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CIMA BA3 practice questions

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Question 1Fundamentals of Financial Accounting

A business records revenue when a sale is agreed with a customer, even though cash will be received two months later. Which accounting concept supports recording the revenue now?

  1. Going concern concept
  2. Business entity concept
  3. Accruals (matching) concept Correct answer.
  4. Prudence concept

Explanation

The accruals concept requires income to be recognised when it is earned and expenditure when it is incurred, not when cash moves. Because the sale has occurred, revenue is recognised now and the unpaid amount is carried as a receivable. The other concepts address continuity of the entity, caution in measurement, and separation of owner and business.

Question 2Fundamentals of Financial Accounting

A trader purchases goods for resale on credit. Which pair of entries correctly records the transaction in the books of the trader?

  1. Debit purchases, credit trade payables Correct answer.
  2. Debit purchases, credit inventory
  3. Debit cash, credit purchases
  4. Debit trade payables, credit purchases

Explanation

A credit purchase increases the expense of goods bought for resale, so purchases is debited. The obligation to the supplier increases, so trade payables is credited. No cash has moved and inventory is not credited at the point of purchase under a periodic system.

Question 3Fundamentals of Financial Accounting

Which statement best describes the purpose of the trial balance?

  1. To confirm that total debits equal total credits in the ledger Correct answer.
  2. To prove that no fraudulent entries have been made
  3. To show the market value of the entity's assets
  4. To calculate the profit for the accounting period

Explanation

A trial balance lists ledger balances and tests the arithmetic equality of debits and credits. It is a check on double-entry bookkeeping, not a statement of profit, value or fraud. Errors of principle, omission and compensating errors can still leave the trial balance in balance.

Question 4Fundamentals of Financial Accounting

An entity pays an annual insurance premium of $4,800 on 1 April for the twelve months to 31 March. Its year end is 31 December. What amount should be charged as insurance expense for that year and what is the prepayment at the year end?

  1. Expense $2,400; prepayment $2,400
  2. Expense $3,600; prepayment $1,200 Correct answer.
  3. Expense $4,800; prepayment $0
  4. Expense $1,200; prepayment $3,600

Explanation

Nine months of cover (April to December) relate to the current year, so the expense is 9/12 × $4,800 = $3,600. The remaining three months (January to March) are a prepayment of 3/12 × $4,800 = $1,200. The accruals concept requires the cost to be spread over the periods benefiting from it.

Question 5Fundamentals of Financial Accounting

A machine is bought for $50,000 with an estimated residual value of $5,000 and a useful life of five years. Using the straight-line method, what is the annual depreciation charge?

  1. $8,000
  2. $10,000
  3. $5,000
  4. $9,000 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. The depreciable amount is $50,000 − $5,000 = $45,000, divided by five years gives $9,000 per year. Residual value is not depreciated because it is expected to be recovered on disposal.

Question 6Fundamentals of Financial Accounting

Which of the following is an error of principle?

  1. A motor vehicle purchase was debited to the motor expenses account Correct answer.
  2. A sale of $500 was completely omitted from the books
  3. The same transaction was recorded twice in the sales day book
  4. A purchase invoice of $90 was entered as $900

Explanation

An error of principle occurs when a transaction is recorded in the wrong class of account, here a capital item treated as revenue expenditure. The double entry still balances, so the trial balance is unaffected. Omission, transposition and duplication are different categories of error.

Question 7Fundamentals of Financial Accounting

A trader's bank statement shows a debit balance of $2,000 at 31 March. Unpresented cheques total $600 and there are no other reconciling items. What is the cash book balance at that date?

  1. $2,600 overdrawn
  2. $1,400 overdrawn Correct answer.
  3. $2,600 positive
  4. $1,400 positive

Explanation

A debit balance on the bank statement means the bank views the customer as overdrawn. Unpresented cheques have been deducted in the cash book but not yet in the bank statement, so the cash book shows a larger overdraft. The cash book balance is therefore $2,000 + $600 = $2,600 overdrawn, and the statement balance is $600 less overdrawn than the cash book.

