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ITAA Toelatingsexamen practice questions

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Question 1Accountancy

Which financial statement reports a company's revenues and expenses for a period?

  1. Statement of cash flows
  2. Balance sheet
  3. Statement of profit or loss Correct answer.
  4. Statement of changes in equity

Explanation

The statement of profit or loss (income statement) matches revenues earned with expenses incurred during an accounting period, producing profit or loss. The balance sheet instead shows assets, liabilities and equity at a single date.

Question 2Accountancy

A business buys equipment for 10,000 on credit. Which pair of accounts is affected?

  1. Equipment increases and equity increases
  2. Equipment increases and cash decreases
  3. Equipment increases and accounts payable increases Correct answer.
  4. Cash decreases and accounts payable decreases

Explanation

The dual-entry rule requires that every transaction be recorded with equal debits and credits. Acquiring equipment on credit increases an asset (equipment) and simultaneously increases a liability (accounts payable).

Question 3Accountancy

What is the primary purpose of a trial balance?

  1. To check that total debits equal total credits Correct answer.
  2. To prove the business is profitable
  3. To value inventory at year end
  4. To calculate depreciation

Explanation

A trial balance lists all ledger balances and totals the debit and credit columns to confirm arithmetic equality. It detects certain errors but does not by itself confirm profitability or correct valuation.

Question 4Accountancy

Under the accrual basis, when is revenue recognised?

  1. When the tax authority is notified
  2. When cash is received
  3. When the goods or services are delivered and control passes Correct answer.
  4. When the invoice is printed

Explanation

Accrual accounting recognises revenue when the performance obligation is satisfied, that is when control of goods or services transfers to the customer. The timing of cash receipt is irrelevant to revenue recognition under this basis.

Question 5Accountancy

Which of the following is a current asset?

  1. Inventory held for resale Correct answer.
  2. Delivery van
  3. Mortgage payable in 15 years
  4. Goodwill

Explanation

A current asset is expected to be realised or consumed within the normal operating cycle or within twelve months. Inventory held for resale meets that definition, whereas a van, goodwill and a long-term mortgage do not.

Question 6Accountancy

A company has current assets of 80,000 and current liabilities of 40,000. What is the current ratio?

  1. 40,000
  2. 2.0 Correct answer.
  3. 3.0
  4. 0.5

Explanation

The current ratio is current assets divided by current liabilities, so 80,000 divided by 40,000 equals 2.0. This indicates the company holds two units of short-term resources for every unit of short-term obligation.

Question 7Accountancy

Which document is sent by a seller to request payment from a credit customer?

  1. Purchase order
  2. Sales invoice Correct answer.
  3. Remittance advice
  4. Credit note

Explanation

A sales invoice states the goods or services supplied, the amount due and the payment terms, and it forms the basis for the customer's payable. A credit note instead reduces an amount already invoiced.

Question 8Accountancy

What does the matching principle require?

  1. Liabilities are matched with equity
  2. Assets are recorded at their market value each year
  3. Expenses are recorded in the same period as the revenues they helped generate Correct answer.
  4. Cash receipts and payments are recorded in the same period

Explanation

The matching principle links expenses to the revenues they helped earn so that profit for a period reflects the resources consumed to generate that period's income. This is closely tied to accrual accounting and adjusting entries.

Question 9Accountancy

A machine costing 50,000 with no residual value is depreciated straight-line over 5 years. What is the annual depreciation charge?

  1. 25,000
  2. 12,500
  3. 10,000 Correct answer.
  4. 5,000

Explanation

Straight-line depreciation allocates the depreciable amount equally over the useful life. Here 50,000 divided by 5 years gives 10,000 per year.

Question 10Accountancy

A company receives 1,200 in advance for services to be delivered next month. How is this recorded on receipt?

  1. Debit cash 1,200 and credit revenue 1,200
  2. Debit deferred income 1,200 and credit cash 1,200
  3. Debit revenue 1,200 and credit cash 1,200
  4. Debit cash 1,200 and credit deferred income 1,200 Correct answer.

Explanation

Because the service has not yet been performed, no revenue may be recognised; the cash received creates an obligation to deliver, recorded as deferred income (a liability). Cash is debited and the liability credited until performance occurs.

Question 11Accountancy

Which error would still allow a trial balance to balance?

  1. Posting a debit entry as a credit
  2. Adding the debit column incorrectly
  3. Recording only the debit side of a transaction
  4. Recording a sale of 500 as 50 in both the sales and receivables accounts Correct answer.

