) Complete omission of a transaction
- C) Posting an entry on the wrong side of an account
- D) Incorrect classification of accounts
Answer: C
- If wages are paid in cash, the journal entry will include:
- A) Debit Wages Account, Credit Bank Account
- B) Debit Cash Account, Credit Wages Account
- C) Debit Wages Account, Credit Cash Account
- D) Debit Wages Account, Credit Capital Account
Answer: C
- Goods returned to suppliers are recorded in the:
- A) Purchases book
- B) Purchase returns book
- C) Cash book
- D) Journal proper
Answer: B
- What is the journal entry for rent paid in advance?
- A) Debit Rent Account, Credit Cash Account
- B) Debit Prepaid Rent Account, Credit Cash Account
- C) Debit Cash Account, Credit Rent Account
- D) Debit Cash Account, Credit Prepaid Rent Account
Answer: B
- What is the journal entry for goods purchased on credit?
- A) Debit Cash Account, Credit Purchases Account
- B) Debit Purchases Account, Credit Supplier Account
- C) Debit Supplier Account, Credit Purchases Account
- D) Debit Purchases Account, Credit Bank Account
Answer: B
- Which account is credited when interest is received?
- A) Cash Account
- B) Interest Account
- C) Bank Account
- D) Income Account
Answer: B
Unit 04 : Subsidiary Books & Cash Books
- Subsidiary books are primarily used to:
- A) Record all transactions in one place
- B) Record specific types of transactions
- C) Prepare the trial balance
- D) Calculate profit or loss
Answer: B
- Which of the following is NOT a subsidiary book?
- A) Purchases book
- B) Sales book
- C) Cash book
- D) Ledger
Answer: D
- The purchases book is used to record:
- A) All purchases
- B) Only credit purchases of goods
- C) Only cash purchases
- D) Purchases of fixed assets
Answer: B
- What is recorded in the sales book?
- A) All sales transactions
- B) Only cash sales
- C) Only credit sales of goods
- D) Sales of fixed assets
Answer: C
- The returns inward book is also known as the:
- A) Purchase returns book
- B) Sales returns book
- C) Cash book
- D) Journal proper
Answer: B
- Which book is used to record credit purchases returned to suppliers?
- A) Sales book
- B) Purchases book
- C) Purchase returns book
- D) Journal proper
Answer: C
- The journal proper is used to record:
- A) Cash transactions
- B) All credit transactions
- C) Transactions that do not fit into other subsidiary books
- D) Bank transactions
Answer: C
- Which of the following is recorded in the purchases returns book?
- A) Goods returned by customers
- B) Goods returned to suppliers
- C) Fixed assets purchased
- D) All types of returns
Answer: B
- Goods sold on credit are recorded in the:
- A) Sales book
- B) Cash book
- C) Journal proper
- D) Sales returns book
Answer: A
- Which subsidiary book is maintained to record daily petty expenses?
- A) Purchases book
- B) Petty cash book
- C) Cash book
- D) Sales book
Answer: B
- The cash book is a combination of:
- A) Journal and ledger
- B) Purchases and sales book
- C) Ledger and trial balance
- D) Balance sheet and journal
Answer: A
- Which type of cash book records both cash and bank transactions?
- A) Single column cash book
- B) Double column cash book
- C) Triple column cash book
- D) Petty cash book
Answer: C
- In a single column cash book, the credit side represents:
- A) Cash payments
- B) Cash receipts
- C) Bank deposits
- D) None of the above
Answer: A
- Contra entries are recorded in:
- A) Purchases book
- B) Sales book
- C) Three-column cash book
- D) Journal proper
Answer: C
- The petty cash book is maintained using the:
- A) Single entry system
- B) Double entry system
- C) Imprest system
- D) Accrual system
Answer: C
- Which of the following is NOT recorded in a cash book?
- A) Credit sales
- B) Cash payments
- C) Cash receipts
- D) Bank transactions
Answer: A
- A cash book serves as a:
- A) Journal
- B) Ledger
- C) Both journal and ledger
- D) None of the above
Answer: C
- Which column is NOT part of the triple column cash book?
- A) Cash column
- B) Bank column
- C) Discount column
- D) Trial balance column
Answer: D
- Which type of cash book is used for recording small day-to-day expenses?
- A) Double column cash book
- B) Petty cash book
- C) Single column cash book
- D) Sales returns book
Answer: B
- In a triple column cash book, discount allowed is recorded on the:
- A) Debit side
- B) Credit side
- C) Both sides
- D) None of the above
Answer: A
- What is recorded as a contra entry in a cash book?
- A) Payment made in cash
- B) Receipt of cash from sales
- C) Transfer of funds from cash to bank
- D) Purchase of goods on credit
Answer: C
- When a cheque is deposited in the bank, it is recorded in the:
- A) Purchases book
- B) Bank column of the cash book
- C) Petty cash book
- D) Sales book
Answer: B
- A bank overdraft is recorded on the:
- A) Debit side of the cash book
- B) Credit side of the cash book
- C) Discount column
- D) Contra entry column
Answer: B
- The imprest amount in a petty cash book is:
- A) The opening balance for petty cash
- B) The total expenses during the period
- C) The amount reimbursed at the end of the period
- D) The cash received from customers
Answer: A
- The cash book is balanced:
- A) Daily
- B) Weekly
- C) Monthly
- D) Periodically, as per business needs
Answer: D
- An error in the cash book is rectified by:
- A) Making a journal entry
- B) Preparing a trial balance
- C) Making an adjustment in the cash book itself
- D) Correcting it in the ledger
Answer: C
- If the cash column of the cash book is undercast, the rectification involves:
- A) Adding the difference on the debit side
- B) Adding the difference on the credit side
- C) Subtracting the difference from the debit side
- D) Subtracting the difference from the credit side
Answer: A
- A purchase of a fixed asset recorded in the purchases book is an error of:
- A) Omission
- B) Commission
- C) Principle
- D) Compensating error
Answer: C
- A discount allowed by the supplier should be recorded in the:
- A) Purchases book
- B) Sales returns book
- C) Cash book
- D) Purchase returns book
Answer: C
- If the debit and credit columns of the cash book are not balanced, the error is likely due to:
- A) An omission of a contra entry
- B) Misposting in subsidiary books
- C) An incorrect ledger entry
- D) All of the above
Answer: D
Unit 05 : Trial Balance
- What is the primary purpose of a trial balance?
- A) To prepare financial statements
- B) To check the arithmetical accuracy of ledger accounts
- C) To record transactions
- D) To compute profits
Answer: B
- Which of the following best defines a trial balance?
- A) A list of all ledger balances
- B) A summary of cash and credit transactions
- C) A financial statement
- D) A list of only debit transactions
Answer: A
- A trial balance is prepared:
- A) At the start of the accounting period
- B) After preparing ledger accounts
- C) Before journalizing transactions
- D) After preparing the balance sheet
Answer: B
- If the trial balance does not balance, it indicates:
- A) No errors in the books
- B) Errors in the recording or posting process
- C) The financial statements are correct
- D) The profit is calculated accurately
Answer: B
- Which of the following accounts always have a debit balance?
- A) Capital
- B) Revenues
- C) Expenses
- D) Liabilities
Answer: C
- Which account usually has a credit balance?
- A) Cash
- B) Purchases
- C) Sales
- D) Drawings
Answer: C
- Which of the following is NOT a type of trial balance?
- A) Gross trial balance
- B) Adjusted trial balance
- C) Post-closing trial balance
- D) Pre-closing trial balance
Answer: A
- What is an adjusted trial balance?
- A) A trial balance prepared after adjustments
- B) A trial balance prepared before adjustments
- C) A summary of only credit balances
- D) A record of cash transactions
Answer: A
- The trial balance contains:
- A) Only nominal accounts
- B) Only personal accounts
- C) All ledger accounts
- D) Only real accounts
Answer: C
- Which statement is true about a trial balance?
- A) It is a financial statement.
- B) It shows the financial position of the business.
- C) It ensures that all transactions are error-free.
- D) It lists all accounts with debit and credit balances.