Question 8Fundamentals of Financial Accounting

Which item would appear in the statement of financial position as a non-current liability?

  1. A bank loan repayable in five equal annual instalments beginning next year Correct answer.
  2. Trade payables due within 60 days
  3. Accrued electricity charges for the last quarter
  4. A bank overdraft repayable on demand

Explanation

A liability is classified as non-current when the obligation is settled beyond twelve months after the reporting date. A loan repayable over five years has a substantial non-current element, even though the next instalment is current. Trade payables, accruals and overdrafts are normally current.

Question 9Fundamentals of Financial Accounting

Which of the following best describes the effect of a rights issue on a company's statement of financial position?

  1. Cash increases and retained earnings increase
  2. Cash increases and share premium decreases
  3. Cash and share capital both increase Correct answer.
  4. Share capital increases and liabilities decrease

Explanation

A rights issue is an offer of new shares to existing shareholders, usually at a discount to market price. The company receives cash and issues new shares, so cash and share capital increase; any amount above nominal value goes to share premium. Retained earnings and liabilities are not affected by the issue itself.

Question 10Fundamentals of Financial Accounting

A company has issued 100,000 ordinary shares of $1 each, fully paid, and has retained earnings of $250,000. It makes a 1-for-4 bonus issue. What are the share capital and reserves immediately after the bonus issue?

  1. Share capital $125,000; retained earnings $125,000
  2. Share capital $125,000; retained earnings $225,000 Correct answer.
  3. Share capital $100,000; retained earnings $250,000
  4. Share capital $125,000; retained earnings $250,000

Explanation

A bonus issue capitalises reserves by issuing shares to existing shareholders for no cash. The 1-for-4 issue creates 25,000 new $1 shares, raising share capital to $125,000, and reduces retained earnings by the same $25,000 to $225,000. Total equity is unchanged at $350,000.

Question 11Fundamentals of Financial Accounting

Which statement about the difference between capital expenditure and revenue expenditure is correct?

  1. Both types of expenditure are added to the cost of the non-current asset
  2. Capital expenditure is added to the cost of a non-current asset, while revenue expenditure is charged to profit or loss Correct answer.
  3. Capital expenditure is charged to profit or loss, while revenue expenditure is added to the asset
  4. Both types of expenditure are charged to profit or loss in the year incurred

Explanation

Capital expenditure acquires or improves a non-current asset and provides benefit over several periods, so it is capitalised. Revenue expenditure relates to day-to-day running costs and is expensed. Misclassifying capital expenditure as revenue understates profit and asset values.

Question 12Fundamentals of Financial Accounting

An entity sells goods for $10,000 excluding sales tax at 20%. The customer pays in cash. Which entry records the sales tax element correctly?

  1. Debit cash $2,000, credit sales tax payable $2,000 Correct answer.
  2. Debit sales tax payable $2,000, credit cash $2,000
  3. Debit sales $2,000, credit sales tax payable $2,000
  4. Debit cash $2,000, credit sales $2,000

Explanation

Sales tax collected from customers is not income of the business; it is a liability owed to the tax authority. The tax on $10,000 at 20% is $2,000, so cash is debited and sales tax payable credited. Revenue recognised is the $10,000 net amount.

Question 13Fundamentals of Financial Accounting

Which item is a current asset in the statement of financial position of a manufacturing business?

  1. Raw materials awaiting use in production Correct answer.
  2. Goodwill arising on the acquisition of a rival
  3. A factory building used in production
  4. A five-year loan made to a supplier

Explanation

Current assets are expected to be realised, sold or consumed within twelve months or the operating cycle. Raw materials will be consumed in production and sold within that cycle. Factory buildings, long-term loans and goodwill are non-current assets.

