BOOKKEEPING TEST 02
Bookkeeping: Maintaining Financial Records Test 02 - Instructions - Instructions
- Format: This exam consists of 100 multiple-choice questions. Each question has one correct answer.
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FA2 Maintaining Financial Records Questions
Question 1: Which accounting concept ensures that financial statements are prepared under the assumption that the entity will continue to operate indefinitely?
A) Materiality
B) Consistency
C) Going Concern
D) Prudence
Answer: C) Going Concern. The going concern concept assumes that the business will continue to operate in the foreseeable future without intention to liquidate.
Question 2: What qualitative characteristic of useful financial information ensures that the information reflects the actual financial situation of a company?
A) Comparability
B) Faithful Representation
C) Timeliness
D) Understandability
Answer: B) Faithful Representation. Faithful representation ensures that financial information accurately reflects the economic conditions of the business.
Question 3: Which accounting principle requires companies to record revenue when it is earned and expenses when they are incurred, regardless of cash flow?
A) Prudence
B) Business Entity
C) Historical Cost
D) Accrual Accounting
Answer: D) Accrual Accounting. Accrual accounting records revenues and expenses when they are earned or incurred, not when cash is exchanged.
Question 4: In double-entry bookkeeping, what is the effect of purchasing equipment worth TZS 2,000,000 on credit?
A) Increase in liabilities and decrease in assets
B) Increase in assets and decrease in equity
C) Decrease in liabilities and increase in assets
D) Increase in assets and increase in liabilities
Answer: D) Increase in assets and increase in liabilities. Purchasing equipment on credit increases the asset (equipment) and liability (creditors).
Question 5: Which qualitative characteristic of useful financial information refers to the ability to compare financial statements across different periods and entities?
A) Comparability
B) Relevance
C) Verifiability
D) Timeliness
Answer: A) Comparability. Comparability allows users to analyze differences and similarities in financial data across time periods or different entities.
Question 6: Which accounting concept emphasizes the need to include all significant information in financial reports that could affect decision-making?
A) Consistency
B) Prudence
C) Materiality
D) Historical Cost
Answer: C) Materiality. Materiality means that all significant financial information must be included in financial reports to ensure accurate decision-making.
Question 7: In the accounting equation, what happens to the equity when a sole trader withdraws TZS 500,000 from the business for personal use?
A) Equity increases
B) Equity decreases
C) Assets increase
D) Liabilities decrease
Answer: B) Equity decreases. A withdrawal (also known as drawings) reduces the equity of a sole trader.
Question 8: What is the role of IFRS in relation to the preparation of financial statements?
A) It sets the rules for double-entry bookkeeping.
B) It provides guidelines for preparing budgets.
C) It provides standards for preparing financial statements.
D) It outlines tax payment procedures.
Answer: C) It provides standards for preparing financial statements. IFRS establishes rules for how financial statements should be prepared and presented globally.
Question 9: Which accounting principle ensures that businesses record expenses as soon as there is a possibility of loss, even if the actual loss has not yet occurred?
A) Duality
B) Prudence
C) Going Concern
D) Accrual Accounting
Answer: B) Prudence. Prudence requires that businesses recognize expenses and liabilities as soon as they are probable to avoid overstating income.
Question 10: What is the importance of closing off general ledger accounts and preparing a trial balance?
A) It helps ensure that the accounts are in balance for the next accounting period.
B) It prepares the accounts for an audit.
C) It generates tax information.
D) It reconciles bank accounts.
Answer: A) It helps ensure that the accounts are in balance for the next accounting period. A trial balance checks that debits equal credits, which is essential for accurate financial reporting.
Question 11: Which financial statement element represents the resources owned by a business?
A) Assets
B) Liabilities
C) Equity
D) Expenses
Answer: A) Assets. Assets are resources owned by a business that are expected to bring future economic benefits.
Question 12: What is the impact on the accounting equation when a company takes out a loan of TZS 5,000,000?
A) Increase in assets and decrease in liabilities
B) Increase in assets and increase in liabilities
C) Decrease in equity and increase in assets
D) No effect on the accounting equation
Answer: B) Increase in assets and increase in liabilities. The loan increases cash (asset) and creates a liability (loan payable).
