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KASNEB CPA Foundation study materials
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KASNEB CPA Foundation practice questions

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Question 1Foundation Level

A business has total assets of Shs 850,000 and liabilities of Shs 320,000. What is the amount of the owner's capital?

  1. Shs 320,000
  2. Shs 530,000 Correct answer.
  3. Shs 850,000
  4. Shs 1,170,000

Explanation

The accounting equation states that assets equal capital plus liabilities, so capital is derived as assets less liabilities. Shs 850,000 less Shs 320,000 gives Shs 530,000.

Question 2Foundation Level

A trader buys goods on credit from a supplier. Which entry correctly records the transaction?

  1. Credit the purchases account
  2. Debit the cash account
  3. Debit the supplier's account
  4. Debit the purchases account Correct answer.

Explanation

Purchases of goods increase an expense, and expenses are debited. The supplier becomes a creditor, and an increase in a liability is credited, so the supplier's account is credited.

Question 3Foundation Level

A machine costs Shs 1,200,000, has an estimated residual value of Shs 200,000 and a useful life of five years. Using the straight-line method, what is the annual depreciation charge?

  1. Shs 240,000
  2. Shs 1,000,000
  3. Shs 280,000
  4. Shs 200,000 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. (Shs 1,200,000 - Shs 200,000) divided by 5 years gives Shs 200,000 per year.

Question 4Foundation Level

A firm's cash book shows a debit balance of Shs 45,000. Cheques issued but not yet presented total Shs 8,000, while deposits not yet credited by the bank total Shs 5,000. What is the balance shown on the bank statement?

  1. Shs 58,000
  2. Shs 42,000
  3. Shs 48,000 Correct answer.
  4. Shs 32,000

Explanation

Starting from a debit cash book balance, add unpresented cheques and deduct deposits not yet credited to arrive at the bank statement balance. Shs 45,000 + Shs 8,000 - Shs 5,000 = Shs 48,000.

Question 5Foundation Level

Rent paid during the year was Shs 240,000. The opening prepaid rent was Shs 30,000 and the closing accrued rent was Shs 20,000. What amount should be charged to the income statement for the year?

  1. Shs 190,000
  2. Shs 230,000 Correct answer.
  3. Shs 250,000
  4. Shs 290,000

Explanation

The expense for the period is the amount paid, less any opening prepayment relating to the current period, plus any amount accrued but unpaid at the end. Shs 240,000 - Shs 30,000 + Shs 20,000 = Shs 230,000.

Question 6Foundation Level

Trade receivables are Shs 800,000 and a provision for doubtful debts of five per cent is required. The existing provision is Shs 30,000. What is the effect of the adjustment on the income statement?

  1. Shs 40,000 credited to the income statement
  2. Shs 10,000 charged to the income statement Correct answer.
  3. Shs 10,000 credited to the income statement
  4. Shs 40,000 charged to the income statement

Explanation

The required provision is five per cent of Shs 800,000, which is Shs 40,000. Since Shs 30,000 already exists, the provision must be increased by Shs 10,000, and an increase in a provision is an expense charged to the income statement.

Question 7Foundation Level

Partners Kim and Otieno have capital balances of Shs 500,000 and Shs 300,000 respectively. The partnership agreement provides for interest on capital at ten per cent per annum. What is the total interest on capital for the year?

  1. Shs 80,000 Correct answer.
  2. Shs 50,000
  3. Shs 8,000
  4. Shs 30,000

Explanation

Interest on capital is computed on each partner's capital balance at the agreed rate. Kim earns Shs 50,000 and Otieno earns Shs 30,000, giving a total of Shs 80,000.

Question 8Foundation Level

A company issues 10,000 ordinary shares of Shs 20 nominal value each at Shs 25 per share. What amount is credited to the share premium account?

  1. Shs 50,000 Correct answer.
  2. Shs 250,000
  3. Shs 20,000
  4. Shs 200,000

Explanation

Share premium is the excess of the issue price over the nominal value of the shares issued. The premium is Shs 5 per share, so 10,000 shares yield Shs 50,000.

