FINANCIAL ACCOUNTING TEST 01
Financial Accounting Test 01 - Instructions
- Format: This exam consists of 100 multiple-choice questions. Each question has one correct answer.
- Answering Questions: Choose the correct answer from the options provided for each question.
- Scoring:
- If your answer is correct, the system will mark it as correct and provide a brief explanation.
- If your answer is incorrect, the system will mark it as wrong and show the correct answer with an explanation.
- Report Card: At the end of the exam, you'll see a report card that summarizes your performance:
- Total Questions Attempted: The number of questions you answered.
- Correct Answers: How many answers were correct.
- Wrong Answers: How many answers were incorrect.
- Percentage: The percentage of correct answers.
- Ongoing Marking: The system will automatically mark your answers as you proceed through the exam, so you will see your results in real-time.
- Technical Issues: If you encounter any problems, please contact support at [email protected].
Good luck!
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FA/FFA Financial Accounting Questions
Question 1: What is the purpose of reconciling the trade payables general ledger account to supplier statements?
A) To track sales revenue
B) To correct errors in payroll processing
C) To verify the balance owed to suppliers aligns with their statements
D) To reconcile cash balances with bank statements
Answer: C) To verify the balance owed to suppliers aligns with their statements. This helps ensure accuracy in financial reporting.
Question 2: Which of the following errors would NOT be detected by preparing a trial balance?
A) A transaction posted to the wrong account
B) An incorrect amount posted to the accounts
C) A transaction entered twice in the system
D) A debit entered as a credit
Answer: B) An incorrect amount posted to the accounts. A trial balance only identifies unbalanced transactions, not errors in amounts.
Question 3: What is the purpose of a suspense account in accounting?
A) To correct tax errors
B) To track pending sales transactions
C) To temporarily hold unbalanced transactions until they can be corrected
D) To record interest payments
Answer: C) To temporarily hold unbalanced transactions until they can be corrected. Suspense accounts are used to manage discrepancies in the trial balance.
Question 4: When preparing a statement of cash flows, which of the following would be classified as an investing activity?
A) Purchase of property, plant, and equipment
B) Payment of dividends to shareholders
C) Payment of salaries and wages
D) Issuing shares to raise capital
Answer: A) Purchase of property, plant, and equipment. Investing activities include the acquisition and disposal of long-term assets.
Question 5: How is goodwill calculated during a business acquisition?
A) Fair value of assets + liabilities
B) Purchase price - fair value of net assets
C) Fair value of consideration transferred + fair value of non-controlling interests - fair value of net assets at acquisition
D) Fair value of assets + fair value of net liabilities at acquisition
Answer: C) Fair value of consideration transferred + fair value of non-controlling interests - fair value of net assets at acquisition. This is how goodwill is calculated under IFRS Accounting Standards.
Question 6: What is the main purpose of interpreting financial statements using ratio analysis?
A) To assess the financial performance and position of a company
B) To determine the amount of taxes owed
C) To prepare the annual budget
D) To forecast future sales revenue
Answer: A) To assess the financial performance and position of a company. Ratios provide insights into profitability, liquidity, efficiency, and other key metrics.
Question 7: What is considered an "adjusting event" under IFRS Accounting Standards?
A) An event that occurs after the reporting period and does not affect the financial statements
B) An event that provides further evidence of conditions that existed at the end of the reporting period
C) A significant change in management policy
D) A new transaction that occurs after the reporting period
Answer: B) An event that provides further evidence of conditions that existed at the end of the reporting period. Adjusting events impact financial statements by revealing conditions that were present at the reporting date.
Question 8: Which of the following is NOT a key feature of the statement of financial position?
A) It shows the company’s cash flow over a period
B) It shows the company’s assets, liabilities, and equity at a specific point in time
C) It reflects the accounting equation
D) It forms part of the company’s annual financial statements
Answer: A) It shows the company’s cash flow over a period. The statement of financial position reflects the company’s assets, liabilities, and equity at a specific point, not cash flow over time.
Question 9: When reconciling the trade payables general ledger account, what is the primary purpose of comparing the balance with external documents?
A) To ensure the accuracy of the company's revenue figures
B) To validate the accuracy of the company's inventory records
C) To confirm that the recorded liabilities match the actual amounts owed to suppliers
D) To verify the correctness of the company's capital structure
Answer: C) To confirm that the recorded liabilities match the actual amounts owed to suppliers. This ensures the accuracy of trade payables in financial reporting.
Question 10: How would you correct a transaction recorded twice in the general ledger?
A) By adjusting the trial balance
B) By creating a new transaction entry
C) By preparing a journal entry to remove the duplicate
D) By updating the suspense account
Answer: C) By preparing a journal entry to remove the duplicate. This ensures that the transaction is accurately recorded only once.
