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KASNEB CS21 practice questions

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Question 1Accountancy

Which accounting concept requires that expenses be matched with the revenues they helped to generate in the same period?

  1. Going concern concept
  2. Accrual concept
  3. Matching concept Correct answer.
  4. Prudence concept

Explanation

The matching concept holds that expenses should be recognised in the same accounting period as the revenues to which they relate, so profit is measured meaningfully. This is why adjustments such as closing inventory and prepayments are made at period end.

Question 2Accountancy

A business pays Ksh 120,000 on 1 April for a one-year insurance policy. Using the accrual basis, what amount should be charged as insurance expense in the year ended 31 December?

  1. Ksh 60,000
  2. Ksh 90,000 Correct answer.
  3. Ksh 30,000
  4. Ksh 120,000

Explanation

Nine months of the twelve-month policy fall within the accounting year (April to December), so the expense is 9/12 × 120,000 = Ksh 90,000. The remaining Ksh 30,000 is a prepayment carried forward as an asset.

Question 3Accountancy

Which of the following is recorded in the journal proper rather than in any of the books of prime entry?

  1. Purchase of goods on credit from a supplier
  2. Correction of an error by means of a set-off between two ledger accounts Correct answer.
  3. A credit sale of goods to a customer
  4. Cash received from a debtor

Explanation

The journal proper records transactions that do not fit the specialised day books, such as adjusting entries, corrections of errors and opening entries. A set-off between ledger accounts is a classic journal proper entry.

Question 4Accountancy

A trial balance extracted at year end has total debits exceeding total credits by Ksh 1,000. Which error would cause this imbalance?

  1. A purchase of Ksh 1,000 posted to the purchases account only Correct answer.
  2. A sale of Ksh 1,000 entered in the sales day book as Ksh 100
  3. A sale of Ksh 1,000 completely omitted from the records
  4. A payment of Ksh 1,000 posted to the wrong expense account

Explanation

A one-sided entry creates an imbalance equal to the amount, because only one account has been debited while the corresponding credit is missing. Here the debit in purchases has no matching credit in payables.

Question 5Accountancy

Under the reducing balance method, an asset costing Ksh 200,000 with a residual value of Ksh 20,000 is depreciated at 20% per annum. What is the depreciation charge for the second year?

  1. Ksh 28,800
  2. Ksh 32,000 Correct answer.
  3. Ksh 40,000
  4. Ksh 36,000

Explanation

Year one depreciation is 20% × 200,000 = Ksh 40,000, leaving a carrying amount of Ksh 160,000. Year two depreciation is 20% × 160,000 = Ksh 32,000.

Question 6Accountancy

Which method of inventory valuation is prohibited by IAS 2?

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

Explanation

IAS 2 permits FIFO and weighted average cost, and requires specific identification where goods are not ordinarily interchangeable. LIFO is not permitted because it can distort reported profit and inventory values.

Question 7Accountancy

A company's bank statement shows a balance of Ksh 50,000 while its cash book shows Ksh 46,000. Unpresented cheques total Ksh 8,000 and there are no other reconciling items. What is the balance shown by the bank statement adjusted for unpresented cheques?

  1. Ksh 42,000 Correct answer.
  2. Ksh 58,000
  3. Ksh 54,000
  4. Ksh 38,000

Explanation

Unpresented cheques have been deducted in the cash book but not yet in the bank statement, so the bank balance is higher than the cash book. Adjusting the bank statement balance: 50,000 − 8,000 = Ksh 42,000, which should reconcile to the cash book figure once other items are considered.

Question 8Accountancy

Which document is sent by a supplier to a customer to inform them that their account has been debited for a returned or overcharged item?

  1. Statement of account
  2. Credit note
  3. Remittance advice
  4. Debit note Correct answer.

Explanation

A debit note is issued to increase the amount owed by the customer, for example when goods are undercharged. From the supplier's perspective the customer's account is debited, so a debit note is sent.

Question 9Accountancy

A sole trader's capital at the start of the year was Ksh 300,000. During the year he introduced Ksh 50,000 and withdrew Ksh 80,000. Closing capital was Ksh 350,000. What was the profit for the year?

  1. Ksh 50,000
  2. Ksh 80,000 Correct answer.
  3. Ksh 20,000
  4. Ksh 130,000

Explanation

Using the accounting equation: closing capital = opening capital + capital introduced + profit − drawings. Rearranging: profit = 350,000 − 300,000 − 50,000 + 80,000 = Ksh 80,000.

Question 10Accountancy

Which of the following appears in the statement of financial position as a current liability?

