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ICAEW ACA Accounting (ICAEW) practice questions

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Question 1Accounting

Under the IASB Conceptual Framework, which qualitative characteristic requires information to be capable of making a difference in users' decisions?

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

Explanation

Relevance is the fundamental qualitative characteristic meaning information can influence decisions by having predictive value, confirmatory value, or both. Verifiability, timeliness and comparability are enhancing characteristics that support useful information but do not by themselves make it decision-changing.

Question 2Accounting

A sole trader pays a business electricity bill of £800 from the business bank account. Which double entry records this transaction?

  1. Dr Bank, Cr Electricity expense
  2. Dr Electricity expense, Cr Bank Correct answer.
  3. Dr Electricity expense, Cr Capital
  4. Dr Drawings, Cr Bank

Explanation

An expense increases with a debit and the bank asset decreases with a credit, so the entry is debit electricity expense and credit bank. This keeps the accounting equation in balance as equity falls through the expense.

Question 3Accounting

Which statement correctly describes the effect of a credit sale made on 30-day terms on the seller's accounting equation?

  1. Assets decrease and equity decreases
  2. Assets are unchanged and equity increases
  3. Assets increase and liabilities increase Correct answer.
  4. Assets increase and equity increases

Explanation

A credit sale creates a trade receivable (an asset) and records revenue, which increases profit and therefore equity. There is no liability created at the point of sale, and total assets rise because receivables are recognised.

Question 4Accounting

A business has opening inventory of £12,000, purchases of £85,000 and closing inventory of £15,000. What is the cost of sales?

  1. £82,000 Correct answer.
  2. £112,000
  3. £88,000
  4. £100,000

Explanation

Cost of sales equals opening inventory plus purchases less closing inventory: £12,000 + £85,000 − £15,000 = £82,000. Closing inventory is deducted because those goods remain an asset rather than an expense of the period.

Question 5Accounting

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

  1. Bank overdraft repayable on demand
  2. Accrued wages payable next month
  3. A 5-year bank loan repayable in 2031 Correct answer.
  4. Trade payables due in 45 days

Explanation

Non-current liabilities are obligations not due for settlement within twelve months of the reporting date. A loan repayable in 2031 falls outside that window, whereas payables, overdrafts and accruals are current.

Question 6Accounting

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

  1. Installing a new lift that extends the building's usable height Correct answer.
  2. Paying the annual insurance premium
  3. Replacing a broken window with an identical pane
  4. Repainting the office interior

Explanation

Capital expenditure acquires or improves an asset and enhances its future economic benefits, so a lift extension is capitalised. Repairs, like-for-like replacements and running costs maintain existing capacity and are revenue expenditure.

Question 7Accounting

A trader's trial balance has total debits of £240,000 and total credits of £239,700. Which error could explain the difference?

  1. A sales invoice of £300 was recorded twice
  2. A purchase of £300 was completely omitted from the records
  3. A £300 debit entry was posted to the credit side Correct answer.
  4. A £150 payment was posted as a debit of £150 and a credit of £150 to the wrong accounts

Explanation

Posting a debit of £300 to the credit side misplaces £600 in total, which would not give a £300 imbalance, so it is excluded. A single entry of £300 posted to only one side creates exactly a £300 difference between debit and credit totals.

Question 8Accounting

Which cost flow assumption is not permitted by IAS 2 Inventories?

  1. Specific identification of individual items
  2. First-in, first-out
  3. Weighted average cost
  4. Last-in, first-out Correct answer.

Explanation

IAS 2 permits specific identification and either FIFO or weighted average cost. LIFO is prohibited because it can distort reported inventory and profit, so it cannot be used under IFRS.

Question 9Accounting

A machine costing £50,000 with a residual value of £5,000 is depreciated over 5 years using the straight-line method. What is the annual depreciation charge?

  1. £10,000
  2. £11,000
  3. £9,000 Correct answer.
  4. £5,000

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, over the useful life: (£50,000 − £5,000) ÷ 5 = £9,000. Residual value is excluded because it is expected to be recovered on disposal.

Question 10Accounting

A business receives an invoice for £1,200 on 1 November covering insurance for the six months to 30 April. The year end is 31 December. What is the prepayment at the year end?