Question 14Fundamentals of Financial Accounting

A business has opening inventory of $8,000, purchases of $42,000 and closing inventory of $10,000. What is the cost of sales?

  1. $44,000
  2. $40,000 Correct answer.
  3. $42,000
  4. $50,000

Explanation

Cost of sales equals opening inventory plus purchases less closing inventory. Here $8,000 + $42,000 − $10,000 = $40,000. Closing inventory is deducted because it has not been sold in the period.

Question 15Fundamentals of Financial Accounting

Which statement correctly describes the effect of using the reducing balance method of depreciation compared with the straight-line method?

  1. Depreciation is lower in early years and higher in later years
  2. Depreciation is higher in early years and lower in later years Correct answer.
  3. No depreciation is charged until the asset is sold
  4. Depreciation is constant each year over the asset's life

Explanation

Reducing balance applies a fixed percentage to the carrying amount, which falls each year, so the charge declines over time. Straight-line produces an equal charge each year. The reducing balance method is often used for assets that lose value quickly early in their lives.

Question 16Fundamentals of Financial Accounting

A company's gross profit is $80,000, administrative expenses are $25,000 and selling expenses are $15,000. What is the operating profit?

  1. $65,000
  2. $40,000 Correct answer.
  3. $55,000
  4. $80,000

Explanation

Operating profit is gross profit less operating expenses, here $80,000 − $25,000 − $15,000 = $40,000. Gross profit only deducts cost of sales. Both administrative and selling expenses are operating costs.

Question 17Fundamentals of Financial Accounting

Which of the following would be recorded in the journal proper rather than in a book of prime entry such as the sales day book?

  1. A purchase invoice received from a supplier
  2. A credit sale invoice issued to a customer
  3. A cash sale made over the counter
  4. Correction of an error where a motor vehicle was debited to motor expenses Correct answer.

Explanation

The journal proper records transactions that do not fit the specialised day books, including corrections of errors and adjustments. Credit sales, cash sales and credit purchases are first recorded in the sales day book, cash book and purchases day book respectively.

Question 18Fundamentals of Financial Accounting

What is the correct treatment of a suspense account balance that arises because the trial balance does not agree?

  1. It is netted against share capital
  2. It is treated as income in the statement of profit or loss
  3. It is shown in the statement of financial position until the error is found and corrected Correct answer.
  4. It is written off immediately to retained earnings

Explanation

A suspense account is opened temporarily to make the trial balance balance while the cause of the difference is investigated. It is presented in the statement of financial position, often as an unexplained balance, until the error is located and corrected. Writing it off or treating it as income would misstate the financial statements.

Question 19Fundamentals of Financial Accounting

A business receives a bank loan of $20,000. Which effect does this have on the accounting equation?

  1. Liabilities increase by $20,000 and equity decreases by $20,000
  2. Assets increase by $20,000 and liabilities increase by $20,000 Correct answer.
  3. Assets increase by $20,000 and equity increases by $20,000
  4. Assets increase by $20,000 and liabilities decrease by $20,000

Explanation

The accounting equation is assets = liabilities + equity. Receiving loan cash increases the asset of cash and creates an obligation to repay, increasing liabilities by the same amount. Equity is unaffected because the loan is not a capital contribution or profit.

Question 20Fundamentals of Financial Accounting

A company wishes to improve its current ratio without changing total current assets. Which action would achieve this?

  1. Taking out a long-term loan and holding the cash
  2. Collecting a trade receivable in cash
  3. Purchasing inventory on credit
  4. Using cash to pay off a current liability Correct answer.

Explanation

The current ratio is current assets divided by current liabilities. Paying a current liability with cash reduces both by the same amount; when the ratio exceeds 1, this increases the ratio. The other options either increase current liabilities or simply swap one current asset for another.

Question 21Fundamentals of Financial Accounting

Which of the following is the correct order of the main components of a statement of profit or loss?

