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LC Business study materials
LC Business study resources

LC Business practice questions

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Question 1Business

A bakery owner wants to know whether the business made a profit last month. Which financial statement should be reviewed first?

  1. The statement of retained earnings
  2. The balance sheet
  3. The cash flow statement
  4. The income statement Correct answer.

Explanation

The income statement lists revenues and expenses for a period and shows whether the business earned a profit or incurred a loss. The balance sheet shows financial position at a single point in time, while the cash flow statement tracks movements in cash rather than profitability.

Question 2Business

A company sells goods to a customer on credit with payment due in 60 days. Which accounting concept requires revenue to be recorded when the goods are delivered rather than when cash is received?

  1. The prudence concept
  2. The matching principle
  3. The accrual concept Correct answer.
  4. The going concern concept

Explanation

The accrual concept records revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. This is why a credit sale is recognised at delivery.

Question 3Business

A business has current assets of $80,000 and current liabilities of $40,000. What is its current ratio?

  1. 0.5
  2. 1.5
  3. 3.0
  4. 2.0 Correct answer.

Explanation

The current ratio is current assets divided by current liabilities, so $80,000 divided by $40,000 equals 2.0. A ratio of 2.0 means the business holds twice as much in short-term assets as it owes in short-term obligations.

Question 4Business

Which document is sent by a seller to a buyer to request payment for goods already supplied?

  1. An invoice Correct answer.
  2. A credit note
  3. A purchase order
  4. A delivery note

Explanation

An invoice states the goods or services supplied, the amount due and the payment terms, and it formally requests payment. It is issued after supply to trigger settlement.

Question 5Business

A firm's marketing team segments customers by age, income and lifestyle. Which type of segmentation is being used?

  1. Demographic segmentation Correct answer.
  2. Psychographic segmentation
  3. Behavioural segmentation
  4. Geographic segmentation

Explanation

Age and income are demographic variables, so grouping customers on these bases is demographic segmentation. Lifestyle is often treated as psychographic, but the mix described is conventionally classified as demographic when age and income dominate.

Question 6Business

Which of the following is a fixed cost for a small printing business in the short term?

  1. Monthly rent on the workshop Correct answer.
  2. Ink used in the printing process
  3. Paper purchased per job
  4. Courier charges per delivery

Explanation

Fixed costs do not vary with output in the short term, and rent on premises must be paid whether or not jobs are produced. The other items rise and fall with the volume of work.

Question 7Business

A manager compares the cost of two suppliers and finds supplier A charges $12 per unit while supplier B charges $10 per unit but requires a minimum order of 1,000 units. Which consideration is most relevant before choosing supplier B?

  1. Whether the business can use or store 1,000 units Correct answer.
  2. Whether supplier A offers a loyalty scheme
  3. Whether supplier B advertises more widely
  4. Whether supplier A has a longer trading history

Explanation

A lower unit price only produces savings if the volume can be absorbed without waste or excessive storage cost. The minimum order quantity therefore makes demand and storage capacity the decisive issue.

Question 8Business

Which source of finance is most appropriate for a sole trader who needs a small amount of money for a few weeks to cover a seasonal gap?

  1. A debenture issue
  2. A bank overdraft Correct answer.
  3. A 20-year mortgage
  4. Issuing shares to the public

Explanation

A bank overdraft provides short-term flexibility and is repaid as cash comes in, which suits a brief seasonal shortfall. Long-term instruments are designed for assets held over many years.

Question 9Business

A retailer's gross profit margin falls from 40% to 32% while sales revenue remains unchanged. Which explanation is most consistent with this change?

  1. Administrative salaries have been cut
  2. The cost of goods sold has risen as a proportion of revenue Correct answer.
  3. The business has repaid a long-term loan
  4. The number of employees has increased

Explanation

Gross profit margin is gross profit divided by revenue, so a fall with stable revenue points to a higher cost of goods sold. Loan repayment and salary changes affect net profit or cash, not the gross margin.

Question 10Business

A company has a debtors' collection period of 75 days, while the industry average is 45 days. What is the most likely consequence for the business?

  1. Lower risk of bad debts
  2. Higher gross profit margin
  3. Improved liquidity because debtors pay promptly
  4. Increased working capital tied up in receivables Correct answer.

Explanation

A long collection period means cash is locked up in unpaid invoices, raising the working capital requirement. It also increases exposure to bad debts rather than reducing it.

Question 11Business

A firm uses break-even analysis and finds its margin of safety is 500 units. What does this figure represent?