Question 11: What is an example of an investing activity in the statement of cash flows?
A) Purchase of new machinery
B) Payment of short-term loans
C) Receipt of dividend income
D) Payment of salaries
Answer: A) Purchase of new machinery. Investing activities include transactions involving the acquisition or disposal of long-term assets.
Question 12: Which of the following statements is true regarding the statement of profit or loss and other comprehensive income?
A) It includes only cash transactions
B) It reflects the company's revenue, expenses, and other comprehensive income over a period
C) It reports the company's financial position as of the reporting date
D) It is prepared using only historical cost accounting
Answer: B) It reflects the company's revenue, expenses, and other comprehensive income over a period. This statement provides a summary of financial performance.
Question 13: What is the purpose of calculating ratios when analyzing financial statements?
A) To determine the company's market share
B) To assess the accuracy of the company's tax returns
C) To evaluate the company's internal control systems
D) To measure the company's performance and financial health
Answer: D) To measure the company's performance and financial health. Ratios help assess various aspects of financial performance and position.
Question 14: How should events occurring after the reporting period be classified according to IFRS Accounting Standards?
A) Adjusting or non-adjusting based on their nature and impact
B) As prior period adjustments
C) As contingent liabilities
D) As revaluation adjustments
Answer: A) Adjusting or non-adjusting based on their nature and impact. Adjusting events affect amounts reported, while non-adjusting events do not.
Question 15: What is the main characteristic of an associate in group accounting?
A) Full control over the associate's financial policies
B) The ability to influence the financial and operational decisions of the associate
C) Significant influence without full control
D) Ownership of more than 50% of the associate's shares
Answer: C) Significant influence without full control. Associates are entities where the investor has significant influence but not full control.
Question 16: When preparing consolidated financial statements, what is the treatment for unrealized profits arising from intra-group transactions?
A) Remove unrealized profits to avoid overstatement of income
B) Include unrealized profits as part of the group’s consolidated income
C) Treat unrealized profits as part of the subsidiary’s income
D) Report unrealized profits as a separate line item in the consolidated balance sheet
Answer: A) Remove unrealized profits to avoid overstatement of income. Unrealized profits from intra-group transactions are eliminated in consolidation.
Question 17: Which financial statement shows the company's cash inflows and outflows over a period?
A) Statement of financial position
B) Statement of profit or loss and other comprehensive income
C) Statement of changes in equity
D) Statement of cash flows
Answer: D) Statement of cash flows. This statement provides details on cash inflows and outflows, categorized into operating, investing, and financing activities.
Question 18: What technique can be used to calculate missing figures in incomplete records?
A) Use of the accounting equation
B) Use of historical cost accounting principles
C) Use of the cash flow statement
D) Use of market valuation techniques
Answer: A) Use of the accounting equation. The accounting equation helps in calculating missing figures by ensuring that assets equal liabilities plus equity.
Question 19: Which of the following is NOT a component of the consolidated statement of financial position?
A) Fair value adjustments at acquisition
B) Elimination of intra-group trading balances
C) Removal of unrealised profit on intra-group sales
D) Calculation of dividend payable to shareholders
Answer: D) Calculation of dividend payable to shareholders. This is a component of the statement of changes in equity, not the consolidated statement of financial position.
Question 20: In financial reporting, what is the purpose of the statement of changes in equity?
A) To show changes in equity from transactions with shareholders and other factors
B) To provide information on cash flows from operating, investing, and financing activities
C) To detail the company's profitability and comprehensive income
D) To present the company's financial position as of the reporting date
Answer: A) To show changes in equity from transactions with shareholders and other factors. This statement tracks the changes in equity over a period.
Question 21: What is the primary purpose of preparing a trial balance?
A) To ensure that the total debits equal total credits in the general ledger
B) To calculate the company's profit and loss for the period
C) To prepare the final financial statements
D) To determine the amount of tax owed
Answer: A) To ensure that the total debits equal total credits in the general ledger. The trial balance checks the mathematical accuracy of the ledger accounts.
Question 22: Which of the following errors would NOT be detected by a trial balance?
A) A transaction recorded in the wrong account
B) A transposition error in recording amounts
C) A missing entry in the general ledger
D) An error in applying the accounting equation
Answer: D) An error in applying the accounting equation. A trial balance will not detect errors related to the incorrect application of the accounting equation if debits and credits are still balanced.
Question 23: What is a common method to correct an error identified in a trial balance?
A) Prepare a journal entry to adjust the accounts
B) Ignore the error and proceed with financial reporting
C) Adjust the trial balance manually
D) Delete the incorrect transaction from the ledger
Answer: A) Prepare a journal entry to adjust the accounts. This corrects the identified errors in the general ledger accounts.
Question 24: When preparing a statement of financial position, how is the accounting equation applied?
A) Assets = Liabilities + Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities - Equity
D) Assets - Liabilities = Equity
Answer: A) Assets = Liabilities + Equity. The accounting equation ensures that the balance sheet balances by reflecting the company’s financial position.
Question 25: In a statement of cash flows, which activity involves the cash received from customers?
A) Operating activities
B) Investing activities
C) Financing activities
D) Non-operating activities
Answer: A) Operating activities. Cash received from customers is classified under operating activities as it relates to the core business operations.
Question 26: How are adjusting events after the reporting period treated in financial statements according to IFRS?
A) They are adjusted in the financial statements to reflect new information
B) They are disclosed in the notes to the financial statements only
C) They are ignored if they occur after the reporting period
D) They are included in the next period's financial statements
Answer: A) They are adjusted in the financial statements to reflect new information. Adjusting events provide evidence of conditions existing at the reporting date.
Question 27: What is the primary objective of preparing disclosure notes to financial statements?
A) To provide additional information and context for the financial statements
B) To summarize the company’s cash flow activities
C) To disclose the company’s profitability
D) To prepare the trial balance
Answer: A) To provide additional information and context for the financial statements. Disclosure notes help users understand the financial statements better.
Question 28: What is the key feature of a suspense account?
A) It temporarily holds transactions until errors are identified and corrected
B) It records transactions that are not yet approved
C) It tracks the company's long-term investments
D) It consolidates the company’s cash flow
Answer: A) It temporarily holds transactions until errors are identified and corrected. Suspense accounts are used to resolve discrepancies in the general ledger.
Question 29: How is goodwill calculated in a consolidated financial statement?
A) Fair value of consideration plus fair value of non-controlling interest minus fair value of net assets at acquisition
B) Purchase price of the subsidiary minus the book value of its assets
C) Total assets of the subsidiary minus its liabilities
D) Net income of the subsidiary during the acquisition year
Answer: A) Fair value of consideration plus fair value of non-controlling interest minus fair value of net assets at acquisition. This calculation determines the goodwill at acquisition.
Question 30: In a statement of profit or loss, which line item would typically include revenue from sales of goods and services?
A) Revenue
B) Cost of sales
C) Operating profit
D) Profit before tax
Answer: A) Revenue. Revenue represents the total income earned from the sale of goods and services before any costs or expenses are deducted.
Question 31: What is the primary purpose of financial reporting?
A) Preparing marketing plans
B) Recording, analyzing, and summarizing financial data
C) Setting company goals
D) Conducting employee performance reviews
Answer: B) Recording, analyzing, and summarizing financial data. Financial reporting involves documenting and summarizing financial information to provide a clear picture of a company's financial position.
Question 32: Which type of business entity is characterized by personal liability for business debts?
A) Limited liability company
B) Corporation
C) Sole trader
D) Partnership
Answer: C) Sole trader. In a sole trader business, the owner is personally liable for all business debts and obligations.
Question 33: What is a key advantage of operating as a limited liability company compared to a sole trader?
A) Unlimited personal liability
B) Simplicity in legal structure
C) Less regulatory oversight
D) Limited liability for the owners
Answer: D) Limited liability for the owners. A limited liability company protects its owners from personal liability for business debts, unlike a sole trader.
Question 34: Which of the following is NOT one of the primary financial statements?
A) Statement of market share
B) Statement of financial position
C) Statement of profit or loss and other comprehensive income
D) Statement of cash flows
Answer: A) Statement of market share. The primary financial statements include the statement of financial position, statement of profit or loss and other comprehensive income, and statement of cash flows.
Question 35: What is the role of the IFRS Foundation® in financial reporting?
A) Auditing financial statements
B) Providing tax advice
C) Developing marketing strategies
D) Overseeing the development and maintenance of IFRS® Accounting Standards
Answer: D) Overseeing the development and maintenance of IFRS® Accounting Standards. The IFRS Foundation® oversees the International Accounting Standards Board (IASB®) in developing and maintaining IFRS® Accounting Standards.
Question 36: What is the primary purpose of the statement of changes in equity?
A) To detail the company's cash inflows and outflows
B) To summarize profit and loss for the period
C) To show cash inflows and outflows
D) To present the company’s revenues and expenses during a period
Answer: D) To present the company’s revenues and expenses during a period. This statement reflects the company’s profitability by detailing revenues and expenses.
Question 37: Which organization is responsible for interpreting IFRS® Accounting Standards?
A) International Sustainability Standards Board (ISSB™)
B) International Accounting Standards Board (IASB®)
C) IFRS Foundation®
D) IFRS Interpretations Committee (IFRIC®)
Answer: D) IFRS Interpretations Committee (IFRIC®). The IFRIC® provides interpretations of IFRS® Accounting Standards to ensure consistent application.
Question 38: What is the main function of the statement of profit or loss and other comprehensive income?
A) To list the company’s assets and liabilities at a point in time
B) To outline the changes in the company’s equity
C) To show cash inflows and outflows
D) To present the company’s revenues and expenses during a period
Answer: D) To present the company’s revenues and expenses during a period. This statement reflects the company’s profitability by detailing revenues and expenses.
Question 39: Which entity is tasked with setting IFRS® Accounting Standards?
A) IFRS Interpretations Committee (IFRIC®)
B) International Sustainability Standards Board (ISSB™)
C) IFRS Foundation®
D) International Accounting Standards Board (IASB®)
Answer: D) International Accounting Standards Board (IASB®). The IASB® is responsible for establishing and maintaining IFRS® Accounting Standards.
Question 40: What responsibility do directors have in the preparation of financial statements?
A) Conducting internal audits
B) Managing day-to-day operations
C) Setting company marketing strategies
D) Ensuring the accuracy and completeness of the financial statements
Answer: D) Ensuring the accuracy and completeness of the financial statements. Directors are responsible for ensuring that the financial statements present a true and fair view of the company's financial position.
Question 41: Which accounting principle assumes that a business will continue to operate indefinitely?
A) Accrual accounting
B) Historical cost
C) Going concern
D) Consistency
Answer: C) Going concern. The going concern principle assumes that a business will continue to operate for the foreseeable future.
Question 42: What is the principle of accrual accounting concerned with?
A) Recording revenues and expenses when they are earned or incurred, not when cash is received or paid
B) Valuing assets based on their historical cost
C) Reporting financial information in a consistent manner
D) Recognizing revenue only when cash is received
Answer: A) Recording revenues and expenses when they are earned or incurred, not when cash is received or paid. Accrual accounting aligns financial reporting with economic events.
Question 43: What does the principle of materiality refer to in accounting?
A) Recording all transactions regardless of size
B) Omitting information that is not significant to the users' decision-making
C) Applying the same accounting policies over time
D) Recognizing revenue when cash is received
Answer: B) Omitting information that is not significant to the users' decision-making. Materiality allows accountants to exclude information that would not affect the decisions of financial statement users.
Question 44: Which accounting principle emphasizes that financial information should not be offset unless required by accounting standards?
A) Offsetting
B) Prudence
C) Consistency
D) Duality
Answer: A) Offsetting. The offsetting principle dictates that assets and liabilities or income and expenses should not be offset unless specifically required by accounting standards.
Question 45: What does the principle of consistency in accounting ensure?
A) The application of the same accounting methods over time
B) The recording of transactions at their current market value
C) The recognition of revenues only when earned
D) The disclosure of all significant information
Answer: A) The application of the same accounting methods over time. Consistency ensures that the same accounting principles and methods are applied from one period to the next.
Question 46: How does the concept of prudence affect financial reporting?
A) By recording assets at their highest value
B) By recognizing potential losses and liabilities earlier than potential gains
C) By adjusting financial statements based on future projections
D) By ensuring all transactions are recorded at fair value
Answer: B) By recognizing potential losses and liabilities earlier than potential gains. Prudence requires a cautious approach in financial reporting to avoid overstating assets or income.
Question 47: What does the duality principle in accounting state?
A) Every transaction must be recorded in at least two accounts
B) Financial statements must be prepared annually
C) Every transaction has a dual effect on the accounting equation
D) Every account must have a corresponding debit and credit entry
Answer: C) Every transaction has a dual effect on the accounting equation. The duality principle reflects that each transaction affects at least two accounts to maintain balance.
Question 48: What does the business entity concept state?
A) Business transactions should be recorded only when cash is received
B) Business activities should be kept separate from personal activities
C) Financial statements should be prepared in accordance with international standards
D) The historical cost of assets should be adjusted annually
Answer: B) Business activities should be kept separate from personal activities. The business entity concept ensures that the financial affairs of a business are separate from those of its owner.
Question 49: How does the principle of substance over form affect financial reporting?
A) By recording transactions based on their legal form rather than economic substance
B) By focusing on the economic substance of transactions rather than their legal form
C) By applying the historical cost principle to all assets
D) By ensuring that financial statements are comparable across different companies
Answer: B) By focusing on the economic substance of transactions rather than their legal form. The principle of substance over form requires that the economic reality of transactions is reflected in the financial statements.
Question 50: Which qualitative characteristic of useful financial information ensures that financial information can be cross-checked with other sources?
A) Relevance
B) Understandability
C) Verifiability
D) Comparability
Answer: C) Verifiability. Verifiability ensures that financial information can be confirmed by external sources or through verification procedures.
Question 51: What is the purpose of a sales invoice in an accounting system?
A) To request payment for goods or services provided
B) To record the receipt of cash from customers
C) To confirm the delivery of goods to customers
D) To record a purchase from a supplier
Answer: A) To request payment for goods or services provided. A sales invoice is used to request payment from customers for goods or services delivered.
Question 52: Which document is used to confirm the receipt of goods in a business transaction?
A) Sales order
B) Goods dispatched note
C) Goods received note
D) Supplier statement
Answer: C) Goods received note. A goods received note confirms the receipt of goods into inventory.
Question 53: How does the accounting equation ensure that the books are balanced?
A) By ensuring that assets equal liabilities plus equity
B) By ensuring that revenues equal expenses
C) By ensuring that debits equal credits in the general ledger
D) By ensuring that cash inflows equal cash outflows
Answer: A) By ensuring that assets equal liabilities plus equity. The accounting equation (Assets = Liabilities + Equity) ensures that the financial statements are balanced.
Question 54: What is a key feature of a computerized accounting system?
A) Manual recording of transactions
B) Use of physical ledgers
C) Use of external servers (cloud storage) for data
D) Limited data processing capabilities
Answer: C) Use of external servers (cloud storage) for data. Computerized accounting systems often use cloud storage to store and manage data.
Question 55: How does an accounting system contribute to compliance with organizational policies?
A) By recording only cash transactions
B) By applying a consistent format for financial statements
C) By ensuring timely and accurate recording of transactions
D) By excluding non-financial information
Answer: C) By ensuring timely and accurate recording of transactions. An accounting system helps organizations adhere to their policies by recording transactions in a timely and accurate manner.
Question 56: What is the primary function of a general ledger account?
A) To summarize and record all financial transactions for a specific account
B) To store personal information of customers
C) To track inventory levels
D) To generate sales reports
Answer: A) To summarize and record all financial transactions for a specific account. General ledger accounts are used to compile all transactions related to a particular account.
Question 57: How are journal entries processed in an accounting system?
A) By recording them directly into the financial statements
B) By posting them to the general ledger accounts
C) By entering them into a cash register
D) By creating invoices for transactions
Answer: B) By posting them to the general ledger accounts. Journal entries are first recorded in journals and then posted to the appropriate general ledger accounts.
Question 58: What does it mean to balance and close the general ledger accounts at year-end?
A) To ensure that all account balances are accurate and to prepare the accounts for the new fiscal year
B) To verify that all transactions have been recorded
C) To prepare the financial statements for external reporting
D) To reconcile bank statements with ledger accounts
Answer: A) To ensure that all account balances are accurate and to prepare the accounts for the new fiscal year. Balancing and closing general ledger accounts involves adjusting and zeroing out balances to prepare for the next accounting period.
Question 59: What is the purpose of a sales order in an accounting system?
A) To confirm the receipt of payment from a customer
B) To record the delivery of goods to a customer
C) To document a customer's request to purchase goods or services
D) To issue a refund to a customer
Answer: C) To document a customer's request to purchase goods or services. A sales order is used to confirm and record a customer's order before it is fulfilled.
Question 60: How are credit notes used in accounting?
A) To reduce the amount a customer owes after an adjustment or return
B) To record an initial sale to a customer
C) To request payment from a customer
D) To confirm the receipt of goods
Answer: A) To reduce the amount a customer owes after an adjustment or return. A credit note is issued to adjust or reduce the amount owed by a customer due to returns or errors in invoicing.
Question 61: How should sales returns be recorded in the general ledger accounts?
A) As an increase in sales revenue
B) As a reduction in sales revenue
C) As an increase in accounts payable
D) As a decrease in accounts receivable
Answer: B) As a reduction in sales revenue. Sales returns are recorded as a reduction to sales revenue to reflect the decrease in total sales.
Question 62: Which principle describes the need to record transactions when they occur rather than when cash changes hands?
A) Consistency
B) Prudence
C) Accrual accounting
D) Duality
Answer: C) Accrual accounting. Accrual accounting requires that transactions be recorded when they occur, not necessarily when cash is received or paid.
Question 63: How is sales tax typically recorded in the sales tax general ledger account?
A) As a liability to be paid to the tax authorities
B) As an expense
C) As income
D) As an asset
Answer: A) As a liability to be paid to the tax authorities. Sales tax collected from customers is recorded as a liability until it is remitted to the tax authorities.
Question 64: What is the purpose of accounting for discounts received in the general ledger?
A) To increase the cost of goods sold
B) To reduce the total amount of expenses
C) To decrease the amount payable to suppliers
D) To increase the total revenue
Answer: C) To decrease the amount payable to suppliers. Discounts received reduce the total amount payable to suppliers, affecting the accounts payable balance.
Question 65: How should the acquisition of tangible non-current assets be recorded in the general ledger?
