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VCE Accounting study materials
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VCE Accounting practice questions

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Question 1Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which accounting assumption allows a business to record revenue when it is earned rather than only when cash is received?

  1. Entity assumption
  2. Historical cost
  3. Going concern
  4. Accrual basis Correct answer.

Explanation

The accrual basis assumption requires revenue to be recognised when it is earned and expenses when they are incurred, regardless of when cash moves. This is what allows profit to reflect economic activity rather than cash timing. The other assumptions address continuity, separation of the business from its owner, and measurement basis.

Question 2Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business owner withdraws cash from the business bank account to pay for a family holiday. How should this be recorded?

  1. Drawings, reducing owner's equity Correct answer.
  2. A loan to the owner, creating a receivable
  3. A capital contribution, increasing equity
  4. An expense, reducing profit

Explanation

Under the entity assumption, personal spending by the owner is not a business expense. It is recorded as drawings, which reduce owner's equity because resources have left the business for private use. Treating it as an expense would wrongly understate profit.

Question 3Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following is an example of an asset?

  1. Equipment purchased for use in the business Correct answer.
  2. A loan from a supplier that must be repaid next month
  3. A bank overdraft owed to the bank
  4. GST collected from customers and payable to the tax office

Explanation

An asset is a present economic resource controlled by the entity as a result of past events, with the potential to produce future economic benefits. Equipment used in the business meets this definition because it helps generate revenue over several periods. Liabilities, by contrast, are present obligations to transfer resources.

Question 4Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business receives $2,200 cash from a customer for services to be performed next month. What is the correct classification of this receipt?

  1. Revenue, because cash has been received
  2. Accounts receivable, an asset
  3. Capital, because the owner contributed funds
  4. Unearned revenue, a liability Correct answer.

Explanation

Because the service has not yet been performed, the business owes the customer a future service, creating a present obligation. The cash received is therefore recorded as unearned revenue, which is a liability. Revenue is recognised only once the service is delivered.

Question 5Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which statement best describes the purpose of the Goods and Services Tax in business records?

  1. It is revenue for the business because it is collected from customers
  2. It is an expense because it is paid to suppliers
  3. It reduces the cost of goods purchased from suppliers
  4. It is collected on behalf of the tax authority and is not revenue or an expense Correct answer.

Explanation

GST is a tax collected by the business on behalf of the government, so it passes through the business rather than belonging to it. GST collected on sales is a liability and GST paid on purchases is a receivable until settled. Neither affects profit because neither is revenue nor an expense.

Question 6Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business purchases inventory for $5,500 including GST of 10%. What amount should be debited to the inventory account?

  1. $5,500
  2. $5,050
  3. $5,000 Correct answer.
  4. $6,050

Explanation

Because the business can claim the GST paid as an input credit, the inventory is recorded net of GST. Dividing $5,500 by 1.10 gives $5,000, which is the cost of the goods. The $500 GST is recorded separately as a receivable from the tax authority.

Question 7Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which qualitative characteristic is best supported by keeping source documents for every transaction?

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

Explanation

Verifiability means different knowledgeable observers could reach consensus that the information faithfully represents the transactions. Source documents such as receipts and invoices provide that evidence. Without them, reported figures cannot be independently checked.

Question 8Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business pays $1,200 for a one-year insurance policy covering the next twelve months. What is the correct treatment at the time of payment?

  1. Record $1,200 as a liability until the year ends
  2. Record $1,200 as prepaid insurance, an asset Correct answer.
  3. Record $100 as an expense and $1,100 as an asset
  4. Record the full $1,200 as an expense immediately

Explanation

At the date of payment, the business has paid for cover it has not yet used, so it controls a future economic benefit. That benefit is a prepaid insurance asset. As each month passes, $100 is transferred to insurance expense.

Question 9Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following transactions increases one asset and decreases another asset?