Answer: D
- The total of the trial balance debit column must equal the:
- A) Total of the ledger accounts
- B) Total of the credit column
- C) Total of the journal entries
- D) Total of all adjustments
Answer: B
- A trial balance is prepared using:
- A) Journal entries
- B) Ledger balances
- C) Balance sheet items
- D) Adjusted profits
Answer: B
- What type of account is included in the trial balance?
- A) Only nominal accounts
- B) Only real accounts
- C) Only personal accounts
- D) All types of accounts
Answer: D
- Which of the following is NOT included in the trial balance?
- A) Cash account
- B) Depreciation expense account
- C) Closing stock account
- D) Sales account
Answer: C
- Where are errors of omission reflected?
- A) In the trial balance
- B) In the journal
- C) In the ledger
- D) Not in the trial balance
Answer: D
- The trial balance is prepared for:
- A) A single account
- B) All accounts in the ledger
- C) Credit transactions only
- D) Debit transactions only
Answer: B
- Which side of the trial balance is capital shown on?
- A) Debit
- B) Credit
- C) Both sides
- D) None of the above
Answer: B
- If the purchases account has a balance, it will be placed in the trial balance on the:
- A) Credit side
- B) Debit side
- C) Both sides
- D) None of the above
Answer: B
- A suspense account is created in the trial balance to:
- A) Record cash transactions
- B) Temporarily record differences in trial balance totals
- C) Record errors of commission
- D) Record opening stock
Answer: B
- Which of the following errors will NOT affect the trial balance?
- A) Errors of omission
- B) Errors of principle
- C) Errors of commission
- D) All of the above
Answer: D
- Which error affects the agreement of the trial balance?
- A) Omission
- B) Principle
- C) Misposting
- D) Compensating errors
Answer: C
- If ₹5,000 received from a debtor is omitted from the trial balance, it is an error of:
- A) Commission
- B) Omission
- C) Principle
- D) Compensating error
Answer: B
- If a transaction is recorded on the wrong side of the trial balance, it is called an error of:
- A) Omission
- B) Principle
- C) Misposting
- D) Duplication
Answer: C
- Which of the following errors affects only one account?
- A) Compensating error
- B) Error of omission
- C) Error of principle
- D) Error of commission
Answer: D
- An error in the trial balance can result in the creation of:
- A) Suspense account
- B) Adjustment account
- C) Profit and loss account
- D) Balance sheet
Answer: A
- Which of the following errors will affect the trial balance totals?
- A) Posting ₹5,000 as ₹50
- B) Omission of an entry
- C) Entering a wrong amount on both sides
- D) Recording a transaction in the wrong account
Answer: A
- If cash received from a debtor is posted to the creditor’s account, it is:
- A) An error of omission
- B) An error of commission
- C) An error of principle
- D) A compensating error
Answer: B
- A trial balance is prepared to detect:
- A) Errors of omission
- B) Errors of principle
- C) Clerical errors
- D) All types of errors
Answer: C
- The trial balance is NOT affected by:
- A) An error in totaling the purchases book
- B) An error in the sales account
- C) Recording goods purchased in the asset account
- D) Posting ₹100 as ₹1,000
Answer: C
- Which of the following balances is shown in the debit column of the trial balance?
- A) Sales
- B) Capital
- C) Drawings
- D) Outstanding rent
Answer: C
Unit 06: Final Accounts
- What are final accounts?
- A) Accounts prepared after the ledger
- B) Accounts prepared to determine financial results
- C) Subsidiary books of accounts
- D) Trial balance accounts
Answer: B
- Which of the following is NOT a part of final accounts?
- A) Trading Account
- B) Profit and Loss Account
- C) Trial Balance
- D) Balance Sheet
Answer: C
- What is the primary purpose of final accounts?
- A) To record transactions
- B) To summarize and analyze financial performance and position
- C) To track daily expenses
- D) To record journal entries
Answer: B
- Final accounts are prepared for which period?
- A) Weekly
- B) Monthly
- C) Annually
- D) Daily
Answer: C
- Which account is used to calculate gross profit or loss?
- A) Profit and Loss Account
- B) Balance Sheet
- C) Trading Account
- D) Cash Book
Answer: C
- What does the trading account show?
- A) Net profit or loss
- B) Gross profit or loss
- C) Financial position
- D) Total liabilities
Answer: B
- Which of the following is recorded on the credit side of a trading account?
- A) Sales returns
- B) Purchases
- C) Sales
- D) Carriage inward
Answer: C
- The opening stock is shown on the ______ side of the trading account.
- A) Credit
- B) Debit
- C) Both
- D) None
Answer: B
- Which of the following is a direct expense?
- A) Office rent
- B) Carriage inward
- C) Salaries
- D) Commission paid
Answer: B
- The formula for gross profit is:
- A) Net Sales – Cost of Goods Sold
- B) Purchases – Sales Returns
- C) Total Expenses – Sales Revenue
- D) Sales – Net Profit
Answer: A
- The profit and loss account is prepared to calculate:
- A) Gross profit or loss
- B) Net profit or loss
- C) Financial position
- D) Working capital
Answer: B
- Which of the following is shown on the debit side of the profit and loss account?
- A) Discount received
- B) Rent paid
- C) Sales revenue
- D) Closing stock
Answer: B
- The credit side of the profit and loss account contains:
- A) Direct expenses
- B) Indirect expenses
- C) Gains and incomes
- D) Closing stock
Answer: C
- Which of the following is NOT included in the profit and loss account?
- A) Interest earned
- B) Rent paid
- C) Purchase of fixed assets
- D) Discount received
Answer: C
- Net profit is transferred to the:
- A) Capital account
- B) Trading account
- C) Cash book
- D) Suspense account
Answer: A
- The balance sheet is a statement of:
- A) Income and expenses
- B) Financial position at a particular date
- C) Transactions during the year
- D) Profit and loss
Answer: B
- Which of the following is shown under current assets?
- A) Land
- B) Debtors
- C) Capital
- D) Bank loan
Answer: B
- What is included under current liabilities?
- A) Long-term loans
- B) Creditors
- C) Machinery
- D) Prepaid expenses
Answer: B
- The main heading under liabilities in the balance sheet is:
- A) Fixed liabilities
- B) Current liabilities
- C) Reserves and surplus
- D) All of the above
Answer: D
- Which side of the balance sheet is capital shown on?
- A) Asset side
- B) Liability side
- C) Both sides
- D) None of the above
Answer: B
- Closing stock is shown in:
- A) Trading account only
- B) Balance sheet only
- C) Both trading account and balance sheet
- D) Profit and loss account
Answer: C
- Which of the following is NOT an adjustment item in final accounts?
- A) Depreciation
- B) Outstanding expenses
- C) Credit purchases
- D) Prepaid expenses
Answer: C
- Depreciation is shown in the:
- A) Profit and loss account (debit side)
- B) Trading account
- C) Balance sheet (asset side)
- D) Balance sheet (liability side)
Answer: A
- Outstanding expenses are:
- A) Current liabilities
- B) Fixed liabilities
- C) Current assets
- D) Fixed assets
Answer: A
- Which adjustment is added to net profit in final accounts?
- A) Prepaid expenses
- B) Depreciation
- C) Outstanding income
- D) Bad debts
Answer: C
- Prepaid expenses are shown on the:
- A) Liability side of the balance sheet
- B) Asset side of the balance sheet
- C) Debit side of the profit and loss account
- D) Credit side of the trading account
Answer: B
- Bad debts are written off in the:
- A) Profit and loss account
- B) Balance sheet (liability side)
- C) Trading account
- D) Capital account
Answer: A
- The value of fixed assets is reduced by:
- A) Depreciation
- B) Prepaid expenses
- C) Accrued income
- D) Outstanding expenses
Answer: A
- Net profit is shown in the balance sheet under:
- A) Liabilities
- B) Assets
- C) Reserves and surplus
- D) Prepaid income
Answer: C
- Which account is NOT adjusted in the final accounts?
- A) Suspense account
- B) Purchase returns account
- C) Machinery account
- D) Goodwill account
Answer: A
Unit 07: Introduction to Management Accounting
- What is management accounting?
