Provision and Reserves

1. Which of the following statements is NOT true about Provisions?

a) It is made when liability is known.
b) It is a charge against profits.
c) It is shown on the liability side of Balance sheet.
d) It is not mandatory to make provision.

2. If the amount of any known liability cannot be determined with substantial accuracy:
a) A provision should be created.
b) A Contingent liability should be created.
c) A definite liability should be created.
d) A reserve should be created.

3. If the amount of any known liability can be determined with accuracy

a) A liability should be provided
b) A provision should be made
c) A reserve should be set aside
d) None

4. Profit on sale of fixed asset is used to create

a) Specific reserve
b) General reserve
c) Capital reserve
d) None

5. Which of the following is not true about reserves?

a) It is an appropriation of profits
b) Reserves does not reduce the Net profits
c) It is debited to profit and loss account
d) It is made to meet future uncertainties.

6. Assertions (A): Reserves is an Appropriation of profits.

Reason (R): Reserves are created only if adequate profits have been earned.
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
 7. Which of the following reserve is not disclosed in the balance sheet
a) General reserve
b) Capital reserve
c) Secret reserve
d) None

8. Dividend Equalization Reserve is :

a) Specific Reserve
b) None of these
c) Secret Reserve
d) General Reserve

9. Which of the following is not true about secret reserves?

a) The actual position of the firm is better than what is disclosed in the balance
sheet
b) It leads to unfair presentation of financial statements.
c) It may be utilized by management to cover their mistakes or misdeeds.
d) It is shown in the Balance sheet.

10. These reserves are not available for distribution of dividends

a) Revenue reserves
b) General reserves
c) Capital reserves
d) None of the above.

Watch this video for better understanding: https://youtu.be/gJJR9BME0Wk

Answer Keys

1 D
2 A
3 A
4 C
5 C
6 A
7 C
8 A
9 D
10 C