CUET UG Accountancy Booster Test 3 Preparation and Methods -

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CUET UG Accountancy Booster Test 2 Preparation and Methods

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 2 Preparation and Methods

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QUESTION 1 OF 20

Under the Direct Method, how is cash flow from operating activities computed in relation to the Statement of Profit and Loss?

Answer Review

1 Under the Direct Method, how is cash flow from operating activities computed in relation to the Statement of Profit and Loss?

A By adjusting net profit for non-cash expenses.

B By starting with net profit and systematically adjusting for working capital.

C By disclosing major classes of gross cash receipts and gross cash payments directly, completely skipping net profit adjustments.

D By ignoring operating cash flows completely to focus on financing.

💡 Short Explanation

The Direct Method focuses on actual cash transactions. It reports cash receipts and cash payments directly. Net profit adjustments are not required.

✅ Correct Answer Explanation

Under the Direct Method, operating cash flow is determined by identifying major classes of gross cash receipts and gross cash payments. Unlike the Indirect Method, it does not begin with net profit and therefore avoids adjustments for non-cash items and working capital changes.

❓ Why Other Options Are Incorrect

Option A: Describes the Indirect Method.
Option B: Also describes the Indirect Method.
Option D: Operating cash flows are a mandatory part of the statement.

🎯 Strategy

Used: Method Differentiation

Application: Distinguish Direct Method from Indirect Method.

Final Logic: Direct Method = Actual Cash Receipts and Payments.

🧠 Memory Trick

Direct Method = Direct Cash Data

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

2 Why must 'gain on sale of machinery' be strategically deducted from net profit in the Indirect Method?

A Because it is an investing inflow that is already included in net profit.

B Because it is an operating outflow.

C Because it does not involve any actual cash transfer.

D Because it is treated purely as an extraordinary item.

💡 Short Explanation

Gain on sale increases accounting profit. It relates to investing activities. Double counting must be avoided.

✅ Correct Answer Explanation

The gain on sale of machinery is included in net profit but actually arises from an investing activity. Since the entire sale proceeds will be reported separately under investing activities, the gain portion must be deducted from net profit while calculating cash flows from operating activities.

❓ Why Other Options Are Incorrect

Option B: Gain is not an operating outflow.
Option C: The gain arises from a transaction involving cash.
Option D: It is not necessarily an extraordinary item.

🎯 Strategy

Used: Non-operating Item Adjustment

🧠 Memory Trick

Asset Sale Gain = Deduct from Operations

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

3 Calculate Cash Receipts from Customers:
Revenue from Operations = Rs. 30,650
Opening Trade Receivables = Rs. 1,200
Closing Trade Receivables = Rs. 1,700

A Rs. 31,850

B Rs. 30,150

C Rs. 31,150

D Rs. 28,950

💡 Short Explanation

Increase in receivables means some sales remain uncollected. Deduct increase in receivables from revenue.

✅ Correct Answer Explanation

Cash Receipts from Customers = Revenue from Operations + Opening Receivables − Closing Receivables = Rs. 30,650 + Rs. 1,200 − Rs. 1,700 = Rs. 30,150 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Incorrect application of receivable adjustment.

🎯 Strategy

Used: Formula Substitution

🧠 Memory Trick

Sales + Opening Debtors − Closing Debtors

📚 Class XII – Accountancy Part II – Cash Flow Statement – Cash Receipts

4 Calculate Cash Paid to Suppliers and Employees:
Cost of Revenue = Rs. 26,000
Administrative Expenses = Rs. 910
Opening Trade Payables = Rs. 1,890
Closing Trade Payables = Rs. 150
Opening Inventories = Rs. 1,950
Closing Inventories = Rs. 900

A Rs. 26,910

B Rs. 29,700

C Rs. 25,000

D Rs. 27,600

💡 Short Explanation

Adjust cost for inventory changes. Adjust for creditor changes. Add administrative expenses.

