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NPAT practice questions

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Question 1Commerce

A retailer buys a jacket for $40 and sells it for $60. What is the gross profit margin as a percentage of the selling price?

  1. 20%
  2. 50%
  3. 66.7%
  4. 33.3% Correct answer.

Explanation

Gross profit is $60 − $40 = $20. Expressed as a percentage of the selling price, the margin is $20 ÷ $60 = 33.3%. Markup on cost would instead be 50%, which is a different measure.

Question 2Commerce

Which document does a seller issue to a buyer to formally request payment for goods delivered on credit?

  1. Credit note
  2. Bill of lading
  3. Purchase order
  4. Invoice Correct answer.

Explanation

An invoice itemises goods or services supplied and states the amount the buyer owes and the payment terms. It is the seller's formal demand for payment. A purchase order originates from the buyer, and a credit note reduces an amount already owed.

Question 3Commerce

A business records revenue when goods are shipped to the customer rather than when cash is received. Which accounting concept does this illustrate?

  1. Consistency
  2. Accrual Correct answer.
  3. Going concern
  4. Prudence

Explanation

The accrual concept recognises revenue when it is earned and expenses when incurred, regardless of when cash moves. Recording revenue at shipment rather than at receipt of cash is the defining feature of accrual accounting.

Question 4Commerce

In a market where demand rises while supply remains unchanged, what is the expected effect on equilibrium price and quantity?

  1. Price rises and quantity falls
  2. Price rises and quantity rises Correct answer.
  3. Price falls and quantity falls
  4. Price falls and quantity rises

Explanation

An outward shift in demand along an unchanged supply curve moves the equilibrium up and to the right. Both equilibrium price and equilibrium quantity increase. This is the standard comparative-static result for a demand increase.

Question 5Commerce

Which of the following is classified as a current liability on a company's balance sheet?

  1. Long-term bank loan repayable in five years
  2. Retained earnings
  3. Motor vehicles used in delivery
  4. Trade payables due within 30 days Correct answer.

Explanation

Current liabilities are obligations expected to be settled within one year or the normal operating cycle. Trade payables due in 30 days meet that test. Long-term loans, fixed assets and equity do not.

Question 6Commerce

A company's sales are $500,000, cost of goods sold is $300,000 and operating expenses are $120,000. What is its operating profit?

  1. $120,000
  2. $200,000
  3. $80,000 Correct answer.
  4. $180,000

Explanation

Operating profit equals gross profit minus operating expenses: ($500,000 − $300,000) − $120,000 = $80,000. Gross profit alone is $200,000, but operating costs must still be deducted.

Question 7Commerce

Which of the following best describes a business-to-business (B2B) transaction?

  1. A wholesaler supplying stock to a retail chain Correct answer.
  2. A household paying a utility bill
  3. A consumer buying groceries from a supermarket
  4. A shopper ordering a gift online

Explanation

B2B commerce occurs between organisations, such as a wholesaler selling stock to a retailer. Transactions involving private individuals purchasing for personal use are business-to-consumer.

Question 8Commerce

A firm's break-even point is 2,000 units, with a selling price of $25 and variable cost of $15 per unit. What are its total fixed costs?

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

Explanation

Contribution per unit is $25 − $15 = $10. At break-even, total contribution equals fixed costs, so 2,000 × $10 = $20,000.

Question 9Commerce

A company issues a cheque but the payee has not yet presented it to the bank. In a bank reconciliation, how is this item treated?

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

Explanation

An unpresented cheque has been recorded in the cash book but not yet in the bank statement. To reconcile, it is deducted from the bank statement balance because the bank has not yet reduced the account.

Question 10Commerce

Which pricing strategy sets a low initial price to capture market share quickly before raising it later?

  1. Penetration pricing Correct answer.
  2. Price skimming
  3. Cost-plus pricing
  4. Premium pricing

Explanation

Penetration pricing deliberately sets a low launch price to attract customers and build share, with increases planned once loyalty is established. Skimming does the opposite by starting high.

Question 11Commerce

A bank offers 8% annual interest compounded annually. What is the approximate value of $1,000 after two years?

  1. $1,124.80
  2. $1,166.40 Correct answer.
  3. $1,160.00
  4. $1,080.00

Explanation

Compound interest applies interest to the accumulated balance: $1,000 × 1.08² = $1,166.40. Simple interest over the same period would give only $1,160.