Question 13: Which accounting principle dictates that a business's financial records should be kept separate from the personal finances of its owner?
A) Prudence
B) Materiality
C) Business Entity
D) Historical Cost
Answer: C) Business Entity. The business entity principle requires that the business’s transactions are recorded separately from the owner’s personal transactions.
Question 14: Why is it necessary to close off general ledger accounts at the end of an accounting period?
A) To prepare the accounts for external auditing
B) To transfer profits to the bank account
C) To reset the balances for the new accounting period
D) To generate reports for stakeholders
Answer: C) To reset the balances for the new accounting period. Closing off ledger accounts ensures that the accounts start fresh for the next period.
Question 15: What is the purpose of preparing journal entries in the accounting process?
A) To record financial transactions in a chronological order
B) To reconcile bank accounts
C) To calculate income tax
D) To approve financial statements
Answer: A) To record financial transactions in a chronological order. Journal entries help ensure that transactions are accurately recorded as they occur.
Question 16: If a business makes a cash sale of TZS 1,000,000, what is the effect on the accounting equation?
A) Assets increase, liabilities decrease
B) Assets increase, equity increases
C) Liabilities increase, equity decreases
D) No effect on the accounting equation
Answer: B) Assets increase, equity increases. The cash sale increases the cash balance (asset) and increases revenue, which boosts equity.
Question 17: Which accounting record typically serves as the starting point for creating a company’s financial statements?
A) Bank reconciliation
B) Trial balance
C) General ledger
D) Income statement
Answer: B) Trial balance. A trial balance ensures that the debit and credit entries are balanced and serves as a foundation for preparing financial statements.
Question 18: How does the use of a cloud-based accounting system benefit a business in terms of financial record-keeping?
A) It allows access to data from anywhere with internet access.
B) It guarantees protection from cyberattacks.
C) It eliminates the need for bookkeeping staff.
D) It automates the reconciliation process.
Answer: A) It allows access to data from anywhere with internet access. Cloud-based accounting systems provide flexibility by allowing data to be accessed remotely.
Question 19: What is the meaning of income in the context of financial statements?
A) Money borrowed by the business
B) Revenue earned from business operations
C) Assets sold by the business
D) Equity contributions from owners
Answer: B) Revenue earned from business operations. Income refers to money earned from selling goods or providing services.
Question 20: Which of the following describes the purpose of general ledger accounts?
A) To record detailed financial transactions for each account
B) To reconcile cash flow and profits
C) To calculate the company's tax liabilities
D) To produce budget forecasts
Answer: A) To record detailed financial transactions for each account. General ledger accounts are used to organize and record the detailed financial transactions of a business.
Question 21: At the end of the financial year, what should be done with the balances in the general ledger accounts?
A) Leave them as they are
B) Carry forward balances into the next period or close them off, depending on the account type
C) Transfer them to the inventory account
D) Clear all balances to zero
Answer: B) Carry forward balances into the next period or close them off, depending on the account type. Year-end procedures involve either closing revenue and expense accounts or carrying forward asset, liability, and equity balances.
Question 22: How should sales transactions be recorded in the general ledger?
A) Credit the sales account and debit the accounts receivable or cash account
B) Debit the sales account and credit the inventory account
C) Credit the accounts payable and debit the cash account
D) Debit the expense account and credit the sales account
Answer: A) Credit the sales account and debit the accounts receivable or cash account. Sales transactions increase revenue (credit) and increase receivables or cash (debit).
Question 23: How should purchase transactions be recorded in the general ledger?
A) Debit the purchases account and credit accounts payable or cash
B) Credit the purchases account and debit accounts receivable
C) Debit the cash account and credit the sales account
D) Debit the inventory account and credit the accounts payable
Answer: A) Debit the purchases account and credit accounts payable or cash. Purchases are recorded as an expense (debit) with either a liability or cash decrease (credit).
Question 24: How are sales returns recorded in the general ledger?
A) Credit the sales account and debit accounts receivable
B) Debit the sales returns account and credit the accounts receivable or cash account
C) Debit the purchases account and credit the inventory account
D) Debit the sales account and credit the cash account
Answer: B) Debit the sales returns account and credit the accounts receivable or cash account. Sales returns reduce revenue (debit) and either reduce receivables or cash (credit).