- A) Recording of transactions
- B) Preparation of financial statements
- C) Use of accounting data for decision-making
- D) Preparation of tax returns
Answer: C
- Management accounting primarily focuses on:
- A) Historical data
- B) Future planning and decision-making
- C) Tax compliance
- D) External reporting
Answer: B
- The main objective of management accounting is to:
- A) Report to shareholders
- B) Assist management in decision-making
- C) Comply with legal requirements
- D) Audit financial transactions
Answer: B
- Which of the following is NOT a function of management accounting?
- A) Budgeting
- B) Cost control
- C) Tax filing
- D) Performance evaluation
Answer: C
- Management accounting is useful for:
- A) Financial reporting
- B) Internal decision-making
- C) Legal compliance
- D) Statutory audits
Answer: B
- Which of the following is a tool used in management accounting?
- A) Ratio analysis
- B) Cash flow statement
- C) Budgetary control
- D) All of the above
Answer: D
- Variance analysis is used to:
- A) Calculate tax liability
- B) Compare actual performance with standards
- C) Record daily transactions
- D) Prepare final accounts
Answer: B
- The tool used for analyzing financial statements is called:
- A) Cash accounting
- B) Financial ratio analysis
- C) Auditing
- D) Tax accounting
Answer: B
- Budgetary control involves:
- A) Recording daily expenses
- B) Comparing actual performance with budgeted figures
- C) Preparing income tax returns
- D) Calculating depreciation
Answer: B
- Which of the following is a part of cost control?
- A) Setting standards
- B) Measuring actual costs
- C) Taking corrective action
- D) All of the above
Answer: D
- Management accounting provides information for:
- A) Investment decisions
- B) Pricing decisions
- C) Cost control decisions
- D) All of the above
Answer: D
- Decision-making in management accounting is based on:
- A) Past financial performance
- B) Forecasts and analysis
- C) Tax regulations
- D) Legal compliance
Answer: B
- Which type of decision is supported by marginal costing?
- A) Tax planning
- B) Make or buy decisions
- C) Historical cost recording
- D) External reporting
Answer: B
- The break-even analysis helps in:
- A) Determining the level of sales required to cover costs
- B) Recording financial transactions
- C) Filing tax returns
- D) Preparing balance sheets
Answer: A
- Management accounting helps in identifying:
- A) Profitable products
- B) Cost-saving opportunities
- C) Investment opportunities
- D) All of the above
Answer: D
- Which of the following is NOT a characteristic of management accounting?
- A) Future-oriented
- B) Decision-making tool
- C) Complies with GAAP
- D) Provides non-financial information
Answer: C
- A key limitation of management accounting is that it:
- A) Focuses on future trends
- B) Relies on historical cost data
- C) Lacks standardization
- D) Is mandatory for businesses
Answer: C
- Management accounting is:
- A) A legal requirement
- B) Optional for businesses
- C) A type of auditing
- D) Tax accounting
Answer: B
- Which of the following is a disadvantage of management accounting?
- A) High implementation cost
- B) Time-consuming processes
- C) Dependency on the quality of data
- D) All of the above
Answer: D
- Management accounting information is primarily used by:
- A) Shareholders
- B) Creditors
- C) Internal management
- D) Tax authorities
Answer: C
- Management accounting is related to financial accounting because it:
- A) Prepares tax returns
- B) Provides data for internal decision-making
- C) Is used for external reporting
- D) Depends on financial records for analysis
Answer: D
- Cost accounting and management accounting are related because:
- A) Both deal with external reporting
- B) Cost accounting data is used for managerial decisions
- C) Both are mandatory by law
- D) Both prepare financial statements
Answer: B
- Which type of accounting focuses on compliance with legal requirements?
- A) Financial accounting
- B) Management accounting
- C) Cost accounting
- D) Tax accounting
Answer: A
- The integration of management accounting and cost accounting helps in:
- A) Preparing budgets
- B) External reporting
- C) Tax audits
- D) Managing payroll
Answer: A
- The main difference between financial and management accounting is:
- A) Financial accounting is future-oriented
- B) Management accounting focuses on external users
- C) Management accounting focuses on internal decision-making
- D) Financial accounting is used for tax purposes only
Answer: C
- The primary source of data for management accounting is:
- A) Financial records
- B) Market surveys
- C) Tax reports
- D) Audit findings
Answer: A
- Which of the following is NOT included in management accounting reports?
- A) Budgets
- B) Tax returns
- C) Performance reports
- D) Variance analysis
Answer: B
- The decision-making process in management accounting involves:
- A) Identifying the problem
- B) Analyzing data
- C) Evaluating alternatives
- D) All of the above
Answer: D
- Management accounting does NOT focus on:
- A) Preparing profit and loss statements
- B) Preparing budgets
- C) Decision-making
- D) Performance evaluation
Answer: A
- Management accounting uses financial and non-financial data to:
- A) Comply with legal standards
- B) Prepare tax returns
- C) Assist in strategic planning
- D) Audit business processes
Answer: C
Unit 08 : Financial Statement Analysis
- Financial statement analysis is primarily used to:
- A) Prepare tax returns
- B) Evaluate financial performance
- C) Record daily transactions
- D) Conduct audits
Answer: B
- Which of the following is NOT a financial statement?
- A) Balance sheet
- B) Profit and loss account
- C) Cash flow statement
- D) Sales invoice
Answer: D
- The process of analyzing financial statements involves:
- A) Identifying trends
- B) Comparing financial data
- C) Evaluating financial ratios
- D) All of the above
Answer: D
- The primary purpose of financial statement analysis is to:
- A) Assess a company’s financial health
- B) Prepare budgets
- C) Record transactions
- D) File tax returns
Answer: A
- Financial statement analysis is useful for:
- A) Investors
- B) Creditors
- C) Management
- D) All of the above
Answer: D
- Which of the following is a tool for financial statement analysis?
- A) Ratio analysis
- B) Trend analysis
- C) Common-size statements
- D) All of the above
Answer: D
- What is a common-size statement?
- A) A statement where all items are expressed as a percentage of a base figure
- B) A statement showing only current year data
- C) A tax return document
- D) None of the above
Answer: A
- Trend analysis involves:
- A) Comparing financial data over several periods
- B) Preparing tax returns
- C) Analyzing competitor data
- D) Recording transactions
Answer: A
- Horizontal analysis is also known as:
- A) Trend analysis
- B) Ratio analysis
- C) Vertical analysis
- D) Cash flow analysis
Answer: A
- Vertical analysis expresses items in the financial statement as a percentage of:
- A) Sales
- B) Total assets or revenue
- C) Net profit
- D) Shareholder equity
Answer: B
- Which of the following is a liquidity ratio?
- A) Current ratio
- B) Debt-to-equity ratio
- C) Gross profit margin
- D) Return on investment
Answer: A
- The formula for the current ratio is:
- A) Current liabilities / Current assets
- B) Current assets / Current liabilities
- C) Total liabilities / Total equity
- D) Net profit / Net sales
Answer: B
- Debt-to-equity ratio measures:
- A) Profitability
- B) Solvency
- C) Liquidity
- D) Efficiency
Answer: B
- The formula for gross profit margin is:
- A) (Net profit / Sales) × 100
- B) (Gross profit / Sales) × 100
- C) (Operating profit / Sales) × 100
- D) (Sales / Total assets) × 100
Answer: B
- A high inventory turnover ratio indicates:
- A) Slow inventory movement
- B) Efficient inventory management
- C) Poor sales performance
- D) Excess inventory
Answer: B
- The cash flow statement is divided into:
- A) Operating, investing, and financing activities
- B) Current, fixed, and intangible activities
- C) Direct, indirect, and administrative activities
- D) None of the above
Answer: A
- Which of the following is classified as an operating activity in the cash flow statement?
- A) Purchase of fixed assets
- B) Sale of investments
- C) Payment of salaries
- D) Issuance of shares
Answer: C
- Investing activities in a cash flow statement include:
- A) Purchase of machinery
- B) Sale of investments
- C) Lending money
- D) All of the above
Answer: D
- Financing activities in the cash flow statement include:
- A) Issuance of shares
- B) Payment of dividends
- C) Borrowing loans
- D) All of the above
Answer: D
- A positive cash flow from operating activities indicates:
- A) High investments
- B) Healthy core business operations
- C) Increased debt
- D) Sale of fixed assets
Answer: B
- Financial statement analysis helps in:
- A) Identifying profitability
- B) Assessing liquidity
- C) Evaluating solvency
- D) All of the above
Answer: D
- A key limitation of financial statement analysis is:
- A) It focuses on qualitative data
- B) It is based on historical data
- C) It ignores financial ratios
- D) It lacks relevance for stakeholders
Answer: B
- Which of the following is NOT a benefit of financial statement analysis?