Question 12Commerce

Which of the following is a key advantage of a limited liability company over a sole proprietorship?

  1. Ownership cannot be transferred
  2. Financial statements need not be prepared
  3. Owners' personal assets are protected from business debts Correct answer.
  4. The company pays no tax on profits

Explanation

In a limited liability company, shareholders' liability is limited to their invested capital, protecting personal assets. A sole trader, by contrast, has unlimited personal liability for business debts.

Question 13Commerce

A firm's inventory turnover ratio falls from 8 times to 5 times. What does this most likely indicate?

  1. The firm is selling stock faster
  2. The firm has reduced its fixed costs
  3. Stock is being held longer before sale Correct answer.
  4. The firm's profit margin has risen

Explanation

Inventory turnover measures how many times stock is sold and replaced in a period. A fall from 8 to 5 means stock sits longer before being sold, which can tie up working capital and raise holding costs.

Question 14Commerce

Which of the following is an example of a fixed cost for a bakery?

  1. Monthly rent on the shop premises Correct answer.
  2. Packaging for each cake sold
  3. Hourly wages for extra weekend staff
  4. Flour used in baking

Explanation

Fixed costs do not vary with output in the short run, and rent on premises is typically paid regardless of how much is baked. Ingredients, packaging and extra hourly staff vary with production levels.

Question 15Commerce

An investor buys shares at $20 and receives a dividend of $1 per share before selling at $23. What is the total return as a percentage of the purchase price?

  1. 20% Correct answer.
  2. 10%
  3. 25%
  4. 15%

Explanation

Total return combines the capital gain ($23 − $20 = $3) and the dividend ($1), giving $4 on a $20 investment, or 20%. Ignoring the dividend would understate the return.

Question 16Commerce

Which element of the marketing mix focuses on distribution channels and making products available to customers?

  1. Price
  2. Promotion
  3. Place Correct answer.
  4. Product

Explanation

In the four Ps framework, place covers distribution, logistics and channel decisions that determine how and where customers obtain the product. Promotion concerns communication, not availability.

Question 17Commerce

A debtor owing $500 is declared bankrupt and the debt is written off. What is the effect on the accounting equation?

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

Explanation

Writing off a bad debt removes a receivable, reducing assets. The loss reduces profit and therefore equity, so both assets and equity fall by $500. Liabilities are unaffected.

Question 18Commerce

A country can produce a good at a lower opportunity cost than its trading partner. This describes which concept?

  1. Comparative advantage Correct answer.
  2. Balance of trade
  3. Economies of scale
  4. Absolute advantage

Explanation

Comparative advantage exists where a country gives up less of another good to produce a unit, measured by opportunity cost. Absolute advantage, by contrast, concerns producing more with the same resources.

Question 19Commerce

A business has current assets of $150,000 and current liabilities of $100,000. What is its current ratio, and how is it interpreted?

  1. 2.5, indicating excess cash
  2. 1.5, indicating adequate short-term liquidity Correct answer.
  3. 1.0, indicating break-even liquidity
  4. 0.67, indicating liquidity problems

Explanation

The current ratio is current assets divided by current liabilities: $150,000 ÷ $100,000 = 1.5. A ratio above 1 suggests the business can meet short-term obligations from current assets.

Question 20Commerce

A firm increases its output and finds that average total cost falls. Which concept does this illustrate?

  1. Diminishing marginal returns
  2. Marginal cost pricing
  3. Economies of scale Correct answer.
  4. Diseconomies of scale

Explanation

Economies of scale occur when rising output spreads fixed costs over more units, lowering average total cost. Diminishing returns would cause marginal costs to rise in the short run.

Question 21Commerce

Under double-entry bookkeeping, a business pays $2,000 cash for equipment. Which entry is correct?

  1. Debit equipment $2,000; credit cash $2,000 Correct answer.
  2. Debit cash $2,000; credit trade payables $2,000
  3. Debit equipment $2,000; credit capital $2,000
  4. Debit cash $2,000; credit equipment $2,000

Explanation

Equipment is an asset that increases, so it is debited. Cash is an asset that decreases, so it is credited. The entries keep the accounting equation in balance.

Question 22Commerce

A company has net profit of $90,000, total assets of $600,000 and sales of $450,000. What is its return on total assets?