Question 25: How should trade discounts be accounted for in accordance with IFRS®?
A) They are recorded as an expense
B) Trade discounts are not recorded separately; the sales or purchase amount is recorded net of the discount
C) They are recorded as income
D) Trade discounts are added to the revenue
Answer: B) Trade discounts are not recorded separately; the sales or purchase amount is recorded net of the discount. IFRS® does not require separate recognition of trade discounts.
Question 26: How should settlement discounts allowed to customers be accounted for?
A) Record the discount as an expense when the customer pays within the discount period
B) Deduct the discount from the revenue account
C) Record it as an increase in the sales account
D) No need to record it separately
Answer: A) Record the discount as an expense when the customer pays within the discount period. Settlement discounts offered reduce the amount received and are recorded as an expense under IFRS®.
Question 27: How do you account for discounts received from suppliers?
A) Reduce the cost of purchases or record it as income if separate
B) Add the discount to the cash account
C) Record the discount as an expense
D) Ignore the discount
Answer: A) Reduce the cost of purchases or record it as income if separate. Discounts received reduce the overall cost of purchases.
Question 28: What information is typically required to register for sales tax?
A) Business name, address, and annual turnover
B) Business owner's personal tax returns
C) Bank account details only
D) Sales invoices
Answer: A) Business name, address, and annual turnover. These details are required to register for sales tax with tax authorities.
Question 29: What is the effect of underpaying sales tax on a business?
A) The business receives a refund
B) The business may face penalties for late payment
C) It reduces the business’s liability
D) It increases the sales revenue
Answer: B) The business may face penalties for late payment. Underpayment or late payment of sales tax can result in penalties imposed by tax authorities.
Question 30: What is the sales tax classification for supplies such as basic food items in many tax jurisdictions?
A) Exempt
B) Standard-rated
C) Zero-rated
D) Reduced-rated
Answer: A) Exempt. Basic food items are often exempt from sales tax in many tax jurisdictions.
Question 31: How should cash transactions be recorded in the general ledger?
A) Debit the cash account for inflows and credit for outflows
B) Credit the cash account for inflows and debit for outflows
C) Only credit the cash account
D) No entry is needed for cash transactions
Answer: A) Debit the cash account for inflows and credit for outflows. Cash inflows increase cash (debit), while outflows decrease cash (credit).
Question 32: What is the impact of bank reconciliations on financial reporting?
A) They ensure the cash balance reported matches the bank balance
B) They increase the cash balance reported
C) They eliminate the need for cash flow statements
D) They only affect the income statement
Answer: A) They ensure the cash balance reported matches the bank balance. Bank reconciliations help identify discrepancies between the bank's records and the company's records.
Question 33: How should adjustments for inventory be recorded when preparing financial statements?
A) Adjust the cost of goods sold and closing inventory accounts
B) Only adjust the sales account
C) Record it as a separate expense
D) No adjustments are needed
Answer: A) Adjust the cost of goods sold and closing inventory accounts. Proper adjustments ensure accurate representation of inventory value in financial statements.
Question 34: What method can be used to value inventories?
A) FIFO (First In, First Out)
B) LIFO (Last In, First Out)
C) Specific identification
D) All of the above
Answer: D) All of the above. FIFO, LIFO, and specific identification are all methods used to value inventories under different circumstances.
Question 35: Which IFRS® requirement must be followed when valuing inventories?
A) Use the lower of cost or net realizable value
B) Always use historical cost
C) Valuate inventories based on market value
D) Ignore obsolete stock
Answer: A) Use the lower of cost or net realizable value. IFRS® requires that inventories be recorded at the lower of cost or net realizable value to ensure accurate reporting.
Question 36: How do you calculate the value of closing inventories using the FIFO method?
A) Add the costs of the most recent purchases
B) Add the costs of the earliest purchases
C) Average all purchase costs
D) Only consider the cost of the latest purchase
Answer: A) Add the costs of the most recent purchases. Under FIFO, the earliest inventory purchased is sold first, so the closing inventory consists of the most recent purchases.
Question 37: How should the average cost method (AVCO) be applied to inventory valuation?