- A) Informed decision-making
- B) Tax compliance
- C) Performance evaluation
- D) Future planning
Answer: B
- Financial statement analysis is least useful for:
- A) Auditors
- B) Competitors
- C) Management
- D) Regulatory authorities
Answer: B
- Financial ratios are useful for comparing:
- A) A company’s performance over time
- B) A company’s performance with its competitors
- C) Both A and B
- D) None of the above
Answer: C
- A balance sheet shows:
- A) Revenue and expenses
- B) Financial position at a specific point in time
- C) Cash inflows and outflows
- D) Changes in equity
Answer: B
- The income statement is also known as:
- A) Profit and loss account
- B) Statement of financial position
- C) Cash flow statement
- D) Statement of retained earnings
Answer: A
- Which financial statement shows the financial performance of a company over a period?
- A) Balance sheet
- B) Income statement
- C) Cash flow statement
- D) Notes to accounts
Answer: B
- Which of the following is NOT part of a balance sheet?
- A) Assets
- B) Liabilities
- C) Net sales
- D) Equity
Answer: C
- The primary users of financial statement analysis include:
- A) Investors
- B) Creditors
- C) Management
- D) All of the above
Answer: D
Unit 9: Fund Flow Statement
- The fund flow statement shows:
- A) Changes in financial position between two periods
- B) Profit and loss for the year
- C) Assets and liabilities at a particular time
- D) None of the above
Answer: A
- Fund flow analysis is primarily used to:
- A) Prepare budgets
- B) Analyze the movement of funds
- C) Record daily transactions
- D) Pay dividends
Answer: B
- The primary objective of a fund flow statement is to:
- A) Show liquidity
- B) Show changes in working capital
- C) Show cash inflows and outflows
- D) Evaluate profitability
Answer: B
- Funds in a fund flow statement refer to:
- A) Only cash
- B) Working capital
- C) Fixed assets
- D) Long-term liabilities
Answer: B
- Which of the following is NOT included in the fund flow statement?
- A) Current assets
- B) Fixed assets
- C) Non-current liabilities
- D) Capital expenditure
Answer: D
- The two main components of a fund flow statement are:
- A) Fund flow and cash flow
- B) Sources of funds and applications of funds
- C) Assets and liabilities
- D) Revenue and expenditure
Answer: B
- Increase in long-term liabilities is treated as:
- A) Source of funds
- B) Application of funds
- C) No impact on funds
- D) Reduction of funds
Answer: A
- A decrease in current liabilities is considered as:
- A) Source of funds
- B) Application of funds
- C) No change in funds
- D) Increase in working capital
Answer: B
- Sale of fixed assets is categorized under:
- A) Application of funds
- B) Source of funds
- C) No effect on funds
- D) Revenue income
Answer: B
- Which of the following represents an application of funds?
- A) Issue of shares
- B) Redemption of debentures
- C) Increase in working capital
- D) Both B and C
Answer: D
- Working capital is calculated as:
- A) Current assets – Current liabilities
- B) Fixed assets – Current liabilities
- C) Total assets – Total liabilities
- D) Net profit – Expenses
Answer: A
- Increase in working capital is a result of:
- A) Increase in current assets
- B) Decrease in current liabilities
- C) Both A and B
- D) None of the above
Answer: C
- A decrease in working capital indicates:
- A) Excess funds
- B) Lack of funds
- C) Funds have been used elsewhere
- D) None of the above
Answer: C
- Which of the following causes a decrease in working capital?
- A) Sale of fixed assets
- B) Payment of dividends
- C) Issue of shares
- D) Borrowing of loans
Answer: B
- Working capital is crucial for:
- A) Long-term investments
- B) Day-to-day operations
- C) Fixed asset management
- D) None of the above
Answer: B
- Fund flow statements are prepared using:
- A) Balance sheets of two consecutive periods
- B) Cash flow statements
- C) Profit and loss accounts
- D) None of the above
Answer: A
- The first step in preparing a fund flow statement is to:
- A) Prepare a cash flow statement
- B) Calculate changes in working capital
- C) Identify fixed asset transactions
- D) Prepare the profit and loss account
Answer: B
- Which of the following is NOT a step in preparing a fund flow statement?
- A) Preparation of a statement of changes in working capital
- B) Preparation of a profit and loss account
- C) Identification of sources and uses of funds
- D) Preparation of cash flow statement
Answer: D
- Statement of changes in working capital shows:
- A) Only sources of funds
- B) Changes in current assets and liabilities
- C) Profitability of the company
- D) Cash inflows and outflows
Answer: B
- The difference between current assets and current liabilities is referred to as:
- A) Net profit
- B) Working capital
- C) Cash flow
- D) Gross margin
Answer: B
- Issue of shares increases:
- A) Working capital
- B) Fixed assets
- C) Long-term funds
- D) Short-term liabilities
Answer: C
- Repayment of a loan is considered as:
- A) Source of funds
- B) Application of funds
- C) Revenue income
- D) No effect on funds
Answer: B
- Which transaction does NOT affect working capital?
- A) Purchase of fixed assets
- B) Sale of inventory
- C) Issue of debentures
- D) Payment of creditors
Answer: C
- Depreciation is considered in a fund flow statement as:
- A) Source of funds
- B) Application of funds
- C) Non-fund item
- D) None of the above
Answer: C
- Payment of dividends affects the fund flow statement as:
- A) Increase in funds
- B) Application of funds
- C) Decrease in working capital
- D) Both B and C
Answer: D
- Fund flow analysis is primarily useful for:
- A) Short-term planning
- B) Long-term financial planning
- C) Tax compliance
- D) Daily operations
Answer: B
- A fund flow statement helps to:
- A) Assess cash liquidity
- B) Analyze profitability
- C) Understand financial health
- D) Prepare budgets
Answer: C
- Fund flow statements are not concerned with:
- A) Fixed asset transactions
- B) Changes in long-term liabilities
- C) Revenue generation
- D) Working capital changes
Answer: C
- One major limitation of fund flow statements is:
- A) It uses historical data
- B) It cannot evaluate liquidity
- C) It cannot assess profitability
- D) All of the above
Answer: D
- Fund flow statements are typically prepared for:
- A) A specific date
- B) A period of time
- C) Monthly analysis
- D) Tax filing purposes
Answer: B
Unit 10 : Cash Flow Statement
- The cash flow statement shows:
- A) Financial position of the company
- B) Changes in cash and cash equivalents during a period
- C) Profitability of the company
- D) Net worth of the company
Answer: B
- The cash flow statement is prepared as per:
- A) AS-2
- B) AS-3
- C) AS-7
- D) AS-6
Answer: B
- Cash flow statements are divided into how many major sections?
- A) Two
- B) Three
- C) Four
- D) Five
Answer: B
- Which of the following is NOT a component of a cash flow statement?
- A) Operating activities
- B) Investing activities
- C) Financing activities
- D) Marketing activities
Answer: D
- The cash flow statement is primarily used to:
- A) Measure profitability
- B) Assess liquidity and solvency
- C) Record fixed assets
- D) Compute cost of goods sold
Answer: B
- Operating activities in a cash flow statement include:
- A) Day-to-day business transactions
- B) Sale of fixed assets
- C) Issuance of shares
- D) Payment of dividends
Answer: A
- An example of cash inflow from operating activities is:
- A) Sale of goods
- B) Purchase of machinery
- C) Issue of debentures
- D) Payment of taxes
Answer: A
- Which of the following is an outflow in operating activities?