  1. The profit earned per unit sold
  2. The number of units that must be scrapped
  3. The maximum output the factory can produce
  4. The number of units sold above the break-even point Correct answer.

Explanation

The margin of safety is the excess of actual or planned sales over break-even sales, showing how far sales can fall before a loss arises. A figure of 500 units means output can drop by that amount and the business still breaks even.

Question 12Business

A business decides to reduce its product range from 40 items to 12 fast-selling items. Which is the most likely benefit?

  1. Higher inventory holding costs
  2. Simpler stock control and lower storage costs Correct answer.
  3. Increased product differentiation
  4. Greater exposure to a single customer

Explanation

Rationalising a product range reduces the variety of stock to be tracked and stored, cutting holding and administration costs. It typically simplifies rather than complicates operations.

Question 13Business

A manager delegates a task to a junior employee but retains accountability to senior management. Which principle does this illustrate?

  1. Span of control
  2. Unity of command
  3. Accountability cannot be delegated Correct answer.
  4. Centralisation

Explanation

Authority to perform a task may be delegated, but the manager remains answerable for the outcome. This is the principle that accountability cannot be delegated.

Question 14Business

A firm introduces a piece-rate pay scheme. Which outcome is most consistent with motivation theory?

  1. Employees will always become more loyal to the firm
  2. Output may rise but quality may fall if only quantity is rewarded Correct answer.
  3. Absenteeism will necessarily increase
  4. Labour turnover will fall regardless of working conditions

Explanation

Piece rates reward volume, so workers may prioritise speed over careful work unless quality is also monitored and rewarded. The effect on loyalty or turnover depends on many other factors.

Question 15Business

A company's cash flow forecast shows a negative closing balance in month three. Which action is most appropriate?

  1. Increase the dividend paid to shareholders
  2. Arrange additional short-term finance or accelerate collections from debtors Correct answer.
  3. Delay payments to suppliers without informing them
  4. Purchase additional fixed assets for cash

Explanation

A projected cash deficit must be closed by bringing cash forward or arranging a facility in advance. Chasing debtors and arranging short-term finance directly address the shortfall.

Question 16Business

A business operates in a market where demand is price inelastic. If it raises its price, what is the most likely effect on total revenue?

  1. Total revenue will remain exactly the same
  2. Total revenue will fall to zero
  3. Total revenue will fall
  4. Total revenue will rise Correct answer.

Explanation

With inelastic demand, the percentage fall in quantity demanded is smaller than the percentage rise in price, so total revenue increases. Customers continue buying despite the higher price.

Question 17Business

A firm's income statement shows revenue of $200,000, cost of goods sold of $120,000 and operating expenses of $50,000. What is the operating profit?

  1. $80,000
  2. $30,000 Correct answer.
  3. $20,000
  4. $50,000

Explanation

Operating profit is revenue minus cost of goods sold minus operating expenses: $200,000 minus $120,000 minus $50,000 equals $30,000. Gross profit would be $80,000 before deducting operating expenses.

Question 18Business

A company is considering entering a foreign market. Which factor most directly reduces the risk of the venture?

  1. A long-standing domestic brand
  2. Strong local distribution partnerships Correct answer.
  3. High domestic advertising spend
  4. A large domestic market share

Explanation

Local partners supply market knowledge, networks and distribution that reduce execution risk in an unfamiliar market. Domestic strengths do not automatically transfer across borders.

Question 19Business

A firm's gearing ratio is 65%, well above the sector average of 35%. Which risk does this primarily indicate?

  1. The firm has too many debtors
  2. The firm is underusing its equity base
  3. The firm holds excessive inventory relative to sales
  4. The firm relies heavily on debt and faces greater exposure to interest rate changes Correct answer.

Explanation

Gearing compares debt to total capital, so a high ratio means a large share of funding is borrowed. This increases fixed interest obligations and makes earnings more sensitive to rate changes.

Question 20Business

A manager is deciding whether to accept a special order at a price below the normal selling price, using only spare capacity. Which cost is most relevant to the decision?

  1. The depreciation already charged on existing equipment
  2. The variable cost of producing the additional units Correct answer.
  3. An allocated share of head office overhead
  4. The original purchase cost of machinery already owned

Explanation

When spare capacity exists, the incremental cost of fulfilling the order is what matters, and that is the variable cost of the extra units. Costs already incurred or allocated regardless of the decision are not relevant.

Question 21Business

A business reports revenue of $500,000, a gross profit margin of 30% and an operating profit margin of 8%. What is the amount of operating expenses?

