Below are 40 high-quality MCQs with answers on the requested topics from Financial Statements & Accounting Concepts, covering current vs non-current assets, EPS, diluted EPS, dividends, stock dividend vs stock split, trading on equity, debt trap, profitability/liquidity/solvency ratios, leverage, off–balance sheet financing, fraud, going concern, concepts & principles, etc.
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✅ MCQs with Answers
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1. Current Assets vs Non-Current Assets
Q1. Which of the following is NOT a current asset?
A. Inventory
B. Prepaid expenses
C. Trade receivables
D. Trademark
Answer: D — Trademark (intangible and non-current).
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Q2. A non-current asset is expected to be held for:
A. Less than 3 months
B. Less than 12 months
C. More than 12 months
D. Only until next operating cycle
Answer: C — More than 12 months
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Q3. Which of the following will be classified as a current asset even if its maturity exceeds 12 months?
A. Long-term fixed deposits
B. Trade receivable from credit sales
C. Land held for sale in 2 years
D. Long-term loan to subsidiary
Answer: B — Trade receivable (part of working capital cycle).
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2. Earnings Per Share (EPS) & Diluted EPS
Q4. Basic EPS is calculated as:
A. Net income / Weighted average shares
B. Net income / Closing shares
C. Net income – dividends / Equity
D. Operating income / Shares
Answer: A
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Q5. Diluted EPS incorporates:
A. Only existing equity shares
B. Only warrants
C. Potential shares from convertible instruments
D. Only treasury stock
Answer: C
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Q6. Which instrument reduces diluted EPS?
A. Anti-dilutive options
B. Convertible preference shares
C. Anti-dilutive warrants
D. Restricted stock that increases EPS
Answer: B — Convertible preference shares increase denominator
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3. Dividends: Annual vs Interim
Q7. Interim dividend is declared by:
A. Shareholders only
B. Board of Directors
C. Statutory auditor
D. Government authority
Answer: B
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Q8. Which statement is correct?
A. Annual dividend is paid mid-year
B. Interim dividend is final
C. Annual dividend is declared after year-end financial statements
D. Interim dividend is always higher
Answer: C
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4. Stock Dividend vs Stock Split
Q9. A stock split results in:
A. Increase in paid-up capital
B. Increase in number of shares; same total equity
C. Cash outflow
D. Increase in retained earnings
Answer: B
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Q10. A stock dividend results in:
A. Cash outflow
B. Transfer from retained earnings to share capital
C. Decrease in shareholders’ equity
D. No accounting entry
Answer: B
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5. Trading on Equity & Debt Trap
Q11. Trading on equity refers to:
A. Raising equity to increase EPS
B. Using debt to increase EPS
C. Using preference shares to reduce EPS
D. None
Answer: B
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Q12. A company enters a debt trap when:
A. Profit decreases
B. Depreciation increases
C. New loans are taken to pay old loans
D. Working capital increases
Answer: C
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6. Profitability, Liquidity & Solvency
Q13. Profitability ratio indicates:
A. Short-term paying ability
B. Long-term financial health
C. Ability to generate earnings
D. Ability to issue shares
Answer: C
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Q14. Solvency ratio measures:
A. Ability to pay dividends
B. Long-term debt repayment ability
C. Market share
D. Inventories turnover
Answer: B
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Q15. Liquidity ratio excludes:
A. Inventory
B. Cash
C. Bank balance
D. Marketable securities
Answer: A — Inventory is excluded in quick ratio
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7. Operating Leverage & Financial Leverage
Q16. Degree of operating leverage arises due to:
A. Debt financing
B. Fixed operating costs
C. Variable operating costs
D. Dividends
Answer: B
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Q17. Financial leverage exists when the firm uses:
A. Equity only
B. Working capital loans
C. Debt or preference capital
D. Depreciation
Answer: C
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Q18. High operating leverage means the firm has:
A. High variable costs
B. Low break-even point
C. High fixed costs
D. No contribution margin
