I85PREP
⌘ K
HKDSE BAFS study materials
HKDSE BAFS study resources

HKDSE BAFS practice questions

One question at a time. Build your HKDSE BAFS understanding.

First 50 of 190 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 1Finance, accounting and controls

The fundamental accounting equation can be expressed as:

  1. Assets = Liabilities - Capital
  2. Capital = Assets + Liabilities
  3. Assets = Capital + Liabilities Correct answer.
  4. Liabilities = Assets + Capital

Explanation

The accounting equation states that Assets = Capital (owner's equity) + Liabilities. The resources controlled by the business (assets) are financed either by the owner (capital) or by outsiders (liabilities).

Question 2Finance, accounting and controls

Under the double-entry system, when a business pays a trade payable by cheque, the correct entry is:

  1. Debit Bank; Credit Trade payable
  2. Debit Trade payable; Credit Purchases
  3. Debit Trade payable; Credit Bank Correct answer.
  4. Debit Cash; Credit Trade payable

Explanation

Paying a supplier reduces a liability (trade payable) and reduces an asset (bank). Liabilities decrease on the debit side, so debit Trade payable; assets decrease on the credit side, so credit Bank.

Question 3Finance, accounting and controls

Recognising revenue when it is earned rather than when cash is received is an application of which concept?

  1. Cash basis
  2. Materiality concept
  3. Accruals (matching) concept Correct answer.
  4. Consistency concept

Explanation

The accruals (matching) concept requires revenues and expenses to be recognised in the period they are earned or incurred, regardless of when cash changes hands, so that profit is measured fairly.

Question 4Finance, accounting and controls

A trial balance is prepared mainly to:

  1. Calculate the net profit for the year
  2. Value the closing inventory
  3. Check the arithmetical accuracy of the double-entry ledgers Correct answer.
  4. Determine the amount of dividends to pay

Explanation

A trial balance lists all ledger balances to confirm that total debits equal total credits, checking the arithmetical accuracy of the double-entry records. It is a starting point for preparing financial statements but not a financial statement itself.

Question 5Finance, accounting and controls

Which type of error will NOT be revealed by a trial balance that still balances?

  1. Adding one ledger account incorrectly
  2. Posting only one side of a transaction
  3. An error of complete omission of a transaction Correct answer.
  4. Recording a different amount on each side of an entry

Explanation

An error of complete omission means a transaction is left out entirely, so both the debit and credit are missing and the trial balance still balances. Errors affecting only one side or one amount would cause an imbalance.

Question 6Finance, accounting and controls

In the statement of financial position, which of the following is classified as a non-current asset?

  1. Inventory
  2. Trade receivables
  3. Motor vehicles Correct answer.
  4. Cash at bank

Explanation

Motor vehicles are held for long-term use in the business and so are non-current (fixed) assets. Inventory, trade receivables and cash at bank are current assets expected to be realised within one year.

Question 7Finance, accounting and controls

Gross profit is calculated as:

  1. Net sales minus all operating expenses
  2. Net sales minus cost of goods sold minus tax
  3. Net sales minus cost of goods sold Correct answer.
  4. Cost of goods sold minus net sales

Explanation

Gross profit equals net sales (revenue) less the cost of goods sold. Operating expenses are deducted afterwards to arrive at profit for the year.

Question 8Finance, accounting and controls

Cost of goods sold equals:

  1. Opening inventory + purchases - closing inventory Correct answer.
  2. Opening inventory - purchases + closing inventory
  3. Purchases + closing inventory - opening inventory
  4. Closing inventory + purchases + opening inventory

Explanation

Cost of goods sold is opening inventory plus purchases (and direct carriage) minus closing inventory. It measures the cost of the goods that were actually sold during the period.

Question 9Finance, accounting and controls

A business buys goods on credit. Which books of original entry should record this transaction?

  1. Sales journal
  2. Cash book
  3. Purchases journal Correct answer.
  4. General journal

Explanation

Credit purchases of goods for resale are recorded in the purchases journal (purchases day book). The cash book records cash and bank transactions, and the sales journal records credit sales.

Question 10Finance, accounting and controls

Which statement about the going concern assumption is correct?

  1. The business will cease trading within twelve months
  2. All assets must be valued at their forced-sale price
  3. The business will continue operating for the foreseeable future Correct answer.
  4. Profit is recognised only when cash is received

Explanation

The going concern assumption presumes the business will continue to operate for the foreseeable future. This justifies, for example, valuing non-current assets at cost less depreciation rather than at break-up values.