  1. The owner contributing cash to the business
  2. Receiving cash from an accounts receivable customer Correct answer.
  3. Purchasing equipment on credit
  4. Paying wages owing to employees

Explanation

Collecting cash from a debtor increases the bank asset and reduces the accounts receivable asset by the same amount. Total assets are unchanged, so the accounting equation still balances. This is an asset swap rather than a change in equity.

Question 10Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business has total assets of $180,000 and liabilities of $65,000. What is owner's equity?

  1. $180,000
  2. $65,000
  3. $115,000 Correct answer.
  4. $245,000

Explanation

The accounting equation states that assets equal liabilities plus owner's equity. Rearranging gives equity as assets minus liabilities, so $180,000 minus $65,000 equals $115,000. This represents the owner's residual interest in the business.

Question 11Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following would be classified as a current liability?

  1. Accounts payable due in 30 days Correct answer.
  2. A mortgage repayable in fifteen years
  3. Equipment used in production
  4. Prepaid rent for next month

Explanation

A current liability is an obligation expected to be settled within twelve months of the reporting date. Accounts payable due in 30 days meets this test. Long-term borrowings and assets fall outside this classification.

Question 12Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business records a sale of $3,300 including GST on credit. Which entry correctly records the transaction?

  1. Debit sales $3,000; debit GST collected $300; credit accounts receivable $3,300
  2. Debit accounts receivable $3,300; credit sales $3,000 and GST collected $300 Correct answer.
  3. Debit accounts receivable $3,000; credit sales $3,000
  4. Debit accounts receivable $3,300; credit sales $3,300

Explanation

The debtor owes the full $3,300, so accounts receivable is debited with that amount. Of this, $3,000 is the business's revenue and $300 is GST collected on behalf of the tax authority, which is a liability. Splitting the credit keeps revenue free of tax.

Question 13Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which document would normally be issued by a seller to inform a buyer that the amount owed has been reduced because goods were returned?

  1. Purchase order
  2. Receipt
  3. Invoice
  4. Credit note Correct answer.

Explanation

A credit note is issued when goods are returned or an allowance is granted, reducing the amount the customer owes. It records the reduction in the receivable and any GST adjustment. An invoice, by contrast, increases the amount owed.

Question 14Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business uses the perpetual inventory system. What is the effect of a credit sale of goods costing $800 for $1,400 excluding GST?

  1. Increase accounts receivable by $1,400, increase sales by $1,400, increase cost of sales by $800 and decrease inventory by $800 Correct answer.
  2. Increase inventory by $800 and increase sales by $1,400
  3. Increase sales by $1,400 and increase inventory by $1,400
  4. Increase accounts receivable by $1,400 and increase inventory by $800

Explanation

Under perpetual inventory, two entries are made for each sale: the revenue entry and the cost entry. The receivable and sales rise by the selling price, while cost of sales rises and inventory falls by the cost price. This keeps the inventory balance continuously up to date.

Question 15Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following best explains why a physical stocktake is still needed even when a perpetual inventory system is used?

  1. To identify discrepancies caused by theft, damage or recording errors Correct answer.
  2. To record the owner's drawings
  3. To determine the selling price of goods
  4. To calculate the GST owed on sales

Explanation

A perpetual system relies on recorded movements, which can differ from actual stock because of theft, spoilage, breakage or clerical mistakes. A physical count reveals these discrepancies so the inventory account can be adjusted. It also supports the verifiability of the reported inventory figure.

Question 16Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business reports a gross profit of $60,000 and a net profit of $24,000. Which statement is correct?

  1. Cost of sales total $36,000
  2. Operating expenses total $84,000
  3. Operating expenses total $36,000 Correct answer.
  4. Gross profit margin equals net profit margin

Explanation

Net profit is gross profit less operating expenses, so operating expenses equal $60,000 minus $24,000, which is $36,000. Cost of sales is deducted earlier in the calculation of gross profit. The two margins differ whenever operating expenses are non-zero.

Question 17Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following is classified as an operating expense rather than part of cost of sales?