A) Calculate the average cost of all units available for sale
B) Use only the cost of the last purchase
C) Average the costs of the first and last purchases
D) Select the highest purchase cost
Answer: A) Calculate the average cost of all units available for sale. The average cost method spreads costs evenly across all units available for sale.
Question 38: What is the primary purpose of maintaining accurate inventory records?
A) To ensure financial statements accurately reflect the financial position
B) To reduce labor costs
C) To increase sales only
D) To eliminate the need for physical counts
Answer: A) To ensure financial statements accurately reflect the financial position. Accurate inventory records are crucial for reporting true financial health.
Question 39: What should a business do to prepare for year-end inventory counts?
A) Review inventory records and reconcile discrepancies
B) Ignore inventory levels until year-end
C) Sell all remaining inventory
D) Only count high-value items
Answer: A) Review inventory records and reconcile discrepancies. Proper preparation ensures accurate counts and inventory valuations.
Question 40: What is a key benefit of using a computerized accounting system for inventory management?
A) It provides real-time inventory tracking and updates
B) It reduces the need for any physical counts
C) It only benefits the sales department
D) It eliminates all accounting errors
Answer: A) It provides real-time inventory tracking and updates. Computerized systems enhance accuracy and efficiency in managing inventory.
Question 41: Which inventory valuation method results in the highest profit during periods of rising prices?
A) FIFO (First In, First Out)
B) LIFO (Last In, First Out)
C) Weighted average cost
D) Specific identification
Answer: B) LIFO (Last In, First Out). During rising prices, LIFO results in lower profits as the most recent higher costs are matched against revenue.
Question 42: How does the choice of inventory valuation method impact the balance sheet?
A) It affects the value of current assets reported
B) It does not impact current assets
C) It only affects liabilities
D) It only impacts the income statement
Answer: A) It affects the value of current assets reported. Different methods result in varying inventory values, impacting the financial position.
Question 43: What distinguishes non-current assets from current assets?
A) Non-current assets are intended for long-term use
B) Non-current assets are convertible to cash within one year
C) Non-current assets have a useful life of less than one year
D) Non-current assets do not generate income
Answer: B) Non-current assets are convertible to cash within one year. Non-current assets are typically held for longer periods, providing long-term benefits.
Question 44: What is the primary purpose of depreciation in financial accounting?
A) To allocate the cost of a tangible asset over its useful life
B) To increase asset value
C) To provide tax benefits only
D) To enhance cash flow
Answer: A) To allocate the cost of a tangible asset over its useful life. Depreciation matches the cost of an asset with the revenue it generates.
Question 45: When classifying expenditures, which of the following is considered an asset expenditure?
A) Purchase of machinery
B) Office supplies purchased for immediate use
C) Employee salaries
D) Advertising expenses
Answer: A) Purchase of machinery. Asset expenditures are capitalized, as they provide long-term benefits.
Question 46: How would misclassifying an asset as an expense impact the financial statements?
A) It would understate profits and assets
B) It would overstate profits
C) It would have no impact
D) It would only affect the cash flow statement
Answer: A) It would understate profits and assets. Misclassification can distort the financial health of the entity.
Question 47: Which method can be used to calculate depreciation?
A) Straight-line method
B) Double declining balance method
C) Sum-of-the-years'-digits method
D) All of the above
Answer: D) All of the above. Each method serves different accounting needs and can be chosen based on asset characteristics.
Question 48: When preparing journal entries for asset acquisition, what is recorded?
A) The cost of the asset and any related expenses
B) Only the cash payment made
C) Depreciation expense only
D) No entry is needed
Answer: A) The cost of the asset and any related expenses. Accurate journal entries reflect the total investment in the asset.
Question 49: What is the purpose of a non-current asset register?
A) To track and manage all non-current assets owned by the business
B) To record sales transactions
C) To calculate tax obligations
D) To track employee performance
Answer: A) To track and manage all non-current assets owned by the business. This helps in accurate reporting and management of asset values.
Question 50: How do accruals impact the financial statements?
A) They ensure revenues and expenses are recognized in the period they occur
B) They only affect cash flow
C) They have no impact on financial statements
D) They reduce taxable income
Answer: A) They ensure revenues and expenses are recognized in the period they occur. Accrual accounting provides a more accurate financial picture.
