CUET US Accountancy Booster Test 2 Preparation and Methods -

🚀

CUET UG Accountancy Booster Test 1 Preparation and Methods

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 1 Preparation and Methods

1 / 20

QUESTION 1 OF 20

What primary advantage does the Direct Method provide that the Indirect Method lacks?

Answer Review

1 What primary advantage does the Direct Method provide that the Indirect Method lacks?

A It is simpler to calculate starting from net profit.

B It provides information which is useful in estimating future cash flows.

C It eliminates the need to record depreciation.

D It is legally mandatory for all small-scale enterprises.

💡 Short Explanation

The Direct Method reports actual cash receipts and cash payments. It provides more transparent information regarding cash movements. This helps users estimate future cash flows more accurately.

✅ Correct Answer Explanation

Under the Direct Method, major classes of gross cash receipts and gross cash payments are separately disclosed. This enables investors, creditors, and management to better understand actual cash movements and predict future cash flows. Hence, the Direct Method provides information useful in estimating future cash flows.

❓ Why Other Options Are Incorrect

Option A: The Indirect Method is generally simpler because it starts with net profit.
Option C: Depreciation must still be recorded under accounting standards.
Option D: No such legal requirement exists.

🎯 Strategy

Used: Concept Identification

Application: Identify the unique benefit of the Direct Method.

Final Logic: Future cash flow estimation is the major advantage.

🧠 Memory Trick

Direct Method = Direct View of Future Cash Potential

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Direct Method

2 Arrange the steps for preparing cash flow from operations via the Indirect Method:
1. Adjust for changes in working capital (Current Assets & Liabilities).
2. Start with Net Profit before Tax and Extraordinary Items.
3. Deduct Income Tax paid.
4. Add non-cash items like depreciation and goodwill amortised.

A 1, 2, 3, 4

B 4, 3, 2, 1

C 2, 1, 4, 3

D 2, 4, 1, 3

💡 Short Explanation

Begin with Net Profit before Tax. Add non-cash expenses. Adjust working capital changes. Deduct tax paid.

✅ Correct Answer Explanation

The Indirect Method follows a systematic process: 1. Start with Net Profit before Tax. 2. Add non-cash expenses such as depreciation and goodwill amortisation. 3. Adjust for changes in current assets and current liabilities. 4. Deduct income tax paid. Therefore, the correct sequence is 2 → 4 → 1 → 3.

❓ Why Other Options Are Incorrect

Options A, B, and C place adjustments in the wrong sequence.

🎯 Strategy

Used: Sequence Analysis

Application: Follow the prescribed AS-3 format.

Final Logic: Profit → Non-cash Items → Working Capital → Tax.

🧠 Memory Trick

Profit → Add Back → Adjust → Tax

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Indirect Method

3 Receipt of cash from royalties, fees, and commissions is strictly classified as:

A Cash inflows from operating activities.

B Cash inflows from investing activities.

C Cash inflows from financing activities.

D Cash equivalents.

💡 Short Explanation

Royalties, fees, and commissions arise from normal business operations. They generate operating revenue.

✅ Correct Answer Explanation

Cash receipts from royalties, fees, and commissions arise from the principal revenue-generating activities of an enterprise. Therefore, they are classified as cash inflows from operating activities.

❓ Why Other Options Are Incorrect

Option B: Investing activities relate to long-term assets and investments.
Option C: Financing activities relate to capital and borrowings.
Option D: These are cash receipts, not cash equivalents.

🎯 Strategy

Used: Activity Classification

Application: Determine the source of revenue.

Final Logic: Revenue-generating activities are operating activities.

🧠 Memory Trick

Fees + Royalties + Commission = Operations

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Cash Receipts

4 A company paid ₹2,00,000 to suppliers, ₹50,000 to employees, and ₹1,00,000 for acquiring a patent. What is the total cash outflow specifically from operating activities?

A ₹3,50,000

B ₹1,50,000

C ₹2,50,000

D ₹1,00,000

💡 Short Explanation

Supplier payments and employee payments are operating activities. Patent acquisition is an investing activity.

✅ Correct Answer Explanation

Operating Cash Outflow = Payment to Suppliers + Payment to Employees = ₹2,00,000 + ₹50,000 = ₹2,50,000 The patent purchase is excluded because it is an investing activity.

❓ Why Other Options Are Incorrect

Option A: Incorrectly includes patent purchase.
Option B: Omits supplier payments.
Option D: Includes only patent purchase.

