Prepare for FAA 2026 with these Important MCQs on Financial Statements, specially prepared by Exam Waves. Practice key questions on Trading Account, Gross Profit, Gross Loss, direct expenses, stock, and other important concepts to improve your exam preparation.
Q1. Which of the following statements correctly describe the two major parts of Financial Statements?
- Income Statement includes Trading A/c and Profit & Loss A/c.
- Trading A/c is used to determine Gross Profit.
- Profit & Loss A/c is used to determine Net Profit.
- Positional Statement refers to the Balance Sheet showing the position of assets and liabilities.
A) 1 and 2 only
B) 1, 2 and 3 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
Answer: D
Q2. Consider the following statements regarding the Balance Sheet:
- It is the summary of all ledger accounts presented in such a manner that it gives detailed information about the financial position of a company.
- G.P. is shown on the Debit side.
- G.L. is shown on the Credit side.
- It is one of the reports prepared by company management to show financial performance.
Which of the statements given above are correct?
A) 1 and 2 only
B) 1, 2 and 3 only
C) 1, 3 and 4 only
D) 1, 2, 3 and 4
Answer: D
Q3. Assertion (A): An Income Statement is prepared to ascertain the profit or loss of a business during a period of time.
Reason (R): The Income Statement is divided into two parts, namely Trading A/c and Profit & Loss A/c.
Choose the correct answer:
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
Answer: B
Q4. Which of the following statements correctly describe a Trading Account?
- It is prepared to ascertain trading results.
- It shows Gross Profit or Gross Loss.
- Only direct revenues and direct expenses are considered in it.
- Gross Profit or Gross Loss is calculated in the Trading Account.
A) 1 and 2 only
B) 1, 2 and 3 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
Answer: D
Q5. Match List I with List II and select the correct answer:
| List I | List II |
|---|---|
| A. Trading A/c | 1. Net Profit |
| B. Profit & Loss A/c | 2. Position of assets and liabilities |
| C. Balance Sheet | 3. Gross Profit or Gross Loss |
| D. Income Statement | 4. Ascertain profit or loss during a period |
A) A-3, B-1, C-2, D-4
B) A-1, B-3, C-4, D-2
C) A-3, B-2, C-1, D-4
D) A-4, B-1, C-2, D-3
Answer: A
Q6. Which of the following correctly represents the formula for Gross Profit?
A) Gross Profit = Net Sales + Cost of Goods Sold
B) Gross Profit = Net Sales − Cost of Goods Sold
C) Gross Profit = Cost of Goods Sold − Net Sales
D) Gross Profit = Sales − Purchase Return
Answer: B
Q7. Consider the following formulas:
- Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses − Closing Stock
- Net Sales = Sales − Sales Return
- Net Purchases = Purchases − Purchase Return
- Gross Loss = Cost of Goods Sold − Net Sales
Which of the above formulas are correct?
A) 1 and 2 only
B) 1, 2 and 3 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
Answer: D
Q8. Assertion (A): Gross Profit arises out of trading activities.
Reason (R): When the trading activities result in a loss instead of profit, it is called Gross Loss.
Choose the correct answer:
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
Answer: B
Q9. Which of the following are identified as Direct Expenses?
- Carriage inward
- Wages
- Freight
- Insurance
A) 1 and 2 only
B) 1, 2 and 3 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
Answer: D
Q10. Which of the following statements correctly describe Direct Expenses?
- They are directly associated with the purchase or production of goods.
- Expenses related to either purchase or manufacturing of goods are written on the Debit side.
- Carriage inward and wages are examples of Direct Expenses.
- All expenses of a business are necessarily Direct Expenses.
A) 1 and 2 only
B) 1, 2 and 3 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
Answer: B
Q11. Which of the following groups contains only the items shown on the Debit side of the Trading Account?
A) Opening Stock, Carriage Inward, Insurance, Wages, Power, Fuel, Rent and Royalties
B) Opening Stock, Sales, Wages, Fuel, Rent and Royalties
C) Closing Stock, Carriage Inward, Insurance, Wages and Power
D) Opening Stock, Sales Return, Freight, Dock Charges and Purchases
Answer: A
Q12. Consider the following items appearing on the Debit side of a Trading Account:
- Opening Stock
- Carriage Inward
- Insurance
- Wages
- Power
- Fuel
- Rent
- Return Outward
- Purchase Return
- Royalties
Which of the above are included on the Debit side as shown?