  1. Freight inwards on goods purchased
  2. Depreciation of delivery vehicles Correct answer.
  3. Customs duty on imported inventory
  4. Purchase of inventory for resale

Explanation

Operating expenses are costs incurred in running the business that are not directly tied to acquiring the goods sold. Depreciation of delivery vehicles is such a cost. Freight inwards, customs duty and the purchase price itself are all costs of bringing inventory to a saleable condition.

Question 18Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business has a bank overdraft of $4,000 and a bank loan of $50,000 repayable in five years. How should these appear in the balance sheet?

  1. Both as current liabilities
  2. Overdraft as a non-current liability and loan as a current liability
  3. Overdraft as a current liability and loan as a non-current liability Correct answer.
  4. Both as non-current liabilities

Explanation

Classification depends on when the obligation is expected to be settled. A bank overdraft is repayable on demand, making it a current liability, while a loan due in five years is non-current. Presenting them separately helps users assess short-term liquidity.

Question 19Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which accounting element is increased by a credit entry?

  1. Assets
  2. Drawings
  3. Expenses
  4. Liabilities Correct answer.

Explanation

Under double-entry rules, liabilities, owner's equity, revenue and income accounts increase on the credit side. Assets, expenses and drawings increase on the debit side. This convention keeps the extended accounting equation in balance.

Question 20Units 1 and 2 (Accounting study design, accreditation period from 2025)

A trial balance totals $96,400 on both sides. What can be concluded from this?

  1. Profit has been calculated correctly
  2. All transactions have been recorded
  3. The ledger is free of all errors
  4. No arithmetic or one-sided posting errors have occurred, but other errors may remain Correct answer.

Explanation

A balanced trial balance confirms only that total debits equal total credits. Errors such as omitting a transaction entirely, posting to the wrong account of the same type, or recording a compensating error will not disturb the balance. Further checking is therefore still required.

Question 21Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business pays a supplier $1,650 cash for an outstanding account. What is the effect on the accounting equation?

  1. Assets decrease and liabilities decrease Correct answer.
  2. Assets increase and liabilities increase
  3. Liabilities decrease and owner's equity increases
  4. Assets decrease and owner's equity decreases

Explanation

Paying a supplier reduces the bank asset and also reduces the accounts payable liability by the same amount. Because both sides of the equation fall equally, owner's equity is unaffected. The transaction settles an existing obligation rather than creating an expense.

Question 22Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business's inventory turnover is 8 times per year. What does this indicate?

  1. The business earns an 8% gross profit margin
  2. The business sells its average inventory about 8 times each year Correct answer.
  3. The business holds stock for about 45 days on average
  4. The business has 8 times more inventory than sales

Explanation

Inventory turnover measures how many times average inventory is sold and replaced during a period. A figure of 8 means the stock cycles roughly eight times per year. Dividing 365 by 8 gives about 46 days of stock holding, which reflects liquidity.

Question 23Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business uses the straight-line method to depreciate equipment costing $24,000 with a residual value of $4,000 over five years. What is the annual depreciation expense?

  1. $4,800
  2. $2,400
  3. $5,600
  4. $4,000 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, which is cost less residual value, evenly over the useful life. Here $24,000 minus $4,000 equals $20,000, and dividing by five years gives $4,000 per year. The residual value is excluded because it is expected to be recovered at the end.

Question 24Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which statement best explains why depreciation is recorded even though no cash is paid?

  1. It records the fall in the market value of the asset each year
  2. It allocates the cost of the asset over the periods that benefit from its use Correct answer.
  3. It reduces the GST payable on the asset
  4. It provides funds to replace the asset when it wears out

Explanation

Depreciation applies the matching principle by spreading an asset's cost across the reporting periods that consume its service potential. It is an allocation of historical cost, not a valuation of market price. It also does not set aside cash for replacement.

Question 25Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business records a $900 payment for advertising as a debit to advertising expense and a credit to bank. Later it discovers the payment was actually for the owner's personal membership. Which correction is required?