  1. Bank loan repayable in five years
  2. Accrued electricity expense Correct answer.
  3. Provision for doubtful debts
  4. Accumulated depreciation on plant

Explanation

Accrued expenses are amounts owed for goods or services already consumed and are settled within the normal operating cycle, so they are current liabilities. Accumulated depreciation and provisions for doubtful debts are contra or valuation items against assets.

Question 11Accountancy

A company has current assets of Ksh 240,000, inventory of Ksh 90,000 and current liabilities of Ksh 120,000. What is the quick (acid test) ratio?

  1. 1.50
  2. 0.75
  3. 1.25 Correct answer.
  4. 2.00

Explanation

The quick ratio excludes inventory: (240,000 − 90,000) ÷ 120,000 = 150,000 ÷ 120,000 = 1.25.

Question 12Accountancy

A firm's gross profit margin falls from 30% to 25% while the sales value is unchanged. Which explanation is most consistent with this?

  1. The firm reduced its selling prices without a fall in cost of sales Correct answer.
  2. Operating expenses increased during the year
  3. The firm paid off a long-term loan early
  4. The firm issued additional share capital

Explanation

Gross profit margin is gross profit divided by sales. If selling prices fall while cost of sales per unit is unchanged, the gross profit per unit falls and the margin drops. Operating expenses, loan repayments and share issues affect net profit or financing, not gross margin.

Question 13Accountancy

Which of the following is a feature of a limited liability partnership rather than a general partnership?

  1. The partners share profits equally by default
  2. Innocent partners have liability limited to their capital contribution Correct answer.
  3. The partnership cannot own property in its own name
  4. The partnership must have at least twenty partners

Explanation

In a limited liability partnership, a partner's liability is generally limited to the capital contributed, protecting innocent partners from the negligence or misconduct of others. General partners, by contrast, have unlimited joint and several liability.

Question 14Accountancy

In the absence of a partnership agreement, how should profits be shared between two partners who contributed unequal capital?

  1. In the ratio of time devoted to the business
  2. As decided by the senior partner
  3. Equally between the partners Correct answer.
  4. In the ratio of capital contributed

Explanation

Where no agreement exists, the default rule is that partners share profits and losses equally, regardless of capital contributions. Capital ratios apply only if the partners have expressly agreed to them.

Question 15Accountancy

A and B share profits in the ratio 3:2. C is admitted and the new ratio is 2:2:1. What is C's share of profits?

  1. One third
  2. One quarter
  3. One fifth Correct answer.
  4. Two fifths

Explanation

The new ratio totals 2 + 2 + 1 = 5 parts, and C is allocated 1 of those 5 parts, which is one fifth.

Question 16Accountancy

On the dissolution of a partnership, in what order are the following paid, assuming all are outstanding?

  1. Partners' capital, partners' loans, external creditors
  2. External creditors, partners' loans, partners' capital Correct answer.
  3. Partners' loans, external creditors, partners' capital
  4. External creditors, partners' capital, partners' loans

Explanation

On dissolution, outside creditors are settled first, then partners' loans are repaid, and finally partners' capital balances are returned. Partners' loans rank ahead of capital because they are debts of the firm to the partners.

Question 17Accountancy

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

  1. Dividend equalisation reserve
  2. General reserve
  3. Retained earnings
  4. Share premium Correct answer.

Explanation

Share premium arises on the issue of shares above nominal value and is a capital reserve. It is not available for distribution as dividends because it represents capital contributed by shareholders.

Question 18Accountancy

A company issues 100,000 ordinary shares of Ksh 10 each at Ksh 14 per share, fully payable on application. How should the excess be recorded?

  1. As a debit to share premium of Ksh 400,000
  2. As a credit to retained earnings of Ksh 400,000
  3. As a credit to share capital of Ksh 400,000
  4. As a credit to share premium of Ksh 400,000 Correct answer.

Explanation

The nominal value of 100,000 × Ksh 10 = Ksh 1,000,000 is credited to share capital, and the excess of Ksh 4 per share, totalling Ksh 400,000, is credited to share premium.

Question 19Accountancy

Which of the following best describes the purpose of preparing a statement of cash flows?

  1. To reconcile the opening and closing bank balances with profit
  2. To provide information on the entity's ability to generate cash and its liquidity Correct answer.
  3. To disclose the market value of the entity's assets
  4. To show the profit earned from trading activities

Explanation

A statement of cash flows reports cash inflows and outflows classified into operating, investing and financing activities, helping users assess liquidity, solvency and the ability to generate cash.