  1. 6.7%
  2. 20%
  3. 12%
  4. 15% Correct answer.

Explanation

Return on total assets is net profit divided by total assets: $90,000 ÷ $600,000 = 15%. This measures how efficiently assets generate profit.

Question 23Commerce

A firm faces a price elasticity of demand of −2 for its product. If it raises the price by 5%, what happens to quantity demanded and total revenue?

  1. Quantity falls 10% and revenue falls Correct answer.
  2. Quantity falls 2.5% and revenue rises
  3. Quantity is unchanged and revenue rises
  4. Quantity falls 10% and revenue rises

Explanation

Elasticity of −2 means a 5% price rise reduces quantity demanded by 10%. Because demand is elastic, the proportional fall in quantity exceeds the price rise, so total revenue falls.

Question 24Commerce

A project requires an initial outlay of $10,000 and returns $4,000 per year for three years. Using a discount rate of 10%, what is the approximate net present value?

  1. -$53 Correct answer.
  2. $947
  3. $2,000
  4. -$1,000

Explanation

Discounting each $4,000 receipt gives $3,636 + $3,306 + $3,005 = $9,947. Subtracting the $10,000 outlay yields an NPV of about −$53, so the project is marginally value-destroying at 10%.

Question 25Commerce

A company's gearing ratio is calculated as long-term debt divided by total capital employed. If debt is $400,000 and equity is $600,000, what is the gearing ratio?

  1. 66.7%
  2. 150%
  3. 40% Correct answer.
  4. 60%

Explanation

Capital employed is $400,000 + $600,000 = $1,000,000. Gearing is debt divided by capital employed: $400,000 ÷ $1,000,000 = 40%. High gearing increases financial risk through fixed interest obligations.

Question 26Commerce

A trader starts the year with capital of $40,000. During the year she earns a net profit of $12,000 and withdraws $7,000 for personal use. What is her closing capital?

  1. $45,000 Correct answer.
  2. $59,000
  3. $52,000
  4. $33,000

Explanation

Closing capital equals opening capital plus net profit minus drawings, because profit increases owner's equity while drawings reduce it. Here $40,000 + $12,000 − $7,000 = $45,000.

Question 27Commerce

Which document is sent by a seller to a buyer to inform the buyer that the amount owed on an invoice has been reduced, for example because of returned goods?

  1. A statement of account
  2. A purchase order
  3. A debit note
  4. A credit note Correct answer.

Explanation

A credit note is issued by the seller to reduce the amount previously invoiced, typically after goods are returned or an overcharge is corrected. It records a reduction in the buyer's debt in the seller's books.

Question 28Commerce

Which of the following best explains why a business might choose to operate as a franchise rather than as an independent start-up?

  1. The franchisee keeps all decision-making power without any contractual limits
  2. The franchisee is protected from competition within its local market by law
  3. The franchisee avoids all start-up capital because the franchisor funds the outlet
  4. The franchisee gains a proven brand, systems and training, though it pays fees and royalties Correct answer.

Explanation

Franchising lets the franchisee use an established brand, operating systems and support, which lowers some start-up risks. In return the franchisee pays initial fees and continuing royalties and must follow the franchisor's standards.

Question 29Commerce

A firm's gross profit is $80,000 and its expenses are $95,000. What does this indicate about the firm's results?

  1. It has made a gross loss of $15,000
  2. It has made a net profit of $15,000
  3. It has made a net loss of $15,000 Correct answer.
  4. It has broken even at the net level

Explanation

Net profit or loss equals gross profit minus expenses. With gross profit of $80,000 and expenses of $95,000, the result is a net loss of $15,000, even though the firm still earned a gross profit.

Question 30Commerce

A firm holds inventory that cost $10,000. Its net realisable value is now estimated at $8,500 because of falling market prices. Under the prudence concept, at what value should the inventory be reported?

  1. $9,250
  2. $1,500
  3. $10,000
  4. $8,500 Correct answer.

Explanation

Prudence requires inventory to be measured at the lower of cost and net realisable value. Since net realisable value of $8,500 is below cost of $10,000, the inventory is written down to $8,500.

Question 31Commerce

A business receives a bank loan of $50,000. Which effect does this transaction have on the accounting equation?

