Balance sheet statement MCQ Quiz - Objective Question with Answer for Balance sheet statement - Download Free PDF

The incorrect option is At the end of the period, the income and expenditure account balances are transferred to receipts and payments accounts.

Key Points

• In the receipts and payments account, both capital and revenue receipts and payments are recorded. So, option 2 is contextually correct.
• Since the receipts and payments account is nothing but a cashbook without a date column, its balance denotes the difference between the cash received and the amount paid. So, option 3 is also contextually correct.
• Income and expenses, in the case of not for profit organization, is prepared the same way as to profit and loss accounts in a firm. The expenses are debited and incomes are credited. Therefore, option 4 is also contextually correct.
• At the end of the period, the income and expenditure account balances are transferred to the Balance sheet and not in receipts and payments. Therefore, option 1 is incorrect.

The correct answer is purchase of stationary.

Key Points

•  In the trial balance, accounts that usually have a debit balance are those representing assets, expenses, and losses.
• "Purchase of stationary" is an expense account. Expenses are costs incurred by a business, and they reduce the owner's equity.
• Therefore, the "Purchase of stationary" account will typically have a debit balance in the trial balance, as it reflects the total amount spent on stationery purchases during a specific accounting period.

Important PointsAccounting Balances:

• Debit (Dr) and Credit (Cr) are two fundamental terms in double-entry accounting.
• Debit represents an increase in assets or expenses and a decrease in liabilities, equity, or revenue.
• Credit represents an increase in liabilities, equity, or revenue and a decrease in assets or expenses.

Normal Balances:

• For different types of accounts, there are normal balances.
• Assets (like cash, inventory) typically have a debit (Dr) normal balance because they increase with debits.
• Liabilities (like loans, accounts payable) typically have a credit (Cr) normal balance because they increase with credits.
• Equity (like owner's capital) usually has a credit (Cr) normal balance.
• Expenses (like rent, utilities) typically have a debit (Dr) normal balance because they represent costs and reduce equity.
• Revenues (like sales, interest income) usually have a credit (Cr) normal balance because they increase equity.

Additional Information Trial Balance: A trial balance is a statement used to ensure that total debits equal total credits after posting transactions to the ledger.
If all entries are recorded correctly, the sum of all debit balances should equal the sum of all credit balances, resulting in a "balanced" trial balance.
However, some accounts, like expenses and assets, usually have debit balances, while others, like liabilities and equity, usually have credit balances.

Balancing Process: When errors occur, such as debiting an expense instead of crediting it, the trial balance won't balance.
To correct it, adjustments (journal entries) must be made. For example, if you accidentally debit an expense when you should have credited it, you'll need to make a correcting entry that credits the expense account.
The goal is to ensure that the fundamental accounting equation (Assets = Liabilities + Equity) remains balanced.

So, in the case of "Purchase of stationary," it's an expense account, and expenses normally have a debit balance because they reduce equity when incurred. If it's incorrectly credited, it will need a correcting entry that debits the expense account to bring the trial balance back into balance.

The correct answer is - Money market deposits for very short period

Key Points

• Money market deposits for very short period
  • Cash equivalents are short-term, highly liquid investments that are easily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.
  • Money market deposits for very short periods meet these criteria as they are typically highly liquid and have a short maturity period, making them readily convertible to cash.
  • Such deposits are considered safe and are widely accepted in financial markets as near-cash items.

Additional Information

• Cash-in-hand
  • This refers to physical currency held by the business and is classified as cash, not a cash equivalent.
• Preference shares matured after one year
  • These are considered long-term investments and do not qualify as cash equivalents due to their longer maturity period.
• Shares of unlisted companies
  • These are equity investments and are subject to market risk and liquidity constraints, thus not qualifying as cash equivalents.

Recording of wrong liability in the balance sheet results in the creation of the secret reserve.

Key PointsSecret Reserves - Every organization keeps a reserve to ensure the organization's financial stability. The reserve is typically recorded on the balance sheet at the conclusion of the accounting period. However, some companies fail to reveal their reserves in their balance sheets, resulting in the development of a secret reserve.

Methods of Secret Reserve Creation:

The following methods are used to build secret reserves:

1. Excess depreciation on fixed assets is shown.
2. Current assets are undervalued.
3. By entirely eliminating an asset from the company's accounts.
4. By exaggerating the value of liabilities.
5. By classifying the revenue as a liability.
6. By setting aside a large portion of the profit as a contingency fund for future events.

Additional Information

1. General Reserves - The term "general reserve" refers to the amount of profit set aside by a company in the form of reserves, or the earnings that the company wishes to save in order to meet future uncertainties, such as meeting contingencies, paying dividends, increasing working capital, offsetting future losses, and strengthening liquid resources, among other things.
2. Capital Reserves - A capital reserve is a line item in a company's balance sheet's equity section that represents cash on hand that can be utilized for future expenses or to cover capital losses. It is formed from a company's profit and is obtained from its accumulated capital surplus.
3. Revenue Reserves - The revenue reserve is a fund created from a company's profits generated over time from its operating activities and retained for the purpose of expanding the company's business or meeting future contingencies.