- A) Interest received
- B) Purchase of raw materials
- C) Proceeds from sale of assets
- D) Dividends paid
Answer: B
- Net profit is adjusted in operating activities to include:
- A) Depreciation
- B) Increase in stock
- C) Decrease in creditors
- D) All of the above
Answer: D
- The direct method of preparing a cash flow statement for operating activities involves:
- A) Adjusting net profit for non-cash items
- B) Recording cash receipts and payments
- C) Adjusting changes in working capital
- D) None of the above
Answer: B
- Investing activities primarily involve:
- A) Acquisition and disposal of fixed assets
- B) Day-to-day transactions
- C) Issuance of shares
- D) Payment of taxes
Answer: A
- Which of the following is an inflow under investing activities?
- A) Purchase of machinery
- B) Sale of land
- C) Payment of dividends
- D) Issuance of shares
Answer: B
- Cash outflows from investing activities include:
- A) Purchase of investments
- B) Proceeds from the sale of assets
- C) Loan repayment
- D) Depreciation
Answer: A
- Dividend income is classified under:
- A) Operating activities
- B) Investing activities
- C) Financing activities
- D) None of the above
Answer: B
- Investing activities reflect:
- A) The company’s capital structure
- B) The purchase and sale of long-term assets
- C) Revenue generation
- D) Changes in working capital
Answer: B
- Financing activities primarily involve:
- A) Long-term liabilities and equity
- B) Current liabilities
- C) Fixed assets
- D) Operating expenses
Answer: A
- Which of the following is an example of a financing activity?
- A) Issuance of shares
- B) Sale of fixed assets
- C) Purchase of inventory
- D) Interest received
Answer: A
- Cash outflows from financing activities include:
- A) Repayment of loans
- B) Sale of investments
- C) Proceeds from share issuance
- D) Dividend income
Answer: A
- Dividends paid to shareholders are recorded under:
- A) Operating activities
- B) Investing activities
- C) Financing activities
- D) None of the above
Answer: C
- The repayment of a long-term loan is classified as:
- A) Operating activity
- B) Investing activity
- C) Financing activity
- D) None of the above
Answer: C
- The indirect method for cash flow statements begins with:
- A) Net profit before tax
- B) Operating cash flows
- C) Gross revenue
- D) Net sales
Answer: A
- Under the indirect method, depreciation is:
- A) Added to net profit
- B) Subtracted from net profit
- C) Ignored
- D) Adjusted in financing activities
Answer: A
- An increase in accounts receivable is treated as:
- A) Cash inflow
- B) Cash outflow
- C) No effect
- D) Financing activity
Answer: B
- A decrease in accounts payable is:
- A) Cash inflow
- B) Cash outflow
- C) Financing activity
- D) No effect on cash flow
Answer: B
- Which of the following is subtracted in the indirect method of cash flow statements?
- A) Increase in liabilities
- B) Decrease in assets
- C) Increase in assets
- D) Depreciation
Answer: C
- The cash flow statement helps in:
- A) Assessing the firm’s ability to generate cash
- B) Evaluating profitability
- C) Preparing budgets
- D) Analyzing fixed assets
Answer: A
- Which of the following is NOT included in cash and cash equivalents?
- A) Bank balances
- B) Short-term marketable securities
- C) Long-term investments
- D) Demand deposits
Answer: C
- Which method is more commonly used for preparing a cash flow statement?
- A) Direct method
- B) Indirect method
- C) Historical method
- D) None of the above
Answer: B
- A cash flow statement does NOT include:
- A) Non-cash transactions
- B) Operating activities
- C) Investing activities
- D) Financing activities
Answer: A
- The cash flow statement is prepared for:
- A) A particular date
- B) A specific accounting period
- C) A financial year only
- D) None of the above
Answer: B
Unit 11: Understanding Cost
- What is the definition of cost?
- A) The price paid to acquire goods or services
- B) The amount of profit earned
- C) The value of sales made
- D) The amount received from customers
Answer: A
- Which of the following is NOT a characteristic of cost?
- A) Measurable
- B) Relevant to production
- C) Reflects selling price
- D) Related to time and activity
Answer: C
- The cost that remains constant per unit but changes in total is called:
- A) Fixed cost
- B) Variable cost
- C) Semi-variable cost
- D) Opportunity cost
Answer: B
- The cost that remains constant in total but decreases per unit as production increases is:
- A) Fixed cost
- B) Variable cost
- C) Marginal cost
- D) Direct cost
Answer: A
- Opportunity cost is defined as:
- A) The cost incurred in producing a product
- B) The cost of the next best alternative forgone
- C) The cost that does not change
- D) The cost of acquiring assets
Answer: B
- The cost that can be directly attributed to a specific product is called:
- A) Indirect cost
- B) Overhead cost
- C) Direct cost
- D) Fixed cost
Answer: C
- Indirect costs are also known as:
- A) Variable costs
- B) Direct costs
- C) Overheads
- D) Prime costs
Answer: C
- Which of the following is an example of a fixed cost?
- A) Raw material cost
- B) Wages of factory workers
- C) Rent of the factory building
- D) Cost of electricity for machinery
Answer: C
- A cost that is partly fixed and partly variable is termed as:
- A) Variable cost
- B) Fixed cost
- C) Semi-variable cost
- D) Sunk cost
Answer: C
- Costs incurred in the past and not relevant to current decision-making are known as:
- A) Fixed costs
- B) Sunk costs
- C) Marginal costs
- D) Opportunity costs
Answer: B
- Cost behavior refers to how costs change with changes in:
- A) Production volume
- B) Selling price
- C) Tax rates
- D) Market conditions
Answer: A
- In marginal costing, fixed costs are treated as:
- A) Product costs
- B) Period costs
- C) Relevant costs
- D) Opportunity costs
Answer: B
- The relationship between cost, volume, and profit is analyzed using:
- A) Contribution margin
- B) Cost-Volume-Profit analysis
- C) Fixed cost analysis
- D) Cash flow statement
Answer: B
- If production increases, variable cost per unit will:
- A) Increase
- B) Decrease
- C) Remain constant
- D) Become zero
Answer: C
- Fixed cost per unit decreases as:
- A) Production volume decreases
- B) Production volume increases
- C) Variable cost increases
- D) Direct costs decrease
Answer: B
- Costs that vary with the level of production are classified as:
- A) Fixed costs
- B) Variable costs
- C) Direct costs
- D) Overheads
Answer: B
- Which of the following is NOT included in direct costs?
- A) Direct materials
- B) Direct labor
- C) Factory rent
- D) Direct expenses
Answer: C
- Prime cost is the sum of:
- A) Fixed costs and variable costs
- B) Direct costs and overheads
- C) Direct material, direct labor, and direct expenses
- D) All costs incurred in production
Answer: C
- Costs that can be controlled by management are known as:
- A) Controllable costs
- B) Sunk costs
- C) Indirect costs
- D) Period costs
Answer: A
- Costs that are incurred regardless of production are called:
- A) Direct costs
- B) Fixed costs
- C) Variable costs
- D) Semi-variable costs
Answer: B
- In marginal costing, contribution is calculated as:
- A) Sales – Fixed costs
- B) Sales – Variable costs
- C) Sales – Total costs
- D) Sales – Overheads
Answer: B
- The break-even point is achieved when:
- A) Sales = Fixed costs
- B) Sales = Variable costs
- C) Sales = Total costs
- D) Sales > Total costs
Answer: C
- Which of the following is TRUE for absorption costing?
- A) Fixed costs are charged to the product
- B) Fixed costs are excluded from product cost
- C) Only variable costs are considered
- D) Contribution is calculated
Answer: A
- Marginal costing is useful for:
- A) Short-term decision-making
- B) Long-term investment decisions
- C) Preparing financial accounts
- D) Valuing fixed assets
Answer: A
- Under absorption costing, fixed overheads are treated as:
- A) Period costs
- B) Product costs
- C) Opportunity costs
- D) Irrelevant costs
Answer: B
- The term “cost accounting” refers to:
- A) Recording income and expenses
- B) Recording, classifying, and allocating costs
- C) Preparing financial statements
- D) Analyzing revenue
Answer: B
- A cost that is incurred to acquire a specific resource or service is called:
- A) Indirect cost
- B) Variable cost
- C) Direct cost
- D) Opportunity cost
Answer: C
- The purpose of cost analysis is to:
- A) Minimize costs and maximize efficiency
- B) Increase profit margins
- C) Allocate funds
- D) Record transactions
Answer: A
- Which of the following is an uncontrollable cost?