  1. Gross profit, revenue, cost of sales, operating profit, operating expenses
  2. Revenue, cost of sales, gross profit, operating expenses, operating profit Correct answer.
  3. Revenue, operating expenses, gross profit, cost of sales, operating profit
  4. Cost of sales, revenue, operating profit, gross profit, operating expenses

Explanation

The statement begins with revenue, deducts cost of sales to give gross profit, then deducts operating expenses to give operating profit. This order allows users to assess both trading margin and cost control. Other income and finance costs are then added or deducted to reach profit before tax.

Question 22Fundamentals of Financial Accounting

An entity has profit before tax of $60,000. It paid a dividend of $10,000 during the year and had opening retained earnings of $150,000. What is the closing retained earnings?

  1. $210,000
  2. $190,000
  3. $220,000
  4. $200,000 Correct answer.

Explanation

Closing retained earnings equal opening retained earnings plus profit for the year less dividends paid. Here $150,000 + $60,000 − $10,000 = $200,000. Dividends are a distribution to owners and are not an expense in profit or loss.

Question 23Fundamentals of Financial Accounting

Which of the following best explains why a company's statement of cash flows is useful to users in addition to the statement of profit or loss?

  1. It measures profit on a consistent basis with the tax return
  2. It reports the market value of the company's shares at the year end
  3. It replaces the statement of financial position for liquidity analysis
  4. It shows actual cash generated and used, which cannot be manipulated by accrual accounting choices Correct answer.

Explanation

Profit is measured on an accruals basis and involves judgements such as depreciation and provisions. The statement of cash flows reports actual receipts and payments, helping users assess liquidity and solvency. It complements rather than replaces the other primary statements.

Question 24Fundamentals of Financial Accounting

A trader's cash book shows a debit balance of $500. The bank statement shows a credit balance of $800. Which item could explain the difference?

  1. Bank interest credited by the bank but not recorded in the cash book
  2. An error by the trader in adding up the cash book
  3. A customer's cheque returned unpaid by the bank
  4. Cheques paid to suppliers not yet presented at the bank Correct answer.

Explanation

A cash book debit balance represents money held at the bank, while a credit balance on the bank statement means the bank owes the customer. Unpresented cheques have reduced the cash book but not yet the bank statement. This makes the bank statement balance higher than the cash book balance.

Question 25Fundamentals of Financial Accounting

Which of the following is a characteristic of an asset as defined in financial reporting frameworks?

  1. A future economic benefit that the entity expects to receive from a planned purchase
  2. A liability that has been settled in the current period
  3. A resource owned by the entity regardless of whether it has future economic benefit
  4. A present economic resource controlled by the entity as a result of past events Correct answer.

Explanation

An asset is a present economic resource controlled by the entity as a result of past events. Control and the existence of potential economic benefit are both required. A planned future purchase does not yet create an asset, and ownership alone is not the test.

Question 26Fundamentals of Financial Accounting

Which accounting concept requires that a business's financial statements include only transactions that can be measured in monetary terms?

  1. The money measurement concept Correct answer.
  2. The accruals concept
  3. The going concern concept
  4. The business entity concept

Explanation

The money measurement concept states that accounting records only those items that can be expressed reliably in monetary units, so items such as employee skill or brand reputation are excluded unless a monetary amount can be attached. The other concepts address continuity of the entity, separation of owner and business, and timing of income and expenses rather than measurability.

Question 27Fundamentals of Financial Accounting

A sole trader takes goods from inventory for personal use, cost $300. Which double entry records this?

  1. Dr Drawings $300; Cr Cash $300
  2. Dr Drawings $300; Cr Purchases $300 Correct answer.
  3. Dr Purchases $300; Cr Drawings $300
  4. Dr Inventory $300; Cr Drawings $300

Explanation

Goods taken by the owner are drawings, so the drawings account is debited. The goods came out of purchases (or inventory), so that account is credited to remove the cost from the business. No cash moves, so cash is unaffected.

