A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 82 - 83 of 93

Question 82

Question

MCQ▾

Which of the following will be treated as drawings?

Choices

Choice (4)

a.

Withdrawing money for payment of salary to employees

b.

Withdrawing money for purchase of asset

c.

Withdrawing money for payment to creditors

d.

Withdrawing money from business for private expenses

Answer

d.

Explanation

Cash or value of goods withdrawn by the owner of a business for his personal use or for making any private payments made of the funds of business are called drawings. Drawing is a contra entry owners՚ equity account used to record the withdrawals of cash or other assets made by an owner from the enterprise during a fiscal year.

Example:

  • Withdrawals of assets by the owner for personal use
  • Proprietor withdraws cash for personal use

Entry Example for drawings is:

Drawings a/c dr.

To, Cash at bank cr.

Question 83

Question

MCQ▾

Which of the following are the advantages of Secret Reserves?

Choices

Choice (4)

a.

Profit need not be disclosed to competitors, thus financial interests of the business are promoted

b.

Heavy losses of an exceptional nature can be met without disclosing the fact in the published statements and without disturbing the normal profits of the business

c.

Dividend may be equalized more effectively

d.

The working capital of the concern can be increased

Answer

c.

Explanation

‘Secret reserve is a reserve which does not appear in the balance sheet of a company. It helps to reduce the disclosed profit and the tax liability.’ Secret reserve is created by undervaluation of inventories, making excessive provision for doubtful debts, charging expenditure to capital account.

Objects of creating secret reserve are:

  • To strengthen financial position of company
  • To meet unforeseen emergencies
  • To avoid competition from firms
  • To regulate dividend.

Developed by: