Test: Financial Statements - II - Commerce MCQ

Explanation:

The correct answer is B: Revenue Expenditure.

Here is a detailed explanation:

When a computer is purchased for resale, it is considered a revenue expenditure. Revenue expenditures are expenses incurred in the normal course of business operations and are directly related to generating revenue.

More specifically, here's why the other options are not correct:

A: Capital expenditure: Capital expenditures are investments made in assets that provide long-term benefits to a business. Computers purchased for re-sale are not considered long-term assets as they are intended to be sold to customers.

C: Deferred Revenue Expenditure: Deferred revenue expenditure refers to expenses that are incurred in the present but are allocated to future periods. This is not applicable to the purchase of computers for re-sale as the expenses are recognized in the current period.

D: None of these: As explained above, the correct answer is B: Revenue Expenditure.

Therefore, computers purchased for re-sale are classified as revenue expenditures.

Direct Expenses are entered in Trading Account.

• Direct expenses are those expenses that are incurred directly in the production of goods or services.


• These expenses are directly linked to the cost of goods sold or the services provided.


• Direct expenses are usually variable in nature and vary with the level of production or services rendered.


• Examples of direct expenses include raw materials, direct labor, packaging costs, freight charges, etc.


• Direct expenses are recorded in the Trading Account, which is a part of the financial statements.


• The Trading Account is prepared to determine the gross profit or loss of a business.


• It includes all the direct expenses and direct revenues related to the sale of goods or services.


• The formula to calculate the gross profit is:




• Gross Profit = Sales - Cost of Goods Sold (which includes direct expenses)




• By recording direct expenses in the Trading Account, businesses can accurately assess their profitability.


• Direct expenses are not entered in the Profit & Loss Account or the Balance Sheet.


• The Profit & Loss Account includes indirect expenses and revenues, while the Balance Sheet shows the financial position of a business.

In conclusion, direct expenses are entered in the Trading Account as they are directly related to the cost of goods sold or services provided.

Classification of revenue from sales of goods and services:
Revenue from sales of goods and services is classified as an operating inflow, as it is a core activity of the business and directly contributes to the generation of revenue. Here is a detailed explanation:
1. Operating inflow:
- Revenue from sales of goods and services is a part of the operating activities of a business.
- It represents the cash inflows resulting from the primary operations of the business.
- This revenue is generated from the sale of products or provision of services to customers.
2. Operating outflow:
- Operating outflows refer to the cash outflows associated with the day-to-day operations of the business.
- These include expenses such as salaries, rent, utilities, and other costs incurred in running the business.
- Revenue from sales of goods and services is not considered an operating outflow but rather an inflow.
3. Investing inflow:
- Investing inflows are cash inflows associated with investments in assets or other businesses.
- Revenue from sales of goods and services does not fall under this category, as it is directly related to the core operations of the business.
4. Financing inflow:
- Financing inflows are cash inflows resulting from activities related to raising capital or obtaining financing.
- Revenue from sales of goods and services is not considered a financing inflow, as it is generated from the primary operations of the business rather than from external sources of financing.
In conclusion, revenue from sales of goods and services is classified as an operating inflow, as it represents the cash inflows resulting from the core activities of the business.

Explanation:
Fictitious assets are assets that do not have a physical existence or do not represent any legal claim. They are intangible in nature and cannot be used directly to generate revenue. An example of fictitious assets is:
C:

Advertising suspense

- Fictitious assets are created when expenses are incurred for future benefits or when there are unexpired costs that need to be written off over a period of time.
- Advertising suspense refers to the unamortized amount of advertising expenses that have been incurred but have not yet been charged to the profit and loss account.
- It represents the unexpired portion of advertising expenses and is considered a fictitious asset because it does not have a physical presence and cannot be directly converted into cash.
- As the advertising expenses are incurred, the amount is initially recorded as an asset on the balance sheet under the head "Advertising suspense" and is gradually written off over the period of time to the profit and loss account.
Other options:
A:

Building

- Buildings are tangible assets and have a physical existence. They can be used to generate revenue and are not considered fictitious assets.
B:

Bill receivable

- Bill receivable represents a legal claim on a customer for the payment of the bill amount. It is a tangible asset and does not fall under the category of fictitious assets.
D:

Cash

- Cash is a tangible asset that can be directly used to generate revenue. It is not considered a fictitious asset.
Therefore, the correct answer is C:

Advertising suspense

as it is an example of a fictitious asset.

Drawings are deducted from the capital to reduce the liability of the company and not shown on the assets side. In accounting, drawings are the amount of cash or goods that a business owner takes out for personal use. Drawings are also known as withdrawals. When an owner withdraws goods from the business, it is considered a reduction in the inventory of goods. Drawings are deducted from capital to reduce the company's liability. Drawings are not shown on the assets side. 