A) 1, 2, 3, 4 and 5 only
B) 1, 2, 3, 4, 5, 6 and 7 only
C) 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10
D) 2, 3, 4, 5, 8 and 9 only
Answer: C
Q13. Which of the following groups contains only the items shown on the Credit side of the Trading Account?
A) Sales, Closing Stock, Sales Return, Freight and Dock Charges
B) Sales, Opening Stock, Freight, Dock Charges and Wages
C) Sales, Closing Stock, Purchase Return, Freight and Dock Charges
D) Closing Stock, Carriage Inward, Sales Return, Freight and Dock Charges
Answer: A
Q14. Match List I with List II and identify the correct combination:
| List I | List II |
|---|---|
| A. Opening Stock | 1. Goods remaining unsold at the end of current accounting period |
| B. Closing Stock | 2. Sale of goods sold + Gross Profit |
| C. Sales | 3. Closing stock or unsold goods at the end of previous year brought forward |
| D. Stock | 4. Goods lying unsold on a particular date |
A) A-3, B-1, C-2, D-4
B) A-1, B-3, C-4, D-2
C) A-3, B-4, C-2, D-1
D) A-4, B-1, C-3, D-2
Answer: A
Q15. Asif is examining the stock of a business. Which of the following statements correctly distinguish Opening Stock from Closing Stock?
- Opening Stock refers to closing stock or unsold goods at the end of the previous year brought forward.
- Closing Stock represents goods remaining unsold at the end of the current accounting period.
- Both Opening Stock and Closing Stock relate to unsold goods.
- Closing Stock refers only to goods sold during the current accounting period.
A) 1 and 2 only
B) 1, 2 and 3 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
Answer: B
Q16. Assertion (A): Wages paid to bring a new machine are not shown in the Trading Account.
Reason (R): Such wages are not treated in the same manner as wages associated with the purchase or production of goods for Trading Account purposes.
Choose the correct answer:
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
Answer: A
Q17. Consider the following statements regarding Insurance:
- Insurance may be included among Direct Expenses.
- If interest is given on salaries or wages, it is shown in P/L A/c.
- Expenses related to purchase or manufacturing of goods are written on the Debit side of the Trading Account.
- Insurance is listed among the examples of Direct Expenses.
Which of the statements given above are correct?
A) 1 and 2 only
B) 1, 3 and 4 only
C) 2, 3 and 4 only
D) 1, 2, 3 and 4
Answer: D
Q18. Match the following items with the appropriate side of the Trading Account:
| List I | List II |
|---|---|
| A. Opening Stock | 1. Credit Side |
| B. Wages | 2. Debit Side |
| C. Sales | 3. Credit Side |
| D. Closing Stock | 4. Debit Side |
| E. Freight | 5. Credit Side |
Which of the following is correctly matched?
A) A-2, B-4, C-3, D-1, E-5
B) A-1, B-2, C-3, D-4, E-5
C) A-2, B-3, C-1, D-5, E-4
D) A-4, B-1, C-3, D-2, E-5
Answer: A
Q19. Mushtaq is calculating the trading result of a business. Net Sales are ₹80,000 and Cost of Goods Sold is ₹65,000. Based on the Gross Profit formula, what is the trading result?
A) Gross Loss of ₹15,000
B) Gross Profit of ₹15,000
C) Gross Profit of ₹1,45,000
D) Gross Loss of ₹1,45,000
Answer: B
Q20. Consider the following statements about Financial Statements and Trading Account:
- Trading A/c is used to determine Gross Profit or Gross Loss.
- Profit & Loss A/c is associated with Net Profit.
- Gross Profit = Net Sales − Cost of Goods Sold.
- Cost of Goods Sold includes Opening Stock, Net Purchases and Direct Expenses, less Closing Stock.
- Net Sales are calculated after deducting Sales Return from Sales.
- Net Purchases are calculated after deducting Purchase Return from Purchases.
- Opening Stock represents unsold goods from the previous year brought forward, while Closing Stock represents goods remaining unsold at the end of the current accounting period.
Which of the statements given above are correct?
A) 1, 2, 3 and 4 only
B) 1, 2, 3, 4 and 5 only
C) 2, 3, 4, 5, 6 and 7 only
D) 1, 2, 3, 4, 5, 6 and 7
Answer: D