Question 28Fundamentals of Financial Accounting

A credit customer is declared bankrupt and the debt of $450 is confirmed irrecoverable. Which entry records the write-off?

  1. Dr Allowance for receivables $450; Cr Trade receivables $450
  2. Dr Irrecoverable debts expense $450; Cr Trade receivables $450 Correct answer.
  3. Dr Cash $450; Cr Trade receivables $450
  4. Dr Trade receivables $450; Cr Irrecoverable debts expense $450

Explanation

Writing off a bad debt removes the receivable and recognises an expense, so irrecoverable debts expense is debited and trade receivables credited. The allowance for receivables is only used where a general provision is being adjusted, not for a specific confirmed write-off.

Question 29Fundamentals of Financial Accounting

Which document is sent by a supplier to correct an overcharge on a previous invoice?

  1. A remittance advice
  2. A debit note
  3. A credit note Correct answer.
  4. A purchase order

Explanation

A credit note is issued by the supplier to reduce the amount owed by the customer, typically after goods are returned or an overcharge is identified. A debit note is raised by the buyer, and remittance advices and purchase orders serve different purposes in the trading cycle.

Question 30Fundamentals of Financial Accounting

An entity pays a six-month insurance premium of $1,200 on 1 April, and the year end is 31 December. What is the prepayment at the year end?

  1. $900
  2. $600 Correct answer.
  3. $1,200
  4. $300

Explanation

Nine months of the premium has expired by 31 December, leaving three months unexpired. Three months at $200 per month gives a prepayment of $600, which is carried forward as a current asset.

Question 31Fundamentals of Financial Accounting

A trial balance extracted before adjustments shows total debits of $84,000 and total credits of $83,600. Which is the most likely explanation?

  1. A payment of $400 posted to the correct side of the wrong account
  2. A transposition error in one ledger account Correct answer.
  3. A purchase invoice omitted from the purchases day book
  4. A sale of $400 recorded twice in the sales day book

Explanation

A difference of $400 that is divisible by 9 often indicates a transposition error, where digits are reversed in one entry. Errors of omission and errors of commission on the correct side do not disturb the trial balance, and a duplicated entry would create a larger imbalance.

Question 32Fundamentals of Financial Accounting

A business receives a bank statement showing charges of $75 that are not yet in its cash book. What is the effect of recording these charges?

  1. Trade payables increase by $75
  2. Bank overdraft decreases by $75
  3. Net profit increases by $75
  4. Bank overdraft increases by $75 Correct answer.

Explanation

Bank charges are an expense that reduces the bank balance or increases an overdraft. Recording them debits the expense and credits the bank account, so an overdraft rises by $75 and profit falls rather than rises.

Question 33Fundamentals of Financial Accounting

Which method of inventory valuation is not permitted by IAS 2 Inventories?

  1. First in, first out (FIFO)
  2. Weighted average cost
  3. Last in, first out (LIFO) Correct answer.
  4. Specific identification of unit costs

Explanation

IAS 2 prohibits LIFO because it can produce inventory values that do not reflect recent costs. FIFO, weighted average cost and specific identification are all acceptable cost formulas under the standard.

Question 34Fundamentals of Financial Accounting

Equipment costing $50,000 with accumulated depreciation of $30,000 is sold for $15,000. What is the profit or loss on disposal?

  1. Profit of $5,000
  2. Profit of $15,000
  3. Loss of $15,000
  4. Loss of $5,000 Correct answer.

Explanation

Carrying amount is cost less accumulated depreciation, which is $20,000. Sale proceeds of $15,000 are $5,000 below the carrying amount, giving a loss on disposal of $5,000.

Question 35Fundamentals of Financial Accounting

Under the reducing balance method, an asset costing $10,000 is depreciated at 20% per year. What is the depreciation charge for the second year?