Question 51: Which accounting concept requires that revenue be recognized when it is earned, regardless of when cash is received?
A) Accrual basis
B) Cash basis
C) Matching principle
D) Conservatism
Answer: A) Accrual basis. The accrual basis of accounting ensures that revenue is recorded when earned, not necessarily when cash is received.
Question 52: How should prepaid expenses be reported on the financial statements?
A) As current assets
B) As long-term liabilities
C) As expenses
D) Not reported
Answer: A) As current assets. Prepaid expenses are considered current assets until they are consumed.
Question 53: What impact do accruals have on profit for the period?
A) They can increase profit
B) They do not affect profit
C) They always decrease profit
D) They only impact cash flow
Answer: A) They can increase profit. Accruals ensure that expenses and revenues are recorded in the correct period, affecting profit.
Question 54: Which of the following correctly illustrates the impact of deferred income on financial statements?
A) Increases current liabilities
B) Decreases net income
C) Increases assets
D) Does not affect cash flow
Answer: B) Decreases net income. Deferred income is recognized as a liability until earned, impacting net income.
Question 55: What type of accounting adjustment is required for accrued expenses at year-end?
A) Increase liabilities
B) Decrease assets
C) Increase equity
D) No adjustment needed
Answer: A) Increase liabilities. Accrued expenses represent obligations that need to be recognized in the financial statements.
Question 56: Which of the following statements about depreciation methods is true?
A) The choice of method can affect financial statements
B) All methods result in the same total depreciation expense
C) Depreciation does not affect cash flow
D) Only straight-line method is acceptable
Answer: A) The choice of method can affect financial statements. Different methods allocate depreciation expense differently over the asset's life.
Question 57: In which situation would a company choose to use the diminishing-balance method of depreciation?
A) For assets that provide consistent utility over time
B) For assets that lose value quickly
C) For low-cost items
D) For all types of assets
Answer: B) For assets that lose value quickly. The diminishing-balance method reflects the accelerated loss of value for certain assets.
Question 58: What is the effect of recognizing a deferred expense on the financial statements?
A) Increase current liabilities
B) Decrease net income in the current period
C) Increase assets
D) No effect
Answer: B) Decrease net income in the current period. Recognizing a deferred expense shifts expense recognition to a future period.
Question 59: Which component is crucial for the accurate reporting of non-current assets?
A) Non-current asset register
B) Cash flow statement
C) Profit and loss account
D) Accounts receivable ledger
Answer: A) Non-current asset register. A non-current asset register is essential for tracking and managing the value of long-term assets.
Question 60: How is the impact of sales tax on inventory reflected in financial statements?
A) Included in the cost of inventory
B) Treated as a separate liability
C) Reported as an expense
D) Not recorded
Answer: A) Included in the cost of inventory. Sales tax incurred on inventory purchases is typically included in the inventory cost.
Question 61: Which of the following is an example of a trade receivable?
A) Inventory
B) Bank loan
C) Customer invoice not yet paid
D) Employee salaries payable
Answer: C) Customer invoice not yet paid. A trade receivable is an amount owed to a business by its customers for goods or services supplied on credit.
Question 62: What is the impact of writing off an irrecoverable debt on the statement of profit or loss?
A) It reduces the profit for the period
B) It increases the cash flow for the period
C) It increases the total liabilities
D) It does not impact the profit or loss
Answer: A) It reduces the profit for the period. Writing off an irrecoverable debt is an expense, which decreases the net profit of the business.
Question 63: How is the movement in the allowance for irrecoverable debts calculated?
A) Difference between opening and closing balances of the allowance account
B) The total amount of debts written off during the year
C) The total value of trade receivables
D) The total revenue earned during the period
Answer: A) Difference between opening and closing balances of the allowance account. The movement in the allowance for irrecoverable debts is the net change in the allowance account over the period.
Question 64: When preparing journal entries to create an allowance for irrecoverable debts, which account is credited?
A) Allowance for irrecoverable debts account
B) Cash account
C) Trade receivables account
D) Sales account
Answer: A) Allowance for irrecoverable debts account. The allowance account is credited to create the provision for irrecoverable debts.