A) By increasing the relevant asset account and decreasing cash or increasing liabilities
B) By increasing the expense account and decreasing cash
C) By recording as a liability only
D) By decreasing the asset account and increasing equity
Answer: A) By increasing the relevant asset account and decreasing cash or increasing liabilities. The acquisition of tangible non-current assets increases the asset account and either decreases cash or increases liabilities.
Question 66: What is the purpose of depreciation?
A) To allocate the cost of an asset over its useful life
B) To increase the asset's value over time
C) To record immediate expenses
D) To calculate inventory costs
Answer: A) To allocate the cost of an asset over its useful life. Depreciation spreads the cost of an asset over the period it is used.
Question 67: What is the impact of inventory valuation methods on financial statements?
A) They affect the reported profit and the value of assets
B) They influence the tax rates applicable
C) They determine the amount of sales tax payable
D) They affect the depreciation expense of assets
Answer: A) They affect the reported profit and the value of assets. Different inventory valuation methods impact the calculation of cost of goods sold and the ending inventory balance, which in turn affect profit and asset values.
Question 68: What is the primary difference between tangible and intangible non-current assets?
A) Tangible assets have physical substance, while intangible assets do not
B) Intangible assets are depreciated, while tangible assets are not
C) Tangible assets are not capitalized, while intangible assets are
D) Intangible assets are recorded as expenses
Answer: A) Tangible assets have physical substance, while intangible assets do not. Tangible assets are physical items like machinery, while intangible assets include patents and trademarks.
Question 69: How is amortisation different from depreciation?
A) Amortisation applies to intangible assets, while depreciation applies to tangible assets
B) Amortisation is calculated using the straight-line method, while depreciation is not
C) Depreciation is only recorded at the year-end, while amortisation is recorded monthly
D) There is no difference; both terms are used interchangeably
Answer: A) Amortisation applies to intangible assets, while depreciation applies to tangible assets. Amortisation is used for intangible assets, whereas depreciation is used for tangible assets.
Question 70: What is the purpose of an allowance for irrecoverable debts?
A) To estimate and account for potential losses from debts that may not be collected
B) To record actual losses from debts that have been written off
C) To increase the amount of receivables reported
D) To reduce the amount of cash available
Answer: A) To estimate and account for potential losses from debts that may not be collected. An allowance for irrecoverable debts estimates potential losses and adjusts the receivables balance accordingly.
Question 71: What is the definition of a "provision" according to IFRS® Accounting Standards?
A) A liability of uncertain timing or amount
B) A future asset expected to be received
C) An expense that is certain and quantifiable
D) An equity adjustment
Answer: A) A liability of uncertain timing or amount. A provision is recognized for a liability that is uncertain in timing or amount but can be estimated.
Question 72: How should a contingent liability be classified under IFRS® Accounting Standards?
A) As an expense
B) As a liability
C) As a potential liability, not yet recognized
D) As an asset
Answer: C) As a potential liability, not yet recognized. Contingent liabilities are not recorded in the financial statements but are disclosed if material.
Question 73: Which of the following is a characteristic of a provision?
A) It is recorded when there is a present obligation and it can be reliably estimated
B) It is recorded when the outcome is uncertain
C) It is an amount set aside for a future uncertain asset
D) It is recognized only when it is probable that the future expense will be incurred
Answer: A) It is recorded when there is a present obligation and it can be reliably estimated. Provisions are recognized when there is a present obligation and the amount can be estimated.
Question 74: What is the primary purpose of reconciling the trade receivables and trade payables accounts?
A) To ensure the accuracy of balances and identify discrepancies
B) To calculate the total sales revenue
C) To determine the amount of sales tax payable
D) To prepare the cash flow statement
Answer: A) To ensure the accuracy of balances and identify discrepancies. Reconciliation helps ensure that records are accurate and any discrepancies are identified and corrected.
Question 75: How should the closing balance of the allowance for irrecoverable debts appear in the statement of financial position?
A) As a deduction from trade receivables
B) As an addition to trade payables
C) As a separate line item under liabilities
D) As an expense in the profit or loss statement
Answer: A) As a deduction from trade receivables. The allowance for irrecoverable debts is deducted from the trade receivables balance to show the net realizable value.
Question 76: What is a key characteristic of contingent assets according to IFRS® Accounting Standards?
A) They are not recognized but disclosed if probable
B) They are recorded as assets in the financial statements
C) They are recorded as liabilities until realized
D) They are reported as equity adjustments
Answer: A) They are not recognized but disclosed if probable. Contingent assets are disclosed in financial statements if their realization is probable, but they are not recognized until realized.
Question 77: What should be considered when calculating provisions for future liabilities?