Question 11Finance, accounting and controls

The consistency concept in accounting requires that:

  1. The same accounting methods are applied from one period to the next Correct answer.
  2. Profits are always increasing each year
  3. All businesses use identical accounting policies
  4. Inventory is valued at selling price

Explanation

The consistency concept requires a business to apply the same accounting policies and methods from period to period so that financial statements are comparable over time. Changes are made only with good reason and disclosure.

Question 12Finance, accounting and controls

Which of the following is a capital expenditure rather than a revenue expenditure?

  1. Repairing a delivery van
  2. Purchasing a new delivery van Correct answer.
  3. Paying the van's annual insurance
  4. Buying fuel for the van

Explanation

Purchasing a new delivery van acquires a non-current asset providing benefit over many years, so it is capital expenditure. Repairs, insurance and fuel are recurring running costs and are revenue expenditure.

Question 13Finance, accounting and controls

An error of principle occurs when:

  1. A transaction is recorded in the wrong class of account, such as treating an asset purchase as an expense Correct answer.
  2. Two errors cancel each other out
  3. An entry is completely omitted
  4. Figures are transposed, e.g. $54 recorded as $45

Explanation

An error of principle records a transaction in the wrong type of account, for example debiting motor expenses instead of the motor vehicles asset account. The trial balance still balances because debits equal credits.

Question 14Finance, accounting and controls

When goods are returned by a credit customer, the correct double entry in the seller's books is:

  1. Debit Trade receivables; Credit Returns inwards
  2. Debit Returns inwards; Credit Trade receivables Correct answer.
  3. Debit Returns outwards; Credit Trade payables
  4. Debit Bank; Credit Trade receivables

Explanation

Goods returned by a customer are returns inwards (sales returns). The seller debits Returns inwards (reducing net sales) and credits the customer's Trade receivables account, lowering the amount owed.

Question 15Finance, accounting and controls

A trade discount is best described as:

  1. A reduction for prompt payment recorded in the accounts
  2. A reduction in the list price given before the invoice total, not separately recorded Correct answer.
  3. Interest charged on overdue accounts
  4. A bonus paid to salespersons

Explanation

A trade discount reduces the list price of goods and is deducted before the invoice total is calculated, so it is not recorded separately in the ledgers. A cash discount, by contrast, rewards prompt payment and is recorded.

Question 16Finance, accounting and controls

Under the money measurement concept, which of the following would NOT be recorded in a company's accounts?

  1. The cost of a newly purchased machine
  2. The skill and loyalty of the workforce Correct answer.
  3. Cash received from a customer
  4. The amount owed to a supplier

Explanation

The money measurement concept records only items that can be expressed reliably in monetary terms. The skill and loyalty of the workforce, though valuable, cannot be objectively measured in money and is therefore not recorded.

Question 17Finance, accounting and controls

Inventory should normally be valued at:

  1. Cost only
  2. Selling price only
  3. The lower of cost and net realisable value Correct answer.
  4. The higher of cost and net realisable value

Explanation

Applying the prudence concept, inventory is valued at the lower of cost and net realisable value (NRV). NRV is the estimated selling price less costs to complete and sell.

Question 18Finance, accounting and controls

A machine costing $100,000 with no residual value is depreciated using the straight-line method over 5 years. The annual depreciation charge is:

  1. $10,000
  2. $50,000
  3. $25,000
  4. $20,000 Correct answer.

Explanation

Straight-line depreciation = (cost - residual value) / useful life = ($100,000 - 0) / 5 = $20,000 per year. The charge is the same each year under this method.

Question 19Finance, accounting and controls

Equipment costing $80,000 is depreciated at 25% per annum using the reducing-balance method. The depreciation charge for the SECOND year is:

  1. $20,000
  2. $12,500
  3. $16,000
  4. $15,000 Correct answer.

Explanation

Year 1 depreciation = 25% x $80,000 = $20,000, leaving a net book value of $60,000. Year 2 depreciation = 25% x $60,000 = $15,000. The reducing-balance method applies the rate to the falling net book value.

Question 20Finance, accounting and controls

The straight-line method of depreciation is most appropriate when an asset:

  1. Loses more value in its early years
  2. Is expected to increase in value
  3. Has an indefinite useful life
  4. Provides roughly equal benefits over its useful life Correct answer.

