case-based Assertion–Reason (A–R) questions with US GAAP & basic financial concepts topics. These are designed with conceptual depth.
🔷 Case-Based Assertion–Reason Questions (with Answers)
📌 Instructions:
Choose the correct option:
A. Both Assertion (A) and Reason (R) are true, and R is correct explanation
B. Both A and R are true, but R is NOT correct explanation
C. A is true, R is false
D. A is false, R is true
🧾 1. Financial Statements Components
Case:
ABC Ltd. prepares Income Statement, Balance Sheet, and Statement of Equity.
Assertion (A): Income Statement shows financial position at a point in time.
Reason (R): Balance Sheet shows assets, liabilities, and equity at a specific date.
✅ Answer:
💰 2. Equity vs Debt
Case:
XYZ Ltd. raises funds via equity shares and debentures.
Assertion (A): Equity shareholders bear higher risk than debt holders.
Reason (R): Debt holders have fixed claim on profits and priority in liquidation.
✅ Answer:
📉 3. Depreciation Methods
Case:
Company uses Straight Line Method (SLM).
Assertion (A): Depreciation under SLM remains constant every year.
Reason (R): Asset usage is assumed uniform over its useful life.
✅ Answer:
📊 4. Revenue Recognition (ASC 606)
Case:
A software company delivers product and recognizes revenue.
Assertion (A): Revenue is recognized when control transfers to customer.
Reason (R): Revenue recognition depends on cash receipt.
✅ Answer:
📦 5. Current Assets & Liabilities
Case:
Firm classifies inventory as current asset.
Assertion (A): Inventory is a current asset.
Reason (R): It is expected to be converted into cash within operating cycle.
✅ Answer:
📘 6. Proprietary Theory
Case:
Owner views business as extension of self.
Assertion (A): Proprietary theory treats owner’s equity as residual interest.
Reason (R): Assets – Liabilities = Owner’s Equity.
✅ Answer:
⚖️ 7. Capital Maintenance
Case:
Company measures profit after maintaining capital.
Assertion (A): Profit arises only after capital is maintained.
Reason (R): Capital maintenance ensures real income measurement.
✅ Answer:
📈 8. Trading on Equity
Case:
Firm uses debt to increase return on equity.
Assertion (A): Trading on equity increases EPS when ROI > cost of debt.
Reason (R): Debt is cheaper than equity in all situations.
✅ Answer:
📉 9. Financial Leverage
Case:
Company has high debt.
Assertion (A): Financial leverage increases variability of EPS.
Reason (R): Fixed interest obligations amplify returns.
✅ Answer:
⚠️ 10. Debt Trap
Case:
Firm continuously borrows to repay old loans.
Assertion (A): Debt trap occurs due to excessive borrowing.
Reason (R): New debt is used to repay existing debt.
✅ Answer:
🏦 11. Treasury Stock
Case:
Company buys back its own shares.
Assertion (A): Treasury stock reduces shareholders’ equity.
Reason (R): It is shown as an asset in Balance Sheet.
✅ Answer:
💵 12. Dividend Types
Case:
Company declares stock dividend.
Assertion (A): Stock dividend increases total equity.
Reason (R): It transfers retained earnings to share capital.
✅ Answer:
📊 13. Operating Cycle
Case:
Manufacturing firm converts inventory into cash.
Assertion (A): Operating cycle includes inventory + receivable period.
Reason (R): It measures liquidity efficiency.
✅ Answer:
📚 14. Annual Report Content
Case:
Company publishes annual report.
Assertion (A): Annual report includes financial statements and auditor’s report.
Reason (R): It helps stakeholders make decisions.
✅ Answer:
📉 15. Calls in Arrears
Case:
Shareholder fails to pay call money.
Assertion (A): Calls in arrears reduce paid-up capital.
Reason (R): It represents unpaid portion of subscribed capital.
✅ Answer:
📊 16. Issued vs Paid-up Capital
Case:
Company issued 10,000 shares, partly paid.
Assertion (A): Paid-up capital ≤ Issued capital.
Reason (R): Shareholders may not pay full amount.
✅ Answer:
📉 17. Financial Risk of Equity Shareholders
Case:
Company increases debt.
Assertion (A): Equity shareholders face higher financial risk.
Reason (R): Debt increases fixed obligations.
✅ Answer:
📊 18. Preemptive Rights
Case:
Company issues new shares.
Assertion (A): Preemptive right protects ownership percentage.
Reason (R): Existing shareholders get first right to subscribe.
✅ Answer:
📉 19. Depreciation (Reducing Balance)
Case:
Company uses diminishing balance method.
Assertion (A): Depreciation expense decreases over time.
Reason (R): It is calculated on reduced book value.
✅ Answer:
🧾 20. Balance Sheet Equation
Case:
Firm reports assets and liabilities.
Assertion (A): Assets = Liabilities + Equity.
Reason (R): It represents dual aspect concept.
✅ Answer:
📊 21. Equity Statement
Case:
Statement of changes in equity prepared.
Assertion (A): It shows movement in equity during the period.
Reason (R): It includes dividends and retained earnings changes.
✅ Answer:
📈 22. Operating Leverage
Case:
Company has high fixed costs.
Assertion (A): Operating leverage magnifies EBIT changes.
Reason (R): Fixed costs remain constant regardless of output.
✅ Answer:
🧮 23. Residuary Theory
Case:
Enterprise focuses on equity shareholders.
Assertion (A): Equity shareholders are residual claimants.
Reason (R): They receive income after all obligations.
✅ Answer:
📉 24. Income Statement
Case:
Firm reports revenues and expenses.
Assertion (A): Income Statement measures profitability.
Reason (R): It records assets and liabilities.
✅ Answer: C
🧾 25. Board vs Shareholders
Case:
Corporate governance structure.
Assertion (A): Board of Directors manages company.
Reason (R): Shareholders appoint directors.
✅ Answer:
