I85PREP
⌘ K
SACE Stage 2 Accounting study materials
SACE Stage 2 Accounting study resources

SACE Stage 2 Accounting practice questions

One question at a time. Build your SACE Stage 2 Accounting understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Financial accounting

Which accounting assumption justifies preparing financial statements at regular intervals, such as annually?

  1. Business entity
  2. Historical cost
  3. Reporting period Correct answer.
  4. Going concern

Explanation

The reporting period assumption divides the ongoing life of a business into artificial time intervals so that performance and position can be measured and reported at regular dates. Without it, profit could only be determined when the entity finally ceased operations.

Question 2Financial accounting

A business receives $2,400 on 1 May for services to be delivered evenly over the following twelve months. Under accrual accounting, how much revenue is recognised for the year ended 31 December?

  1. $1,600 Correct answer.
  2. $800
  3. $2,000
  4. $2,400

Explanation

Revenue is recognised as the service is performed, so eight months of the twelve-month period fall within the reporting year. Eight twelfths of $2,400 equals $1,600, with the remaining $800 treated as unearned revenue, a liability.

Question 3Financial accounting

Which item would be classified as a current liability in a classified statement of financial position?

  1. Retained earnings
  2. Motor vehicles held for delivery use
  3. A bank loan repayable in five years
  4. GST payable to the tax office Correct answer.

Explanation

Current liabilities are obligations expected to be settled within twelve months of the reporting date. GST collected but not yet remitted is due shortly and therefore qualifies as current.

Question 4Financial accounting

Equipment costing $18,000 with accumulated depreciation of $7,500 is sold for $9,200 cash. What is the result reported on the sale?

  1. Gain of $9,200
  2. Loss of $1,300 Correct answer.
  3. Gain of $1,300
  4. Loss of $8,800

Explanation

Carrying amount equals cost less accumulated depreciation, which is $10,500. The proceeds of $9,200 are lower than the carrying amount, producing a loss on disposal of $1,300.

Question 5Financial accounting

A business has current assets of $84,000 and current liabilities of $56,000. What is the current ratio?

  1. 0.67 : 1
  2. 1.67 : 1
  3. 2.00 : 1
  4. 1.50 : 1 Correct answer.

Explanation

The current ratio divides current assets by current liabilities, so $84,000 divided by $56,000 gives 1.50. This indicates $1.50 of current assets available for each $1 of short-term obligations.

Question 6Financial accounting

Which transaction increases one asset and decreases another asset, leaving total equity unchanged?

  1. Paying a supplier's account by cash
  2. Recording depreciation on equipment
  3. Receiving cash from a customer for an earlier credit sale Correct answer.
  4. Purchasing office supplies on credit

Explanation

Collecting an account receivable converts one asset into another: cash rises while receivables fall by the same amount. Total assets and equity are unaffected.

Question 7Financial accounting

Which document is issued by a seller to record a reduction in the amount owed by a customer who returned faulty goods?

  1. Credit note Correct answer.
  2. Statement of account
  3. Purchase order
  4. Remittance advice

Explanation

A credit note documents a reduction in the amount a customer owes, typically for returned goods or an overcharge. It allows both parties to adjust their records consistently.

Question 8Financial accounting

Under the perpetual inventory system, what is the effect of recording a credit sale of goods costing $600 for $1,000?

  1. Increase cost of sales by $1,000 and decrease sales by $600
  2. Decrease inventory by $600 and increase cost of sales by $600, while recording sales of $1,000 Correct answer.
  3. Increase inventory by $600 and increase sales by $1,000
  4. Decrease inventory by $1,000 and record a gain of $400

Explanation

A perpetual system records both sides of a sale: revenue of $1,000 and, simultaneously, the removal of inventory at cost with a matching charge to cost of sales. This keeps the inventory account continuously updated.

Question 9Financial accounting

Which of the following best describes the purpose of a trial balance?