🎯 Strategy

Used: Classification + Calculation

🧠 Memory Trick

Suppliers + Employees = Operating Cash Flow

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Cash Payments

5 How is Net Profit before Tax mathematically derived if Net Profit after Tax is given?

A Net Profit after Tax − Provision for Tax

B Net Profit after Tax + Provision for Tax made during the year

C Net Profit after Tax / Provision for Tax

D Net Profit after Tax + Depreciation

💡 Short Explanation

Tax has already reduced net profit. Add tax provision back to obtain pre-tax profit.

✅ Correct Answer Explanation

Net Profit Before Tax = Net Profit After Tax + Provision for Tax Made During the Year This adjustment restores profit before taxation.

❓ Why Other Options Are Incorrect

Option A moves further away from pre-tax profit.
Option C has no accounting basis.
Option D ignores tax provision.

🎯 Strategy

Used: Formula Recall

🧠 Memory Trick

After Tax + Tax = Before Tax

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Net Profit Starting Point

6 Which statements are true regarding accrual adjustments in the indirect method?
I. Outstanding expenses decrease is deducted from operating profit.
II. Prepaid expenses increase is added to operating profit.

A Only I is correct.

B Only II is correct.

C Both I and II are correct.

D Neither I nor II is correct.

💡 Short Explanation

Decrease in outstanding expenses means more cash paid. Increase in prepaid expenses means cash outflow and should be deducted.

✅ Correct Answer Explanation

Statement I is correct because a decrease in outstanding expenses represents additional cash payment. Statement II is incorrect because an increase in prepaid expenses is deducted, not added, while calculating operating cash flow.

❓ Why Other Options Are Incorrect

Statement II is false.

🎯 Strategy

Used: Working Capital Analysis

🧠 Memory Trick

Prepaid ↑ = Deduct

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Accrual Adjustment

7 Why must depreciation be added back to net profit under the indirect method?

A It is an investing cash outflow.

B It is a financing cash outflow.

C It represents an actual cash payment to an external party.

D It is a non-cash item that reduced net profit but did not result in any cash outflow.

💡 Short Explanation

Depreciation reduces accounting profit. No actual cash leaves the business.

✅ Correct Answer Explanation

Depreciation is charged in the Statement of Profit and Loss but does not involve payment of cash. Therefore, it is added back while computing cash from operating activities.

❓ Why Other Options Are Incorrect

Depreciation is not a cash transaction.

🎯 Strategy

Used: Non-cash Adjustment

🧠 Memory Trick

Depreciation? Add Back!

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Depreciation Add-back

8 If Net Profit before tax is ₹1,30,000, depreciation is ₹20,000, goodwill amortised is ₹7,000, and gain on sale of machinery is ₹3,000, what is the operating profit before working capital changes?

A ₹1,50,000

B ₹1,46,000

C ₹1,54,000

D ₹1,60,000

💡 Short Explanation

Add depreciation. Add goodwill amortisation. Deduct gain on machinery sale.

✅ Correct Answer Explanation

Operating Profit before Working Capital Changes = ₹1,30,000 + ₹20,000 + ₹7,000 − ₹3,000 = ₹1,54,000 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Incorrect treatment of gain or non-cash adjustments.

🎯 Strategy

Used: Substitution

🧠 Memory Trick

Add Expenses, Deduct Gains

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Goodwill Adjustment

9 Assertion (A): Interest received by a non-financial company is treated as an investing activity.
Reason (R): Interest received represents income generated from investments rather than the principal operations of the business.

A Both A and R are true and R is the correct explanation of A.

B Both A and R are true but R is not the correct explanation of A.

C A is true but R is false.

D A is false but R is true.

💡 Short Explanation

Interest is earned from investments. Not part of normal operations for non-financial enterprises.

✅ Correct Answer Explanation

For a non-financial enterprise, interest received is classified as an investing activity because it arises from investments rather than principal revenue-generating operations. The reason correctly explains the assertion.

❓ Why Other Options Are Incorrect

Both statements are correct and logically connected.

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Interest Received = Investing Return

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Interest Adjustment

10 How is dividend paid treated in a Cash Flow Statement for a non-financial enterprise?

A Operating outflow

B Financing outflow

C Investing inflow

D Operating inflow

💡 Short Explanation

Dividend is paid to shareholders. Shareholders are providers of capital. Therefore financing activity.

✅ Correct Answer Explanation

Dividend paid represents a distribution to owners of the enterprise. Under AS-3, dividend paid by a non-financial enterprise is classified as a financing cash outflow.