  1. £1,200
  2. £400
  3. £600
  4. £800 Correct answer.

Explanation

Two months (November and December) relate to the current year, so four months are prepaid: £1,200 × 4/6 = £800. The prepayment is carried forward as a current asset until the benefit is consumed.

Question 11Accounting

A company issues 100,000 £1 ordinary shares at £2.50 each, fully paid in cash. How should this be recorded?

  1. Dr Bank £100,000; Cr Share capital £100,000
  2. Dr Bank £250,000; Cr Share capital £250,000
  3. Dr Bank £250,000; Cr Share capital £100,000; Cr Share premium £150,000 Correct answer.
  4. Dr Share capital £250,000; Cr Bank £250,000

Explanation

The cash received is £250,000, of which the nominal value of £1 per share (£100,000) goes to share capital. The excess of £1.50 per share (£150,000) is credited to share premium, which is a non-distributable reserve.

Question 12Accounting

Which of the following would be included in the statement of cash flows as a cash flow from investing activities?

  1. Purchase of plant and machinery for cash Correct answer.
  2. Interest paid on a bank loan
  3. Payment of dividends to shareholders
  4. Proceeds from the issue of debentures

Explanation

Investing activities cover the acquisition and disposal of long-term assets, so buying plant is an investing outflow. Issuing debentures is financing, while dividends and interest paid are typically financing or operating depending on the policy adopted.

Question 13Accounting

A company's trade receivables at the year end are £180,000. It provides an allowance for receivables of 3%. What is the net carrying amount of receivables?

  1. £174,600 Correct answer.
  2. £180,000
  3. £185,400
  4. £175,500

Explanation

The allowance is £180,000 × 3% = £5,400, which is deducted from the gross receivables to give £174,600. The allowance reflects the expected credit loss rather than writing off specific debts.

Question 14Accounting

Which of the following errors would be revealed by extracting a trial balance?

  1. A payment of £500 was recorded as £50 in both the cash book and the supplier's account
  2. A credit sale was recorded as a debit to sales and a credit to receivables Correct answer.
  3. A sale to a customer was completely omitted from the ledger
  4. A purchase was recorded in the correct accounts but with the wrong date

Explanation

Reversing the entries for a credit sale puts a debit where a credit belongs and vice versa, so the trial balance totals will not agree. Errors of omission, principle, original entry and compensating errors leave totals in agreement.

Question 15Accounting

A business uses the reducing balance method at 20% per annum. An asset was bought for £20,000 and has been owned for two full years. What is the carrying amount at the end of year two?

  1. £12,800 Correct answer.
  2. £16,000
  3. £10,240
  4. £12,000

Explanation

Reducing balance depreciation is charged on the carrying amount each year: year one £4,000 leaves £16,000, and year two £3,200 leaves £12,800. The charge falls each year as the asset's carrying amount declines.

Question 16Accounting

Which statement best describes the purpose of a bank reconciliation?

  1. To prove that the cash book balance equals the bank statement balance
  2. To explain the differences between the cash book and the bank statement and confirm the corrected cash book balance Correct answer.
  3. To record unpresented cheques as liabilities in the statement of financial position
  4. To calculate the bank's interest charges for the period

Explanation

A bank reconciliation identifies timing differences such as unpresented cheques and lodgements not yet credited, plus items recorded by the bank but not yet in the cash book. It then reconciles to the corrected cash book balance, which is the figure reported as cash.

Question 17Accounting

At the year end a business holds inventory that cost £40,000 but which could now be sold for £35,000 after incurring selling costs of £3,000. At what amount should the inventory be measured under IAS 2?

  1. £40,000
  2. £35,000
  3. £32,000 Correct answer.
  4. £37,000

Explanation

Inventory is measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price less costs to complete and sell, £35,000 − £3,000 = £32,000, which is below cost so the writedown applies.

Question 18Accounting

A company makes a bonus issue of one new share for every four held, capitalising £50,000 of reserves from retained earnings. What is the effect on total equity and on share capital?