Answer: C
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8. Off-Balance Sheet Financing
Q19. Off-balance-sheet financing includes:
A. Capital leases
B. Operating leases
C. Internal accruals
D. Depreciation
Answer: B (under old GAAP classification)
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Q20. Purpose of off-balance-sheet financing is to:
A. Improve liquidity
B. Hide liabilities
C. Increase equity capital
D. Reduce interest cost
Answer: B
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9. Accounting Manipulation & Fraud
Q21. Window dressing is:
A. Ethical accounting
B. Manipulation of accounts to show better financial position
C. Amortization policy
D. Tax compliance
Answer: B
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Q22. Recording fake sales is an example of:
A. Error of omission
B. Accounting fraud
C. Depreciation error
D. Capitalization
Answer: B
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Q23. Cutter Company delays recording expenses to next year. This is:
A. conservatism
B. manipulation
C. realization
D. prudence
Answer: B
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10. Going Concern
Q24. Going concern assumes:
A. Business will liquidate in 1 year
B. Business will continue indefinitely
C. Business stops operations
D. Assets valued at NRV only
Answer: B
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Q25. Going concern may fail if:
A. Revenue increases
B. Cash flow declines persistently
C. Depreciation is high
D. Inventory turnover rises
Answer: B
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11. Money Measurement Concept
Q26. Money measurement concept states:
A. Only monetary transactions are recorded
B. All events must be recorded
C. Non-monetary events prioritized
D. Inflation-adjusted accounts required
Answer: A
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Q27. Which item will not be recorded under money measurement?
A. Purchase of machinery
B. Employee loyalty
C. Rent paid
D. Sales revenue
Answer: B
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12. Consistency Principle
Q28. Consistency principle means:
A. Changing methods every year
B. Same accounting methods must be used over periods
C. Management free to change policy without disclosure
D. Switching methods to increase profits
Answer: B
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Q29. Consistency ensures:
A. True and fair view
B. Comparability over years
C. Faster audits
D. Lower tax
Answer: B
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13. Realisation Concept
Q30. Revenue is recognised when:
A. Cash is collected
B. Goods are produced
C. Risk & rewards transferred
D. Order is received
Answer: C
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Q31. Under realisation principle, credit sales are recorded:
A. When cash received
B. Immediately when goods delivered
C. Only when cheque clears
D. Never
Answer: B
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14. Dual Aspect Concept
Q32. Dual aspect states:
A. Only assets recorded
B. Every transaction has two effects
C. Transactions have one entry
D. Liabilities ignored
Answer: B
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Q33. Buying machinery for cash impacts:
A. Asset increases; liability increases
B. Asset increases; asset decreases
C. Expense increases; liability increases
D. No effect
Answer: B
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15. Additional Mixed MCQs
Q34. Earnings management means:
A. Legal, ethical enhancement of earnings
B. Deliberate manipulation within GAAP boundaries
C. Tax fraud
D. Insider trading
Answer: B
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Q35. A company with high leverage will have:
A. Lower interest obligation
B. Higher risk & higher EPS volatility
C. No debt
D. Lower returns to shareholders
Answer: B
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Q36. Inventory is valued at:
A. Market price
B. Cost or NRV whichever higher
C. Cost or NRV whichever lower
D. Selling price
Answer: C
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Q37. Capitalizing an expense results in:
A. Lower profit
B. Higher profit
C. No effect
D. Lower assets
Answer: B (expense avoided)
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Q38. Which affects operating leverage?
A. Interest expense
B. Fixed operating cost
C. Dividend
D. Depreciation
Answer: B
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Q39. Which affects financial leverage?
A. Interest expense
B. Contribution margin
C. Fixed operating expenses
D. Variable cost
Answer: A
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Q40. If EPS decreases due to conversion of debentures, the instrument is:
A. Anti-dilutive
B. Dilutive
C. Equity-neutral
D. Not issued
Answer: B