Explanation

Straight-line depreciation spreads cost evenly, so it suits assets that deliver roughly equal economic benefits each year, such as buildings or fixtures. The reducing-balance method better matches assets losing more value early on.

Question 21Finance, accounting and controls

When an irrecoverable (bad) debt is written off, the correct double entry is:

  1. Debit Trade receivables; Credit Bad debts
  2. Debit Allowance for doubtful accounts; Credit Bank
  3. Debit Bad debts; Credit Bank
  4. Debit Bad debts; Credit Trade receivables Correct answer.

Explanation

Writing off an irrecoverable debt records an expense (debit Bad debts) and removes the uncollectible amount from trade receivables (credit Trade receivables). The expense reduces profit for the year.

Question 22Finance, accounting and controls

At year-end, trade receivables are $200,000 and a business decides to create an allowance for doubtful accounts of 5%. The allowance to be recognised is:

  1. $5,000
  2. $1,000
  3. $20,000
  4. $10,000 Correct answer.

Explanation

The allowance for doubtful accounts = 5% x $200,000 = $10,000. This amount is charged as an expense and shown as a deduction from trade receivables in the statement of financial position.

Question 23Finance, accounting and controls

A rent expense of $60,000 was paid for the year, but $5,000 of it relates to the next accounting period. The rent expense recognised in this period's statement of profit or loss is:

  1. $60,000
  2. $65,000
  3. $55,000 Correct answer.
  4. $5,000

Explanation

The $5,000 paid in advance is a prepayment relating to next period. Applying the accruals concept, only $60,000 - $5,000 = $55,000 is charged this period; the $5,000 is carried forward as a current asset (prepaid expense).

Question 24Finance, accounting and controls

Wages of $48,000 were paid during the year, but $4,000 of wages for the period is still owing at year-end. The wages expense for the period is:

  1. $48,000
  2. $44,000
  3. $52,000 Correct answer.
  4. $4,000

Explanation

Accrued wages owing at year-end must be added to the amount paid. Wages expense = $48,000 + $4,000 = $52,000, and the $4,000 owing is shown as a current liability (accrual).

Question 25Finance, accounting and controls

A bank reconciliation statement is prepared to:

  1. Calculate the profit earned by the bank
  2. Record interest earned on a fixed deposit only
  3. Replace the need for a cash book
  4. Reconcile the cash book balance with the bank statement balance Correct answer.

Explanation

A bank reconciliation statement explains differences between the balance in the business's cash book and the balance on the bank statement, caused by items such as unpresented cheques, deposits not yet credited and bank charges.

Question 26Finance, accounting and controls

In a bank reconciliation, a cheque issued by the business but not yet presented to the bank is known as a/an:

  1. Unpresented (outstanding) cheque Correct answer.
  2. Uncredited deposit
  3. Dishonoured cheque
  4. Standing order

Explanation

An unpresented (outstanding) cheque is one the business has recorded as paid but which the payee has not yet cashed, so it appears in the cash book but not yet on the bank statement.

Question 27Finance, accounting and controls

A control account for trade receivables is used to:

  1. Record every individual customer's transactions in detail
  2. Record only credit purchases
  3. Replace the statement of financial position
  4. Provide a summary total that checks the accuracy of the receivables ledger Correct answer.

Explanation

A trade receivables (sales ledger) control account summarises totals from the books of original entry. Its balance should agree with the sum of the individual customer balances, providing an internal check on accuracy.

Question 28Finance, accounting and controls

Which item would appear on the credit side of a trade payables (purchases ledger) control account?

  1. Cash paid to suppliers
  2. Returns outwards
  3. Discounts received
  4. Credit purchases Correct answer.

Explanation

Credit purchases increase the amount owed to suppliers and are recorded on the credit side of the trade payables control account. Payments, discounts received and returns outwards reduce the liability and appear on the debit side.

Question 29Finance, accounting and controls

Incomplete records (single-entry) techniques are most useful when a business:

  1. Maintains a full double-entry system
  2. Uses computerised accounting throughout
  3. Is a listed limited company
  4. Has lost some records or kept only partial books Correct answer.

Explanation

Incomplete records methods are applied when full double-entry records are not kept or some records are missing. Accountants reconstruct figures using the accounting equation, control accounts and cash analyses.