❓ Why Other Options Are Incorrect

Not related to operating activities.
Not an investing inflow.

🎯 Strategy

Used: Activity Classification

🧠 Memory Trick

Dividend Paid = Finance Outflow

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Dividend Adjustment

11 Match the changes in current assets with their treatment in the Indirect Method:

List 1	List 2
1. Increase in Inventory	a. Added
2. Decrease in Trade Receivables	b. Deducted
3. Decrease in Prepaid Expenses	c. Added
4. Increase in Accrued Income	d. Deducted

A 1-a, 2-b, 3-c, 4-d

B 1-c, 2-d, 3-a, 4-b

C 1-b, 2-a, 3-c, 4-d

D 1-d, 2-c, 3-b, 4-a

💡 Short Explanation

Increase in Inventory → Deduct. Decrease in Trade Receivables → Add. Decrease in Prepaid Expenses → Add. Increase in Accrued Income → Deduct.

✅ Correct Answer Explanation

Under the Indirect Method: Increase in current assets decreases cash and is deducted. Decrease in current assets increases cash and is added. Therefore: Inventory Increase → Deduct. Trade Receivables Decrease → Add. Prepaid Expenses Decrease → Add. Accrued Income Increase → Deduct. Thus, Option C is correct.

❓ Why Other Options Are Incorrect

They incorrectly classify increases and decreases in current assets.

🎯 Strategy

Used: Working Capital Analysis

Application: Apply the rule for current asset adjustments.

Final Logic: Current Asset ↑ = Deduct; Current Asset ↓ = Add.

🧠 Memory Trick

Asset Up → Cash Down; Asset Down → Cash Up

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Working Capital Changes

12 Operating Profit before Working Capital Changes is ₹10,000. Trade Payables increase by ₹5,000 and Trade Receivables increase by ₹2,000. What is the Cash Generated from Operations?

A ₹17,000

B ₹15,000

C ₹7,000

D ₹13,000

💡 Short Explanation

Increase in Trade Payables → Add. Increase in Trade Receivables → Deduct.

✅ Correct Answer Explanation

Cash Generated from Operations = Operating Profit + Increase in Trade Payables − Increase in Trade Receivables = ₹10,000 + ₹5,000 − ₹2,000 = ₹13,000 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Incorrect treatment of working capital adjustments.

🎯 Strategy

Used: Substitution Method

Application: Apply working capital adjustment rules.

Final Logic: ₹10,000 + ₹5,000 − ₹2,000 = ₹13,000.

🧠 Memory Trick

Payables Up Add, Receivables Up Deduct

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Cash Generated from Operations

13 Tax calculated strictly on normal operating profit is classified under which activity?

A Financing Activity

B Operating Activity

C Investing Activity

D Extraordinary Activity

💡 Short Explanation

Tax on normal business profit arises from operations. Therefore classified as operating activity.

✅ Correct Answer Explanation

Income tax generally arises from operating activities unless specifically attributable to financing or investing activities. Therefore, tax on normal operating profit is classified as an operating activity.

❓ Why Other Options Are Incorrect

Financing and investing classifications apply only when tax directly relates to those activities.
Extraordinary classification is not applicable.

🎯 Strategy

Used: Activity Classification

🧠 Memory Trick

Operating Profit Tax = Operating Activity

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Income Tax Treatment

14 Provision for Taxation on April 1 is ₹10,000 and on March 31 is ₹13,000. Provision made during the year is ₹8,000. What is the Income Tax Paid?

A ₹11,000

B ₹8,000

C ₹5,000

D ₹13,000

💡 Short Explanation

Opening Provision + Current Provision − Tax Paid = Closing Provision.

✅ Correct Answer Explanation

Tax Paid = Opening Provision + Provision Made − Closing Provision = ₹10,000 + ₹8,000 − ₹13,000 = ₹5,000 Thus, Option C is correct.

❓ Why Other Options Are Incorrect

Formula not applied correctly.

🎯 Strategy

Used: Formula Application

🧠 Memory Trick

Opening + New Provision − Closing = Tax Paid

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Tax Paid Calculation

15 Cash advances and loans made specifically by financial enterprises are usually classified as:

A Financing Activities

B Investing Activities

C Cash Equivalents

D Operating Activities

💡 Short Explanation

Lending is the principal business activity of financial enterprises.

✅ Correct Answer Explanation

For financial enterprises such as banks and finance companies, making loans and advances is a core revenue-generating activity. Therefore, these cash flows are classified as operating activities.