  1. To determine the profit for the reporting period
  2. To check that total debits equal total credits in the ledger Correct answer.
  3. To disclose the market value of the entity's assets
  4. To prove that every transaction was recorded in the correct ledger account

Explanation

A trial balance lists ledger balances and tests the arithmetic equality of debits and credits. It detects certain errors but cannot confirm that transactions were posted to the correct accounts.

Question 10Financial accounting

A payment of $540 for rent was recorded in the rent expense account as $450. Which type of error has occurred?

  1. Error of complete omission
  2. Error of original entry Correct answer.
  3. Error of principle
  4. Compensating error

Explanation

An error of original entry occurs when an incorrect amount is entered in the books and then posted consistently to both accounts. Because the same wrong figure is used on both sides, the trial balance still balances.

Question 11Financial accounting

Which entry correctly records a bank loan received of $20,000 into the business bank account?

  1. Debit capital $20,000; credit bank $20,000
  2. Debit bank loan $20,000; credit bank $20,000
  3. Debit bank $20,000; credit bank loan $20,000 Correct answer.
  4. Debit bank $20,000; credit revenue $20,000

Explanation

Receiving loan funds increases the bank asset, so bank is debited. The obligation to repay the lender increases, so the loan liability is credited.

Question 12Financial accounting

A business records a $3,000 electricity bill for the current period that remains unpaid at year end. What is the correct adjusting entry?

  1. Debit prepaid electricity; credit electricity expense
  2. Debit electricity expense; credit accrued expenses Correct answer.
  3. Debit accrued expenses; credit electricity expense
  4. Debit electricity expense; credit bank

Explanation

The expense was incurred in the period but not yet paid, so it must be recognised with a corresponding accrued liability. Debiting the expense and crediting accrued expenses achieves this.

Question 13Financial accounting

Which statement about the straight-line method of depreciation is correct?

  1. It ignores the estimated residual value of the asset
  2. It charges a larger depreciation amount in the asset's first year than later years
  3. It is based on the units of output produced each period
  4. It allocates an equal amount of depreciation to each period of useful life Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly across the estimated useful life. It suits assets whose benefits are consumed at a roughly constant rate.

Question 14Financial accounting

A machine costs $50,000, has a residual value of $5,000 and a useful life of five years. Using the reducing balance method at 20% per annum, what is the depreciation expense for the second year?

  1. $7,200
  2. $8,000 Correct answer.
  3. $9,000
  4. $10,000

Explanation

Reducing balance applies the rate to the carrying amount. First-year depreciation is 20% of $50,000, or $10,000, leaving $40,000; the second-year charge is 20% of $40,000, which is $8,000.

Question 15Financial accounting

Which of the following is a feature of a partnership's financial statements rather than a sole trader's?

  1. A single capital account for the owner
  2. Separate capital and current accounts for each partner Correct answer.
  3. A statement of financial position listing liabilities
  4. An income statement showing gross profit

Explanation

Partnerships commonly maintain a fixed capital account and a separate current account for each partner to record drawings, interest and profit shares. A sole trader needs only one capital account.

Question 16Financial accounting

A company issues 100,000 ordinary shares at $2.50 each, fully paid. How is this recorded?

  1. Debit bank $250,000; credit retained earnings $250,000
  2. Debit bank $250,000; credit share capital $250,000 Correct answer.
  3. Debit retained earnings $250,000; credit share capital $250,000
  4. Debit share capital $250,000; credit bank $250,000

Explanation

Issuing shares brings cash into the company, increasing the bank asset, and increases share capital within equity by the same amount. The entry debits bank and credits share capital.

Question 17Financial accounting

Which item appears in the statement of changes in equity but not in the income statement?

  1. Interest expense
  2. Cost of sales
  3. Dividends paid to shareholders Correct answer.
  4. Depreciation expense

Explanation

Dividends are distributions of profit to owners and are recorded directly against retained earnings in the statement of changes in equity. They are not an expense and do not affect reported profit.

Question 18Financial accounting

A business has a bank overdraft of $12,000 and a separate bank account with a positive balance of $12,000. How should these be reported?

