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If a check / cheque received from Debtors / Accounts Receivable , then it is debited in the cash account. The other account “Accounts Receivable Account” is credited but it is not recorded under share capital account. The reason behind is that the cash received from debtors belongs to company’s checking account and not with the owners or shareholders’ account. The company or corporation is a separate legal entity having its own seal and enter into the contract. So, this transaction related to receiving cheque from debtors (customers) on the behalf of the company should be recorded in the company’s checking account and accounts receivable account. Customers purchased goods on credit from the company and not from shareholders and then make payments to company through check is also concerned with the business matters of company. If the owners invested their own cash into the business i.e., purchased shares then it will be added to the share capital account which ultimately will inc...

The correct answer of this MCQ is “C”, as the Adjusting Entries are dated at the end of the accounting period i.e., on the last date of accounting period e.g., on 31 st December but entered on concerned ledger’s accounts later on as the adjusting process requires time which is not possible on the last day before the closing of the current accounting period. During the adjusting process, each account (Income, Expenses, Assets, Liabilities and Equity) is carefully analyzed and examined as the Adjustments affect one Income Statement Account (Revenues and Expenses) and one Balance Sheet Account (Assets, Liabilities and Equity). Due to this effect, all the required ledger’s account balances need to be updated which makes the process more lengthy and time consuming. This process ultimately affects the Financial Statements, such as Statement of Comprehensive Income, Statement of Financial Position, Statement of Owners’ Equity and Statement of Cash Flows, which are also required upda...

The correct choice is d), as usually, it is not the main purpose or objective of Financial Reporting to provide the liquidation value of an entity and, normally, it is prepared to provide information of ongoing or carrying on business (based on going-concern concept) which is still not going into liquidation near future. In fact, it provides information of company’s financial performance and financial position, cash flows activities, movements of equity, profitability, liquidity, etc., to Users of Financial Information both internal users such as Owners, Board of Directors, Management, Employees and external users such as Shareholders, Investors, Creditors, Suppliers / Vendors, Professional Bodies such as Audit Firms & Law Agencies, Government, etc. However, in case of liquidation of the business, or when the entity wants to check the investment opportunities for investors or lending risks for creditors i.e., whether the entity will pay to creditors out of its physical asse...

The correct choice is (b), as after the preparation of Unadjusted Trial Balance , there is a need to make Adjustments to the accounts due to Accruals And Deferrals at the end of the period. After that Adjusted Trial Balance is prepared completely to reflect updated balances of accounts. Then we are in a position to prepare Financial Statements which include Income Statement, Statement of Stockholders’ Equity and classified balance sheet. Income statement shows Net Income or Net Loss for the period. Net income is the excess of revenues over expenses during the accounting period while net loss is occurred when expenses are greater than revenues for the current period. A classified Balance shows the equality of balances of assets, liabilities and equity on a particular day which may change on the next day. A statement of shareholders’ equity shows the changes or movements of equity over a period of time i.e., from the beginning to the year’s end. This statement shows information abo...

Important Example Of External User Of Accounting Information This statement is “false”, as stockholders or shareholders are not participating in the decision-making process eventhough they become the owners of the corporation / company by buying stocks / shares, especially, in case of large and popular company, as they spread around the world, so they can’t make decision and control day-to day business’ operations. However, top management i.e., board of directors are internal users of company and they manage and control the business activities on the behalf of the owners of the company’s business. They are in a good position to manage the business operations and are held responsible for the performance and financial health of the company’s business. They define overall objectives & goals, set directions and make strategic planning to achieve those objectives and goals set in the strategic planning i.e., making vision, mission and objectives and goals for the company at corporat...

The correct answer is b. External Users, as these types of users are outsiders for the company’s business which are not directly and internally see the business enterprise. They are outside stakeholders who are interested in the financial performance and financial reports of the business. These Users Of Accounting Information Or Users of Financial Statements include investors (shareholders / stockholders), lenders or creditors or suppliers, customers, financial institutions (such as banks, investment companies, etc.), government, professionals (such as law firms), regulatory authorities and others. An investor is interested in the Profitability , liquidity and return on their investment. All of these information can be obtained from the financial reports and analysis of financial reports of the business enterprise. On the other hand, internal users are directly and internally involved in the day-to day business activities. They are more capable to operate, manage and grow the b...

The correct answer is (C) Profitability , as due to it the company is able to give benefits, incentives to its employees and meet the cost of running the business. The Profit is obtained after deducting Expenses from Revenues . The company is able to finance different projects of the business after meeting all the expenses of the business. Such company can attract and convince investors to invest in the business as due to profitability, the company / corporation is in a position to distribute its share of return to its shareholders / stockholders. It shows the financial performance of the company during the accounting period that how well it is able to get profits from its revenues, resources and equity after meeting all the relevant expenses i.e., how well the company is utilizing its resources to get profits. Profitability is important for the company’s business to finance its various business activities in order to run the business, to Stabilize The Business and to gro...