A) The best estimate of the expenditure required to settle the obligation
B) The total expected revenue from related transactions
C) The historical cost of similar liabilities
D) The maximum amount that can be legally claimed
Answer: A) The best estimate of the expenditure required to settle the obligation. Provisions should be based on the best estimate of the amount needed to settle the obligation.
Question 78: What is the impact of a bonus (capitalisation) issue on the financial statements?
A) It increases the number of shares in circulation but does not affect total equity
B) It reduces the company's cash reserves
C) It increases the company's debt obligations
D) It impacts the retained earnings by reducing them
Answer: A) It increases the number of shares in circulation but does not affect total equity. A bonus issue increases the share capital and the number of shares without changing the total equity.
Question 79: How should finance costs be recorded in the financial statements?
A) As an expense in the statement of profit or loss
B) As an asset in the statement of financial position
C) As an increase in equity
D) As a reduction in sales revenue
Answer: A) As an expense in the statement of profit or loss. Finance costs are recorded as expenses in the statement of profit or loss.
Question 80: What is the primary purpose of performing a bank reconciliation?
A) To ensure that the cash balance recorded in the bank account matches the bank statement
B) To calculate the bank interest income
C) To identify opportunities for investment
D) To determine the company's profitability
Answer: A) To ensure that the cash balance recorded in the bank account matches the bank statement. Bank reconciliations help confirm that the recorded cash balance aligns with the bank statement.
Question 81: What is the primary purpose of a trial balance?
A) To ensure that debits equal credits in the general ledger
B) To calculate net profit or loss
C) To prepare financial statements
D) To record all transactions
Answer: A) To ensure that debits equal credits in the general ledger. A trial balance is used to verify that the total debits equal the total credits in the ledger, ensuring arithmetical accuracy.
Question 82: What is a limitation of a trial balance?
A) It does not detect errors of omission or errors of principle
B) It cannot be used to prepare financial statements
C) It is not used in double-entry bookkeeping
D) It does not include cash balances
Answer: A) It does not detect errors of omission or errors of principle. A trial balance may not identify all types of errors, such as those where transactions are omitted or principles are incorrectly applied.
Question 83: Which of the following errors would a trial balance not highlight?
A) Errors of omission
B) Errors of commission
C) Errors of original entry
D) Errors of principle
Answer: A) Errors of omission. Errors of omission occur when transactions are completely left out of the books, which a trial balance cannot detect.
Question 84: What is the primary purpose of a suspense account?
A) To temporarily record discrepancies while investigating errors
B) To record transactions that are not yet approved
C) To prepare the final accounts
D) To manage cash flow
Answer: A) To temporarily record discrepancies while investigating errors. A suspense account is used to hold transactions temporarily until the errors causing discrepancies are resolved.
Question 85: How should errors that lead to the creation of a suspense account be recorded?
A) They should be corrected by making appropriate journal entries
B) They should be ignored until the next financial period
C) They should be included in the financial statements as they are
D) They should be transferred to the cash account
Answer: A) They should be corrected by making appropriate journal entries. Errors causing a suspense account must be adjusted by making the correct journal entries.
Question 86: What does the accounting equation state regarding the statement of financial position?
A) Assets = Liabilities + Equity
B) Assets + Liabilities = Equity
C) Assets = Liabilities - Equity
D) Assets + Equity = Liabilities
Answer: A) Assets = Liabilities + Equity. This equation ensures that a company's assets are funded by liabilities and equity, maintaining the balance in the statement of financial position.
Question 87: How should the income tax expense be recorded in the statement of profit or loss?
A) It should be included as an expense
B) It should be included as a liability
C) It should be recorded in the statement of financial position
D) It should be recorded as part of equity
Answer: A) It should be included as an expense. Income tax expense is accounted for as an expense in the statement of profit or loss.
Question 88: What is the benefit of a statement of cash flows to users of financial statements?
A) It provides insights into the cash inflows and outflows, helping assess liquidity
B) It helps determine the company’s market value
C) It replaces the need for a statement of profit or loss
D) It calculates tax liabilities
Answer: A) It provides insights into the cash inflows and outflows, helping assess liquidity. The statement of cash flows offers detailed information about the company's cash movements, aiding in liquidity assessment.
Question 89: How should an event after the reporting period be classified if it provides evidence of conditions that existed at the reporting date?
A) As an adjusting event
B) As a non-adjusting event
C) As an operating event
D) As a financial event
Answer: A) As an adjusting event. Adjusting events provide additional evidence about conditions that existed at the reporting date and should be adjusted in the financial statements.
Question 90: What is the main distinction between profit and cash flow?
A) Profit includes non-cash items while cash flow focuses on actual cash transactions
B) Profit and cash flow are identical concepts
C) Cash flow is calculated only from operating activities
D) Profit is calculated only from sales revenues
Answer: A) Profit includes non-cash items while cash flow focuses on actual cash transactions. Profit can involve non-cash elements like accruals, whereas cash flow represents actual cash movements.