  1. Assets increase by $50,000 and liabilities decrease by $50,000
  2. Liabilities increase by $50,000 and capital decreases by $50,000
  3. Assets increase by $50,000 and capital increases by $50,000
  4. Assets increase by $50,000 and liabilities increase by $50,000 Correct answer.

Explanation

A loan increases the bank balance, which is an asset, and creates an obligation to repay, which is a liability. Capital is unaffected because the owner has not contributed or withdrawn resources.

Question 32Commerce

A company's profit margin on sales is 6% and its total asset turnover is 2.5 times. Using the relationship between these ratios, what is its return on total assets?

  1. 2.4%
  2. 15.0% Correct answer.
  3. 8.5%
  4. 41.7%

Explanation

Return on total assets can be decomposed as profit margin multiplied by total asset turnover. Here 6% × 2.5 = 15%, meaning each dollar of assets generates 15 cents of profit.

Question 33Commerce

A firm sells a product with a contribution margin of $12 per unit and fixed costs of $60,000. It then spends an extra $12,000 on advertising, which raises sales volume by 800 units. What is the net effect on profit?

  1. Profit is unchanged
  2. Profit falls by $2,400 Correct answer.
  3. Profit rises by $12,000
  4. Profit rises by $9,600

Explanation

The extra contribution is 800 units × $12 = $9,600, while the extra fixed cost is $12,000. The net effect is a fall in profit of $2,400, so the campaign does not cover its cost.

Question 34Commerce

A firm has an accounts receivable collection period of 75 days and an accounts payable payment period of 40 days, and holds inventory for 50 days. What is its cash operating cycle?

  1. 90 days
  2. 165 days
  3. 35 days
  4. 85 days Correct answer.

Explanation

The cash operating cycle equals inventory days plus receivables days minus payables days. Here 50 + 75 − 40 = 85 days, the period for which the firm must finance its working capital.

Question 35Economics

A country's consumer price index rises from 125 to 130 over one year. What is the approximate inflation rate for that year?

  1. 4.0% Correct answer.
  2. 2.5%
  3. 5.0%
  4. 3.8%

Explanation

The inflation rate is the percentage change in the price index, computed as (130 − 125) / 125 = 0.04, or 4.0%. Dividing the absolute change by the starting index value, not the ending value, gives the standard measure.

Question 36Economics

In a market with a binding price ceiling set below the equilibrium price, which outcome is expected?

  1. An upward shift of the supply curve
  2. A shortage of the good Correct answer.
  3. A surplus of the good
  4. Equilibrium quantity traded

Explanation

A price ceiling below equilibrium prevents the price from rising to clear the market. At the lower price, quantity demanded exceeds quantity supplied, producing a shortage.

Question 37Economics

A good has a price elasticity of demand of 0.4. If its price rises by 10%, what happens to quantity demanded?

  1. It falls by 4% Correct answer.
  2. It falls by 40%
  3. It rises by 4%
  4. It falls by 10%

Explanation

Elasticity equals the percentage change in quantity demanded divided by the percentage change in price. With elasticity 0.4 and a 10% price increase, quantity demanded falls by 0.4 × 10% = 4%.

Question 38Economics

Which situation best illustrates the economic concept of opportunity cost?

  1. A student attends college instead of working full time Correct answer.
  2. A government collects more tax revenue
  3. A consumer buys a good on sale
  4. A firm pays its workers a higher wage

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. Attending college sacrifices the wages that full-time work would have earned, which is the classic illustration.

Question 39Economics

Gross domestic product measures the market value of which of the following?

  1. The total income earned by a country's government
  2. All goods and services sold by a country's citizens anywhere in the world
  3. The total value of a country's financial assets
  4. All final goods and services produced within a country's borders in a period Correct answer.

Explanation

GDP is the market value of all final goods and services produced within a country's geographic borders during a given period. It counts domestic production regardless of producer nationality.

Question 40Economics

A government increases spending while tax rates stay unchanged. In the short run, this policy is best described as:

  1. Expansionary fiscal policy Correct answer.
  2. A supply-side deregulation
  3. Tight monetary policy
  4. Contractionary fiscal policy

Explanation

Higher government spending without offsetting tax increases raises aggregate demand, which is expansionary fiscal policy. It is intended to boost output and employment in the short run.