  1. Debit drawings $900 and credit advertising expense $900 Correct answer.
  2. Debit bank $900 and credit advertising expense $900
  3. No correction is needed because the trial balance still balances
  4. Debit advertising expense $900 and credit drawings $900

Explanation

Under the entity assumption, personal spending must be recorded as drawings rather than as a business expense. The correction removes the expense and records drawings, which reduces owner's equity. Leaving it as advertising would overstate expenses and understate profit.

Question 26Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which accounting assumption allows a business to report its financial results in regular periods such as monthly or annually?

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

Explanation

The reporting period assumption divides the life of a business into artificial time periods so that reports can be prepared at regular intervals. Without it, profit could only be measured when the business finally closed.

Question 27Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business receives a bank statement directly from its bank. Which qualitative characteristic is most directly supported by this document?

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

Explanation

A bank statement is an independent source document, so information taken from it is free from bias and can be verified. This supports reliability rather than the other characteristics.

Question 28Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following transactions decreases owner's equity?

  1. The business purchases equipment on credit
  2. The business receives cash from a debtor
  3. The owner contributes cash to the business
  4. The business pays a telephone account in cash Correct answer.

Explanation

Paying an expense such as a telephone account reduces profit, and profit is part of owner's equity, so equity falls. The other transactions affect assets or liabilities without reducing equity.

Question 29Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business has current assets of $48,000, inventory of $18,000 and current liabilities of $20,000. What is the quick asset ratio?

  1. 2.4 : 1
  2. 1.2 : 1
  3. 0.9 : 1
  4. 1.5 : 1 Correct answer.

Explanation

The quick asset ratio is (current assets minus inventory) divided by current liabilities, which is ($48,000 − $18,000) ÷ $20,000 = 1.5 : 1. Inventory is excluded because it may take time to convert into cash.

Question 30Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following would be recorded in the cash payments journal?

  1. A cash sale to a customer
  2. A credit purchase of inventory from a supplier
  3. A credit sale to a customer
  4. Payment of wages to employees by electronic transfer Correct answer.

Explanation

The cash payments journal records all transactions where cash leaves the business, including electronic transfers. Credit transactions are recorded in the purchases or sales journals instead.

Question 31Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business uses the perpetual inventory system. It returns damaged goods to a supplier and receives a credit note for $400. Which entry records this return?

  1. Debit accounts payable $400; credit inventory $400 Correct answer.
  2. Debit accounts payable $400; credit purchases $400
  3. Debit purchases returns $400; credit accounts payable $400
  4. Debit inventory $400; credit accounts payable $400

Explanation

Under perpetual inventory, the inventory account is updated continuously, so a purchase return reduces inventory and reduces the amount owing to the supplier. The debit clears part of the liability and the credit reduces the asset.

Question 32Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business's accounts receivable turnover is 6 times per year. What does this indicate?

  1. On average, debtors take about 6 days to settle their accounts
  2. The business collects cash from debtors faster than it pays creditors
  3. On average, debtors take about 61 days to settle their accounts Correct answer.
  4. The business holds inventory for about 61 days

Explanation

The average collection period is 365 divided by the turnover rate, which is 365 ÷ 6 ≈ 61 days. This measures how long, on average, it takes to convert receivables into cash.

Question 33Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business records a credit sale of $2,200 including GST of 10% in the sales journal. Which amount is credited to the sales account?

  1. $220
  2. $2,000 Correct answer.
  3. $2,420
  4. $2,200

Explanation

The sales account records revenue excluding GST, because GST collected is a liability owed to the tax office. Removing 10% GST from $2,200 gives $2,000 of sales revenue.

Question 34Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following is a feature of a good internal control system for cash receipts?