Question 65: How is the closing balance of the allowance for irrecoverable debts reported in the statement of financial position?
A) As an expense in the profit or loss
B) As part of trade receivables in current assets
C) Deducted from trade receivables in current assets
D) As a non-current liability
Answer: C) Deducted from trade receivables in current assets. The allowance for irrecoverable debts is deducted from the trade receivables to reflect the net realizable value of the receivables.
Question 66: Which of the following best describes a provision in accordance with IFRS Accounting Standards?
A) A liability of uncertain timing or amount
B) A deferred income item
C) A trade receivable
D) A contingent asset
Answer: A) A liability of uncertain timing or amount. A provision is recognized when there is a present obligation as a result of a past event and an outflow of resources is probable.
Question 67: What is the purpose of reconciling the bank general ledger account with the bank statement?
A) To identify errors in the inventory records
B) To calculate the interest payable on loans
C) To identify errors and omissions in the bank account records
D) To verify the accuracy of sales invoices
Answer: C) To identify errors and omissions in the bank account records. Bank reconciliation ensures that discrepancies between the bank ledger and bank statement are identified and corrected.
Question 68: In a bank reconciliation, which of the following is classified as a timing difference?
A) An overdraft
B) A cheque issued but not yet presented for payment
C) An incorrect entry in the bank account
D) A deposit received but not recorded in the bank
Answer: B) A cheque issued but not yet presented for payment. Timing differences occur when transactions have been recorded in the ledger but have not yet been processed by the bank.
Question 69: When preparing a reconciliation for the trade payables general ledger account, which of the following should be considered?
A) Customer invoices
B) Supplier statements
C) Bank reconciliation
D) Inventory adjustments
Answer: B) Supplier statements. Reconciliation of trade payables involves comparing the general ledger account with supplier statements to ensure accuracy.
Question 70: How are provisions typically reported in the financial statements?
A) As liabilities on the statement of financial position
B) As assets in the statement of financial position
C) As income in the statement of profit or loss
D) As equity in the statement of financial position
Answer: A) As liabilities on the statement of financial position. Provisions are recognized as liabilities, reflecting potential future outflows of economic resources.
Question 71: Which of the following correctly explains the nature of a provision according to IFRS Accounting Standards?
A) A liability to pay a supplier within 30 days
B) A liability of uncertain timing or amount
C) An asset that has a future economic benefit
D) A liability to be paid after one year
Answer: B) A liability of uncertain timing or amount. Provisions are liabilities where the amount or timing is uncertain and are accounted for under IFRS.
Question 72: What is the impact of an irrecoverable debt on the statement of financial position?
A) It decreases trade receivables and increases expenses
B) It increases trade receivables and decreases liabilities
C) It increases equity and decreases trade payables
D) It decreases liabilities and increases cash
Answer: A) It decreases trade receivables and increases expenses. Writing off an irrecoverable debt reduces the amount of receivables on the balance sheet and is charged as an expense in the profit and loss statement.
Question 73: How is a provision reported in financial statements?
A) As an increase in equity
B) As a non-current asset
C) As a current liability only
D) As either a current or non-current liability depending on the timing of the payment
Answer: D) As either a current or non-current liability depending on the timing of the payment. Provisions are categorized based on when the payment is expected, under IFRS.
Question 74: Which of the following represents a journal entry to write off an irrecoverable debt of TZS 500,000?
A) Debit Trade Receivables TZS 500,000, Credit Sales TZS 500,000
B) Debit Bad Debts Expense TZS 500,000, Credit Trade Receivables TZS 500,000
C) Debit Cash TZS 500,000, Credit Trade Receivables TZS 500,000
D) Debit Trade Payables TZS 500,000, Credit Bank TZS 500,000
Answer: B) Debit Bad Debts Expense TZS 500,000, Credit Trade Receivables TZS 500,000. This journal entry reflects the write-off of an irrecoverable debt.
Question 75: What is the purpose of reconciling a bank general ledger account to the bank statement?
A) To identify timing differences and errors between the records
B) To assess the profitability of the company
C) To determine the total capital injected into the business
D) To calculate the trade payables balance
Answer: A) To identify timing differences and errors between the records. Bank reconciliations help to find discrepancies between the company's ledger and the bank statement.