Question 9Foundation Level

A firm reports a net profit of Shs 500,000, depreciation of Shs 80,000, an increase in trade receivables of Shs 60,000 and a decrease in trade payables of Shs 20,000. What is the net cash flow from operating activities?

  1. Shs 420,000
  2. Shs 500,000 Correct answer.
  3. Shs 540,000
  4. Shs 660,000

Explanation

Depreciation is added back because it is a non-cash expense, while an increase in receivables and a decrease in payables are deducted as movements in working capital. Shs 500,000 + Shs 80,000 - Shs 60,000 - Shs 20,000 = Shs 500,000.

Question 10Foundation Level

A buyer responds to an offer by proposing different terms. In law, what is the effect of that response?

  1. An invitation to treat
  2. A mere inquiry that keeps the offer open
  3. An acceptance of the original offer
  4. A rejection of the original offer Correct answer.

Explanation

A response that seeks to vary the terms of an offer is a counter-offer. A counter-offer destroys the original offer, which can no longer be accepted unless it is renewed.

Question 11Foundation Level

Which of the following amounts to valid consideration for a promise?

  1. A promise to perform an existing public duty
  2. Something of value given in return for the promise Correct answer.
  3. A promise to do what one is already bound to do for the same promisor
  4. A moral obligation owed to the promisor

Explanation

Consideration must be something of value in the eyes of the law, given in return for the promise, and it must not be something the promisee is already obliged to give. Performance of an existing duty, whether public or contractual, and mere moral obligation do not suffice.

Question 12Foundation Level

A minor enters into a contract to purchase goods that are suitable to his condition in life and that he actually needs. What is the legal position on such a contract?

  1. It is entirely void and unenforceable
  2. The minor must pay a reasonable price Correct answer.
  3. It is voidable at the minor's option
  4. It binds the minor only after majority

Explanation

A contract for necessaries is an exception to the general rule that contracts with minors are unenforceable. The minor is bound to pay a reasonable price, not necessarily the contract price, for goods that are necessaries.

Question 13Foundation Level

Under the doctrine of privity of contract, a person who is not a party cannot enforce a contract. Which situation is recognised as an exception to this rule?

  1. Where the third party signed the contract as a witness
  2. Where a trust of the benefit is created for the third party Correct answer.
  3. Where the third party is a minor at the time of the contract
  4. Where the third party is a close relative of the promisor

Explanation

Privity prevents strangers to a contract from enforcing it, but where the contracting party holds the benefit on trust for a third party, that third party may enforce it in equity. Relationship, attestation as a witness or minority does not of itself give a stranger a right to sue.

Question 14Foundation Level

In a contract for the sale of goods, which implied term gives the buyer the right to reject the goods if the seller has no right to sell them?

  1. Condition as to description
  2. Condition as to title Correct answer.
  3. Warranty as to quiet possession
  4. Condition as to merchantable quality

Explanation

The implied condition as to title requires that the seller has the right to sell the goods at the time of sale. Breach of a condition entitles the buyer to reject the goods and treat the contract as repudiated.

Question 15Foundation Level

A payee presents a cheque drawn with two parallel lines across its face. What is the effect of those lines?

  1. It can only be endorsed to a third party
  2. It can be cashed over the counter by the payee
  3. It must be paid into a bank account Correct answer.
  4. It becomes invalid and cannot be paid

Explanation

Crossing a cheque is a direction to the paying bank that payment must be made through a bank account rather than over the counter. General crossing consists of two parallel lines and does not affect the validity or transferability of the cheque.

Question 16Foundation Level

A student gives up a well-paid job to enrol for a full-time course. In economics, the income forgone is best described as:

  1. The total cost of all the alternatives forgone
  2. The additional cost of producing one more unit
  3. The value of the next best alternative forgone Correct answer.
  4. The money paid for the factors of production used

Explanation

Opportunity cost is the value of the next best alternative that is sacrificed when a choice is made. It is not an accounting payment but the benefit lost from the option not taken.

Question 17Foundation Level

When the price of a commodity falls from Shs 10 to Shs 8, quantity demanded rises from 100 to 140 units. What is the price elasticity of demand?