  1. All cash receipts are banked daily and receipted Correct answer.
  2. The owner keeps the cash tin at home for safekeeping
  3. The same person records cash receipts and prepares the bank reconciliation
  4. Cash payments are made from cash received before it is banked

Explanation

Good internal control separates duties and ensures all cash received is documented and banked promptly, reducing the risk of theft or loss. Recording and reconciling should be done by different people.

Question 35Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business has a bank overdraft of $6,000 and a loan repayable in three years of $40,000. How should these be classified in the balance sheet?

  1. The overdraft as a non-current liability and the loan as a current liability
  2. Both as current liabilities
  3. The overdraft as a current liability and the loan as a non-current liability Correct answer.
  4. Both as non-current liabilities

Explanation

A bank overdraft is repayable on demand and is therefore a current liability, while a loan due in three years is a non-current liability. Classification depends on when the obligation is expected to be settled.

Question 36Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business receives $500 from a debtor whose account had been written off as bad in the previous period. Which entry records the recovery under the allowance method?

  1. Debit bad debts expense $500; credit bank $500
  2. Debit accounts receivable $500; credit bank $500
  3. Debit bank $500; credit bad debts recovered $500 Correct answer.
  4. Debit bank $500; credit accounts receivable $500

Explanation

A recovery of a previously written-off debt is not revenue from sales, so it is credited to a bad debts recovered account and the cash received is debited to bank. This distinguishes it from an ordinary receipt from a debtor.

Question 37Units 1 and 2 (Accounting study design, accreditation period from 2025)

An asset costing $18,000 with a residual value of $2,000 is depreciated over four years using the straight-line method. What is the carrying value at the end of year two?

  1. $9,000
  2. $10,000 Correct answer.
  3. $12,000
  4. $8,000

Explanation

Annual depreciation is ($18,000 − $2,000) ÷ 4 = $4,000, so accumulated depreciation after two years is $8,000. The carrying value is $18,000 − $8,000 = $10,000.

Question 38Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following best describes the purpose of preparing a balance sheet?

  1. To explain changes in the bank account during a period
  2. To show the cash received and paid during a period
  3. To show the revenue and expenses for a period
  4. To report the assets, liabilities and owner's equity at a point in time Correct answer.

Explanation

The balance sheet is a statement of financial position as at a particular date, listing what the business owns and owes. It is a snapshot rather than a record of flows over a period.

Question 39Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business had opening inventory of $12,000, purchases of $80,000 and closing inventory of $10,000. Cost of sales is $82,000. What were net sales if gross profit was $28,000?

  1. $102,000
  2. $54,000
  3. $96,000
  4. $110,000 Correct answer.

Explanation

Gross profit equals net sales minus cost of sales, so net sales equal $28,000 + $82,000 = $110,000. Opening and closing inventory affect cost of sales, which is already given.

Question 40Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following is a distinguishing feature of a not-for-profit organisation's financial reporting?

  1. It does not need to prepare a balance sheet
  2. It records all receipts directly as revenue
  3. It prepares an income statement to show profit available for distribution to owners
  4. It reports a surplus or deficit rather than a profit or loss Correct answer.

Explanation

Not-for-profit organisations aim to provide services rather than earn profit, so the excess of revenue over expenses is described as a surplus and a shortfall as a deficit. They still prepare a balance sheet and use accrual accounting.

Question 41Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business's trial balance balances but the bank account has been understated by $900. Which error could explain this?

  1. A payment of $900 posted to the bank account but not to the expense account
  2. A payment of $900 entered only in the cash payments journal Correct answer.
  3. A payment of $900 recorded as a debit to bank and a credit to bank
  4. A transposition error in the bank balance

Explanation

A one-sided entry affects only one account, so total debits and credits remain equal while the bank balance is wrong. Errors that affect only one side of the ledger do not disturb the trial balance.

Question 42Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following is an example of an accrued expense?

  1. Insurance paid in advance for the next period
  2. Interest received in advance from a customer
  3. A debtor who has not yet paid an invoice
  4. Wages earned by employees but not yet paid at balance date Correct answer.