  1. Report as an asset of $24,000
  2. Report as cash of $12,000 and an overdraft liability of $12,000 separately Correct answer.
  3. Net to zero and disclosed as a note only
  4. Offset and shown as nil cash on hand

Explanation

Where separate bank accounts exist at separate institutions or are not legally offsettable, the positive balance is an asset and the overdraft a current liability. They are presented gross rather than netted.

Question 19Financial accounting

Which of the following is an example of a cash flow from investing activities?

  1. Proceeds from issuing shares
  2. Repayment of a bank loan
  3. Purchase of delivery vehicles for cash Correct answer.
  4. Cash received from customers for credit sales

Explanation

Investing activities involve acquiring and disposing of long-term assets. Buying delivery vehicles is capital expenditure and is reported as a cash outflow from investing.

Question 20Financial accounting

A business reports a gross profit ratio of 40% and sales of $250,000. What is the cost of sales?

  1. $100,000
  2. $60,000
  3. $150,000 Correct answer.
  4. $250,000

Explanation

A gross profit ratio of 40% means gross profit is $100,000 on sales of $250,000. Cost of sales is the remaining 60%, which equals $150,000.

Question 21Financial accounting

Which qualitative characteristic is enhanced when financial information is free from material error and bias?

  1. Relevance
  2. Comparability
  3. Faithful representation Correct answer.
  4. Timeliness

Explanation

Faithful representation requires information to depict economic reality completely, neutrally and without material error. Neutrality means the information is not slanted to produce a predetermined outcome.

Question 22Financial accounting

Inventory costing $4,000 has a net realisable value of $3,200 at reporting date. Under the lower of cost and net realisable value rule, what value is reported?

  1. $3,200 Correct answer.
  2. $3,600
  3. $4,000
  4. $800

Explanation

Inventory is measured at the lower of cost and net realisable value, so the write-down to $3,200 is required. The $800 reduction is recognised as an expense in the period.

Question 23Financial accounting

Which internal control procedure best reduces the risk of theft of cash received over the counter?

  1. All cash receipts are banked daily and reconciled by a separate employee Correct answer.
  2. The owner reviews the bank statement annually
  3. The same employee records receipts and performs the bank reconciliation
  4. Receipts are recorded in the ledger at the end of each month

Explanation

Prompt banking limits cash on hand, and separating the reconciliation from handling receipts prevents one person from concealing a shortage. Segregation of duties is a core internal control.

Question 24Financial accounting

A bank statement shows a balance of $5,000. Outstanding cheques total $700 and deposits not yet credited total $400. What is the adjusted bank balance?

  1. $4,300
  2. $5,700
  3. $4,700 Correct answer.
  4. $5,300

Explanation

Outstanding cheques have reduced the cash book but not yet the bank statement, so they are deducted; deposits not yet credited are added. $5,000 less $700 plus $400 equals $4,700.

Question 25Financial accounting

A business has net profit of $45,000, sales of $300,000 and total assets of $500,000. What is the return on assets?

  1. 6.7%
  2. 9% Correct answer.
  3. 60%
  4. 15%

Explanation

Return on assets divides net profit by total assets, so $45,000 divided by $500,000 equals 9%. It measures how efficiently assets generate profit.

Question 26Financial accounting

Which accounting assumption supports preparing financial statements at regular intervals, such as annually, even though the business is expected to continue operating indefinitely?

  1. The accrual assumption
  2. The reporting period assumption Correct answer.
  3. The business entity assumption
  4. The going concern assumption

Explanation

The reporting period assumption divides the life of a continuing business into artificial time periods so that performance can be measured and reported at regular intervals. Going concern justifies why assets are not valued at break-up prices rather than explaining the splitting of time.

Question 27Financial accounting

A business pays $1,200 cash for a one-year insurance policy covering the next twelve months. What is the effect on the accounting equation at the date of payment?