  1. 2.0 Correct answer.
  2. 2.5
  3. 1.0
  4. 0.5

Explanation

Price elasticity of demand is the proportionate change in quantity demanded divided by the proportionate change in price. The quantity change is 40/100 = 0.4 and the price change is 2/10 = 0.2, giving an elasticity of 2.0, which is elastic.

Question 18Foundation Level

A firm's marginal product of labour has fallen to zero while output is still being produced. What does this imply about total product?

  1. Total product is zero
  2. Total product is at its maximum Correct answer.
  3. Total product is rising at an increasing rate
  4. Total product is falling

Explanation

Marginal product is the addition to total product from the last unit of the variable factor. When it is zero, total product stops rising and is at its peak; once marginal product becomes negative, total product falls.

Question 19Foundation Level

A sustained rise in the general price level caused mainly by wage increases that outstrip productivity growth is best described as:

  1. Hyperinflation
  2. Structural inflation
  3. Demand-pull inflation
  4. Cost-push inflation Correct answer.

Explanation

Cost-push inflation arises when rising costs of production, such as wages or input prices, are passed on as higher prices. Wage increases exceeding productivity growth raise unit costs and push prices upwards.

Question 20Foundation Level

Which of the following is a function of a central bank rather than of a commercial bank?

  1. Granting overdrafts to individuals
  2. Lending to small businesses
  3. Accepting deposits from the general public
  4. Issuing currency notes and coins Correct answer.

Explanation

The central bank is the sole authority empowered to issue legal tender currency in a country. Accepting deposits, granting overdrafts and lending to businesses are ordinary commercial banking activities.

Question 21Foundation Level

The weekly sales of a kiosk in five consecutive weeks were 4, 7, 8, 9 and 12 units. What is the mean weekly sale?

  1. 7
  2. 8 Correct answer.
  3. 9
  4. 10

Explanation

The arithmetic mean is the sum of the observations divided by the number of observations. The total is 40 and there are five observations, so the mean is 8 units.

Question 22Foundation Level

In the construction of a Laspeyres price index, which quantities are used as weights?

  1. Base-year quantities Correct answer.
  2. Current-year quantities
  3. No weights are used at all
  4. An average of base-year and current-year quantities

Explanation

The Laspeyres index weights price relatives by the quantities consumed in the base period. The Paasche index, by contrast, uses current-year quantities as weights.

Question 23Foundation Level

Two independent events A and B have probabilities P(A) = 0.5 and P(B) = 0.4, with P(A and B) = 0.2. What is the probability that at least one of the events occurs?

  1. 0.9
  2. 0.2
  3. 0.1
  4. 0.7 Correct answer.

Explanation

The probability that at least one occurs is P(A) + P(B) - P(A and B). Substituting gives 0.5 + 0.4 - 0.2 = 0.7.

Question 24Foundation Level

Employees in an organisation spread rumours and news through informal social interaction. This channel of communication is known as:

  1. The chain of command
  2. The grapevine Correct answer.
  3. The formal channel
  4. The vertical channel

Explanation

The grapevine is the informal communication network that develops from social relationships among employees. It is not sanctioned by management and can carry accurate or distorted information quickly.

Question 25Foundation Level

An organisation wishes to protect its accounting records from total loss in the event of fire destroying its server room. Which control is most appropriate?

  1. Encrypting all data held on the server
  2. Installing antivirus software on the server
  3. Restricting access with user passwords
  4. Storing backup copies at a remote site Correct answer.

Explanation

Protection against physical destruction requires that a copy of the data be held elsewhere so that operations can be restored. Off-site or remote backups ensure the data survives damage to the primary location.

Question 26Foundation Level

A business acquires office furniture costing Shs 120,000 on credit from a supplier. What is the effect of this transaction on the accounting equation?

  1. Assets increase by Shs 120,000 and capital increases by Shs 120,000
  2. Assets increase by Shs 120,000 and liabilities increase by Shs 120,000 Correct answer.
  3. Liabilities increase by Shs 120,000 and capital decreases by Shs 120,000
  4. Assets decrease by Shs 120,000 and liabilities increase by Shs 120,000

Explanation

Every transaction affects two elements of the accounting equation. Acquiring furniture on credit adds an asset and creates an obligation to the supplier, so assets and liabilities rise by the same amount, while capital is untouched because no income or expense arises.