Explanation

A compensating error of the same amount on both the debit and credit sides keeps total debits equal to total credits, so the trial balance still balances. Such errors must be found by review or reconciliation rather than by the trial balance.

Question 12Accountancy

Beginning inventory is 20,000, purchases are 90,000 and closing inventory is 25,000. What is cost of goods sold?

  1. 85,000 Correct answer.
  2. 90,000
  3. 110,000
  4. 135,000

Explanation

Cost of goods sold equals opening inventory plus purchases minus closing inventory: 20,000 + 90,000 - 25,000 = 85,000. Closing inventory is deducted because those goods were not sold during the period.

Question 13Accountancy

A company uses the allowance method and estimates that 3% of its 200,000 receivables are doubtful. What is the required allowance?

  1. 600
  2. 3,000
  3. 6,000 Correct answer.
  4. 20,000

Explanation

The allowance is calculated by applying the estimated percentage to the receivables balance: 3% of 200,000 = 6,000. This amount is recognised as an expense and reduces receivables to their expected recoverable amount.

Question 14Accountancy

What is the effect of a credit sale on the accounting equation?

  1. No change in total assets
  2. Assets increase and liabilities increase
  3. Assets decrease and equity decreases
  4. Assets increase and equity increases Correct answer.

Explanation

A credit sale creates a receivable, increasing assets, and recognises revenue, which increases profit and therefore equity. Total liabilities are unaffected because no borrowing or payable to a supplier arises.

Question 15Accountancy

Which cost is normally treated as a product cost and included in inventory value?

  1. Import duties on purchased raw materials Correct answer.
  2. Sales staff commission
  3. Freight costs to deliver goods to customers
  4. Office administration salaries

Explanation

Costs necessary to bring inventory to its present location and condition, such as import duties and freight inwards, are capitalised in inventory. Selling and administration costs are period costs expensed as incurred.

Question 16Accountancy

A bank statement shows a closing balance of 5,000 while the cash book shows 4,600. Outstanding cheques total 700 and deposits not yet credited total 300. What is the adjusted bank balance?

  1. 4,200
  2. 5,400
  3. 4,600 Correct answer.
  4. 5,000

Explanation

Adjusting the bank statement for items not yet processed: 5,000 - 700 outstanding cheques + 300 deposits in transit = 4,600, which agrees with the cash book. Agreement confirms that the difference was timing only.

Question 17Accountancy

Which item is a liability on the balance sheet?

  1. Trade receivables
  2. Accrued interest payable Correct answer.
  3. Retained earnings
  4. Prepaid rent

Explanation

Accrued interest payable represents an obligation to pay interest that has been incurred but not yet settled, so it is a liability. Prepayments and receivables are assets, while retained earnings form part of equity.

Question 18Accountancy

A company issues shares for 100,000 cash. What is the effect on the balance sheet?

  1. Assets and equity both decrease
  2. Assets increase and liabilities increase
  3. Assets increase by 100,000 and equity increases by 100,000 Correct answer.
  4. Equity increases and liabilities decrease

Explanation

Cash received from a share issue increases the asset cash and simultaneously increases share capital within equity. The accounting equation remains balanced because both sides rise by the same amount.

Question 19Accountancy

Which statement about the straight-line and reducing-balance methods is correct?

  1. Reducing-balance gives a constant annual charge
  2. Straight-line ignores residual value
  3. Straight-line gives a higher charge in the final year
  4. Both produce the same total depreciation over the asset's life Correct answer.

Explanation

Regardless of the allocation pattern, total depreciation over an asset's life equals cost less residual value under both methods. The methods differ only in how that total is distributed across the years.

Question 20Accountancy

A company's gross profit is 60,000 and revenue is 300,000. What is the gross profit margin?

  1. 20% Correct answer.
  2. 25%
  3. 50%
  4. 5%

Explanation

The gross profit margin is gross profit divided by revenue, expressed as a percentage: 60,000 / 300,000 = 20%. It measures the proportion of each sales unit retained after deducting cost of goods sold.

Question 21Accountancy

Which item would appear in a statement of cash flows as an operating activity?

  1. Proceeds from issuing bonds
  2. Payment of a cash dividend
  3. Purchase of a factory building
  4. Cash paid to suppliers for inventory Correct answer.

Explanation

Operating activities are the principal revenue-producing activities of the entity, including cash paid to suppliers and employees. Buying property, issuing debt and paying dividends fall under investing or financing activities.