The correct answer is intangible asset.

Key Points

A Balance Sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time.

• It is key to both financial modelling and accounting.
• It can also be referred to as a statement of net worth or a statement of financial position.
• It adheres to an equation that equates assets with the sum of liabilities and shareholder equity.
• It takes into account the credit as well as debit balances of a company’s current and personal accounts.

As such, the balance sheet is divided into two sides (or sections).

• The left side of the balance sheet outlines all of a company’s assets.
• On the right side, the balance sheet outlines the company’s liabilities and shareholders’ equity.​ 

Important Points 

 Goodwill is an intangible asset.

• It is intangible because you cannot hold it in your hands or see it with your naked eyes.
• It is regarded as a fixed asset in accounting.
• It adds value to the business over an extended period of time.
• Items included in goodwill are proprietary or intellectual property and brand recognition, which are not easily quantifiable.

Additional Information

Fixed Assets

• ​It refers to long-term tangible assets that are used in the operations of a business.
• These assets are expected to last more than one year.
• Examples of fixed assets include land, machinery, vehicles, furniture, computer equipment, buildings, and other equipment.
• They are non-current assets on a company’s balance sheet.
• They're regarded as being illiquid in that they can't easily be converted into cash within a year.

The correct answer is ​(i), (iii) and (iv)

Key Points

• Liability: A liability is something (usually a sum of money) which a business enterprise owes to the outside parties. Liabilities are legal obligations of the organization to third parties. For Example- Bills payable, creditors, loans, etc
• Liability verification is just as crucial as asset verification. 

Important Points

Objectives of Liability Verification:

• To check whether liabilities exist or not.
• Liabilities are properly disclosed.
• Liabilities are properly valued.
• The obligation of the liability must be ensured.
• Liabilities are properly classified and presented in the Balance Sheet.

The correct answer is the allocation of cost of the asset as revenue during the useful life of the asset.

Key Points

•  The fall in the monetary value of an asset due to its constant use, wear and tear, obsolescence is termed as Depreciation. It is considered a yearly non-cash expense of a company.
• Depreciation in accounting only involves the allocation of the cost of the asset as revenue during the useful life of the asset. Depreciation represents how much of an asset's value has been used over the years of its life. 

The correct answer is Rs. 100000

Key Points

Goodwill Valuation: 

A well-established firm earns a good name in the market, builds trust with the customers, and has more business connections than a newly set up business. Thus, the monetary value of this advantage that a buyer is ready to pay is termed, Goodwill.

Capitalization Method:

Capitalization of Average Profits: Under this method, the value of goodwill is calculated by deducting the actual capital employed from the average profits' capitalized value on the normal return rate.

Formula: 

1. Goodwill = Super Profits x (100/ Normal Rate of Return)
2. Super Profit = Average Profit – Normal Profit
3. Normal Profit = Capital employed x Normal Rate of Return/100

Important Points

Given Information:

1. Capital employed = Rs. 150000
2. Average Profit = Rs. 50,000
3. The normal rate of profits = 20%

Working Note:

1. Normal Profit = Capital employed x Normal Rate of Return/100 = 150000x 20/100 =  30,000
2. Super Profit = Average Profit – Normal Profit = 50,000 – 30,000 = 20,000
3. Goodwill = Super Profit x (100/ Normal Rate of Return) =  20000 x 100/20 = 100000.

Therefore, Capital employed in a business is Rs. 150000.profits are Rs. 50000/-and the normal rate of profits is 20%. The amount of goodwill as per the capitalization method would be Rs. 100000

The correct answer is ​reserves and surplus

Key Points

• Outstanding Share Option: The share option outstanding is the difference between the market value and the issue price of shares granted to employees under the Employees Stock Option Scheme.
• For example, if employees are given shares for Rs 60 each, but the market price is Rs 100, the difference, or Rs 40, should be credited to this reserve.

Important Points

• As per Schedule III of the Companies Act 2013, Share Option Outstanding Account is shown under the subhead Reserves and Surplus under the head Shareholders’ Funds. 

The correct answer is Share capital.

• As per the format of the Balance sheet prescribed as per Schedule III of Companies act 2013, Calls unpaid will be shown under the heading of the Share capital of the balance sheet.

Important Points

• Schedule III of the Companies Act 2013, provides the format of financial statements of companies complying with Accounting Standards (AS) and Ind AS under its Division I and Division II respectively. Now Schedule III will apply to NBFC covered under Ind AS.

Current Assets:

• A current asset is an asset that a company holds and can be easily sold or consumed and further lead to the conversion of liquid cash.
• For a company, a current asset is an important factor as it gives them a space to use the money on a day-to-day basis and clear the current business expenses.
• In other words, the meaning of current assets can be explained as an asset that is expected to last only for a year or less is considered as current assets.