  1. $1,800
  2. $1,600 Correct answer.
  3. $2,000
  4. $1,440

Explanation

First-year depreciation is 20% of $10,000, or $2,000, leaving a carrying amount of $8,000. The second-year charge is 20% of $8,000, which equals $1,600.

Question 36Fundamentals of Financial Accounting

A company issues 1,000 ordinary shares of $1 each at a premium of $2 per share, fully paid in cash. How is the share premium recorded?

  1. $2,000 debited to share premium
  2. $2,000 credited to share premium Correct answer.
  3. $3,000 credited to share premium
  4. $1,000 credited to share premium

Explanation

Share premium is the amount received above nominal value. Each share raises $2 above the $1 nominal value, so the premium credited is 1,000 shares multiplied by $2, which equals $2,000. The nominal $1,000 is credited to share capital.

Question 37Fundamentals of Financial Accounting

Which item is deducted from an entity's gross profit to arrive at operating profit?

  1. Income tax expense
  2. Cost of goods sold
  3. Distribution costs Correct answer.
  4. Finance costs

Explanation

Gross profit is revenue less cost of sales, and operating profit is gross profit less operating expenses such as distribution and administrative costs. Cost of sales is already deducted in arriving at gross profit, while finance costs and tax are deducted after operating profit.

Question 38Fundamentals of Financial Accounting

A business has current assets of $60,000 and current liabilities of $40,000. It then uses $10,000 of cash to pay a trade payable. What is the current ratio immediately afterwards?

  1. 1.67:1 Correct answer.
  2. 1.25:1
  3. 2.00:1
  4. 1.50:1

Explanation

Paying a payable reduces both cash and payables by $10,000, leaving current assets of $50,000 and current liabilities of $30,000. The ratio is therefore 50,000 divided by 30,000, which is 1.67:1.

Question 39Fundamentals of Financial Accounting

An entity's capital at the start of the year was $40,000. During the year the owner introduced $10,000 and withdrew $8,000, and profit for the year was $15,000. What is closing capital?

  1. $73,000
  2. $55,000
  3. $47,000
  4. $57,000 Correct answer.

Explanation

Closing capital equals opening capital plus capital introduced plus profit, less drawings. Adding $40,000, $10,000 and $15,000 gives $65,000, and deducting $8,000 gives $57,000.

Question 40Fundamentals of Financial Accounting

Which statement about the effect of a share split on a company's financial statements is correct?

  1. Share premium increases by the amount of the split
  2. Retained earnings are reduced by the nominal value of the new shares
  3. Total share capital is unchanged but the number of shares increases Correct answer.
  4. Total share capital increases by the nominal value of the new shares

Explanation

A share split divides existing shares into a larger number of shares of lower nominal value without changing total share capital or reserves. It is not a bonus issue, so no reserves are capitalised and no premium arises.

Question 41Fundamentals of Financial Accounting

Which of the following is an example of capital expenditure?

  1. Repainting the office interior
  2. Installation costs for a new machine Correct answer.
  3. Replacing a broken window with an identical pane
  4. Annual servicing of delivery vehicles

Explanation

Capital expenditure is incurred to acquire or bring a non-current asset into working condition, so installation costs are capitalised as part of the asset's cost. Repainting, identical replacement and routine servicing maintain existing assets and are revenue expenditure.

Question 42Fundamentals of Financial Accounting

A business records a $5,000 sale of goods on credit to a customer as a sale for $500. Which type of error is this?

  1. An error of original entry Correct answer.
  2. A compensating error
  3. An error of principle
  4. An error of omission

Explanation

An error of original entry occurs when an incorrect amount is entered in the books of prime entry and then posted consistently to both accounts, so the trial balance still agrees. Errors of principle and omission involve the wrong class of account or a missing entry altogether.