✅ Correct Answer Explanation

Purchases Consumed Adjustment = Cost of Revenue + Closing Inventory − Opening Inventory = Rs. 26,000 + Rs. 900 − Rs. 1,950 = Rs. 24,950 Cash Paid to Suppliers = Purchases + Opening Creditors − Closing Creditors = Rs. 24,950 + Rs. 1,890 − Rs. 150 = Rs. 26,690 Add Administrative Expenses = Rs. 26,690 + Rs. 910 = Rs. 27,600 Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

They omit one or more inventory/payable adjustments.

🎯 Strategy

Used: Multi-Step Calculation

🧠 Memory Trick

Inventory + Creditors + Expenses

📚 Class XII – Accountancy Part II – Cash Flow Statement – Cash Payments

5 Net profit earned during the year after tax and dividend is Rs. 1,50,000. Provision for tax made is Rs. 95,000. Declared Dividend is Rs. 1,50,000. Calculate Net Profit before Tax.

A Rs. 2,45,000

B Rs. 3,00,000

C Rs. 3,95,000

D Rs. 4,00,000

💡 Short Explanation

Add back tax provision. Add back dividend appropriation.

✅ Correct Answer Explanation

Net Profit Before Tax = Net Profit After Tax and Dividend + Provision for Tax + Declared Dividend = Rs. 1,50,000 + Rs. 95,000 + Rs. 1,50,000 = Rs. 3,95,000 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

They fail to add back all appropriations.

🎯 Strategy

Used: Profit Reconstruction

🧠 Memory Trick

After Tax + Tax + Dividend = Before Tax

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

6 Read the following statements regarding adjustment of current assets and liabilities:
I. An increase in accrued income is deducted from net profit.
II. Expenses paid in advance at the end of the year are added to the profit.

A Both I and II are correct

B Only II is correct

C Neither I nor II is correct

D Only I is correct

💡 Short Explanation

Accrued income is a current asset. Increase in current asset is deducted. Increase in prepaid expenses is also deducted.

✅ Correct Answer Explanation

Statement I is correct because an increase in accrued income represents income not yet received in cash and must be deducted. Statement II is incorrect because an increase in prepaid expenses is deducted, not added.

❓ Why Other Options Are Incorrect

Statement II is false.

🎯 Strategy

Used: Working Capital Analysis

🧠 Memory Trick

Current Asset ↑ = Deduct

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

7 A machine costing Rs. 25,000 with accumulated depreciation of Rs. 15,000 was sold for Rs. 13,000. What is the precise amount of profit/loss on sale, and how is it adjusted in operating activities?

A Profit of Rs. 3,000; deducted from net profit.

B Loss of Rs. 2,000; added to net profit.

C Profit of Rs. 13,000; deducted from net profit.

D Loss of Rs. 15,000; added to net profit.

💡 Short Explanation

Book value must be determined first. Compare sale proceeds with book value.

✅ Correct Answer Explanation

Book Value = Cost − Accumulated Depreciation = Rs. 25,000 − Rs. 15,000 = Rs. 10,000 Profit on Sale = Sale Price − Book Value = Rs. 13,000 − Rs. 10,000 = Rs. 3,000 Since it is a non-operating gain, it is deducted from net profit under the indirect method.

❓ Why Other Options Are Incorrect

They calculate book value incorrectly.

🎯 Strategy

Used: Asset Disposal Analysis

🧠 Memory Trick

Sale Price − Book Value = Gain/Loss

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

8 Assertion (A):
Goodwill amortised does not result in any cash outflow.
Reason (R):
It is a non-cash expense deducted in the Statement of Profit and Loss, hence must be added back in the Indirect Method.

A Both A and R are false.

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

C A is true but R is false.

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

💡 Short Explanation

Amortisation reduces accounting profit. No cash payment occurs.

✅ Correct Answer Explanation

Goodwill amortisation is a non-cash expense charged against profit. Since it does not involve cash outflow, it must be added back while calculating operating cash flow under the indirect method. Therefore, both statements are true and the reason correctly explains the assertion.

❓ Why Other Options Are Incorrect

Both statements are correct.