  1. Assets decrease $1,200 and liabilities decrease $1,200
  2. Total assets are unchanged because one asset is exchanged for another Correct answer.
  3. Assets increase $1,200 and liabilities increase $1,200
  4. Assets decrease $1,200 and equity decreases $1,200

Explanation

Paying in advance creates a prepaid insurance asset while reducing the bank asset by the same amount, so total assets and equity are unchanged at the payment date. The expense is recognised later as the cover is consumed.

Question 28Financial accounting

Which statement correctly describes the dual effect underlying double-entry bookkeeping?

  1. Every transaction must increase one account and decrease another by equal amounts
  2. Every transaction must affect both an asset account and an expense account
  3. Every transaction is recorded twice in the same ledger account
  4. Every transaction affects at least two accounts and total debits equal total credits Correct answer.

Explanation

Double entry requires each transaction to be recorded with equal debits and credits across at least two accounts, which keeps the ledger in balance. The accounts affected may be of any type, and both may increase or both decrease.

Question 29Financial accounting

A business receives $2,400 from a debtor whose account was previously written off as a bad debt. Using the allowance method, which entry records the recovery?

  1. Debit bank $2,400; credit allowance for doubtful debts $2,400
  2. Debit accounts receivable $2,400; credit bank $2,400
  3. Debit bank $2,400; credit bad debts expense $2,400 Correct answer.
  4. Debit bad debts recovered $2,400; credit bank $2,400

Explanation

A recovery reverses the earlier write-off by debiting bank and crediting bad debts expense, reducing the expense recognised in the current period. Some entities use a separate income account, but the bank debit is always required and the credit reduces the bad debt charge.

Question 30Financial accounting

A firm's inventory at year end cost $18,000. It is damaged and can be sold for $11,000 after incurring $1,500 in repair costs. What value should the inventory be reported at?

  1. $11,000
  2. $9,500 Correct answer.
  3. $18,000
  4. $16,500

Explanation

Net realisable value is expected selling price less costs to complete and sell, giving $11,000 minus $1,500, which equals $9,500. The lower of cost and net realisable value rule requires reporting at $9,500.

Question 31Financial accounting

Which cost should be excluded from the cost price of inventory purchased for resale?

  1. Freight inwards to the business premises
  2. Import duties paid on the goods
  3. The supplier's invoice price of the goods
  4. Abnormal storage costs caused by a labour dispute Correct answer.

Explanation

Cost of inventory includes purchase price, duties and transport needed to bring goods to their present location and condition. Abnormal storage or wastage costs are expensed because they do not form part of the normal cost of acquiring the goods.

Question 32Financial accounting

Equipment costing $40,000 with a residual value of $4,000 is depreciated over eight years using the straight-line method. What is the carrying amount after three years?

  1. $26,500 Correct answer.
  2. $25,000
  3. $24,500
  4. $22,000

Explanation

Annual depreciation is ($40,000 minus $4,000) divided by eight years, which equals $4,500. After three years accumulated depreciation is $13,500, so carrying amount is $40,000 minus $13,500, equal to $26,500.

Question 33Financial accounting

Which statement about the diminishing balance method of depreciation is correct?

  1. It ignores residual value when calculating the final year's charge
  2. It applies a constant rate to the carrying amount, giving higher charges in early years Correct answer.
  3. It is only appropriate for assets that do not lose value over time
  4. It produces an equal depreciation charge each year over the asset's life

Explanation

The diminishing balance method applies a fixed percentage to the reducing carrying amount, so depreciation expense is highest in the first year and declines thereafter. This pattern suits assets that lose value quickly when new.

Question 34Financial accounting

A business has current assets of $90,000, inventory of $30,000 and current liabilities of $45,000. What is the quick ratio?

  1. 0.67
  2. 2.00
  3. 1.50
  4. 1.33 Correct answer.

Explanation

The quick ratio excludes inventory, so quick assets are $90,000 minus $30,000, equal to $60,000. Dividing by current liabilities of $45,000 gives 1.33.

Question 35Financial accounting

Which of the following would improve a business's gross profit ratio without changing its sales revenue?