Question 91: How is goodwill calculated in a consolidated financial statement when non-controlling interest is valued at its fair value at the acquisition date?
A) Fair value of consideration transferred + Fair value of non-controlling interest - Fair value of net assets at acquisition
B) Fair value of consideration transferred - Fair value of non-controlling interest + Fair value of net assets at acquisition
C) Fair value of consideration transferred - Fair value of net assets at acquisition - Fair value of non-controlling interest
D) Fair value of non-controlling interest - Fair value of consideration transferred + Fair value of net assets at acquisition
Answer: A) Fair value of consideration transferred + Fair value of non-controlling interest - Fair value of net assets at acquisition. Goodwill is calculated by summing the consideration transferred and the fair value of non-controlling interests, then subtracting the fair value of net assets acquired.
Question 92: What is the correct treatment of unrealised profit arising from intra-group trading in the consolidated statement of profit or loss?
A) Eliminate the unrealised profit
B) Include it as part of the consolidated profit
C) Record it in the non-controlling interests section
D) Adjust it in the fair value adjustments
Answer: A) Eliminate the unrealised profit. Unrealised profit on intra-group transactions must be eliminated to avoid inflating consolidated profits.
Question 93: If a subsidiary was acquired part way through the financial year, how should its results be included in the consolidated statement of profit or loss?
A) Include only the results from the date of acquisition to the end of the financial year
B) Include the subsidiary’s full-year results
C) Exclude the subsidiary’s results from the consolidated statement
D) Include the results based on the subsidiary’s year-end date
Answer: A) Include only the results from the date of acquisition to the end of the financial year. Results of the subsidiary are consolidated only for the period during which it was part of the group.
Question 94: How is the fair value of consideration transferred recorded in the consolidated statement of financial position?
A) It is included as part of the purchase consideration in the calculation of goodwill
B) It is recorded as a liability in the consolidated statement
C) It is included in the equity section
D) It is recognized as revenue
Answer: A) It is included as part of the purchase consideration in the calculation of goodwill. The fair value of consideration transferred is used to determine the goodwill in a consolidation.
Question 95: What is the formula to calculate the quick ratio, a key liquidity ratio?
A) (Current Assets - Inventories) / Current Liabilities
B) Current Assets / Current Liabilities
C) (Current Assets - Current Liabilities) / Current Liabilities
D) (Cash + Marketable Securities) / Current Liabilities
Answer: A) (Current Assets - Inventories) / Current Liabilities. The quick ratio measures liquidity by excluding inventories from current assets.
Question 96: How do you calculate the return on equity (ROE)?
A) Net Income / Average Shareholders’ Equity
B) Net Income / Total Assets
C) Gross Profit / Total Equity
D) Operating Income / Shareholders’ Equity
Answer: A) Net Income / Average Shareholders’ Equity. ROE measures how effectively equity is used to generate profit.
Question 97: What is the purpose of calculating the debt-to-equity ratio?
A) To assess the company’s financial leverage and risk
B) To evaluate the company’s liquidity
C) To measure the company’s profitability
D) To determine the company’s asset turnover
Answer: A) To assess the company’s financial leverage and risk. The debt-to-equity ratio shows the proportion of debt used relative to equity.
Question 98: How do you calculate the cash flow from operating activities using the indirect method?
A) Start with net income and adjust for changes in working capital and non-cash items
B) Directly add cash received from customers and subtract cash paid to suppliers
C) Calculate cash flows from investing and financing activities and adjust for changes in net income
D) Use the cash balance at the beginning and end of the period to determine cash flow
Answer: A) Start with net income and adjust for changes in working capital and non-cash items. The indirect method starts with net income and adjusts for non-cash transactions and changes in working capital.
Question 99: When consolidating financial statements, how are intra-group trading balances treated?
A) They are eliminated to prevent double-counting
B) They are included in both the parent and subsidiary’s financial statements
C) They are recorded as an expense
D) They are added to the consolidated revenue
Answer: A) They are eliminated to prevent double-counting. Intra-group transactions and balances are eliminated in consolidation to avoid inflating figures.
Question 100: What is the primary difference between the statement of cash flows and the statement of profit or loss?
A) The statement of cash flows focuses on cash movements, while the statement of profit or loss focuses on revenues and expenses
B) The statement of profit or loss includes cash flows from investing activities, while the statement of cash flows does not
C) The statement of cash flows reports only cash received from customers
D) The statement of profit or loss only includes operating income
Answer: A) The statement of cash flows focuses on cash movements, while the statement of profit or loss focuses on revenues and expenses. The cash flow statement shows actual cash inflows and outflows, while the profit or loss statement details revenues and expenses to determine profit.
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