🎯 Strategy

Used: Assertion–Reason Analysis

🧠 Memory Trick

Goodwill Amortisation = Add Back

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

9 For a strictly financial enterprise (whose main business is lending/borrowing), how are interest paid and interest received classified?

A Both as Financing Activities

B Interest Paid as Financing, Interest Received as Investing

C Both as Investing Activities

D Both as Operating Activities

💡 Short Explanation

Interest is part of core business operations. Lending and borrowing generate operating revenue.

✅ Correct Answer Explanation

For financial enterprises, interest received and interest paid arise from principal revenue-generating activities. Therefore, both are classified as operating activities.

❓ Why Other Options Are Incorrect

They do not reflect the special treatment for financial enterprises.

🎯 Strategy

Used: Industry-Specific Classification

🧠 Memory Trick

Financial Enterprise = Interest is Operating

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

10 Arrange the steps for logically handling 'Proposed Dividend' under the Indirect Method:
1. Ascertain previous year's proposed dividend.
2. Add it to Net Profit to find Operating Profit before Tax.
3. Show it as a cash outflow under Financing Activities.

A 3, 2, 1

B 2, 1, 3

C 1, 2, 3

D 1, 3, 2

💡 Short Explanation

Identify previous year's proposed dividend. Add back while computing operating cash flow. Show payment under financing activities.

✅ Correct Answer Explanation

The correct treatment is: 1. Determine the previous year's proposed dividend. 2. Add it back to Net Profit while computing operating activities. 3. Record the actual payment as a financing cash outflow. Hence, the correct sequence is 1 → 2 → 3.

❓ Why Other Options Are Incorrect

They place financing treatment before profit adjustment.

🎯 Strategy

Used: Sequence Analysis

🧠 Memory Trick

Find → Add Back → Finance Outflow

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

11 Match the Following

List 1	List 2
1. Increase in Debtors by Rs. 10,000	a. Deduct Rs. 3,000 from Operating Profit
2. Decrease in Stock by Rs. 5,000	b. Add Rs. 5,000 to Operating Profit
3. Increase in Creditors by Rs. 8,000	c. Add Rs. 8,000 to Operating Profit
4. Decrease in Bills Payable by Rs. 3,000	d. Deduct Rs. 10,000 from Operating Profit

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

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

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

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

💡 Short Explanation

Increase in current assets → Deduct. Decrease in current assets → Add. Increase in current liabilities → Add. Decrease in current liabilities → Deduct.

✅ Correct Answer Explanation

According to working capital adjustment rules: Increase in Debtors = Deduct Rs. 10,000. Decrease in Stock = Add Rs. 5,000. Increase in Creditors = Add Rs. 8,000. Decrease in Bills Payable = Deduct Rs. 3,000. Hence the correct matching is 1-d, 2-b, 3-c, 4-a.

❓ Why Other Options Are Incorrect

They incorrectly apply current asset and liability adjustment rules.

🎯 Strategy

Used: Working Capital Classification

🧠 Memory Trick

CA ↑ Deduct, CA ↓ Add, CL ↑ Add, CL ↓ Deduct

📚 Class XII – Accountancy Part II – Cash Flow Statement – Current Assets Changes

12 If Operating Profit before Working Capital Changes is Rs. 1,54,000, Trade Receivables increase by Rs. 3,000, Trade Payables increase by Rs. 6,000, Prepaid Expenses increase by Rs. 200, and Outstanding Expenses decrease by Rs. 2,000, calculate Net Cash from Operating Activities (assuming no tax).

A Rs. 1,60,000

B Rs. 1,54,800

C Rs. 1,50,000

D Rs. 1,48,800

💡 Short Explanation

Increase in receivables = Deduct. Increase in payables = Add. Increase in prepaid expenses = Deduct. Decrease in outstanding expenses = Deduct.

✅ Correct Answer Explanation

Operating Profit = Rs. 1,54,000 Adjustments: Increase in Trade Receivables = (Rs. 3,000) Increase in Trade Payables = +Rs. 6,000 Increase in Prepaid Expenses = (Rs. 200) Decrease in Outstanding Expenses = (Rs. 2,000) Net Cash from Operating Activities = 1,54,000 − 3,000 + 6,000 − 200 − 2,000 = Rs. 1,54,800 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

They incorrectly adjust one or more working capital items.