Question 20Accountancy

A company reports profit before tax of Ksh 500,000. Depreciation charged was Ksh 60,000, an increase in inventory was Ksh 40,000 and an increase in trade payables was Ksh 30,000. What is the net cash inflow from operating activities before tax?

  1. Ksh 510,000
  2. Ksh 550,000 Correct answer.
  3. Ksh 630,000
  4. Ksh 450,000

Explanation

Starting with profit of 500,000, add back non-cash depreciation of 60,000, deduct the increase in inventory of 40,000 and add the increase in payables of 30,000: 500,000 + 60,000 − 40,000 + 30,000 = Ksh 550,000.

Question 21Accountancy

Which of the following costs should be capitalised as part of the cost of a new machine under IAS 16?

  1. Staff training on how to operate the machine
  2. Delivery and installation costs Correct answer.
  3. The cost of relocating the machine two years later
  4. Losses incurred while the machine was under-utilised

Explanation

Directly attributable costs of bringing an asset to the location and condition necessary for its intended use, such as delivery and installation, are capitalised. Training, relocation and operating losses are not part of the initial cost.

Question 22Accountancy

An organisation prepares its accounts on a fund accounting basis. Which statement best describes the purpose of a receipts and payments account?

  1. It shows the financial position of the organisation at the year end
  2. It summarises actual cash received and paid during the period Correct answer.
  3. It records only the subscription income of members
  4. It records income and expenditure when they are earned or incurred

Explanation

A receipts and payments account is a summary of the cash book, recording all money actually received and paid during the period regardless of when it was earned or incurred. It is used by organisations that do not maintain full accrual records.

Question 23Accountancy

Which of the following is an example of a control account maintained in the general ledger?

  1. The purchases day book
  2. The sales day book
  3. The petty cash book
  4. The trade receivables control account Correct answer.

Explanation

A trade receivables control account is maintained in the general ledger and summarises the total of individual customer balances held in the receivables ledger. Day books and the petty cash book are books of prime entry, not ledger control accounts.

Question 24Accountancy

The trade receivables control account shows a debit balance of Ksh 85,000, but the total of the receivables ledger balances is Ksh 80,000. Which item could explain the difference?

  1. A credit note issued to a customer was recorded in the control account but not in the receivables ledger Correct answer.
  2. An invoice to a customer was posted twice to the receivables ledger
  3. Discount received was omitted from the purchases ledger
  4. A cash sale was recorded in the cash book only

Explanation

A credit note reduces the customer's balance. If it is entered in the control account but not in the individual ledger, the control account will be lower than the sum of the ledger, so the ledger total will exceed the control balance only in the opposite direction; here the control balance is higher than the ledger total, which is consistent with an item reducing the ledger but not the control. A credit note posted to the control account only reduces the control, so the difference must arise from an item entered in the ledger but not the control; the correct explanation is therefore an entry in the ledger not matched in the control.

Question 25Accountancy

Which of the following is an example of a direct cost in a manufacturing account?

  1. Rent of the administrative offices
  2. Factory supervisor's salary
  3. Depreciation of factory machinery
  4. Royalties paid per unit produced Correct answer.

Explanation

Direct costs can be traced to units produced. Royalties paid per unit vary directly with output and are charged to the prime cost. Factory supervision, machinery depreciation and office rent are production or administrative overheads.

Question 26Accountancy

Which accounting concept requires that expenses incurred in earning revenue be matched against that revenue in the same accounting period?

  1. The business entity concept
  2. The prudence concept
  3. The accruals (matching) concept Correct answer.
  4. The going concern concept

Explanation

The accruals concept requires revenue and the expenses incurred in generating it to be recognised in the same period, regardless of when cash changes hands. This matching of income and expense underlies adjustments for accruals and prepayments.

Question 27Accountancy

A trader receives an invoice from a supplier for goods bought on credit. In the trader's books, which double entry records this transaction?

  1. Debit purchases account, credit payables (creditors) control account Correct answer.
  2. Debit payables (creditors) control account, credit purchases account
  3. Debit purchases account, credit cash account
  4. Debit cash account, credit purchases account

Explanation

A credit purchase increases the expense/cost of goods bought (debit purchases) and creates an obligation to the supplier (credit payables). The cash account is unaffected because no payment has yet been made.

Question 28Accountancy

Which of the following is an example of an error of principle?

  1. Omitting a transaction from the books entirely
  2. Recording a sale of Ksh 5,400 as Ksh 4,500 in both accounts
  3. Recording the same transaction twice in the ledger
  4. Recording the purchase of a delivery van in the motor expenses account Correct answer.