Question 27Foundation Level

A machine cost Shs 480,000, is expected to have a residual value of Shs 30,000 and has a useful life of five years. Using the straight-line method, what is the annual depreciation charge?

  1. Shs 96,000
  2. Shs 60,000
  3. Shs 84,000
  4. Shs 90,000 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. The depreciable amount is Shs 480,000 less Shs 30,000, that is Shs 450,000, divided by five years gives Shs 90,000 per year.

Question 28Foundation Level

A supermarket displays goods on its shelves with price tags attached. In law, this display is best described as:

  1. an offer open for acceptance by any customer
  2. a counter-offer made by the shopkeeper
  3. an invitation to treat Correct answer.
  4. a standing offer capable of acceptance at the till

Explanation

Goods displayed for sale are merely an invitation to treat, inviting customers to make offers. The customer makes the offer at the till and the shopkeeper is free to accept or reject it.

Question 29Foundation Level

The ages, in years, of six employees are 24, 27, 31, 35, 40 and 45. What is the median age?

  1. 34 years
  2. 33 years Correct answer.
  3. 35 years
  4. 31 years

Explanation

With an even number of observations the median is the average of the two middle values once the data are arranged in order. The third and fourth values are 31 and 35, whose average is 33 years.

Question 30Foundation Level

Two events A and B are mutually exclusive, with P(A) = 0.3 and P(B) = 0.5. What is the probability that A or B occurs?

  1. 0.8 Correct answer.
  2. 0.15
  3. 1.0
  4. 0.2

Explanation

For mutually exclusive events the probability of either occurring is the sum of their individual probabilities, since they cannot happen together. Therefore P(A or B) equals 0.3 plus 0.5, which is 0.8.

Question 31Foundation Level

An email that appears to come from a customer's bank asks the customer to click a link and re-enter account details, after which the details are stolen. This type of attack is known as:

  1. phishing Correct answer.
  2. spamming
  3. shoulder surfing
  4. adware

Explanation

Phishing uses a fraudulent message that impersonates a trusted organisation to trick the recipient into disclosing confidential credentials. The defining feature is deception of the user rather than a technical attack on the system.

Question 32Foundation Level

A manager circulates a notice full of technical jargon that most recipients cannot understand. This is an example of:

  1. a psychological barrier
  2. a semantic barrier Correct answer.
  3. a physical barrier
  4. an organisational barrier

Explanation

Semantic barriers arise from the meaning of words, including the use of jargon, poor vocabulary or differing interpretations of the same term. Since the problem lies in understanding the language used, it is semantic rather than physical or organisational.

Question 33Foundation Level

The main purpose of preparing a business plan before launching a new venture is to:

  1. serve as the audited financial statements of the business for its first year
  2. satisfy the documentary requirements of the tax authority before trading begins
  3. provide the registrar with the information needed to issue a certificate of registration
  4. set out objectives, strategies and financial forecasts Correct answer.

Explanation

A business plan is a written document that states the venture's objectives, the strategies for achieving them and the financial projections. It guides the entrepreneur and is used to persuade lenders and investors to provide finance.

Question 34Foundation Level

Which of the following errors would still allow the trial balance to agree?

  1. A motor vehicle bought for Shs 900,000 debited to the motor expenses account Correct answer.
  2. A debit balance of Shs 2,000 on a customer's account omitted from the trial balance
  3. A credit sale of Shs 8,000 entered in the sales day book but not posted to the ledger
  4. A payment of Shs 5,000 to a supplier debited to both the supplier's account and the cash account

Explanation

A trial balance agrees whenever total debits equal total credits. Debiting a motor vehicle to motor expenses is an error of principle in which one debit and one credit of equal value are still recorded, so the totals remain equal.

Question 35Foundation Level

At the end of the year, rent of Shs 40,000 for December has been incurred but neither paid nor recorded. What is the effect of the required adjusting entry?