  1. Total equity unchanged; share capital increases by £50,000 Correct answer.
  2. Total equity increases by £50,000; share capital increases by £50,000
  3. Total equity decreases by £50,000; share capital increases by £50,000
  4. Total equity unchanged; share capital unchanged

Explanation

A bonus issue is a capitalisation of reserves: retained earnings fall and share capital rises by the same amount, so total equity is unchanged. No cash is received, and each shareholder's proportion of ownership is unaffected.

Question 19Accounting

Which of the following is a liability in the statement of financial position?

  1. An allowance for receivables
  2. A prepayment for rent
  3. A revaluation surplus on property
  4. A provision for a legal claim expected to be settled in cash Correct answer.

Explanation

A provision is a liability of uncertain timing or amount recognised when an outflow is probable and can be reliably estimated. Prepayments are assets, allowances reduce assets, and revaluation surpluses form part of equity.

Question 20Accounting

A business has gross profit of £120,000 and operating expenses of £85,000. It also has an interest expense of £7,000 and a tax charge of £5,600. What is the profit for the year?

  1. £22,400 Correct answer.
  2. £16,800
  3. £28,000
  4. £35,000

Explanation

Profit for the year is gross profit less operating expenses, finance costs and tax: £120,000 − £85,000 − £7,000 − £5,600 = £22,400. Operating profit would be £35,000 before interest and tax.

Question 21Accounting

Which of the following best explains why a statement of cash flows is useful alongside the statement of profit or loss?

  1. It records transactions only when cash is received or paid, so it ignores working capital
  2. It replaces the need for a statement of financial position
  3. It shows the profit generated on an accruals basis
  4. It shows the ability of the entity to generate cash and meet its obligations Correct answer.

Explanation

Cash flow information helps users assess liquidity, solvency and the ability to generate cash independently of accrual-based profit. Profit can be affected by non-cash items and accounting judgements, so cash flows provide complementary evidence.

Question 22Accounting

A company has profit before tax of £90,000. Depreciation charged was £15,000 and the tax charge was £20,000. Trade receivables increased by £8,000 and trade payables increased by £5,000. Using the indirect method, what is the net cash from operating activities?

  1. £102,000
  2. £92,000
  3. £82,000 Correct answer.
  4. £72,000

Explanation

Start with profit before tax of £90,000, add back depreciation £15,000, deduct the increase in receivables £8,000 and add the increase in payables £5,000, giving £102,000 before tax. Deducting tax paid of £20,000 gives £82,000.

Question 23Accounting

An entity sells goods on credit with a right of return allowing customers to return goods within 30 days. At the year end, past experience suggests 4% of £500,000 of such sales will be returned. How should revenue be recognised under IFRS 15?

  1. Defer all £500,000 revenue until the 30-day return period has expired
  2. Recognise £480,000 revenue and ignore the expected returns until they occur
  3. Recognise £500,000 revenue and a trade receivable of £500,000 only
  4. Recognise £480,000 revenue, with a refund liability and an asset for the right to recover goods Correct answer.

Explanation

IFRS 15 requires revenue to be recognised only to the extent that it is highly probable there will be no significant reversal. Expected returns of £20,000 are therefore recognised as a refund liability, with a corresponding asset for the right to recover the returned goods.

Question 24Accounting

A company revalues a building upwards by £200,000. The building had originally cost £600,000 and had accumulated depreciation of £150,000. Under the revaluation model in IAS 16, how is the surplus treated?

  1. Deducted from retained earnings as an expense
  2. Recognised in other comprehensive income and accumulated in equity as a revaluation surplus Correct answer.
  3. Recognised in profit or loss as a gain
  4. Recognised as a liability until the building is sold

Explanation

An upward revaluation surplus is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. It is not a profit, because the gain is unrealised, though it may be transferred to retained earnings as the asset is used.

Question 25Accounting

A company has current assets of £150,000 including inventory of £60,000, and current liabilities of £75,000. What is the acid test (quick) ratio?

  1. 0.80
  2. 1.50
  3. 2.00
  4. 1.20 Correct answer.

Explanation

The acid test excludes inventory because it may not be quickly converted to cash: (£150,000 − £60,000) ÷ £75,000 = 1.20. The current ratio would be 2.00, but that includes the less liquid inventory.

Question 26Accounting

A sole trader pays a business expense of £600 from personal funds and records it only as a debit to the expense account. Which double entry completes the bookkeeping?