Question 30Finance, accounting and controls

Using the incomplete-records approach, if opening capital is $50,000, closing capital is $90,000, drawings are $20,000 and no new capital was introduced, the profit for the year is:

  1. $40,000
  2. $60,000 Correct answer.
  3. $20,000
  4. $70,000

Explanation

Profit = closing capital + drawings - capital introduced - opening capital = $90,000 + $20,000 - 0 - $50,000 = $60,000. Adding back drawings reflects profit withdrawn during the year.

Question 31Finance, accounting and controls

In the absence of a partnership agreement, the relevant provisions imply that partners share profits and losses:

  1. In proportion to their capital contributions
  2. Equally Correct answer.
  3. According to time spent in the business
  4. Entirely to the senior partner

Explanation

Where no partnership agreement specifies otherwise, profits and losses are shared equally among the partners, no interest is allowed on capital, and no salaries are paid to partners.

Question 32Finance, accounting and controls

In partnership accounts, interest charged on a partner's drawings is:

  1. Credited to the partner's current account
  2. Debited to the partner's current account Correct answer.
  3. Treated as an expense in the statement of profit or loss
  4. Added to the partner's capital account

Explanation

Interest on drawings is a charge against the partner who made the drawings, so it is debited to that partner's current account and credited in the appropriation account, increasing distributable profit.

Question 33Finance, accounting and controls

When a limited company issues ordinary shares at a price above their par (nominal) value, the excess is credited to:

  1. Retained earnings
  2. Share premium account Correct answer.
  3. General reserve
  4. Revaluation reserve

Explanation

The amount received above the par value of shares is credited to the share premium account, a capital reserve. It cannot normally be distributed as a cash dividend.

Question 34Finance, accounting and controls

A debenture issued by a limited company represents:

  1. A share in the ownership of the company
  2. Long-term borrowing on which interest is paid Correct answer.
  3. A reserve created from profits
  4. A current liability due within one month

Explanation

A debenture is a long-term loan to the company. Debenture interest is a finance cost charged in the statement of profit or loss and must be paid whether or not the company is profitable.

Question 35Finance, accounting and controls

A bank reconciliation shows the cash book balance is higher than the bank statement balance, due solely to unpresented cheques. To reconcile, unpresented cheques should be:

  1. Added to the bank statement balance
  2. Deducted from the bank statement balance Correct answer.
  3. Added to the cash book balance
  4. Ignored entirely

Explanation

Unpresented cheques have reduced the cash book balance but have not yet cleared the bank, so the bank statement is temporarily higher by their amount. Starting from the bank statement balance, they are deducted to reconcile to the cash book.

Question 36Finance, accounting and controls

The current ratio is calculated as:

  1. Current assets divided by current liabilities Correct answer.
  2. Current liabilities divided by current assets
  3. (Current assets minus inventory) divided by current liabilities
  4. Current assets minus current liabilities

Explanation

The current ratio = current assets / current liabilities. It measures short-term liquidity, indicating whether a business has enough current assets to meet its current obligations.

Question 37Finance, accounting and controls

The quick (acid-test) ratio differs from the current ratio because it:

  1. Excludes inventory from current assets Correct answer.
  2. Excludes cash from current assets
  3. Includes non-current assets
  4. Uses total liabilities instead of current liabilities

Explanation

The quick ratio = (current assets - inventory) / current liabilities. Inventory is excluded because it is the least liquid current asset and may take time to convert into cash.

Question 38Finance, accounting and controls

A company has current assets of $300,000, inventory of $120,000 and current liabilities of $150,000. Its quick ratio is:

  1. 2.0
  2. 1.2 Correct answer.
  3. 0.8
  4. 1.5

Explanation

Quick ratio = (current assets - inventory) / current liabilities = ($300,000 - $120,000) / $150,000 = $180,000 / $150,000 = 1.2. This shows liquid assets are 1.2 times current liabilities.

Question 39Finance, accounting and controls

Gross profit margin is calculated as:

  1. (Gross profit / net sales) x 100% Correct answer.
  2. (Net profit / net sales) x 100%
  3. (Gross profit / cost of goods sold) x 100%
  4. (Net sales / gross profit) x 100%

Explanation

Gross profit margin = (gross profit / net sales) x 100%. It shows the percentage of sales revenue remaining after deducting the cost of goods sold and is a key profitability indicator.

Question 40Finance, accounting and controls

Inventory turnover (number of times) is most appropriately calculated as:

  1. Net sales / average inventory
  2. Cost of goods sold / average inventory Correct answer.
  3. Average inventory / cost of goods sold
  4. Gross profit / average inventory

Explanation

Inventory turnover = cost of goods sold / average inventory. Using cost of goods sold matches the basis on which inventory is valued, giving the number of times inventory is sold and replaced in a period.