🎯 Strategy

Used: Working Capital Adjustment Formula

🧠 Memory Trick

Receivable ↑ Deduct, Payable ↑ Add

📚 Class XII – Accountancy Part II – Cash Flow Statement – Current Liabilities Changes

13 What happens if income tax paid explicitly includes Rs. 15,000 as Dividend Distribution Tax, and the total tax paid is Rs. 80,000?

A Rs. 80,000 is entirely deducted from Operating Activities.

B Rs. 65,000 is added to Net Profit.

C Rs. 15,000 is deducted from Operating Activities.

D Rs. 65,000 is deducted from Operating Activities and Rs. 15,000 is deducted from Financing Activities.

💡 Short Explanation

Income tax generally belongs to operating activities. Dividend Distribution Tax relates to dividend payment.

✅ Correct Answer Explanation

Total Tax Paid = Rs. 80,000 Less: Dividend Distribution Tax = Rs. 15,000 Operating Tax Outflow = Rs. 65,000 Dividend Distribution Tax = Financing Outflow Therefore: Rs. 65,000 → Operating Activities Rs. 15,000 → Financing Activities Hence, Option D is correct.

❓ Why Other Options Are Incorrect

They fail to separate dividend-related tax.

🎯 Strategy

Used: Tax Classification Analysis

🧠 Memory Trick

Dividend Tax Follows Dividend

📚 Class XII – Accountancy Part II – Cash Flow Statement – Income Tax Deduction

14 To ascertain the actual income tax paid when opening and closing provision for tax balances are given, which ledger account is typically prepared?

A Provision for Taxation Account

B Income Tax Refund Account

C Proposed Dividend Account

D Suspense Account

💡 Short Explanation

Tax paid is determined through provision analysis. Provision account reveals actual payment.

✅ Correct Answer Explanation

When opening and closing tax provisions are available, a Provision for Taxation Account is prepared to ascertain the actual tax paid during the year.

❓ Why Other Options Are Incorrect

Refund Account is not used for this calculation.
Dividend and Suspense Accounts are unrelated.

🎯 Strategy

Used: Ledger Identification

🧠 Memory Trick

Tax Paid? Prepare Tax Provision Account

📚 Class XII – Accountancy Part II – Cash Flow Statement – Tax Provision Treatment

15 An enterprise may hold securities and loans explicitly for dealing or trading purposes. How are cash flows from these specific transactions classified?

A Investing Activities

B Operating Activities

C Financing Activities

D Extraordinary Items

💡 Short Explanation

Trading securities form part of normal operations. They generate regular business income.

✅ Correct Answer Explanation

When securities and loans are held for dealing or trading purposes, they become part of the enterprise's principal revenue-generating activities. Therefore, related cash flows are classified as operating activities.

❓ Why Other Options Are Incorrect

Trading assets are not treated as investments.

🎯 Strategy

Used: Business Activity Classification

🧠 Memory Trick

Trading Purpose = Operating Activity

📚 Class XII – Accountancy Part II – Cash Flow Statement – Operating Activities Section

16 Identify the correct classification:
I. Cash payments to acquire shares of other enterprises (not for trading) is an investing activity.
II. Interest paid on debentures by a manufacturing company is an investing activity.

A Both I and II are correct

B Only II is correct

C Only I is correct

D Neither I nor II is correct

💡 Short Explanation

Share acquisition (not for trading) = Investing. Interest paid by manufacturing company = Financing.

✅ Correct Answer Explanation

Statement I is correct because acquiring shares as investments is an investing activity. Statement II is incorrect because interest paid on debentures by a manufacturing company is treated as a financing activity. Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Statement II is incorrectly classified.

🎯 Strategy

Used: Activity Classification

🧠 Memory Trick

Investment Purchase = Invest; Interest Paid = Finance

📚 Class XII – Accountancy Part II – Cash Flow Statement – Investing and Financing Sections

17 Cash inflows from Operating = Rs. 1,82,000; Cash used in Investing = Rs. (1,50,000); Cash inflows from Financing = Rs. 90,000. What is the exact Net Increase in Cash and Cash Equivalents?