  1. $110,000 Correct answer.
  2. $190,000
  3. $150,000
  4. $40,000

Explanation

Gross profit is 30% of $500,000, or $150,000, and operating profit is 8%, or $40,000. Operating expenses are the difference between the two, which is $110,000.

Question 22Business

A firm with a current ratio of 2.5 and a quick ratio of 0.8 is applying for trade credit. What does the contrast between these ratios most strongly suggest?

  1. The firm has no current liabilities
  2. The firm is over-capitalised with excess cash
  3. The firm's debtors pay faster than the industry average
  4. The firm's liquidity depends heavily on selling inventory Correct answer.

Explanation

The quick ratio strips out inventory, so a large gap between the current and quick ratios indicates that inventory makes up most of the current assets. Liquidity therefore relies on converting that stock into cash.

Question 23Business

A company's contribution per unit is $15, fixed costs are $90,000 and current sales are 8,000 units. What is the margin of safety in units?

  1. 6,000 units
  2. 8,000 units
  3. 2,000 units Correct answer.
  4. 1,500 units

Explanation

Break-even units equal fixed costs divided by contribution per unit, giving 6,000 units. Margin of safety is 8,000 minus 6,000, which is 2,000 units.

Question 24Business

A business switches from labour-intensive to capital-intensive production. Which combination of effects is most likely in the short term?

  1. Both fixed and variable costs rise
  2. Fixed costs fall and variable costs per unit rise
  3. Fixed costs rise and variable costs per unit fall Correct answer.
  4. Both fixed and variable costs fall

Explanation

Automation replaces variable labour with machinery, so depreciation and maintenance raise fixed costs while unit variable cost falls. The trade-off only pays off once output is high enough to spread the fixed cost.

Question 25Business

An investor compares two firms with identical net profit but different depreciation policies, one charging more depreciation than the other. Which statement best explains why their cash flows may still be similar?

  1. Depreciation is paid in cash at the end of each year
  2. Depreciation increases the cash held in the bank
  3. Higher depreciation reduces the tax payable to zero
  4. Depreciation is a non-cash expense that reduces profit without using cash Correct answer.

Explanation

Depreciation allocates the cost of an asset over its useful life and involves no cash outflow in the period. Profit therefore differs between the firms while operating cash flow can be similar, although tax effects may create some difference.

Question 26Business

A bakery calculates that its break-even level of output is 2,500 loaves per month. If it actually sells 3,000 loaves, what is the margin of safety in units?

  1. 500 loaves Correct answer.
  2. 2,500 loaves
  3. 5,500 loaves
  4. 3,000 loaves

Explanation

Margin of safety is actual sales minus break-even sales. Here, 3,000 − 2,500 = 500 loaves, meaning sales could fall by 500 loaves before the bakery makes a loss.

Question 27Business

A firm has a current ratio of 1.2 and a quick ratio of 0.4. Which interpretation is most accurate?

  1. The firm has more than enough liquid assets to cover immediate liabilities.
  2. The firm's current liabilities exceed its current assets.
  3. The firm has sufficient current assets overall but relies heavily on inventory to meet short-term debts. Correct answer.
  4. The firm's inventory levels are unusually low relative to its current assets.

Explanation

A current ratio above 1 suggests current assets cover current liabilities, but a quick ratio well below 1 indicates that excluding inventory, liquid assets are insufficient. The large gap between the two ratios points to inventory making up most of the current assets.

Question 28Business

A company's statement of financial position shows total assets of $800,000 and total liabilities of $500,000. What is the value of equity?

  1. $1,300,000
  2. $300,000 Correct answer.
  3. $500,000
  4. $800,000

Explanation

Equity is calculated as total assets minus total liabilities. Using the accounting equation, $800,000 − $500,000 = $300,000.

Question 29Business

A business receives an invoice for office stationery. Which accounting document should be used to record the purchase in the books of account?

  1. Credit note
  2. Statement of account
  3. Purchase invoice Correct answer.
  4. Sales invoice

Explanation

A purchase invoice is issued by the supplier and received by the buyer to record a credit purchase. It details the goods or services, quantities, prices, and terms.

Question 30Business

A firm's gearing ratio is 60%. Which statement best describes the implication for the firm?

  1. It is likely to have lower interest payments than a firm with a gearing ratio of 20%.
  2. A large proportion of its capital is financed by debt, increasing financial risk. Correct answer.
  3. It has a high proportion of equity in its capital structure, reducing financial risk.
  4. It has no long-term borrowings.

Explanation

Gearing measures the proportion of capital financed by debt. A 60% gearing ratio means debt is a major source of finance, which increases fixed interest commitments and financial risk.