Question 43Fundamentals of Financial Accounting

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

  1. To reconcile the opening and closing balances of each component of equity Correct answer.
  2. To list the non-current assets held at the reporting date
  3. To show the cash generated from operating activities during the period
  4. To disclose the entity's accounting policies for revenue recognition

Explanation

The statement of changes in equity reconciles opening and closing equity by showing movements such as profit, dividends, share issues and other comprehensive income. Cash flows, asset listings and policy disclosures are presented elsewhere in the financial statements.

Question 44Fundamentals of Financial Accounting

Which qualitative characteristic is enhanced when information is available to users before it loses its capacity to influence decisions?

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

Explanation

Timeliness means information is available to decision-makers in time to influence their decisions. Comparability concerns comparisons between entities or periods, verifiability concerns independent confirmation, and understandability concerns clear presentation.

Question 45Fundamentals of Financial Accounting

A company's trade receivables are $80,000 and an allowance for receivables of 5% is required. The allowance currently carried forward is $3,000. What is the charge to profit or loss for the year?

  1. $3,000
  2. $7,000
  3. $1,000 Correct answer.
  4. $4,000

Explanation

The required allowance is 5% of $80,000, which is $4,000. Since $3,000 is already provided, the additional expense is $1,000, being the increase needed to reach the required balance.

Question 46Fundamentals of Financial Accounting

Which of the following is the correct treatment of a contingent liability that is possible but not probable and cannot be measured reliably?

  1. Disclose it in the notes without recognising a liability Correct answer.
  2. Ignore it entirely with no disclosure
  3. Recognise a liability in the statement of financial position
  4. Recognise a provision and a corresponding expense

Explanation

A contingent liability is not recognised because the obligation is not probable or the amount cannot be measured reliably. It is disclosed in the notes unless the possibility of outflow is remote, in which case no disclosure is required.

Question 47Fundamentals of Financial Accounting

An entity's statement of cash flows shows a large profit for the year but a net cash outflow from operating activities. Which item most likely explains this?

  1. A share issue for cash during the year
  2. A reduction in inventory levels
  3. A decrease in trade payables offset by higher sales
  4. A substantial increase in trade receivables Correct answer.

Explanation

Profit is measured on an accruals basis, so sales made on credit increase profit without increasing cash. A large rise in trade receivables absorbs cash and can turn operating profit into an operating cash outflow.

Question 48Fundamentals of Financial Accounting

A company has profit before tax of $90,000. Tax is charged at 20% and a dividend of $12,000 is paid during the year. Opening retained earnings were $100,000. What are closing retained earnings?

  1. $178,000
  2. $172,000
  3. $148,000
  4. $160,000 Correct answer.

Explanation

Profit after tax is $90,000 less 20% tax of $18,000, giving $72,000. Adding this to opening retained earnings of $100,000 and deducting the $12,000 dividend gives $160,000.

Question 49Fundamentals of Financial Accounting

Which of the following describes the accounting treatment of an item that fails to meet the definition of an asset but is significant to users?

  1. It is recognised directly in equity without affecting profit
  2. It must be recorded as a liability until the uncertainty is resolved
  3. It may be disclosed in the notes rather than recognised Correct answer.
  4. It must be recognised as an asset at a nominal value

Explanation

Items that do not meet the definition or recognition criteria for an asset are not recognised in the statement of financial position, but significant items may still need disclosure in the notes so users understand their potential effect. Recognition at nominal value or as a liability would misstate the financial position.

Question 50Fundamentals of Financial Accounting

A trader's cash book shows a debit balance of $1,200, while the bank statement shows a credit balance of $1,500. Unpresented cheques total $400. What is the balance per the bank statement before any other adjustments?

  1. $1,600 credit Correct answer.
  2. $1,900 credit
  3. $800 credit
  4. $1,100 credit

Explanation

The cash book debit balance of $1,200 represents a positive bank balance. Adding unpresented cheques of $400 that the bank has not yet deducted gives a credit balance per the bank statement of $1,600.