Types of Current Assets:

1. Cash and cash equivalent
2. Inventory/ Stock-in-trade
3. Ongoing projects
4. Pre-paid expenses
5. Account receivable/Payment
6. Marketable securities

The above mentioned are the obvious list of current assets that are taken into consideration to check the operation cycle of a company within one year.

Current Assets Formula:

Current assets=Cash+Cash Equivalents +Inventory+ Accounts Receivable+Market Securities+Prepaid Expenses+Other Liquid Assets

1. Fixed Asset: These are tangible or long-term assets that include buildings, land, fixtures, equipment, vehicles, machinery, and furniture.

Therefore, the term “current asset” does not include Furniture.

The correct answer is Rs. 36000

Key Points

Depreciation: The fall in the monetary value of an asset due to its constant use, wear and tear, obsolescence is termed as Depreciation. It is considered as a yearly non-cash expense of a company.

 
Value of machine at  1-1-11 (or at 31-12-10) = Rs. 26244 x (100/90) = 29160

Value of machine at  1-1-10 (or at 31-12-09) = Rs. 29160 x (100/90) = 32400

Value of machine at  1-1-09 (or at 31-12-08) = Rs. 32400 x (100/90) = 36000.

The cost of the machine on 1-1-09 was Rs. 36000

Important PointsExplanation:-

• The closing balance of machinery at the end of the year will be the opening balance of machinery at the beginning of the next year.
• The rate of depreciation is 10% which means that if the value of the machine at the starting of the year is 100%, it will become 90% (100%-10%) at the end of the year.
• To ascertain the value of the machine at the 1-1-09 using the value on 1-1-12, a reverse approach has to be followed.
• To arrive at the value of a machine at the starting of the year, the value at the end shall be multiplied by (100/90).

The correct answer is ​Insurance

Key Points

Insurance: Insurance means protection from financial losses. Insurance is an agreement between two parties that party 1 shall have to pay a certain amount at a specified time as a premium and in return Party 2 shall be liable to pay the losses incurred by Party 1 in the event of the happening of a certain event. An entity that provides insurance is known as an insurer.

Insurance does not reduce the cost of an asset that is insured. 

Additional Information

•  Constant use of assets tends to reduce the value of an asset as it causes wear and tears to the asset.
• An accident causes the value of an asset to reduce as it causes damage to the asset.
• Obsolescence means a condition when an asset's value reduces due to changes in fashion, outdated technology, availability of better substitutes etc.

The closing stock shown in the trial balance is disclosed in final accounts on the assets side of the balance sheet.

Key Points

• Closing Stock - The amount of inventory a company has on hand at the end of a reporting period is known as closing stock.
• Trial Balance - A trial balance is a bookkeeping or accounting report that shows the balances in each of an organization's general ledger accounts. (Accounts with no balance are commonly left from the list.) The debit balance amounts are listed in the "Debit balances" column, while the credit balance amounts are listed in the "Credit balances" column. These two columns' sum should be the same.

Additional Information

• Trading A/c - The trading account is the account that is prepared to assess the gross profit or loss of a business organization. It is the first step of a trade company's final accounting. All items of direct expenses and direct revenue for the current year are examined, but no things from the previous or subsequent years are.
• Profit and Loss A/c - A profit and loss (P&L) account display a company's annual net profit or loss. It is designed to determine a trader's net profit or loss. The profit and loss account is a part of the final accounts. A profit and loss account is used to calculate an enterprise's net income (performance outcome) for a certain year or period. This is the most important data to report for decision-making purposes.
• Balance Sheet - The balance sheet gets its name from the fact that it is made up of the ledger accounts' closing balances at the end of the year. It has two sides: the assets side (on the left) and the liabilities side (on the right). On the asset side, accounts with a debit balance are shown, while those with a credit balance are shown on the liabilities side, and the total of the two sides will accord.

Conclusion:

• Closing stock given in the trial balance has only one effect in financial statements which shows in the assets side of the balance sheet.
• Closing stock given in as an adjustment outside trial balance will have two effects in financial statements which are the credit side of the trading account and the assets side of balance sheet.

The Correct Answer is Part I of Schedule III

Key PointsBalance Sheet: A balance sheet is a financial statement of a company that represents the values of its assets, liabilities, and Shareholder's Equity at a specific time. It basically represents the financial position of a company.

The guidelines and pro format of preparation of the balance sheet of a company are defined under Schedule III Section 129 of Companies Act 2013. 

Important PointsPreparation of the balance sheet of insurance company, banking company, company engaged in generation of supply of electricity are NOT included in Schedule III of Companies Act 2013.

• Preparation of balance sheet of an insurance company is defined in Part II of the First Schedule of Insurance Act, 1938.
• Preparation of balance sheet of banking company third schedule of Banking Regulation Act, 1949
• Preparation of balance sheet of a company engaged in generation or supply of electricity is defined in 6th and 7th Schedules of Electricity Supply Act, 1948.