Test: Financial Statements Of Sole - 1 - Commerce MCQ

Financial statements is the final stage in preparing final accounts. It is prepared to know profitability of the business and is prepared at the end so it is called as final accounts.

The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

The income statement is one of three statements used in both corporate finance (including financial modeling) and accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit, in a coherent and logical manner.

Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Financial statements include:

• Balance sheet
• Income statement
• Cash flow statement.

Discount received will appear in profit & loss account statement credit side, discount received by the buyer when seller allow discount. Generally discount allowed by the supplier when transaction happened on credit basis, such as trade discount, early payment discounts and high volume purchase discounts.

Fixed assets can include buildings, computer equipment, software, furniture, land, machinery, and vehicles. For example, if a company sells produce, the delivery trucks it owns and uses are fixed assets.

Explanation:
 

• Expenses for obtaining a license: This is an example of a capital expenditure as it involves acquiring a license that will provide future benefits to the business.


• Initial expenditure for acquiring patent right: This is also an example of a capital expenditure as it involves acquiring a right that will provide future benefits to the business.


• Depreciation on fixed assets: This is not an example of a capital expenditure. Depreciation is the allocation of the cost of a fixed asset over its useful life, it is not an initial expenditure for acquiring an asset.


 

Therefore, the correct answer is B: Initial expenditure for acquiring patent right.

Revenue Expenditure means:
A:

The expenditure which is incurred for the day to day running of the business.

- Revenue expenditure refers to the expenses that are incurred in the normal course of business operations on a regular basis.
- These expenses are essential for maintaining the business and generating revenue.
- Examples of revenue expenditures include salaries and wages, rent, utility bills, raw materials, advertising expenses, and maintenance costs.
- These expenses are typically recurring and are deducted from the revenue generated in the same accounting period.
- Revenue expenditures are recorded on the income statement and are considered as operating expenses.
B:

The amount which is incurred in acquiring or improving the value of fixed assets.

- This statement is incorrect. The expenditure incurred in acquiring or improving the value of fixed assets is known as capital expenditure, not revenue expenditure.
- Capital expenditure is a long-term investment in fixed assets such as land, buildings, machinery, and equipment.
- Unlike revenue expenditures, capital expenditures are not deducted from revenue in the same accounting period but are capitalized and recorded as assets on the balance sheet.
- These expenditures are typically incurred to enhance the productive capacity or efficiency of the business and are not considered as day-to-day operational expenses.
C:

Both

- This statement is incorrect. Revenue expenditure and capital expenditure are two distinct types of expenditures with different characteristics and accounting treatment.
D:

None

- This statement is incorrect. Revenue expenditures exist and are an essential part of day-to-day business operations.

An expenditure which results in the acquisition of permanent asset which is intended to be permanently used in the business for the purpose of earning revenue is capital expenditure. 

It is the money spent by a business organization on acquiring or maintaining fixed assets such as land, building and equipment. 

In business, Deferred Revenue Expenditure is an expense which is incurred while accounting period. For example, revenue used for advertisement is deferred revenue expenditure because it will keep showing its benefits over the period of two to three years.

► Capital receipts can be found in the balance sheet.

► Revenue receipts can be found in the income statement. 

► Capital receipts either reduce the assets of the company or create liability for the company.