Question 76: When reconciling a trade payables ledger, which of the following would be corrected?
A) Mistakes in sales transactions
B) Errors in supplier invoices and statements
C) Incorrect calculation of tax liabilities
D) Errors in cash balances
Answer: B) Errors in supplier invoices and statements. Reconciling trade payables involves ensuring that supplier invoices and payments match the ledger entries.
Question 77: How does a contra entry between trade receivables and trade payables affect the financial statements?
A) Increases both assets and liabilities
B) Decreases both assets and liabilities
C) Offsets amounts receivable and payable for the same party
D) Increases equity
Answer: C) Offsets amounts receivable and payable for the same party. A contra entry allows amounts owed by and to the same party to be netted off.
Question 78: In which of the following scenarios is a provision likely to be recognized?
A) A legal case is pending, and the outcome is probable with an estimated financial loss
B) A company expects higher sales next year
C) A company plans to expand its operations in five years
D) A trade receivable is expected to pay next month
Answer: A) A legal case is pending, and the outcome is probable with an estimated financial loss. IFRS requires provisions to be recognized for probable future losses with reliable estimates.
Question 79: What is the correct journal entry to record a provision of TZS 2,000,000 for future legal claims?
A) Debit Legal Expenses TZS 2,000,000, Credit Bank TZS 2,000,000
B) Debit Legal Expenses TZS 2,000,000, Credit Provision for Legal Claims TZS 2,000,000
C) Debit Trade Receivables TZS 2,000,000, Credit Provision for Legal Claims TZS 2,000,000
D) Debit Provision for Legal Claims TZS 2,000,000, Credit Bank TZS 2,000,000
Answer: B) Debit Legal Expenses TZS 2,000,000, Credit Provision for Legal Claims TZS 2,000,000. This records the creation of a provision for future legal expenses.
Question 80: Which of the following would require an adjustment to the allowance for irrecoverable debts?
A) An increase in inventory
B) A significant increase in overdue receivables
C) A decrease in the company’s cash balance
D) An increase in trade payables
Answer: B) A significant increase in overdue receivables. When receivables are overdue, the allowance for irrecoverable debts must be reviewed and adjusted accordingly.
Question 81: What is the primary purpose of preparing a trial balance?
A) To record year-end adjustments
B) To verify that total debits equal total credits
C) To prepare financial statements
D) To correct accounting errors
Answer: B) To verify that total debits equal total credits. The trial balance is used to check the accuracy of ledger balances.
Question 82: Which of the following errors will be detected by a trial balance?
A) An entry where debits and credits are unequal
B) A transaction posted to the wrong account
C) An omission of a transaction
D) A compensating error
Answer: A) An entry where debits and credits are unequal. A trial balance reveals errors where the totals of debits and credits do not match.
Question 83: Which of the following errors will NOT be detected by extracting a trial balance?
A) A transposition error
B) A reversal of entries
C) A transaction entered in the wrong account
D) A single-sided journal entry
Answer: C) A transaction entered in the wrong account. Errors of principle or those involving wrong accounts do not affect the trial balance.
Question 84: What is the impact of overstating expenses on the statement of profit or loss?
A) Profit is overstated
B) Profit is understated
C) Profit is not affected
D) There is no impact on the profit or loss
Answer: B) Profit is understated. Overstating expenses reduces the reported profit for the period.
Question 85: What is the main limitation of a trial balance?
A) It identifies all types of errors in the accounts
B) It ensures financial statements are accurate
C) It only checks for mathematical accuracy, not errors in principle
D) It does not identify compensating errors
Answer: C) It only checks for mathematical accuracy, not errors in principle. The trial balance checks if debits equal credits but does not catch all errors.
Question 86: Which of the following adjustments would be recorded on a trial balance?
A) Recording a sale
B) Recognizing depreciation expense
C) Reversing a journal entry
D) Posting a bank transaction
Answer: B) Recognizing depreciation expense. Depreciation is a year-end adjustment that must be accounted for in the trial balance.
Question 87: What is the purpose of a suspense account?