- A) Depreciation
- B) Direct labor
- C) Raw material cost
- D) Advertising cost
Answer: A
- Cost incurred after the product is completed but before it is sold is known as:
- A) Prime cost
- B) Selling cost
- C) Distribution cost
- D) Post-production cost
Answer: C
Unit 12: Marginal Costing
- What does marginal costing primarily focus on?
- A) Fixed costs
- B) Variable costs
- C) Overhead costs
- D) Total costs
Answer: B
- Which of the following costs is considered irrelevant in marginal costing?
- A) Variable costs
- B) Fixed costs
- C) Semi-variable costs
- D) Direct costs
Answer: B
- What is the formula for contribution?
- A) Sales – Fixed Costs
- B) Sales – Variable Costs
- C) Sales – Total Costs
- D) Sales – Profit
Answer: B
- Which of the following statements is true in marginal costing?
- A) Fixed costs are treated as product costs
- B) Variable costs are treated as period costs
- C) Fixed costs are charged to the profit and loss account
- D) Total costs are included in inventory valuation
Answer: C
- What is another name for marginal costing?
- A) Absorption costing
- B) Contribution costing
- C) Differential costing
- D) Standard costing
Answer: C
- Contribution margin is defined as:
- A) Sales revenue – Fixed costs
- B) Sales revenue – Variable costs
- C) Variable costs – Fixed costs
- D) Sales revenue – Total costs
Answer: B
- What does the break-even point represent?
- A) Total sales equal total profit
- B) Total sales equal total costs
- C) Fixed costs equal variable costs
- D) Contribution equals profit
Answer: B
- The break-even point (in units) is calculated as:
- A) Fixed Costs ÷ Contribution per unit
- B) Fixed Costs ÷ Sales price per unit
- C) Fixed Costs ÷ Variable costs per unit
- D) Contribution ÷ Variable costs
Answer: A
- Which of the following will increase the break-even point?
- A) An increase in sales price
- B) A decrease in variable cost
- C) An increase in fixed cost
- D) An increase in contribution margin
Answer: C
- The contribution margin ratio is calculated as:
- A) (Contribution ÷ Sales) × 100
- B) (Sales ÷ Contribution) × 100
- C) (Fixed Costs ÷ Sales) × 100
- D) (Variable Costs ÷ Sales) × 100
Answer: A
- In absorption costing, fixed costs are treated as:
- A) Period costs
- B) Product costs
- C) Variable costs
- D) Direct costs
Answer: B
- What is the main difference between marginal costing and absorption costing?
- A) Treatment of fixed costs
- B) Valuation of variable costs
- C) Calculation of contribution
- D) Use in decision-making
Answer: A
- Under marginal costing, inventory is valued at:
- A) Total cost
- B) Prime cost
- C) Variable cost
- D) Absorption cost
Answer: C
- Which costing method is more useful for short-term decision-making?
- A) Absorption costing
- B) Marginal costing
- C) Standard costing
- D) Historical costing
Answer: B
- In marginal costing, fixed costs are treated as:
- A) Inventory costs
- B) Direct costs
- C) Period costs
- D) Prime costs
Answer: C
- Which of the following decisions is marginal costing most useful for?
- A) Long-term investment planning
- B) Make or buy decisions
- C) Financial statement preparation
- D) Depreciation calculations
Answer: B
- In a “make or buy” decision, relevant costs are:
- A) Only fixed costs
- B) Only variable costs
- C) Total costs
- D) Differential costs
Answer: D
- In shutdown decisions, marginal costing helps in determining:
- A) Whether the contribution covers fixed costs
- B) The profit margin
- C) The breakeven sales
- D) The cost of machinery
Answer: A
- Which cost is irrelevant in a “drop a product” decision?
- A) Fixed cost allocated to the product
- B) Contribution from the product
- C) Variable cost per unit
- D) Direct labor cost
Answer: A
- Marginal costing is most suitable when:
- A) Fixed costs are high
- B) Variable costs are negligible
- C) Decision-making requires cost control
- D) Long-term profitability is analyzed
Answer: C
- Profit-volume ratio is calculated as:
- A) Contribution ÷ Sales
- B) Profit ÷ Sales
- C) Fixed Costs ÷ Sales
- D) Variable Costs ÷ Sales
Answer: A
- What is the formula for margin of safety?
- A) (Total Sales – Break-even Sales) ÷ Total Sales
- B) Fixed Costs ÷ Contribution per unit
- C) Break-even Sales ÷ Total Sales
- D) (Sales – Contribution) ÷ Fixed Costs
Answer: A
- If sales increase beyond the break-even point, the additional profit equals:
- A) Fixed costs
- B) Contribution
- C) Sales revenue
- D) Variable costs
Answer: B
- Which formula calculates break-even sales (in value)?
- A) Fixed Costs ÷ Contribution Margin Ratio
- B) Fixed Costs ÷ Contribution per Unit
- C) Total Costs ÷ Sales
- D) Sales ÷ Profit
Answer: A
- The angle of incidence in a CVP graph indicates:
- A) Fixed costs
- B) Variable costs
- C) Profitability
- D) Break-even point
Answer: C
- Marginal costing is inappropriate for:
- A) Decision-making
- B) Short-term cost control
- C) Long-term pricing decisions
- D) Identifying contribution
Answer: C
- Which of the following is a limitation of marginal costing?
- A) Ignores fixed costs in decision-making
- B) Overvalues inventory
- C) Understates profit
- D) Ignores variable costs
Answer: A
- Marginal cost includes:
- A) Fixed and variable costs
- B) Only variable costs
- C) Only fixed costs
- D) Sunk costs
Answer: B
- In marginal costing, if sales price increases, contribution will:
- A) Decrease
- B) Increase
- C) Remain constant
- D) Depend on fixed costs
Answer: B
- Fixed costs are relevant for decision-making when:
- A) They change based on activity level
- B) They are allocated to multiple products
- C) They can be avoided
- D) They are sunk costs
Answer: C
Unit 13: Decision Making
- Decision making in management accounting is concerned with:
- A) Identifying the past financial performance
- B) Making the most profitable choices for the future
- C) Analyzing external economic factors
- D) Managing liquidity
Answer: B
- Which of the following is a key element in decision making?
- A) Forecasting future costs
- B) Identifying irrelevant costs
- C) Evaluating alternatives based on financial data
- D) Maximizing taxes
Answer: C
- The primary focus of decision making in financial accounting is on:
- A) Short-term profits
- B) Long-term profitability and growth
- C) Past financial performance
- D) Managerial efficiency
Answer: B
- The cost that remains unchanged regardless of the decision made is called:
- A) Sunk cost
- B) Relevant cost
- C) Marginal cost
- D) Fixed cost
Answer: A
- In decision-making, opportunity cost refers to:
- A) The benefit lost by not choosing the next best alternative
- B) The fixed cost of production
- C) The cost of materials
- D) The future cost of current decisions
Answer: A
- Which of the following is a relevant cost in decision making?
- A) Sunk cost
- B) Opportunity cost
- C) Depreciation on existing machinery
- D) Past research and development costs
Answer: B
- An example of an irrelevant cost is:
- A) Direct materials cost
- B) Fixed overhead costs already incurred
- C) Incremental revenue from a new product
- D) Variable costs directly related to production
Answer: B
- Which of the following costs is always relevant in decision-making?
- A) Fixed costs
- B) Direct variable costs
- C) Sunk costs
- D) Administrative costs
Answer: B
- In a make-or-buy decision, which of the following would be considered a relevant cost?
- A) Depreciation on the existing production facility
- B) Purchase price from the supplier
- C) Salaries of permanent staff
- D) Rent of the existing factory
Answer: B
- Which cost is irrelevant when deciding whether to continue or discontinue a product line?
- A) Direct variable costs
- B) Fixed overhead allocated to the product line
- C) Contribution margin of the product
- D) Additional revenue generated by the product line
Answer: B
- In the make-or-buy decision, which of the following would generally be considered relevant?