Question 31Business

A business has a gross profit margin of 25% and an operating profit margin of 10%. What does the difference of 15 percentage points primarily represent?

  1. Cost of goods sold as a percentage of revenue
  2. Interest and tax as a percentage of revenue
  3. Net profit as a percentage of revenue
  4. Operating expenses as a percentage of revenue Correct answer.

Explanation

Gross profit margin shows profit after cost of goods sold, while operating profit margin shows profit after operating expenses as well. The difference therefore reflects operating expenses as a proportion of revenue.

Question 32Business

Which of the following is most likely to be classified as an indirect cost for a furniture manufacturer?

  1. Wood used in production
  2. Assembly worker's wages
  3. Factory supervisor's salary Correct answer.
  4. Upholstery fabric for sofas

Explanation

Indirect costs cannot be traced directly to a single unit of output. A factory supervisor's salary supports production overall and is therefore an indirect cost, unlike materials and direct labour.

Question 33Business

A firm produces 1,000 units at a total cost of $50,000. If fixed costs are $20,000, what is the variable cost per unit?

  1. $30 Correct answer.
  2. $50
  3. $20
  4. $70

Explanation

Total variable cost is total cost minus fixed cost: $50,000 − $20,000 = $30,000. Dividing by 1,000 units gives a variable cost per unit of $30.

Question 34Business

A company uses a just-in-time (JIT) inventory system. Which outcome is most consistent with JIT?

  1. Increased warehouse space requirements
  2. Higher inventory levels to buffer against demand fluctuations
  3. Reduced inventory holding costs but greater vulnerability to supply disruptions Correct answer.
  4. Lower ordering frequency from suppliers

Explanation

JIT aims to minimise inventory by receiving goods just as they are needed, which cuts storage and holding costs. However, it leaves little buffer, so any supply delay can halt production.

Question 35Business

A firm's cash flow forecast shows a closing balance of $10,000 in January, $5,000 in February, and −$2,000 in March. Which action is most appropriate?

  1. Reduce sales revenue in February to conserve cash.
  2. Arrange a short-term overdraft or delay payments to cover the March deficit. Correct answer.
  3. Increase dividend payments to shareholders in March.
  4. Purchase additional fixed assets in March.

Explanation

A negative closing balance indicates a cash shortfall. The firm should take steps to improve cash inflows or delay outflows, such as arranging an overdraft or negotiating longer payment terms.

Question 36Business

A business sells 500 units at $20 each. Variable cost per unit is $12 and fixed costs are $3,000. What is the operating profit?

  1. $10,000
  2. $7,000
  3. $4,000
  4. $1,000 Correct answer.

Explanation

Contribution per unit is $20 − $12 = $8. Total contribution is 500 × $8 = $4,000. Subtracting fixed costs of $3,000 gives an operating profit of $1,000.

Question 37Business

Which source of finance is most appropriate for a company that wants to raise a large amount of long-term capital without increasing its gearing ratio?

  1. Debenture issue
  2. Bank overdraft
  3. Bank loan
  4. Issue of ordinary shares Correct answer.

Explanation

Issuing ordinary shares raises equity finance, which does not require fixed interest payments and therefore does not increase gearing. Loans, debentures, and overdrafts are debt and would raise gearing.

Question 38Business

A firm's debtors' collection period has increased from 40 days to 65 days. Which action would most directly improve this ratio?

  1. Offer early settlement discounts to customers Correct answer.
  2. Reduce the level of inventory held
  3. Extend credit terms to customers
  4. Increase the credit period allowed by suppliers

Explanation

The debtors' collection period measures how long it takes to collect cash from credit customers. Encouraging earlier payment, such as through settlement discounts, reduces the average collection period.

Question 39Business

A manager uses a decision tree to evaluate a new product launch. The expected value of the launch is $50,000 and the cost of the decision tree analysis is $5,000. What does the expected value represent?

  1. The weighted average of possible outcomes based on their probabilities Correct answer.
  2. The minimum possible loss
  3. The maximum possible profit
  4. The most likely single outcome

Explanation

Expected value is calculated by multiplying each possible outcome by its probability and summing the results. It represents a long-run average outcome, not the most likely or extreme outcome.

Question 40Business

A company is deciding whether to invest $100,000 in a project. The project is expected to generate annual net cash inflows of $30,000 for five years. What is the payback period?

  1. 2.50 years
  2. 3.00 years
  3. 3.33 years Correct answer.
  4. 5.00 years

Explanation

Payback period is the time taken for cumulative cash inflows to equal the initial investment. $100,000 ÷ $30,000 per year = 3.33 years.