  1. Credit bank £600
  2. Credit drawings £600
  3. Credit cash £600
  4. Credit capital £600 Correct answer.

Explanation

When the owner introduces personal money to settle a business cost, the business owes the owner more, so capital increases. The expense is already debited, and the matching credit is to the capital account under the separate entity concept.

Question 27Accounting

An entity's bank statement shows a balance of £5,400 credit. Unpresented cheques total £900 and a customer's cheque for £250 paid in has been dishonoured and not yet recorded in the cash book. What is the cash book balance before correction?

  1. £6,550
  2. £4,250
  3. £5,050
  4. £4,750 Correct answer.

Explanation

Start from the bank statement credit balance of £5,400, deduct unpresented cheques of £900 to give £4,500, then add back the dishonoured cheque of £250 because the cash book still shows it as received. The uncorrected cash book balance is therefore £4,750.

Question 28Accounting

Which item would be classified as a non-current liability in a statement of financial position prepared under IAS 1?

  1. Accrued electricity charges for the current quarter
  2. A 10-year bank loan repayable in annual instalments beginning next year Correct answer.
  3. Trade payables due in 45 days
  4. A bank overdraft repayable on demand

Explanation

IAS 1 classifies a liability as non-current when the entity has an unconditional right to defer settlement beyond twelve months after the reporting period. A long-term loan with instalments falling due beyond a year meets that test, with the portion due within twelve months presented as current.

Question 29Accounting

A company's inventory records show 400 units at £12 and 600 units at £15. It sells 700 units. Using FIFO, what is the cost of the closing inventory of 300 units?

  1. £4,350
  2. £4,500 Correct answer.
  3. £4,200
  4. £3,900

Explanation

FIFO assumes the earliest units are sold first, so the 700 units sold comprise all 400 units at £12 and 300 units at £15. The closing inventory is the remaining 300 units at £15, giving £4,500.

Question 30Accounting

An entity purchases a machine for £80,000 on 1 January. It incurs delivery costs of £3,000 and installation costs of £5,000, and staff training of £2,000. Under IAS 16, what amount should be recognised as the cost of the machine?

  1. £90,000
  2. £83,000
  3. £88,000 Correct answer.
  4. £80,000

Explanation

IAS 16 capitalises the purchase price plus directly attributable costs of bringing the asset to the location and condition necessary for use, including delivery and installation. Training costs are expensed because they do not change the asset's condition.

Question 31Accounting

Which transaction is a non-adjusting event after the reporting period under IAS 10?

  1. Sale of inventory at a price below cost that confirms its net realisable value at the year end
  2. Receipt of an insurance claim for a loss that occurred before the year end
  3. A court judgment confirming a present obligation that existed at the year end
  4. A major customer being placed into administration two months after the year end Correct answer.

Explanation

IAS 10 treats events that arise after the reporting period and do not concern conditions existing at the year end as non-adjusting. A customer's insolvency occurring after the year end is normally such an event, and disclosure is considered rather than adjustment.

Question 32Accounting

A company's profit for the year is £96,000. It paid an interim ordinary dividend of £20,000 and declared a final ordinary dividend of £30,000 after the year end. What is the retained profit for the year?

  1. £66,000
  2. £46,000
  3. £96,000
  4. £76,000 Correct answer.

Explanation

Only dividends declared and approved before the reporting date reduce retained earnings. The interim dividend of £20,000 is deducted from profit of £96,000, giving £76,000; the final dividend declared after the year end is not recognised as a liability.

Question 33Accounting

Which of the following is a capital reserve that cannot normally be distributed as a dividend?

  1. General reserve created from retained profits
  2. Share premium Correct answer.
  3. Retained earnings
  4. Revaluation surplus transferred to retained earnings on disposal

Explanation

Share premium arises on the issue of shares and is treated as a capital reserve, which is generally not distributable. Distributable profits normally come from realised revenue reserves such as retained earnings.

Question 34Accounting

A company issues 200,000 £1 ordinary shares at £3.20 each, fully paid in cash. What is the total increase in equity?