  1. Expenses increase and profit falls by Shs 40,000, and a liability is recognised Correct answer.
  2. Prepaid rent of Shs 40,000 is recorded as an asset
  3. No entry is made until the rent is paid, so profit is unaffected
  4. Expenses increase and profit falls by Shs 40,000, and a current asset is recognised in the statement of financial position

Explanation

Under the accrual basis, expenses are recognised when incurred, not when paid. The rent has been consumed in the period, so an expense and a matching accrued liability of Shs 40,000 must be recorded, reducing profit.

Question 36Foundation Level

A firm's cash book shows a debit balance of Shs 250,000 at 31 December. The bank statement on the same date shows a credit balance of Shs 300,000. Cheques issued but not yet presented total Shs 80,000. What is the amount of deposits not yet credited by the bank?

  1. Shs 130,000
  2. Shs 30,000 Correct answer.
  3. Shs 80,000
  4. Shs 50,000

Explanation

The bank statement balance equals the cash book balance plus unpresented cheques less deposits not yet credited. Rearranging, uncredited deposits equal Shs 250,000 plus Shs 80,000 less Shs 300,000, which is Shs 30,000.

Question 37Foundation Level

Inventory that cost Shs 200,000 can now be sold for Shs 185,000, and costs of Shs 10,000 will be incurred to sell it. At what amount should the inventory be carried, and with what effect on profit?

  1. Shs 200,000, with a loss of Shs 25,000 recognised
  2. Shs 185,000, with profit reduced by Shs 15,000
  3. Shs 175,000, with profit reduced by Shs 25,000 Correct answer.
  4. Shs 200,000, with no effect on profit

Explanation

Inventory is measured at the lower of cost and net realisable value. Net realisable value is the selling price less costs to sell, that is Shs 185,000 less Shs 10,000, so the inventory is written down from Shs 200,000 to Shs 175,000 and profit falls by Shs 25,000.

Question 38Foundation Level

A hall is hired for a wedding. Before the event, the hall is destroyed by an accidental fire that was not the fault of either party. The contract is:

  1. discharged by frustration Correct answer.
  2. discharged by breach on the part of the owner
  3. still enforceable, since the hirer must pay the agreed fee
  4. void from the beginning because the subject matter has perished

Explanation

Frustration discharges a contract when, after formation, an event outside the parties' control makes performance impossible or radically different. The accidental destruction of the hall makes performance impossible without fault, so both parties are released from future obligations.

Question 39Foundation Level

Specific goods in a deliverable state are sold. In the absence of any contrary agreement, when does risk pass to the buyer?

  1. When the goods are physically delivered to the buyer
  2. When the buyer has had an opportunity to inspect the goods
  3. When the buyer has paid the full price
  4. When the property in the goods passes to the buyer Correct answer.

Explanation

The general rule in sale of goods law is that risk follows property. Unless the parties agree otherwise, the buyer bears the risk of loss once ownership has passed, even if the goods are still with the seller.

Question 40Foundation Level

A consumer's monthly income rises from Shs 20,000 to Shs 24,000, and her purchases of margarine fall from 10 units to 8 units. The income elasticity of demand for margarine is:

  1. 1.0
  2. -1.0 Correct answer.
  3. -0.2
  4. 2.0

Explanation

Income elasticity is the percentage change in quantity demanded divided by the percentage change in income. Quantity changes by minus 20 per cent and income by plus 20 per cent, giving minus 1.0, and the negative sign shows margarine is an inferior good.

Question 41Foundation Level

A central bank wishes to reduce the money supply in the economy. Which action will achieve this?

  1. Buying government securities in the open market
  2. Selling government securities in the open market Correct answer.
  3. Reducing the central bank's lending rate
  4. Lowering the cash reserve ratio for commercial banks

Explanation

Open market operations work by exchanging securities for money. When the central bank sells securities, buyers pay with cash, which is withdrawn from circulation, so bank reserves and the money supply contract.

Question 42Foundation Level

Nominal GDP rises by 8 per cent in a year while the general price level rises by 10 per cent over the same period. What happened to real GDP?