❓ Why Other Options Are Incorrect

Investing classification applies to non-financial enterprises.

🎯 Strategy

Used: Industry-Specific Classification

🧠 Memory Trick

Bank Loans = Operations

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Financial Enterprises

16 Consider the following statements:
I. Brokerage paid on purchase of non-current investments is an investing activity.
II. Under-writing commission paid is a financing activity.

A Both I and II are correct

B Only I is correct

C Only II is correct

D Neither I nor II is correct

💡 Short Explanation

Brokerage relates to investment acquisition. Underwriting commission relates to raising capital.

✅ Correct Answer Explanation

Brokerage paid for acquiring non-current investments forms part of investing activities. Underwriting commission paid is associated with issue of securities and is therefore classified as a financing activity.

❓ Why Other Options Are Incorrect

Both statements are valid.

🎯 Strategy

Used: Statement Evaluation

🧠 Memory Trick

Investment Cost = Invest; Share Issue Cost = Finance

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Investing and Financing Activities

17 What happens if the sum of cash flows from operating, investing and financing activities is negative?

A Added to current liabilities

B Ignored as an anomaly

C Represents a net decrease in cash and cash equivalents

D Proves the company is bankrupt

💡 Short Explanation

Negative total cash flow means overall cash has decreased.

✅ Correct Answer Explanation

The net result of operating, investing, and financing cash flows determines the increase or decrease in cash and cash equivalents. A negative total indicates a net decrease in cash.

❓ Why Other Options Are Incorrect

Negative cash flow does not automatically imply bankruptcy.

🎯 Strategy

Used: Concept Interpretation

🧠 Memory Trick

Negative Net Flow = Cash Falls

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Net Increase/Decrease in Cash

18 If the Net Decrease in Cash during the year is ₹22,000 and the Closing Cash Balance is ₹60,000, what was the Opening Cash Balance?

A ₹38,000

B ₹22,000

C ₹60,000

D ₹82,000

💡 Short Explanation

Opening Balance = Closing Balance + Net Decrease.

✅ Correct Answer Explanation

Opening Cash Balance = Closing Balance + Net Decrease = ₹60,000 + ₹22,000 = ₹82,000 Thus, Option D is correct.

❓ Why Other Options Are Incorrect

Incorrect application of cash flow equation.

🎯 Strategy

Used: Reverse Calculation

🧠 Memory Trick

Closing + Decrease = Opening

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Opening and Closing Cash

📄 Passage

"Cash equivalents are short-term highly liquid investments that are readily convertible into known amounts of cash and are subject to insignificant risk of changes in value. Normally, they mature within three months from the date of acquisition."

Based on the passage, what qualifies an investment as a cash equivalent?

A Short maturity, usually three months or less, and readily convertible into known cash amounts

B Long maturity exceeding one year

C Investment in equity shares only

D High risk investment with higher return

💡 Short Explanation

Short-term. Highly liquid. Insignificant risk.

✅ Correct Answer Explanation

Cash equivalents must satisfy three conditions: 1. High liquidity. 2. Ready conversion into known cash amounts. 3. Maturity generally within three months from acquisition. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Long maturity and high risk violate AS-3 requirements.
Equity shares are generally excluded.

🎯 Strategy

Used: Passage Analysis

🧠 Memory Trick

3 Months + Liquidity + Safety = Cash Equivalent

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Cash Equivalents

📄 Passage

According to the passage, why are investments in shares generally excluded from cash equivalents?

A Because they are demand deposits with banks

B Because they are always long-term investments

C Because they are subject to significant risk of value changes and are not readily convertible into known amounts of cash

D Because AS-3 permits only government securities as cash equivalents

💡 Short Explanation

Share prices fluctuate significantly. Future cash value is uncertain.

✅ Correct Answer Explanation

Equity shares generally do not satisfy the conditions of known cash value and insignificant risk. Their market value fluctuates continuously, making them unsuitable as cash equivalents. Therefore, they are normally excluded from cash equivalents.

❓ Why Other Options Are Incorrect

Shares are not demand deposits.
They may be short-term or long-term.
AS-3 allows several forms of cash equivalents, not only government securities.

🎯 Strategy

Used: Passage Analysis

🧠 Memory Trick

Shares = Risky, Cash Equivalents = Stable

📚 Class XII – Accountancy Part II – Chapter: Cash Flow Statement – Topic: Exclusion of Equity Shares

CUET UG Accountancy Booster Test 1 Preparation and Methods

Test Complete!

Answer Review