- A) Cost of purchasing an alternative product
- B) Historical cost of manufacturing machinery
- C) Depreciation on old equipment
- D) Fixed costs that will not change
Answer: A
- In make-or-buy decisions, the relevant costs include:
- A) Fixed costs
- B) Sunk costs
- C) Avoidable costs
- D) All of the above
Answer: C
- If a company buys a component from an external supplier, the relevant cost to consider is:
- A) The cost of the supplier’s component
- B) The cost of purchasing the machinery
- C) The depreciation on the factory building
- D) The fixed salaries of employees
Answer: A
- When deciding whether to make or buy a component, what is a key factor in the decision?
- A) Whether fixed costs are incurred
- B) The degree of external competition
- C) The cost savings from producing internally
- D) The availability of labor in the market
Answer: C
- In a make-or-buy decision, which of the following costs is likely to be irrelevant?
- A) Cost of raw materials
- B) Sunk costs
- C) Additional labor cost
- D) Avoidable overheads
Answer: B
- A special order decision involves:
- A) Setting a regular price for products
- B) Offering products at a discounted price to a special customer
- C) Evaluating production costs in normal conditions
- D) Standardizing product offerings
Answer: B
- Which cost is typically considered when deciding whether to accept a special order?
- A) Regular selling price
- B) Sunk costs
- C) Variable costs associated with the special order
- D) Both fixed and variable costs
Answer: C
- When determining the price for a special order, which of the following should be considered?
- A) Historical pricing trends
- B) Variable costs incurred by the special order
- C) Previous marketing strategies
- D) Fixed administrative costs
Answer: B
- In a pricing decision for a special order, what should be the minimum price charged?
- A) The regular price
- B) The total cost per unit
- C) The variable cost per unit
- D) The contribution margin per unit
Answer: C
- If fixed costs are already covered, what would be the minimum price for a special order?
- A) Sales price per unit
- B) Average cost per unit
- C) Variable cost per unit
- D) Fixed costs per unit
Answer: C
- A limiting factor in decision making refers to:
- A) The factor that constrains a company’s ability to produce goods
- B) The factor that drives demand for a product
- C) The factor that increases fixed costs
- D) The factor that reduces revenue
Answer: A
- In a limiting factor situation, the company should focus on maximizing contribution per unit of:
- A) Sales price
- B) Limiting factor
- C) Fixed costs
- D) Total revenue
Answer: B
- If labor hours are the limiting factor, the company should prioritize products that:
- A) Have the highest variable costs
- B) Have the highest contribution margin per labor hour
- C) Require the least labor hours
- D) Generate the highest total sales
Answer: B
- What is the purpose of an optimization decision in managerial accounting?
- A) To maximize fixed costs
- B) To minimize variable costs
- C) To allocate resources in the most profitable way
- D) To reduce sunk costs
Answer: C
- In decision making, when there is a limiting factor, what should management focus on?
- A) Total profit from all products
- B) Contribution per unit of the limiting factor
- C) Reduction in fixed costs
- D) Maximization of sales volume
Answer: B
- In a shutdown decision, a company should consider:
- A) The full cost of operations
- B) Only the fixed costs
- C) The contribution margin that will be lost
- D) The potential to recover fixed costs
Answer: C
- Which of the following is true in a shutdown decision?
- A) If the contribution margin is greater than the fixed costs, the company should continue operations
- B) A company should shut down if the fixed costs are greater than the variable costs
- C) The decision should be based on past financial performance
- D) A company should never shut down regardless of costs
Answer: A
- Which cost is relevant when deciding whether to shut down operations temporarily?
- A) Sunk costs
- B) Fixed costs that cannot be avoided
- C) Contribution margin
- D) Administrative expenses
Answer: C
- If the contribution margin is negative, the company should likely:
- A) Continue operations, but with price reductions
- B) Discontinue the product or shut down the operation
- C) Increase the fixed costs to boost profitability
- D) Seek external financing to cover the loss
Answer: B
- In a shutdown decision, fixed costs that are unavoidable should be treated as:
- A) Relevant costs
- B) Irrelevant costs
- C) Opportunity costs
- D) Differential costs
Answer: B
Unit 14: Budgeting and Budgetary Control
- A budget is defined as:
- A) A financial forecast for the next year
- B) A financial plan used to control income and expenditures
- C) A record of all expenses
- D) A list of projected sales
Answer: B
- Which of the following is the primary purpose of budgeting?
- A) To allocate profits across departments
- B) To plan and control financial resources
- C) To evaluate employee performance
- D) To minimize taxes
Answer: B
- The process of comparing actual performance with budgeted performance is known as:
- A) Budgetary control
- B) Performance evaluation
- C) Financial reporting
- D) Forecasting
Answer: A
- Which of the following is a major benefit of budgeting?
- A) It guarantees financial success
- B) It helps allocate resources efficiently
- C) It ensures that companies can avoid losses
- D) It reduces the need for management
Answer: B
- The period for which a budget is prepared is known as:
- A) The fiscal year
- B) The budget cycle
- C) The budget period
- D) The financial year
Answer: C
- Which of the following is an example of a flexible budget?
- A) A budget that remains fixed regardless of production level
- B) A budget that adjusts according to actual activity levels
- C) A budget used for long-term strategic planning
- D) A budget that is revised only annually
Answer: B
- A master budget consists of:
- A) A sales budget only
- B) Several interrelated budgets
- C) Only fixed costs
- D) Capital expenditure plans
Answer: B
- A cash budget is designed to:
- A) Plan for cash inflows and outflows over a specific period
- B) Measure the profitability of an organization
- C) Set sales targets for a period
- D) Allocate resources among different departments
Answer: A
- The operating budget primarily focuses on:
- A) Profitability and financial performance
- B) Cash flows and capital expenditure
- C) Revenue and expenditure from normal operations
- D) Tax obligations
Answer: C
- A capital budget deals with:
- A) Short-term financial planning
- B) Long-term investments in assets
- C) Daily expenses
- D) Projected sales income
Answer: B
- The process of preparing a budget typically starts with:
- A) Estimating profits
- B) Setting financial goals
- C) Preparing the cash flow statement
- D) Forecasting revenue
Answer: B
- In the budgeting process, top-down budgeting means that:
- A) Lower management sets the budget and submits it to top management
- B) Top management sets the budget for the entire organization
- C) The budget is determined based on actual performance
- D) Budgets are prepared for individual departments
Answer: B
- The final step in the budgeting process is to:
- A) Monitor actual performance
- B) Prepare financial statements
- C) Set long-term objectives
- D) Evaluate the department’s performance
Answer: A
- Which of the following is an essential step in the budgetary control process?
- A) Identifying budgeted targets
- B) Collecting external market data
- C) Preparing tax returns
- D) Developing the company’s mission statement
Answer: A
- Budgetary control helps managers to:
- A) Avoid financial losses
- B) Plan for uncertain future events
- C) Ensure that actual expenses do not exceed budgeted amounts
- D) Make decisions based on external factors only
Answer: C
- Zero-based budgeting requires:
- A) The previous year’s budget as a basis for planning
- B) Justifying all expenses as if starting from scratch
- C) Setting a fixed percentage increase over the previous budget
- D) No adjustments to the budget once it is set
Answer: B
- Which of the following is NOT a feature of flexible budgeting?
- A) It adjusts for changes in the level of activity
- B) It is fixed for a specific period
- C) It helps in comparing actual performance with budgeted figures
- D) It is useful for analyzing variable costs
Answer: B
- Which type of budget is often used for non-profit organizations to ensure that they stay within their funding limits?
- A) Capital budget
- B) Master budget
- C) Cash budget
- D) Project budget
Answer: C
- The main difference between fixed and flexible budgets is:
- A) Fixed budgets change according to actual activity, while flexible budgets do not
- B) Flexible budgets are more useful for long-term planning
- C) Fixed budgets do not change, regardless of actual activity
- D) Flexible budgets are used for capital expenditure
Answer: C
- The purpose of a cash budget is to:
- A) Plan and control cash inflows and outflows
- B) Estimate profit margins for the next period
- C) Calculate projected sales revenue
- D) Set production schedules
Answer: A
- Variance analysis is used to compare:
- A) Budgeted performance with actual performance
- B) Actual performance with previous years’ performance
- C) External factors with internal results
- D) Projected sales with current expenses
Answer: A
- The difference between the budgeted cost and the actual cost is called a:
- A) Profit variance
- B) Contribution margin
- C) Cost variance
- D) Revenue variance
Answer: C
- Which of the following is NOT a type of variance in financial analysis?
