Accountancy and Auditing-I MCQs - 2025

Not-for-profits often use a Receipts and Payments Account (cash-based summary) alongside an Income and Expenditure Account (akin to an Income Statement). Profit-oriented statements (A, B, D) are not primary for NFPs.

Reversing entries are optional and are made at the beginning of a new accounting period to cancel out adjusting entries from the previous period (e.g., accrued expenses). This avoids double-counting and simplifies record-keeping.

Contribution margin (selling price – variable cost) indicates profitability per unit. When resources (e.g., labor, materials) are limited, prioritizing high-margin products maximizes profit. Demand (A) and risk (C) must still be considered.

Responsibility accounting assigns accountability for controllable costs (e.g., departmental expenses). Uncontrollable costs (A) (e.g., corporate overhead) are excluded.

Break-even units = Fixed Costs / (Selling Price – Variable Cost) = $200,000 / ($50 – $20) = 6,666.67. Rounded to the nearest option: 6,000.

Make-or-buy decisions focus on avoidable costs (e.g., variable production costs) and outsourcing quotes. Fixed costs (A) and historical costs (B) are irrelevant unless they change.

Job order costing tracks costs for each custom job (e.g., construction, custom manufacturing). Process costing (A) is for homogeneous products, while ABC (B) allocates overheads based on activities.

Comparability requires transparency. Even if methods differ, users can adjust their analysis if the depreciation policies are fully disclosed in the financial statements. Regulatory frameworks (A) or IFRS (C) alone do not ensure comparability without disclosure.

ZBB starts from a "zero base," requiring justification for every expense, unlike traditional budgeting (A, B). Past costs may inform but do not dictate allocations (D).

The Appropriation Account shows how government funds are allocated and spent, reflecting budgetary compliance. It is specific to public sector entities.

The excess over par value is called "share premium" (or additional paid-in capital) and is recorded separately from the par value of shares. It is part of shareholders’ equity, not revenue (D) or retained earnings (A).

Closing entries are made at the end of an accounting period to reset temporary accounts (e.g., revenues, expenses) to zero and transfer their balances to permanent accounts like retained earnings. The accounting cycle begins with transactions, not financial statements (A). Adjusting entries are mandatory (B), and the post-closing trial balance excludes temporary accounts (D).

Marginal costing focuses on variable costs to make short-term decisions (e.g., pricing, product mix). It excludes fixed costs, which are sunk in the short run.

Predictive value means the information helps users forecast future outcomes (e.g., estimating future cash flows). It is a component of relevance in financial reporting.

Relevance is a fundamental qualitative characteristic of accounting information. It must be capable of making a difference in decisions (e.g., predicting future performance or confirming past evaluations). Free from error (A) relates to reliability, comparability (C) is a separate characteristic, and evidence (D) relates to verifiability.

Upon incorporation, partners’ capital accounts are closed, and their equity is exchanged for shares in the new company. The company issues stock to reflect ownership.

Over-applied overhead occurs when allocated overhead (based on estimates) exceeds actual overhead costs. The difference is adjusted in cost accounting.

Owner’s withdrawals (drawings) reduce the owner’s equity and are recorded in the Statement of Owner’s Equity. They are not expenses (A) or liabilities (B).

Goodwill is an intangible asset because it represents the value of a company's brand, customer relationships, and reputation, which cannot be physically touched but provide future economic benefits. It is recorded when a business is acquired for more than its fair market value.

NFPs prioritize stewardship of funds and mission achievement, not profit maximization. Their reports emphasize accountability to donors and stakeholders.