A) To temporarily record discrepancies in the trial balance
B) To record depreciation
C) To hold provisions for bad debts
D) To adjust for inventory
Answer: A) To temporarily record discrepancies in the trial balance. Suspense accounts are used when the cause of the imbalance is unclear.
Question 88: How can suspense accounts be cleared?
A) By posting new transactions
B) By identifying and correcting errors
C) By reversing all entries
D) By closing the accounts
Answer: B) By identifying and correcting errors. Once errors are identified and corrected, suspense accounts are cleared.
Question 89: Which type of error would result in a suspense account being created?
A) A compensating error
B) A single-sided journal entry
C) An error of omission
D) A transposition error
Answer: B) A single-sided journal entry. If one side of a transaction is not recorded, it results in an imbalance and leads to a suspense account.
Question 90: Which of the following year-end adjustments would affect the trial balance?
A) Recording a cash sale
B) Making an allowance for irrecoverable debts
C) Posting a bank reconciliation
D) Reversing a previous journal entry
Answer: B) Making an allowance for irrecoverable debts. Allowances for irrecoverable debts are recorded as part of year-end adjustments and affect the trial balance.
Question 91: How is the statement of profit or loss affected if year-end adjustments are not made for accruals?
A) Expenses will be understated
B) Expenses will be overstated
C) Revenue will be overstated
D) Profit will remain unchanged
Answer: A) Expenses will be understated. If accruals are not recognized, expenses for the period will be understated,impacting profit.
Question 92: How is the profit shared among partners typically determined?
A) Based on the sales generated by each partner
B) As per the partnership agreement
C) Equally among all partners regardless of input
D) By the number of years each partner has been in business
Answer: B) As per the partnership agreement. The distribution of profits is usually outlined in the partnership agreement.
Question 93: What is one characteristic of a partnership?
A) Limited liability for all partners
B) Unlimited liability for general partners
C) Shares can be publicly traded
D) Partners cannot make decisions collectively
Answer: B) Unlimited liability for general partners. In a partnership, partners may be held personally liable for the debts of the business.
Question 94: When a new partner is admitted, how is goodwill typically treated?
A) Written off immediately
B) Ignored in the financial statements
C) Valued and shared among existing partners
D) Recorded as a liability
Answer: C) Valued and shared among existing partners. Goodwill can be recognized and allocated to existing partners upon the admission of a new partner.
Question 95: What is a key difference between partners’ capital accounts and current accounts?
A) Capital accounts reflect the initial investment, while current accounts track ongoing transactions
B) Current accounts are used for fixed assets only
C) Capital accounts are always positive, while current accounts can be negative
D) There is no difference; both serve the same purpose
Answer: A) Capital accounts reflect the initial investment, while current accounts track ongoing transactions. This distinction is crucial for understanding partner contributions and withdrawals.
Question 96: How should appropriations of profit be accounted for?
A) As expenses on the statement of profit or loss
B) As liabilities in the statement of financial position
C) As income in the statement of profit or loss
D) Not recorded at all until paid
Answer: A) As expenses on the statement of profit or loss. Appropriations are distributions of profit and reduce the profit available to partners.
Question 97: What is typically the first step in preparing financial statements from a trial balance?
A) Adjust for inventory
B) Classify accounts into revenues and expenses
C) Prepare the cash flow statement
D) Finalize the trial balance
Answer: B) Classify accounts into revenues and expenses. This classification is essential for preparing the financial statements.
Question 98: Which method can be used to construct accounts from incomplete records?
A) The use of markups and margins
B) Bank reconciliation only
C) Direct comparisons with competitors
D) Using historical sales data
Answer: A) The use of markups and margins. This method helps in estimating profits based on sales data.
Question 99: What is a primary responsibility of partners in a partnership?
A) To limit their personal liability
B) To act solely in their own interest
C) To manage the business collectively
D) To avoid financial records
Answer: C) To manage the business collectively. Partnerships require shared management and decision-making.
Question 100: How should the financial statements for a partnership be prepared?
A) Based solely on the partner with the highest capital
B) By considering contributions, appropriations, and profit-sharing ratios
C) Without consideration of any partnership agreements
D) Only using external financial data
Answer: B) By considering contributions, appropriations, and profit-sharing ratios. This ensures an accurate representation of each partner's financial position.
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