  1. Paying off a long-term loan early
  2. Increasing advertising spending to attract more customers
  3. Selling additional goods at the existing mark-up
  4. Reducing the cost price paid to suppliers for the same goods Correct answer.

Explanation

The gross profit ratio equals gross profit divided by sales, so lowering the cost of goods sold raises gross profit for the same revenue. The other options either change sales, affect expenses below the gross profit line, or do not touch revenue or cost of sales.

Question 36Financial accounting

Which of the following is an example of a cash flow from financing activities?

  1. Cash paid for new delivery vehicles
  2. Cash received from issuing debentures Correct answer.
  3. Cash paid to a supplier for inventory purchased
  4. Cash received from a customer for goods sold on credit

Explanation

Financing activities involve changes in contributed capital and borrowings, so proceeds from issuing debentures are a financing inflow. Purchases of non-current assets are investing, while customer and supplier cash flows are operating.

Question 37Financial accounting

A business reports a cash balance of $8,000, a bank overdraft of $3,000 in another account, and short-term investments of $5,000. Under the accrual basis, how is cash and cash equivalents reported?

  1. $8,000
  2. $16,000
  3. $10,000 Correct answer.
  4. $5,000

Explanation

Cash equivalents include short-term, highly liquid investments, and balances in separate accounts are aggregated net where they form part of cash management. Adding the $8,000 balance and $5,000 of investments, then deducting the $3,000 overdraft, gives $10,000.

Question 38Financial accounting

Which item is disclosed in the statement of changes in equity for a company but does not appear in the income statement?

  1. Dividends paid to shareholders Correct answer.
  2. Depreciation expense for the year
  3. Interest expense on borrowings
  4. Cost of goods sold

Explanation

Dividends are distributions of profit to owners and are recorded directly in equity, reducing retained earnings, rather than being treated as an expense. The other items are expenses recognised in the income statement.

Question 39Financial accounting

A business has profit before interest and tax of $120,000, interest expense of $20,000 and total assets of $600,000. What is the return on assets using profit after interest?

  1. 20.0%
  2. 13.3%
  3. 10.0%
  4. 16.7% Correct answer.

Explanation

Profit after interest is $120,000 minus $20,000, equal to $100,000. Dividing by total assets of $600,000 gives 16.7%, which measures how efficiently assets generate profit.

Question 40Financial accounting

Which qualitative characteristic is most closely associated with information that can be compared across different businesses using similar accounting policies?

  1. Relevance
  2. Understandability
  3. Comparability Correct answer.
  4. Timeliness

Explanation

Comparability enables users to identify similarities and differences between entities and across periods, and it is supported by consistent accounting policies. Relevance concerns predictive or confirmatory value, while timeliness concerns availability before it loses influence.

Question 41Financial accounting

A business is being sued and its lawyers advise that a loss is probable and can be reliably estimated at $50,000. How should this be treated in the financial statements?

  1. Ignore it because no court decision has been made
  2. Recognise a provision of $50,000 with no disclosure required
  3. Disclose as a contingent liability only
  4. Recognise a provision of $50,000 and disclose it Correct answer.

Explanation

A provision is recognised when a present obligation exists, an outflow is probable and the amount can be reliably estimated, and it must also be disclosed in the notes. A contingent liability is only disclosed where an outflow is possible rather than probable.

Question 42Financial accounting

Which event occurring after the reporting date would normally require adjustment to the financial statements?

  1. Announcing a dividend for the next financial year
  2. A sharp fall in the market price of inventory caused by a new competitor
  3. A major customer becoming insolvent, confirming a receivable was impaired at year end Correct answer.
  4. A fire destroying a warehouse in the following month

Explanation

Adjusting events provide evidence of conditions that existed at the reporting date, so confirmation of a receivable's impairment requires the accounts to be adjusted. Events arising after the reporting date that reflect new conditions are non-adjusting and are disclosed if material.

Question 43Financial accounting

A trader takes goods costing $800 for personal use. What is the correct entry in the business records?