Question 41Business

Which of the following best describes the purpose of a budget in a business?

  1. To determine the tax liability of a company
  2. To calculate the market value of a company's shares
  3. To provide a financial plan and control mechanism for a future period Correct answer.
  4. To record actual transactions after they have occurred

Explanation

A budget is a forward-looking financial plan that sets targets for income and expenditure. It is used to coordinate activities and control performance by comparing actual results with planned figures.

Question 42Business

A firm's actual output is 1,200 units, but its budgeted output was 1,000 units. What is the variance?

  1. Adverse variance of 200 units
  2. No variance
  3. Favourable variance of 200 units Correct answer.
  4. Favourable variance of 1,200 units

Explanation

A variance is the difference between actual and budgeted figures. Producing 200 units more than budget is favourable because higher output can increase contribution, assuming demand exists.

Question 43Business

A business has a high level of operating gearing. What does this imply?

  1. The business is highly geared financially
  2. The business has high variable costs relative to fixed costs
  3. A small change in sales can cause a large change in operating profit Correct answer.
  4. The business has high fixed costs relative to variable costs

Explanation

Operating gearing measures the proportion of fixed costs in the cost structure. High operating gearing means fixed costs are large, so profit is more sensitive to changes in sales volume.

Question 44Business

A company's statement of cash flows shows a large positive net cash flow from operating activities but a negative net cash flow overall. Which is the most likely explanation?

  1. A decrease in inventory levels
  2. High cash sales revenue
  3. Significant investment in non-current assets Correct answer.
  4. An increase in trade payables

Explanation

Operating activities generated cash, but overall cash fell, indicating large cash outflows elsewhere. Purchasing non-current assets is an investing outflow that can outweigh operating inflows.

Question 45Business

A firm's return on capital employed (ROCE) is 12%, while its cost of borrowing is 8%. Which conclusion is most valid?

  1. The firm is making a loss on its borrowed funds.
  2. The firm should immediately repay all its debt.
  3. The firm is generating a return greater than the cost of its debt, so borrowing is financially beneficial. Correct answer.
  4. The firm's gearing ratio must be above 50%.

Explanation

ROCE measures operating profit relative to capital employed. If ROCE exceeds the interest rate on debt, the firm earns more from invested capital than it pays for borrowed funds, which benefits shareholders.

Question 46Business

A company uses absorption costing. Which cost is included in the product cost under absorption costing but excluded under marginal costing?

  1. Direct materials
  2. Fixed production overhead Correct answer.
  3. Direct labour
  4. Variable production overhead

Explanation

Absorption costing includes both variable and fixed production costs in product cost, whereas marginal costing includes only variable costs. Fixed production overhead is therefore the key difference.

Question 47Business

A business is considering a project with an initial investment of $200,000 and expected annual cash inflows of $60,000 for four years. The discount rate is 10%. The present value of an annuity of $1 for four years at 10% is 3.170. What is the net present value (NPV)?

  1. $40,000
  2. −$9,800 Correct answer.
  3. $9,800
  4. $190,200

Explanation

The present value of inflows is $60,000 × 3.170 = $190,200. NPV is $190,200 − $200,000 = −$9,800, meaning the project destroys value at a 10% discount rate.

Question 48Business

Which of the following is an example of a business using a cost leadership strategy?

  1. A budget airline offering low fares by minimising service costs Correct answer.
  2. A luxury car manufacturer emphasising craftsmanship
  3. A boutique hotel offering personalised service
  4. A technology firm investing heavily in research and development

Explanation

Cost leadership involves becoming the lowest-cost producer in the industry, often by stripping out costs. A budget airline that minimises service costs to offer low fares is a classic example.

Question 49Business

A firm's statement of financial position shows inventories of $30,000, trade receivables of $20,000, cash of $10,000, and trade payables of $40,000. What is the quick ratio?

  1. 0.75 Correct answer.
  2. 1.50
  3. 1.25
  4. 0.50

Explanation

The quick ratio excludes inventory from current assets: (20,000 + 10,000) ÷ 40,000 = 30,000 ÷ 40,000 = 0.75. This indicates liquid assets cover only 75% of current liabilities.

Question 50Business

A business has a high level of trade receivables relative to its sales. Which action is most likely to improve its cash flow?

  1. Introduce stricter credit checks for new customers Correct answer.
  2. Increase inventory levels to meet future demand
  3. Offer discounts to customers for early payment
  4. Increase the credit period offered to customers

Explanation

Stricter credit checks reduce the risk of selling to customers who pay late or default, which can shorten the collection period and improve cash flow.