Question 22Accountancy

A company's inventory turnover is 8 times per year. Approximately how many days does inventory remain on hand?

  1. 365 days
  2. 30 days
  3. 46 days Correct answer.
  4. 8 days

Explanation

Days inventory equals 365 divided by the turnover rate: 365 / 8 is approximately 45.6, rounded to 46 days. This indicates how long, on average, goods are held before being sold.

Question 23Accountancy

A company changes its depreciation estimate from 10 to 8 years of useful life. How is this change treated?

  1. As a correction of a prior period error
  2. As a change in accounting estimate applied prospectively Correct answer.
  3. As a retrospective adjustment to opening retained earnings
  4. As a change in reporting currency

Explanation

A revision of useful life is a change in accounting estimate because it reflects new information about future benefits. Such changes are applied prospectively, affecting current and future periods rather than restating prior years.

Question 24Accountancy

Under IFRS, which measurement basis is generally used for property, plant and equipment after initial recognition?

  1. Only the fair value model is permitted
  2. Only the lower of cost and net realisable value
  3. Either the cost model or the revaluation model Correct answer.
  4. Only the cost model is permitted

Explanation

IFRS permits an entity to choose, as an accounting policy, either the cost model or the revaluation model for an entire class of property, plant and equipment. The chosen policy must then be applied consistently within that class.

Question 25Accountancy

A company sells goods with a right of return and estimates returns at 4% of 500,000 of sales. Which treatment is correct?

  1. Recognise revenue of 480,000 and a refund liability of 20,000 Correct answer.
  2. Defer all revenue until the return period expires
  3. Recognise full revenue and ignore the return estimate
  4. Recognise revenue of 500,000 and a receivable of 20,000

Explanation

Revenue is recognised only for goods not expected to be returned, with a corresponding refund liability for the expected returns. Here 4% of 500,000 is 20,000, leaving recognised revenue of 480,000.

Question 26Accountancy

Which accounting concept requires that a business's financial statements contain only transactions of the business itself and exclude the owner's private spending?

  1. The going concern concept
  2. The consistency concept
  3. The business entity concept Correct answer.
  4. The prudence concept

Explanation

The business entity concept treats the business as separate from its owners, so personal transactions of the owner are not recorded in the business books. Going concern concerns continuity of operations, prudence concerns caution in estimates, and consistency concerns applying the same methods over time.

Question 27Accountancy

A business buys office supplies for 400 cash. What is the effect on the accounting equation?

  1. Assets increase by 400 and liabilities decrease by 400
  2. Assets decrease by 400 and equity decreases by 400 Correct answer.
  3. Assets increase by 400 and equity increases by 400
  4. Assets stay the same and liabilities increase by 400

Explanation

Paying cash for an expense reduces the asset cash and also reduces equity through the expense. Total assets fall and equity falls by the same amount, so the equation stays balanced.

Question 28Accountancy

Which of the following is recorded in the sales returns account?

  1. A discount given for early payment
  2. Goods returned by the business to its supplier
  3. Goods returned by a customer Correct answer.
  4. A bad debt written off

Explanation

Sales returns (returns inwards) records goods that customers send back, which reduces revenue. Goods returned to a supplier belong in purchase returns, early payment discounts go to a discount allowed account, and bad debts are a separate expense.

Question 29Accountancy

A firm has opening capital of 50,000, profit for the year of 12,000 and drawings of 7,000. What is closing capital?

  1. 69,000
  2. 62,000
  3. 43,000
  4. 55,000 Correct answer.

Explanation

Closing capital equals opening capital plus profit minus drawings: 50,000 + 12,000 - 7,000 = 55,000. Profit increases the owner's interest while drawings reduce it.

Question 30Accountancy

Which of these is a current asset?

  1. A ten-year bank loan received
  2. Prepaid insurance for the next quarter Correct answer.
  3. Goodwill
  4. A delivery van

Explanation

A prepayment is a current asset because the benefit will be consumed within the next accounting period. A van is a non-current asset, a loan received is a liability, and goodwill is an intangible non-current asset.

Question 31Accountancy

A company has net profit of 45,000, depreciation of 9,000 and an increase in trade receivables of 6,000. What is cash generated from operations?

  1. 42,000
  2. 36,000
  3. 60,000
  4. 48,000 Correct answer.