  1. Debit drawings $800; credit cash $800
  2. Debit purchases $800; credit drawings $800
  3. Debit capital $800; credit inventory $800
  4. Debit drawings $800; credit purchases $800 Correct answer.

Explanation

Goods withdrawn by the owner reduce the inventory available for sale and represent a distribution to the owner. Debiting drawings records the reduction in equity, and crediting purchases removes the cost from the trading account.

Question 44Financial accounting

Which document should be used to record the return of goods to a supplier?

  1. A purchase order
  2. A remittance advice
  3. A credit note received from the supplier Correct answer.
  4. A statement of account from the supplier

Explanation

When goods are returned to a supplier, the supplier issues a credit note that reduces the amount owed by the buyer. A purchase order requests goods, while a statement summarises transactions and a remittance advice accompanies payment.

Question 45Financial accounting

A firm's trial balance totals agree, yet a $500 credit sale to a customer was completely omitted from the records. Which statement is correct?

  1. The trial balance will still balance because both sides of the entry were omitted Correct answer.
  2. The trial balance will not balance because credits exceed debits
  3. The trial balance will still balance because the omission is one-sided
  4. The trial balance will not balance because debits exceed credits

Explanation

An error of complete omission leaves both the debit and credit out, so the totals remain equal even though the accounts are wrong. Trial balance agreement therefore does not guarantee accuracy, only arithmetic equality of debits and credits.

Question 46Financial accounting

A business uses the allowance method. Accounts receivable total $80,000 and the allowance for doubtful debts is to be 5% of receivables. The existing allowance has a credit balance of $1,000. What is the bad debts expense for the year?

  1. $4,000
  2. $1,000
  3. $3,000 Correct answer.
  4. $5,000

Explanation

The required allowance is 5% of $80,000, equal to $4,000. Since $1,000 is already held, the expense needed to raise the allowance is $4,000 minus $1,000, which equals $3,000.

Question 47Financial accounting

Which internal control is most effective at reducing the risk of payments to fictitious suppliers?

  1. Paying suppliers promptly to maintain good relationships
  2. Requiring all payments to be authorised by the same person who orders goods
  3. Matching invoices to approved purchase orders and receiving reports before payment Correct answer.
  4. Allowing the purchasing officer to add new suppliers to the master file without review

Explanation

Three-way matching of the invoice, the approved purchase order and the receiving report verifies that goods were genuinely ordered and received before payment is made. Segregation of duties between ordering, receiving and paying further strengthens the control.

Question 48Financial accounting

A bank statement shows a credit balance of $7,200. Outstanding cheques total $900, bank charges of $150 have not yet been recorded in the cash book, and deposits not yet credited total $500. What is the adjusted bank statement balance after allowing for outstanding items?

  1. $6,800 Correct answer.
  2. $6,200
  3. $7,000
  4. $7,600

Explanation

Outstanding cheques reduce the bank statement balance and deposits not yet credited increase it, so $7,200 minus $900 plus $500 equals $6,800. Bank charges are already recorded by the bank and are adjusted in the cash book instead.

Question 49Financial accounting

Which of the following transactions will increase a business's working capital?

  1. Selling inventory at cost on credit
  2. Paying a trade payable from the bank account
  3. Purchasing inventory on credit
  4. Taking out a five-year loan and retaining the cash Correct answer.

Explanation

Working capital is current assets minus current liabilities. A long-term loan increases the bank current asset while creating a non-current liability, so working capital rises. The other options shift amounts within current items or leave working capital unchanged.

Question 50Financial accounting

Which statement about the balance sheet is correct?

  1. It reports the cash inflows and outflows for a period
  2. It reports the financial position of a business at a specific date Correct answer.
  3. It shows the profit earned over the reporting period
  4. It lists only non-current assets and long-term liabilities

Explanation

The balance sheet presents assets, liabilities and equity at a point in time, reflecting the financial position rather than performance over a period. The income statement and cash flow statement cover flows over a period.