Explanation

An error of principle occurs when a transaction is entered in the wrong class of account, breaching accounting rules, such as treating a capital asset as revenue expenditure. The trial balance still balances, so the error is not self-revealing.

Question 29Accountancy

A machine is bought for Ksh 800,000 and is expected to have a useful life of 4 years with a residual value of Ksh 80,000. Using the straight-line method, what is the annual depreciation charge?

  1. Ksh 200,000
  2. Ksh 220,000
  3. Ksh 80,000
  4. Ksh 180,000 Correct answer.

Explanation

Straight-line depreciation equals (cost minus residual value) divided by useful life: (800,000 - 80,000) / 4 = Ksh 180,000. The residual value is deducted because only the depreciable amount is spread over the life.

Question 30Accountancy

Under the reducing balance method, an asset costing Ksh 500,000 is depreciated at 20% per year. What is the depreciation charge for the second year?

  1. Ksh 60,000
  2. Ksh 90,000
  3. Ksh 80,000 Correct answer.
  4. Ksh 100,000

Explanation

Year one charge is 20% of 500,000 = 100,000, leaving a carrying amount of 400,000. Year two charge is 20% of 400,000 = Ksh 80,000, since the rate applies to the reducing carrying amount.

Question 31Accountancy

Which of the following is the correct treatment of goods taken by the owner for personal use from the business?

  1. Debit drawings account, credit cash account
  2. Debit capital account, credit sales account
  3. Debit drawings account, credit purchases account Correct answer.
  4. Debit purchases account, credit drawings account

Explanation

Goods withdrawn by the owner reduce the goods available for sale and increase the owner's drawings. Purchases are credited to remove the cost from the business, and drawings are debited to reflect the personal withdrawal.

Question 32Accountancy

A trial balance shows total debits of Ksh 412,000 and total credits of Ksh 410,000. Which of the following errors could explain the difference?

  1. A payment of Ksh 1,000 to a supplier was posted to the debit side of the supplier's account Correct answer.
  2. A sale of Ksh 3,000 was posted to the correct side of the customer's account but not to the sales account
  3. A sale of Ksh 2,000 was completely omitted from the books
  4. A purchase of Ksh 500 was recorded as Ksh 5,000 in both accounts

Explanation

Posting a payment to the debit side of a payables account instead of the credit side puts the amount on the wrong side twice, creating a difference of twice the amount, here Ksh 2,000, which matches the Ksh 2,000 imbalance.

Question 33Accountancy

Which of the following is the correct accounting treatment of a prepayment for insurance at the year end?

  1. Deduct it from the insurance expense and show it as a current liability
  2. Add it to the insurance expense and show it as a current liability
  3. Add it to the insurance expense and show it as a current asset
  4. Deduct it from the insurance expense and show it as a current asset Correct answer.

Explanation

A prepayment represents a benefit paid for but not yet consumed, so it is removed from the expense of the period and carried forward as a current asset. This applies the accruals concept by charging only the expense relating to the period.

Question 34Accountancy

A company's trial balance shows an accrual for electricity of Ksh 15,000 at the start of the year and Ksh 20,000 at the end of the year. During the year, Ksh 130,000 was paid for electricity. What is the electricity expense for the year?

  1. Ksh 135,000 Correct answer.
  2. Ksh 130,000
  3. Ksh 165,000
  4. Ksh 125,000

Explanation

Expense equals cash paid plus the closing accrual minus the opening accrual: 130,000 + 20,000 - 15,000 = Ksh 135,000. The opening accrual relates to the prior year and is therefore removed from this year's charge.

Question 35Accountancy

Which of the following items would be included in the cost of goods sold calculation for a trading business?

  1. Purchases less opening inventory plus closing inventory
  2. Closing inventory plus purchases less drawings
  3. Opening inventory plus closing inventory plus purchases
  4. Opening inventory plus purchases less closing inventory Correct answer.

Explanation

Cost of goods sold equals opening inventory plus purchases (adjusted for carriage inwards and returns) less closing inventory. The closing inventory is deducted because those goods remain unsold at year end.

Question 36Accountancy

A business has an opening capital of Ksh 200,000, closing capital of Ksh 260,000, drawings of Ksh 30,000 and additional capital introduced of Ksh 20,000. What is the profit for the year?

  1. Ksh 30,000
  2. Ksh 70,000 Correct answer.
  3. Ksh 50,000
  4. Ksh 90,000

Explanation

Profit equals closing capital minus opening capital plus drawings minus capital introduced: 260,000 - 200,000 + 30,000 - 20,000 = Ksh 70,000. This restates the accounting equation to isolate the profit generated.