Explanation

An accrued expense is an expense that has been incurred but not yet paid or recorded, such as wages owing at balance date. It is recognised so expenses match the period in which they were incurred.

Question 43Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business records a $600 payment for rent as a debit to rent expense and a credit to bank, but the payment was actually $60. Which type of error has occurred?

  1. An error of principle
  2. A complete reversal of entries
  3. An error of original entry Correct answer.
  4. An error of omission

Explanation

An error of original entry occurs when an incorrect amount is entered in the books and then posted consistently to the ledger accounts. The trial balance still balances because both sides are affected equally.

Question 44Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following best explains why a business prepares a post-closing trial balance?

  1. To record transactions that were omitted during the period
  2. To calculate profit for the period
  3. To list all revenue and expense accounts
  4. To verify that ledger balances remain equal after closing entries are posted Correct answer.

Explanation

After revenue, expense and drawings accounts are closed, a post-closing trial balance confirms that total debits still equal total credits. Only permanent accounts remain in the ledger at that point.

Question 45Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following transactions affects the cash flow statement but not the income statement?

  1. A credit sale of inventory
  2. Cash received from a debtor for a previous credit sale Correct answer.
  3. Depreciation of equipment
  4. An accrued expense recorded at balance date

Explanation

Receiving cash from a debtor converts a receivable into cash, which is a cash inflow, but the revenue was recognised when the sale occurred, so profit is unaffected now. The other items affect profit without an immediate cash movement or involve no cash at all.

Question 46Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business owner withdraws inventory for personal use. Under the perpetual inventory system, which entry records this?

  1. Debit purchases; credit drawings
  2. Debit drawings; credit inventory Correct answer.
  3. Debit inventory; credit drawings
  4. Debit drawings; credit sales

Explanation

Inventory taken by the owner is a personal withdrawal, so drawings is debited and the inventory asset is reduced by a credit. It is not a sale because no revenue is earned.

Question 47Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following is the best example of a capital expenditure?

  1. Paying wages to install new machinery
  2. Painting the interior of an office
  3. Installing a new loading dock that extends a warehouse Correct answer.
  4. Replacing a broken window in a building

Explanation

Capital expenditure extends the useful life or capacity of a non-current asset, so it is added to the asset's cost. Expenses that merely maintain the asset in its existing condition are revenue expenditure.

Question 48Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business has a gross profit ratio of 40% in year one and 32% in year two, with sales unchanged. Which explanation is most consistent with this change?

  1. The business reduced its selling prices without reducing cost of sales Correct answer.
  2. The business paid more rent in year two
  3. The business received more interest income in year two
  4. The business issued more capital in year two

Explanation

The gross profit ratio compares gross profit to sales, so a fall with stable sales points to a higher cost of sales relative to sales, such as lower selling prices or higher purchase costs. Rent, interest and capital affect net profit or equity, not gross profit.

Question 49Units 1 and 2 (Accounting study design, accreditation period from 2025)

Which of the following best describes the purpose of the statement of changes in equity?

  1. To show the revenue and expenses for the period
  2. To show the cash inflows and outflows for the period
  3. To show the assets and liabilities at balance date
  4. To show the movements in owner's equity during the period, including profit and drawings Correct answer.

Explanation

The statement of changes in equity reconciles opening and closing equity by showing profit, capital contributions and drawings. It links the income statement to the balance sheet.

Question 50Units 1 and 2 (Accounting study design, accreditation period from 2025)

A business records a $300 cash sale by debiting bank and crediting sales, but the goods cost $180. Under the perpetual inventory system, what additional entry is required?

  1. No additional entry is required
  2. Debit purchases $180; credit bank $180
  3. Debit inventory $180; credit cost of sales $180
  4. Debit cost of sales $180; credit inventory $180 Correct answer.

Explanation

Under perpetual inventory, each sale requires a second entry that transfers the cost of the goods sold from inventory to cost of sales. This keeps the inventory balance and gross profit accurate.