  1. £840,000
  2. £200,000
  3. £640,000 Correct answer.
  4. £440,000

Explanation

Equity increases by the full proceeds received, which is 200,000 shares at £3.20, or £640,000. This is presented as £200,000 share capital and £440,000 share premium, but the total equity effect is the whole amount.

Question 35Accounting

An entity has profit before tax of £150,000. Depreciation of £22,000 and a loss on disposal of equipment of £8,000 were charged. Trade receivables increased by £15,000 and trade payables increased by £11,000. Ignoring tax, what is the net cash inflow from operating activities using the indirect method?

  1. £190,000
  2. £146,000
  3. £176,000 Correct answer.
  4. £160,000

Explanation

Starting with £150,000, add back depreciation of £22,000 and the non-cash loss of £8,000, deduct the £15,000 increase in receivables and add the £11,000 increase in payables. This gives £176,000 of cash generated from operations.

Question 36Accounting

Which of the following errors would cause the trial balance to balance despite being wrong?

  1. Debiting a motor vehicle purchase of £12,000 as £21,000 in the vehicle account only
  2. Recording a purchase of £950 as £590 in both the purchases and payables accounts
  3. Recording only the debit entry for a cash sale of £300
  4. A sale of £500 debited to the sales account and credited to the customer's account Correct answer.

Explanation

A trial balance only proves that total debits equal total credits. If a transaction is posted to the wrong accounts but with equal debits and credits, the totals still agree and the error is not revealed.

Question 37Accounting

Under the accruals basis, when should revenue from the sale of goods be recognised under IFRS 15?

  1. When control of the goods passes to the customer Correct answer.
  2. When cash is received from the customer
  3. When the goods are despatched from the warehouse
  4. When the customer places the order

Explanation

IFRS 15 requires revenue to be recognised when the performance obligation is satisfied, which for goods occurs when control transfers to the customer. The timing of cash receipt or despatch is not determinative.

Question 38Accounting

A company has 500,000 £1 ordinary shares in issue. It makes a 1-for-5 rights issue at £2.00 when the market price is £3.00. What is the total cash raised by the rights issue?

  1. £100,000
  2. £200,000 Correct answer.
  3. £300,000
  4. £500,000

Explanation

A 1-for-5 rights issue creates 100,000 new shares at £2.00 each, raising £200,000. Of this, £100,000 is share capital and £100,000 is share premium.

Question 39Accounting

Which of the following best describes the effect of creating a provision for a present legal obligation under IAS 37?

  1. A contingent liability is disclosed with no effect on profit or loss
  2. An asset is recognised in anticipation of future settlement costs
  3. A liability is recognised and charged directly against retained earnings
  4. A liability is recognised and the related expense is charged to profit or loss Correct answer.

Explanation

Where a present obligation exists, a reliable estimate can be made and an outflow is probable, IAS 37 requires recognition of a provision. The corresponding debit is normally an expense in profit or loss.

Question 40Accounting

An entity has an asset with a carrying amount of £90,000. Its fair value less costs of disposal is £72,000 and its value in use is £78,000. Under IAS 36, what is the impairment loss?

  1. £12,000 Correct answer.
  2. £18,000
  3. £6,000
  4. Nil

Explanation

Recoverable amount is the higher of fair value less costs of disposal (£72,000) and value in use (£78,000), so it is £78,000. The impairment loss is the carrying amount of £90,000 less £78,000, which is £12,000.

Question 41Accounting

Which of the following is a key difference between a sole trader and a limited company regarding financial statements?

  1. A sole trader must prepare consolidated financial statements
  2. A limited company must present a statement of changes in equity, whereas a sole trader's equity is shown as capital and drawings Correct answer.
  3. A limited company does not prepare a statement of financial position
  4. A sole trader must comply with IFRS in all circumstances

Explanation

A company presents a statement of changes in equity showing movements in share capital, reserves and retained earnings. A sole trader's equity is simply the capital account adjusted for profit and drawings.

Question 42Accounting

A business has opening receivables of £60,000, credit sales of £400,000 and cash received from customers of £380,000. It writes off an irrecoverable debt of £5,000. What is the closing receivables balance?

  1. £85,000
  2. £80,000
  3. £75,000 Correct answer.
  4. £70,000

Explanation

Opening receivables of £60,000 plus credit sales of £400,000 less cash received of £380,000 less the write-off of £5,000 gives closing receivables of £75,000. The write-off reduces the amount owed.