Explanation

Start with net profit, add back the non-cash depreciation and subtract the increase in receivables: 45,000 + 9,000 - 6,000 = 48,000. Rising receivables absorb cash, so they are deducted.

Question 32Accountancy

A sole trader takes goods from inventory for personal use, costing 300. Which entry is correct?

  1. Debit inventory 300 and credit drawings 300
  2. Debit drawings 300 and credit cash 300
  3. Debit purchases 300 and credit drawings 300
  4. Debit drawings 300 and credit purchases 300 Correct answer.

Explanation

Goods taken by the owner are drawings, so drawings is debited and purchases (or inventory) is credited to remove the cost from the business. No cash moves, so cash is unaffected.

Question 33Accountancy

Under the reducing-balance method, an asset costs 20,000 and is depreciated at 20% per year. What is the depreciation charge in year 2?

  1. 3,600
  2. 2,560
  3. 3,200 Correct answer.
  4. 4,000

Explanation

Year 1 depreciation is 20% of 20,000 = 4,000, leaving a carrying amount of 16,000. Year 2 depreciation is 20% of 16,000 = 3,200, because the rate is applied to the reducing carrying amount.

Question 34Accountancy

A trial balance totals 100,000 on the debit side and 99,900 on the credit side. Which error could explain the difference?

  1. A purchase of 200 was recorded correctly in the ledger but posted to the wrong supplier account
  2. A sale of 500 was completely omitted from the records
  3. A cash payment of 300 was entered twice in the cash book
  4. A credit entry of 100 was entered in the ledger as 50 Correct answer.

Explanation

A transposition or one-sided error of 50 in a credit entry makes credits 50 short, producing a 100 difference because the debit side remains unchanged. Complete omission, wrong personal account posting and double entry of the same amount on one side affect the trial balance differently or not at all.

Question 35Accountancy

A business receives an invoice for electricity used during the period but not yet paid. Which concept justifies recording the expense now?

  1. Historical cost concept
  2. Entity concept
  3. Accrual concept Correct answer.
  4. Cash basis concept

Explanation

The accrual concept records expenses in the period they are incurred, regardless of when cash is paid. Cash basis would defer recognition until payment, while historical cost and entity concepts do not address timing of expense recognition.

Question 36Accountancy

Which of these is an example of a capital expenditure?

  1. Installing a new lift in an existing building Correct answer.
  2. Repainting the office after normal wear
  3. Replacing a broken window with an identical pane
  4. Paying the monthly electricity bill

Explanation

Capital expenditure improves the asset or extends its useful life, such as installing a new lift, and is added to the asset's cost. Repairs and running costs that merely restore or maintain the asset are revenue expenditure.

Question 37Accountancy

A company has a bank overdraft of 15,000, trade payables of 25,000, accrued expenses of 4,000 and a long-term loan of 60,000. What are current liabilities?

  1. 44,000 Correct answer.
  2. 40,000
  3. 104,000
  4. 19,000

Explanation

Current liabilities are those due within a year: overdraft 15,000 + payables 25,000 + accruals 4,000 = 44,000. The long-term loan is a non-current liability and is excluded.

Question 38Accountancy

Which statement about a suspense account is correct?

  1. It replaces the need for a trial balance
  2. It is a permanent liability shown on the balance sheet
  3. It temporarily holds a difference in the trial balance until the error is found Correct answer.
  4. It records all transactions that have not yet been posted

Explanation

When a trial balance does not agree, the difference is placed in a suspense account so that draft financial statements can be prepared while the error is investigated. Once identified, the correcting entry removes the suspense balance.

Question 39Accountancy

A company's bank loan is 200,000 at 6% annual interest. Interest for the year is paid for 9 months only. What is the accrued interest at year end?

  1. 9,000
  2. 12,000
  3. 3,000 Correct answer.
  4. 1,500

Explanation

Annual interest is 200,000 x 6% = 12,000, or 1,000 per month. Nine months paid means 9,000 paid, so the accrual is 12,000 - 9,000 = 3,000.

Question 40Accountancy

Which document records the return of goods by a customer to a supplier's books?

  1. Purchase invoice
  2. Debit note issued
  3. Credit note issued Correct answer.
  4. Remittance advice

Explanation

When a customer returns goods, the seller issues a credit note to reduce the amount owed. A debit note is raised by the buyer, a purchase invoice records a purchase, and a remittance advice accompanies payment.

Question 41Accountancy

A company has profit before tax of 80,000 and pays tax at 25%. It has 20,000 ordinary shares. What is basic earnings per share?