- A) Price variance
- B) Volume variance
- C) Efficiency variance
- D) Depreciation variance
Answer: D
- A favorable variance occurs when:
- A) Actual costs exceed the budgeted costs
- B) Actual revenue is greater than budgeted revenue
- C) Budgeted expenses are lower than actual expenses
- D) Actual production is lower than planned production
Answer: B
- The main purpose of variance analysis is to:
- A) Minimize tax liabilities
- B) Identify the reasons for performance deviations
- C) Control overhead costs
- D) Avoid budgeting errors
Answer: B
- One challenge of budgeting is:
- A) Predicting future prices accurately
- B) Preparing taxes
- C) Dealing with fixed revenue
- D) Reducing overheads
Answer: A
- The major limitation of zero-based budgeting is that:
- A) It does not account for variable costs
- B) It is time-consuming and labor-intensive
- C) It is less accurate than traditional budgeting
- D) It does not allow for the adjustment of budgets
Answer: B
- Which of the following can lead to inaccurate budgeting?
- A) Overestimating fixed costs
- B) Underestimating variable costs
- C) Accurate forecasting of demand
- D) Both A and B
Answer: D
- Which of the following is a benefit of using participative budgeting?
- A) It simplifies the decision-making process
- B) It increases motivation among lower-level managers
- C) It reduces the time needed for budget preparation
- D) It eliminates the need for performance evaluations
Answer: B
- Which of the following is a key disadvantage of top-down budgeting?
- A) It reduces the complexity of the budgeting process
- B) It may lead to resistance from lower management
- C) It involves more employee participation
- D) It can lead to more accurate budgets
Answer: B
Unit 15: Standard Costing: An Overview
- Standard costing is primarily used for:
- A) Determining taxes
- B) Setting performance benchmarks
- C) Preparing financial statements
- D) Measuring actual profitability
Answer: B
- A standard cost is defined as:
- A) The expected cost of a product or service
- B) The actual cost incurred in production
- C) The cost of raw materials used in production
- D) The cost of capital investments
Answer: A
- Which of the following is NOT a component of standard costing?
- A) Standard labor costs
- B) Standard overhead costs
- C) Standard capital expenditure
- D) Standard material costs
Answer: C
- The main objective of standard costing is to:
- A) Control and reduce the costs of production
- B) Increase the price of products
- C) Reduce taxes
- D) Eliminate accounting errors
Answer: A
- Which of the following is a primary benefit of standard costing?
- A) It provides a detailed report on every transaction
- B) It helps in budgeting and financial planning
- C) It eliminates the need for external audits
- D) It ensures financial statements are error-free
Answer: B
- The process of setting a standard cost involves the estimation of:
- A) Historical data only
- B) Expected costs under normal operating conditions
- C) Future market prices
- D) Actual costs incurred last year
Answer: B
- Standard labor cost is calculated by multiplying:
- A) Actual hours worked by the actual wage rate
- B) Standard hours allowed by the standard wage rate
- C) Standard hours allowed by the actual wage rate
- D) Actual hours worked by the standard wage rate
Answer: B
- Which of the following factors should be considered while setting standard material costs?
- A) Purchase price of materials
- B) Expected wastage
- C) Storage costs
- D) All of the above
Answer: D
- The standard overhead rate is determined by:
- A) Dividing total overhead costs by the actual activity level
- B) Using a standard rate based on expected activity levels
- C) Based on historical overhead expenses
- D) Using actual data from previous periods
Answer: B
- A standard cost for a product is based on:
- A) Industry benchmarks
- B) The best possible production conditions
- C) Both historical and expected costs
- D) Actual cost incurred during production
Answer: C
- The difference between the actual cost and the standard cost is referred to as a:
- A) Profit margin
- B) Cost variance
- C) Break-even point
- D) Contribution margin
Answer: B
- Which of the following is a key type of variance in standard costing?
- A) Material cost variance
- B) Price variance
- C) Efficiency variance
- D) All of the above
Answer: D
- The material price variance is calculated by comparing:
- A) Actual price with standard price for the actual quantity purchased
- B) Standard price with actual price for the standard quantity purchased
- C) Actual quantity with standard quantity
- D) Both A and B
Answer: A
- The labor efficiency variance measures:
- A) The difference between actual labor hours worked and standard labor hours allowed
- B) The difference between actual wages paid and standard wages
- C) The overall cost of labor
- D) None of the above
Answer: A
- The overhead variance is divided into which two components?
- A) Fixed overhead variance and variable overhead variance
- B) Sales price variance and cost price variance
- C) Contribution margin variance and profit variance
- D) Revenue variance and cost variance
Answer: A
- Material cost variance is the difference between:
- A) Standard material costs and actual material costs
- B) Actual material usage and standard material usage
- C) The price of materials in different regions
- D) Both A and B
Answer: D
- The formula for calculating material price variance is:
- A) (Standard Price – Actual Price) × Actual Quantity
- B) (Actual Price – Standard Price) × Standard Quantity
- C) (Actual Quantity – Standard Quantity) × Standard Price
- D) (Standard Price – Actual Price) × Standard Quantity
Answer: D
- Which of the following could cause a material price variance?
- A) Change in supplier pricing
- B) Lower than expected material wastage
- C) Improved worker productivity
- D) A decrease in the quantity of materials used
Answer: A
- Material usage variance is caused by:
- A) Inefficiency in production processes
- B) A difference in the cost of materials
- C) External market fluctuations
- D) Employee skill level
Answer: A
- A favorable material cost variance indicates that:
- A) Actual costs were higher than expected
- B) Actual usage was higher than standard usage
- C) The company spent less on materials than planned
- D) Production volume was higher than expected
Answer: C
- Labor efficiency variance arises when:
- A) Actual labor hours differ from the standard labor hours for the actual output
- B) The hourly wage rate differs from the standard rate
- C) Labor is outsourced
- D) There are changes in overhead rates
Answer: A
- Labor rate variance is the difference between:
- A) Actual labor hours worked and standard labor hours allowed
- B) Actual wage rates and standard wage rates for the actual hours worked
- C) Actual labor cost and standard labor cost
- D) The number of workers and the labor hours required
Answer: B
- A favorable labor rate variance indicates that:
- A) The company paid more per hour than the standard rate
- B) The company paid less per hour than the standard rate
- C) The actual labor hours worked were higher than standard
- D) The production process was inefficient
Answer: B
- The total labor variance is calculated by:
- A) Adding labor rate variance and labor efficiency variance
- B) Subtracting labor efficiency variance from labor rate variance
- C) Subtracting actual labor costs from standard labor costs
- D) Dividing labor costs by output
Answer: A
- Which of the following can cause an adverse labor efficiency variance?
- A) Skilled labor using more time than expected
- B) The use of higher-quality materials
- C) Better equipment being used
- D) Higher-than-expected production
Answer: A
- The variable overhead efficiency variance is the difference between:
- A) Actual variable overhead costs and standard variable overhead costs
- B) The actual hours worked and standard hours allowed for the actual output
- C) Actual fixed overhead costs and expected fixed overhead costs
- D) Both A and B
Answer: B
- The fixed overhead volume variance is caused by:
- A) A difference in the actual production volume and the expected production volume
- B) An increase in the cost of variable inputs
- C) Changes in wage rates
- D) Fluctuations in material prices
Answer: A
- If the actual overhead costs exceed the standard overhead costs, this results in:
- A) A favorable variance
- B) An unfavorable variance
- C) No variance
- D) A cost saving
Answer: B
- Which of the following is NOT typically included in factory overhead costs?
- A) Depreciation on machinery
- B) Wages of factory workers
- C) Rent of factory building
- D) Indirect materials
Answer: B
- Standard costing can be most effective when used in:
- A) A non-manufacturing environment
- B) A highly dynamic and volatile market
- C) A stable production environment with repetitive processes
- D) The service industry only
Answer: C
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