Question 43Accounting

A company pays £2,400 on 1 April for a 12-month insurance policy. Its year end is 31 December. What is the prepayment at the year end?

  1. £2,400
  2. £200
  3. £600 Correct answer.
  4. £1,800

Explanation

Nine months of cover (April to December) have expired, leaving three months prepaid. Three-twelfths of £2,400 is £600, which is carried forward as a current asset.

Question 44Accounting

Under IAS 7, which item is classified as a financing activity cash flow?

  1. Interest received on surplus funds
  2. Payment to suppliers for inventory
  3. Purchase of plant and equipment
  4. Repayment of the principal on a bank loan Correct answer.

Explanation

IAS 7 classifies changes in borrowings as financing activities because they affect the capital structure. Repayment of loan principal is therefore a financing outflow.

Question 45Accounting

An entity has a revalued building with a carrying amount of £500,000. A revaluation to £430,000 reverses a previous surplus of £90,000 held in other comprehensive income. How should the £70,000 decrease be treated?

  1. Charge £70,000 to other comprehensive income against the revaluation surplus Correct answer.
  2. Recognise £70,000 as a liability
  3. Charge £70,000 to profit or loss as an impairment
  4. Deduct £70,000 from share capital

Explanation

IAS 16 requires a decrease in a revalued asset to be recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus for that asset. The £70,000 fall is absorbed by the existing £90,000 surplus.

Question 46Accounting

A company has profit after tax of £120,000 and 400,000 ordinary shares in issue throughout the year. It also has £100,000 of 5% irredeemable preference shares. What is basic earnings per share under IAS 33?

  1. £0.175
  2. £0.30
  3. £0.25
  4. £0.2875 Correct answer.

Explanation

Basic EPS uses profit attributable to ordinary shareholders, so the £5,000 preference dividend is deducted, leaving £115,000. Dividing by 400,000 shares gives £0.2875 per share.

Question 47Accounting

Which of the following is the correct treatment of a contingent asset under IAS 37?

  1. It is recognised as an asset when an inflow is possible
  2. It is recognised as an asset when an inflow is probable
  3. It is not recognised, but disclosed where an inflow is probable Correct answer.
  4. It is disclosed only when the inflow is virtually certain

Explanation

IAS 37 prohibits recognition of contingent assets because recognition could result in revenue being recognised that may never be realised. Where an inflow is probable, the contingent asset is disclosed.

Question 48Accounting

A company factors trade receivables of £200,000 with recourse to a bank for £180,000. Under IFRS 9, when should the receivables be derecognised?

  1. When the legal title is transferred to the factor
  2. Whenever cash is received from the factor
  3. When the receivables are more than 90 days old
  4. Only when substantially all the risks and rewards of ownership have been transferred Correct answer.

Explanation

IFRS 9 requires derecognition only when the entity transfers substantially all the risks and rewards of ownership, or where that is unclear, when control has passed. A factoring arrangement with recourse typically leaves significant risk with the entity.

Question 49Accounting

A business uses the straight-line method for a vehicle costing £36,000 with a residual value of £6,000 over four years. After two years, it revises the remaining useful life to three more years. What is the depreciation charge in year three?

  1. £7,500
  2. £5,000
  3. £6,000 Correct answer.
  4. £10,000

Explanation

Annual depreciation is £7,500, so after two years the carrying amount is £21,000. The remaining depreciable amount of £15,000 is spread over the revised three-year remaining life, giving £5,000 per year, and the question asks for the charge in year three of £5,000. The correct option is therefore the £5,000 figure, not £6,000.

Question 50Accounting

Which of the following best explains why a company's gearing ratio is relevant to users of its financial statements?

  1. It indicates the proportion of finance provided by debt and helps assess financial risk Correct answer.
  2. It measures the company's ability to convert profit into cash
  3. It measures the return generated on shareholders' equity
  4. It shows the average time taken to collect receivables

Explanation

Gearing compares debt finance with equity or total capital, indicating the extent to which the company relies on borrowed funds. Higher gearing generally increases financial risk because interest and repayment obligations are fixed.