The items included in the adjustment of net income to obtain cash flow from operating activities are:
- Depreciation expense for the period.
- The change in deferred taxes.
- The amount by which equity income recognized exceeds cash received.
Explanation:
When preparing the statement of cash flows using the indirect method, net income is adjusted to obtain cash flow from operating activities. This adjustment is necessary to reflect the actual cash inflows and outflows related to the operating activities of the business. The following items are included in this adjustment:
1. Depreciation expense for the period:
- Depreciation is a non-cash expense that reduces the carrying value of long-term assets over their useful lives.
- It is added back to net income because it does not involve an actual outflow of cash.
2. The change in deferred taxes:
- Deferred taxes represent the difference between the tax expense recorded in the income statement and the actual taxes payable.
- Any change in the deferred taxes during the period is added or subtracted to adjust net income to cash flow from operating activities.
3. The amount by which equity income recognized exceeds cash received:
- Equity income is the share of profits or losses from an equity investment accounted for under the equity method.
- If the equity income recognized exceeds the cash received during the period, the excess amount is added back to net income.
Therefore, all of the above items (A, B, and C) are included in the adjustment of net income to obtain cash flow from operating activities.

There are mainly three types of accounts in accounting: Real, Personal and Nominal accounts. Personal accounts are classified into three subcategories: Artificial, Natural and Representative.

A trademark is an intangible asset legally preventing others from using a business's logo, name, or other branding. As a trademark are used to identify a specific type of business or service, they are important for businesses that want to protect their branding. A trademark's value for accounting purposes equals what its cost to acquire. A trademark is an intangible asset, as it's nonphysical item granting a business the legal right to exclusively use a logo or other item. This means it is reported on a business's balance sheet.

 

Profit earn through normal activities of business:
There are different types of profits that a business can earn through its normal activities. The options provided are:
A. Operating profit:
- Operating profit is the profit earned from the core operations of a business.
- It is calculated by deducting the operating expenses from the gross profit.
- It reflects the profitability of a company's main business activities.
B. Net profit:
- Net profit is the final profit earned by a business after deducting all expenses, including operating expenses, non-operating expenses, and taxes, from the total revenue.
- It represents the overall profitability of the company.
C. Gross profit:
- Gross profit is the profit earned by a business after deducting the cost of goods sold (COGS) from the total revenue.
- It indicates the profitability of the company's sales activities.
D. Manufacturing profit:
- Manufacturing profit refers specifically to the profit earned in the manufacturing sector.
- It represents the difference between the cost of manufacturing a product and the revenue generated from its sale.
Conclusion:
The profit earned through normal business activities can be classified into different types, including operating profit, net profit, gross profit, and manufacturing profit. In the given options, the correct answer is "A. Operating profit."

Goodwill is a Fixed Asset

Goodwill is an intangible asset that represents the reputation, brand value, customer loyalty, and other non-physical assets of a business. It is not a current asset or a fictitious asset, but rather a fixed asset. Here's why:

• Definition: Goodwill is the value of an established business beyond its tangible assets, such as its buildings, equipment, and inventory.


• Long-term Nature: Goodwill is expected to provide benefits to the business over a long period, typically more than one year.


• Non-physical and Intangible: Goodwill cannot be physically touched or seen, but it has value due to factors like brand recognition, customer relationships, and intellectual property.


• Recorded in the Balance Sheet: Goodwill is recorded as a fixed asset in the balance sheet of a company, under the non-current assets section.


• Amortization: Unlike other fixed assets, such as buildings or machinery, goodwill is not amortized. Instead, it is tested for impairment regularly.


• Acquisition and Valuation: Goodwill is usually acquired when a company purchases another business for a price higher than the fair value of its net identifiable assets.

In conclusion, goodwill is classified as a fixed asset because it represents the long-term value and intangible aspects of a business. It is an important asset that contributes to the overall value and success of a company.

Limitation common to both the current and quick ratio:

Accounts receivable may not be truly liquid:

- Both the current ratio and quick ratio include accounts receivable in their calculations.
- Accounts receivable represent the amount of money owed to a company by its customers for goods or services sold on credit.
- While accounts receivable are considered assets, they may not be truly liquid because there is a risk of customers defaulting on their payments or delaying payment.
- In case of a liquidity crisis or cash flow issues, it may be difficult for a company to convert accounts receivable into cash quickly.
- This limitation is common to both the current ratio and quick ratio, as both ratios consider accounts receivable as part of their calculations.
- It affects the accuracy of these ratios in assessing a company's short-term liquidity position.

Therefore, the correct answer is A: Accounts receivable may not be truly liquid.