  1. It fell by approximately 2 per cent Correct answer.
  2. It rose by approximately 8 per cent
  3. It rose by approximately 18 per cent
  4. It fell by approximately 10 per cent

Explanation

Real GDP measures output at constant prices, so growth in nominal GDP must be adjusted for inflation. Prices rose faster than nominal output, meaning the physical volume of output fell by roughly the difference of 2 per cent.

Question 43Foundation Level

Shs 100,000 is invested at 10 per cent per annum for two years. By how much does the total compound interest exceed the total simple interest?

  1. Shs 2,000
  2. Shs 10,000
  3. Shs 1,000 Correct answer.
  4. Shs 100

Explanation

Simple interest for two years is Shs 100,000 times 10 per cent times two, which is Shs 20,000. Compound interest accumulates to Shs 121,000, giving Shs 21,000, so the excess is Shs 1,000, being interest on the first year's interest.

Question 44Foundation Level

A population is made up of 60 per cent men and 40 per cent women. A researcher selects 200 people so that the sample contains 120 men and 80 women, choosing randomly within each group. The method used is:

  1. simple random sampling
  2. stratified sampling Correct answer.
  3. systematic sampling
  4. cluster sampling

Explanation

Stratified sampling divides the population into homogeneous groups, or strata, and draws a random sample from each in proportion to its size. The male and female groups are the strata and the sample preserves their proportions.

Question 45Foundation Level

A petty cash float of Shs 20,000 is operated on the imprest system. At the end of the month, paid vouchers total Shs 14,500 and cash in hand is Shs 5,500. How much should be reimbursed to restore the imprest?

  1. Shs 15,000
  2. Shs 20,000
  3. Shs 14,500 Correct answer.
  4. Shs 5,500

Explanation

Under the imprest system the float is restored to its original amount by reimbursing the total of the paid vouchers. The vouchers amount to Shs 14,500, which is also the difference between the float and the cash in hand.

Question 46Foundation Level

In a spreadsheet, which reference will remain fixed on column B and row 4 when the formula is copied to another cell?

  1. $B$4 Correct answer.
  2. $B4
  3. B$4
  4. B4

Explanation

A dollar sign before a column letter or row number creates an absolute reference that does not change on copying. Placing dollar signs before both the column and the row fixes the cell completely.

Question 47Foundation Level

Which section of a formal report sets out the authority for the report, its scope and the methods used?

  1. the findings
  2. the appendices
  3. the executive summary
  4. the terms of reference Correct answer.

Explanation

The terms of reference state who commissioned the report, the problem to be investigated, its scope and the procedure followed. They define the boundaries within which the report is written.

Question 48Foundation Level

A cheque bears two parallel lines together with the words 'not negotiable'. What is the effect of these words?

  1. It remains transferable, but a transferee takes no better title than the transferor Correct answer.
  2. The cheque can only be paid into the account of the original payee
  3. The cheque is void and must be returned to the drawer
  4. The cheque cannot be transferred to any other person

Explanation

The words 'not negotiable' do not stop transfer; they remove the protection given to a holder in due course. A person who takes the cheque acquires it subject to any defect in the transferor's title, so no better title passes than the transferor had.

Question 49Foundation Level

A new partner joins an existing firm. In the absence of any agreement to the contrary, what is the new partner's liability for debts that the firm incurred before admission?

  1. He is liable for half of those debts, the old partners bearing the rest
  2. He is not liable for those debts unless he expressly assumes liability Correct answer.
  3. He is liable for those debts only up to the amount of capital he contributes
  4. He is liable jointly and severally for the full amount of those debts

Explanation

An incoming partner becomes liable only for debts incurred after admission, since he was not a party when the earlier obligations arose. He bears liability for pre-admission debts only if he expressly agrees to assume it.

Question 50Foundation Level

In the long run, a firm operating in a perfectly competitive market will normally earn:

  1. supernormal profit, because products are differentiated
  2. normal profit only Correct answer.
  3. subnormal profit, because price exceeds marginal cost
  4. supernormal profit, because entry is blocked

Explanation

Free entry and exit in perfect competition means supernormal profits attract new firms, which increases supply and pushes price down to the minimum of average total cost. At that point firms earn only normal profit, which is included in cost.