  1. 2.00
  2. 4.00
  3. 1.00
  4. 3.00 Correct answer.

Explanation

Profit after tax is 80,000 x 0.75 = 60,000. Earnings per share is 60,000 / 20,000 shares = 3.00 per share.

Question 42Accountancy

Which of these would be classified as an operating activity in a statement of cash flows prepared under IAS 7?

  1. Proceeds from issuing ordinary shares
  2. Cash paid to suppliers for inventory Correct answer.
  3. Purchase of a new factory
  4. Repayment of a bank loan

Explanation

Payments to suppliers for inventory are part of the entity's day-to-day trading and are operating cash flows. Buying a factory is investing, issuing shares is financing, and repaying a loan is financing.

Question 43Accountancy

A business has a gross profit margin of 25% and revenue of 400,000. If cost of goods sold rises by 20,000 with revenue unchanged, what is the new gross profit margin?

  1. 15%
  2. 25%
  3. 22.5%
  4. 20% Correct answer.

Explanation

Initial gross profit is 25% of 400,000 = 100,000, so cost of goods sold is 300,000. Adding 20,000 gives 320,000, so gross profit becomes 80,000, which is 20% of 400,000.

Question 44Accountancy

A company's acid-test ratio is 0.8, current assets are 90,000 and inventory is 30,000. What are current liabilities?

  1. 75,000 Correct answer.
  2. 37,500
  3. 60,000
  4. 112,500

Explanation

The acid-test ratio uses current assets excluding inventory: (90,000 - 30,000) / current liabilities = 0.8. Therefore current liabilities are 60,000 / 0.8 = 75,000.

Question 45Accountancy

Under IFRS, how should a provision for a present obligation with uncertain timing be measured?

  1. The maximum possible amount payable
  2. The amount already paid to settle similar claims
  3. Best estimate of the expenditure required to settle the obligation Correct answer.
  4. Zero until the amount is confirmed by a court

Explanation

IAS 37 requires a provision to be measured at the best estimate of the expenditure needed to settle the present obligation at the reporting date. It is not the maximum amount, and it is recognised when the obligation is probable and measurable.

Question 46Accountancy

A company issues 10,000 shares with a nominal value of 2 for 5 each. What is the credit to share premium?

  1. 10,000
  2. 20,000
  3. 30,000 Correct answer.
  4. 50,000

Explanation

Share capital is recorded at nominal value: 10,000 x 2 = 20,000. The excess over nominal value is share premium: 10,000 x (5 - 2) = 30,000.

Question 47Accountancy

A company uses the revaluation model for a building carried at 200,000. It is revalued to 260,000. There is no previous revaluation deficit. How is the increase treated?

  1. Recognised as a reduction in depreciation expense
  2. Recognised in other comprehensive income and accumulated in equity as a revaluation surplus Correct answer.
  3. Recognised as a liability until the building is sold
  4. Recognised immediately in profit or loss as a gain

Explanation

Under IAS 16, an upward revaluation with no prior deficit is recognised in other comprehensive income and accumulated in equity as a revaluation surplus. It is not taken to profit or loss, and it is not a liability.

Question 48Accountancy

A company has profit of 100,000, a tax rate of 30%, and pays dividends of 15,000. What is the retained profit for the year?

  1. 70,000
  2. 85,000
  3. 55,000 Correct answer.
  4. 30,000

Explanation

Profit after tax is 100,000 x 0.7 = 70,000. Retained profit deducts dividends: 70,000 - 15,000 = 55,000.

Question 49Accountancy

A company has a debt-to-equity ratio of 0.6 and total equity of 250,000. What is total debt?

  1. 150,000 Correct answer.
  2. 416,667
  3. 250,000
  4. 100,000

Explanation

Debt-to-equity equals total debt divided by total equity, so debt = 0.6 x 250,000 = 150,000. The ratio expresses debt as a proportion of equity, not of total assets.

Question 50Accountancy

Which accounting equation correctly expresses the relationship between assets, liabilities and equity?

  1. Equity = Assets + Liabilities
  2. Liabilities = Assets + Equity
  3. Assets = Liabilities − Equity
  4. Assets = Liabilities + Equity Correct answer.

Explanation

The statement of financial position is built on the identity that everything a business owns (assets) is financed either by outsiders (liabilities) or by the owners (equity). Rearranging the identity gives equity as assets minus liabilities, so any presentation that adds liabilities to assets is arithmetically impossible.