Question 41Economics

According to the law of demand, other things equal, what happens when the price of a good falls?

  1. Demand shifts leftward
  2. Quantity supplied increases
  3. Quantity demanded increases Correct answer.
  4. Quantity demanded decreases

Explanation

The law of demand states an inverse relationship between price and quantity demanded, holding other factors constant. A lower price moves the consumer along the demand curve to a larger quantity.

Question 42Economics

Which of the following is counted as unemployed in the standard labor force measure?

  1. A person without a job who actively looked for work in the past four weeks Correct answer.
  2. A person working part time who wants full-time hours
  3. A retired person who no longer seeks work
  4. A full-time student not seeking work

Explanation

Unemployment counts people without jobs who are available for work and have actively searched recently. Those not seeking work are outside the labor force entirely.

Question 43Economics

A firm's total revenue is 500,000 and its explicit costs are 380,000. The owner could earn 90,000 by working elsewhere. What is the firm's economic profit?

  1. 210,000
  2. 120,000
  3. 90,000
  4. 30,000 Correct answer.

Explanation

Economic profit subtracts both explicit and implicit costs from revenue. Accounting profit is 500,000 − 380,000 = 120,000; subtracting the 90,000 opportunity cost of the owner's time leaves 30,000.

Question 44Economics

A perfectly competitive firm faces a market price of 20 per unit and has marginal cost of 15 at its current output. To maximize profit, the firm should:

  1. Raise its price above the market level
  2. Shut down immediately
  3. Increase output because price exceeds marginal cost Correct answer.
  4. Decrease output because marginal cost is positive

Explanation

Profit maximization occurs where price equals marginal cost. Since price of 20 exceeds marginal cost of 15, each additional unit adds more revenue than cost, so expanding output raises profit.

Question 45Economics

An increase in the price of coffee beans raises the cost of producing coffee. In the market for coffee, this causes:

  1. A leftward shift of the demand curve
  2. A leftward shift of the supply curve Correct answer.
  3. A movement up along the supply curve
  4. A rightward shift of the demand curve

Explanation

Higher input costs reduce the quantity producers are willing to supply at every price, shifting the supply curve leftward. This is a shift of supply, not a movement along it.

Question 46Economics

If a country can produce a good at a lower opportunity cost than its trading partner, the country has:

  1. An absolute advantage in that good
  2. A comparative advantage in that good Correct answer.
  3. A monopoly in that good
  4. A trade deficit in that good

Explanation

Comparative advantage is defined by lower opportunity cost of production, which is the basis for mutually beneficial trade. Absolute advantage instead compares productivity or output per unit of input.

Question 47Economics

A central bank sells government securities in open market operations. The most likely short-run effect is:

  1. An increase in government spending
  2. A decrease in the reserve requirement
  3. A decrease in the money supply and higher interest rates Correct answer.
  4. An increase in the money supply and lower interest rates

Explanation

Selling securities withdraws reserves from the banking system as buyers pay the central bank. Fewer reserves reduce the money supply and push interest rates upward.

Question 48Economics

The marginal propensity to consume is 0.8. Ignoring taxes and imports, what is the simple spending multiplier?

  1. 5.0 Correct answer.
  2. 1.25
  3. 0.2
  4. 4.0

Explanation

The simple multiplier equals 1 divided by (1 − MPC). With MPC of 0.8, the multiplier is 1 / 0.2 = 5.0, meaning an initial spending change produces a fivefold total effect.

Question 49Economics

Which characteristic is typical of an oligopoly market structure?

  1. A few large firms whose decisions are interdependent Correct answer.
  2. Many small firms selling identical products
  3. A single firm supplying the entire market
  4. Free entry with no product differentiation

Explanation

Oligopoly features a small number of firms, each large enough that its pricing and output choices affect rivals. This strategic interdependence distinguishes it from perfect competition and monopoly.

Question 50Economics

A negative externality such as pollution from production means that, at the free-market output level:

  1. Marginal social cost exceeds marginal private cost, so output is too high Correct answer.
  2. Consumer surplus is zero
  3. Social and private costs are equal, so output is efficient
  4. Marginal private cost exceeds marginal social cost, so output is too low

Explanation

A negative externality adds external cost to private cost, so marginal social cost exceeds marginal private cost. Producers ignoring the external cost supply more than the socially efficient quantity.