A Rs. 32,000

B Rs. 2,40,000

C Rs. 1,00,000

D Rs. 1,22,000

💡 Short Explanation

Add operating inflow. Subtract investing outflow. Add financing inflow.

✅ Correct Answer Explanation

Net Increase = Rs. 1,82,000 − Rs. 1,50,000 + Rs. 90,000 = Rs. 1,22,000 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Calculation errors.

🎯 Strategy

Used: Cash Flow Formula

🧠 Memory Trick

Operating + Financing − Investing

📚 Class XII – Accountancy Part II – Cash Flow Statement – Net Increase in Cash

18 The Net Increase in Cash is Rs. 1,22,000. Cash in Hand is Rs. 5,000 and Bank Balance is Rs. 2,00,000 at the beginning of the year. What is the Cash and Cash Equivalents at the end?

A Rs. 1,27,000

B Rs. 3,27,000

C Rs. 2,05,000

D Rs. 4,27,000

💡 Short Explanation

Determine opening cash balance. Add net increase.

✅ Correct Answer Explanation

Opening Cash & Cash Equivalents = Cash in Hand + Bank Balance = Rs. 5,000 + Rs. 2,00,000 = Rs. 2,05,000 Closing Cash & Cash Equivalents = Rs. 2,05,000 + Rs. 1,22,000 = Rs. 3,27,000 Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

They omit either opening cash or net increase.

🎯 Strategy

Used: Reconciliation Formula

🧠 Memory Trick

Opening Cash + Net Increase = Closing Cash

📚 Class XII – Accountancy Part II – Cash Flow Statement – Opening Cash Balance

📄 Passage

"Extraordinary items are not the regular phenomenon, e.g., loss due to theft or earthquake or flood. Extraordinary items are non-recurring in nature and hence cash flows associated with extraordinary items should be classified and disclosed separately as arising from operating, investing or financing activities. This is done to enable users to understand their nature and effect on the present and future cash flows of an enterprise."

According to the passage, why are extraordinary items disclosed separately in the Cash Flow Statement?

A To mathematically match the balance sheet totals.

B To calculate the opening cash balance correctly.

C To enable users to understand their nature and effect on present and future cash flows.

D Because they are a regular operational phenomenon.

💡 Short Explanation

Extraordinary items are unusual. Separate disclosure improves analysis.

✅ Correct Answer Explanation

The passage clearly states that extraordinary items are disclosed separately so users can understand their nature and effect on both present and future cash flows of the enterprise.

❓ Why Other Options Are Incorrect

Extraordinary disclosure is not for balancing purposes.
It is unrelated to opening cash calculation.
Extraordinary items are non-recurring.

🎯 Strategy

Used: Passage-Based Analysis

🧠 Memory Trick

Separate Disclosure = Better Understanding

📚 Class XII – Accountancy Part II – Cash Flow Statement – Closing Cash Calculation

📄 Passage

Based strictly on the passage, a 'loss due to earthquake' is categorized as an extraordinary item fundamentally because:

A It is non-recurring in nature and not a regular phenomenon.

B It is strictly an investing activity.

C It artificially increases cash and cash equivalents.

D It is excluded from the final cash calculation altogether.

💡 Short Explanation

Earthquakes are unusual events. They are not part of normal business operations.

✅ Correct Answer Explanation

The passage explicitly identifies losses due to earthquakes as extraordinary items because such events are non-recurring and not regular business phenomena. Therefore, Option A is correct.

❓ Why Other Options Are Incorrect

Extraordinary items may belong to any activity category.
They do not necessarily increase cash.
They are disclosed, not excluded.

🎯 Strategy

Used: Passage Interpretation

🧠 Memory Trick

Extraordinary = Rare + Non-Recurring

📚 Class XII – Accountancy Part II – Cash Flow Statement – Balance Sheet Matching

CUET UG Accountancy Booster Test 2 Preparation and Methods

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