Question 41Finance, accounting and controls

Return on capital employed (ROCE) measures:

  1. The liquidity of a business
  2. How efficiently capital is used to generate profit Correct answer.
  3. The speed of inventory turnover
  4. The proportion of debt finance used

Explanation

ROCE = (profit before interest and tax / capital employed) x 100%. It assesses how efficiently a business uses its long-term capital to generate operating profit, a core profitability measure.

Question 42Finance, accounting and controls

A high gearing ratio indicates that a company:

  1. Relies heavily on debt (borrowed) finance relative to equity Correct answer.
  2. Has very high liquidity
  3. Earns a high gross profit margin
  4. Has very little inventory

Explanation

The gearing ratio compares debt to equity (or debt to capital employed). A high gearing means a large proportion of finance is borrowed, increasing financial risk because interest must be paid regardless of profit.

Question 43Finance, accounting and controls

Which is a key LIMITATION of using accounting ratios for financial analysis?

  1. Ratios always guarantee future performance
  2. Ratios are based on historical figures and ignore qualitative factors Correct answer.
  3. Ratios can only be calculated for limited companies
  4. Ratios remove the need for any financial statements

Explanation

Ratios are derived from past financial statements and exclude qualitative factors such as management quality, market conditions and staff morale. They may also be distorted by different accounting policies, limiting their usefulness.

Question 44Finance, accounting and controls

Which stakeholder group is MOST directly interested in a company's liquidity ratios to assess whether it can pay debts on time?

  1. Short-term creditors and suppliers Correct answer.
  2. Advertising agencies
  3. The general public
  4. Competitors only

Explanation

Short-term creditors and suppliers are most concerned with liquidity ratios because these indicate whether the business can meet its short-term obligations and pay amounts due to them on time.

Question 45Finance, accounting and controls

Net profit margin is calculated as:

  1. (Net profit / net sales) x 100% Correct answer.
  2. (Net profit / capital employed) x 100%
  3. (Gross profit / net sales) x 100%
  4. (Net sales / net profit) x 100%

Explanation

Net profit margin = (net profit / net sales) x 100%. It shows the proportion of each sales dollar that remains as profit after all expenses, indicating overall profitability and cost control.

Question 46Finance, accounting and controls

Capital employed is most commonly calculated as:

  1. Current assets minus current liabilities
  2. Total equity plus non-current liabilities Correct answer.
  3. Total assets plus total liabilities
  4. Share premium plus inventory

Explanation

Capital employed is commonly defined as total equity plus non-current liabilities, equivalently total assets less current liabilities. It represents the long-term funds invested in the business, used in calculating ROCE.

Question 47Finance, accounting and controls

Which source of finance is generally most suitable for purchasing a long-term non-current asset such as a factory building?

  1. Bank overdraft
  2. Trade credit from suppliers
  3. Long-term loan or mortgage Correct answer.
  4. Petty cash

Explanation

Matching principle suggests long-term assets should be financed by long-term funds, such as a long-term loan or mortgage. Short-term sources like overdrafts and trade credit are unsuitable for funding long-lived assets.

Question 48Finance, accounting and controls

Working capital is defined as:

  1. Current assets minus current liabilities Correct answer.
  2. Non-current assets minus non-current liabilities
  3. Total assets minus total liabilities
  4. Share capital plus reserves

Explanation

Working capital = current assets - current liabilities. It represents the funds available for day-to-day operations and is a key measure of short-term financial health.

Question 49Finance, accounting and controls

The payback period method of investment appraisal measures:

  1. The total profit earned over the asset's life
  2. The time taken to recover the initial investment from net cash inflows Correct answer.
  3. The present value of all future cash flows
  4. The internal rate of return

Explanation

The payback period is the time required for cumulative net cash inflows to repay the initial investment. It is simple to compute but ignores the time value of money and cash flows after payback.

Question 50Finance, accounting and controls

A project requires an initial investment of $200,000 and generates net cash inflows of $50,000 per year. Its payback period is:

  1. 2 years
  2. 4 years Correct answer.
  3. 5 years
  4. 10 years

Explanation

Payback period = initial investment / annual net cash inflow = $200,000 / $50,000 = 4 years. After four years the cumulative inflows exactly equal the initial outlay.