Question 37Accountancy

Which of the following is the correct order of the three sections of a statement of cash flows prepared under IAS 7?

  1. Financing activities, operating activities, investing activities
  2. Operating activities, financing activities, investing activities
  3. Operating activities, investing activities, financing activities Correct answer.
  4. Investing activities, operating activities, financing activities

Explanation

IAS 7 requires cash flows to be classified into operating, investing and financing activities in that order. Operating activities cover day-to-day trading, investing covers non-current assets, and financing covers capital and borrowings.

Question 38Accountancy

A company declares a final dividend of Ksh 0.50 per share on 200,000 ordinary shares, payable after the year end. How should this be treated in the financial statements?

  1. Recognise a current liability of Ksh 100,000 at the year end
  2. Disclose it as a non-adjusting event; no liability is recognised at the year end Correct answer.
  3. Recognise a liability of Ksh 200,000 at the year end
  4. Deduct Ksh 100,000 from retained earnings and recognise a receivable

Explanation

Dividends declared after the reporting date do not create an obligation at that date, so no liability is recognised. IAS 10 requires them to be disclosed as a non-adjusting event after the reporting period.

Question 39Accountancy

Which of the following best describes the purpose of a bank reconciliation statement?

  1. To verify that all bank transactions have been authorised by management
  2. To calculate the amount of interest earned on the bank account
  3. To explain the difference between the cash book balance and the bank statement balance Correct answer.
  4. To replace the cash book as the record of cash transactions

Explanation

A bank reconciliation explains the difference between the bank statement balance and the cash book balance by identifying items such as unpresented cheques, deposits not yet credited and bank charges. It is a control tool, not a substitute for the cash book.

Question 40Accountancy

A company's statement of financial position shows total assets of Ksh 900,000 and total liabilities of Ksh 540,000. What is the gearing ratio measured as debt to equity?

  1. 60% Correct answer.
  2. 150%
  3. 40%
  4. 167%

Explanation

Equity equals assets minus liabilities: 900,000 - 540,000 = 360,000. Debt to equity is liabilities divided by equity: 540,000 / 360,000 = 1.5, or 150%, so the closest listed measure of debt to equity is 150% when expressed as a ratio.

Question 41Finance

A firm has current assets of Sh 480,000 and current liabilities of Sh 300,000. What is its current ratio?

  1. 1.60 Correct answer.
  2. 1.80
  3. 2.40
  4. 0.63

Explanation

The current ratio is current assets divided by current liabilities. Dividing 480,000 by 300,000 gives 1.60, meaning the firm holds Sh 1.60 of current assets for every Sh 1 of current liabilities.

Question 42Finance

Which financial statement reports the cash generated and used by operating, investing and financing activities over a period?

  1. Statement of changes in equity
  2. Statement of cash flows Correct answer.
  3. Statement of profit or loss
  4. Statement of financial position

Explanation

The statement of cash flows classifies cash movements into operating, investing and financing activities. It reconciles opening and closing cash balances for the period.

Question 43Finance

A project requires an initial outlay of Sh 500,000 and generates a single cash inflow of Sh 600,000 after one year. If the cost of capital is 10%, what is the net present value?

  1. Sh 50,000
  2. Sh 100,000
  3. Sh 45,455 Correct answer.
  4. Sh 90,909

Explanation

NPV discounts future cash flows at the cost of capital and deducts the initial outlay. The present value of 600,000 at 10% is 600,000/1.10 = 545,455, giving NPV of 45,455.

Question 44Finance

In break-even analysis, the contribution per unit is calculated as:

  1. Selling price per unit minus variable cost per unit Correct answer.
  2. Selling price per unit minus total fixed costs
  3. Fixed costs divided by units sold
  4. Total revenue divided by units sold

Explanation

Contribution per unit is the selling price less the variable cost per unit, representing the amount each unit contributes towards fixed costs and profit. Total fixed costs are not deducted at unit level.

Question 45Finance

Which of the following best describes the payback period criterion of investment appraisal?

  1. The time taken for cumulative cash inflows to recover the initial investment Correct answer.
  2. The discount rate at which a project's NPV equals zero
  3. The ratio of present value of inflows to initial outlay
  4. The difference between accounting profit and cash flow

Explanation

The payback period measures how long it takes for cumulative cash inflows to equal the initial investment outlay. It is a simple liquidity measure that ignores the time value of money and cash flows after payback.

Question 46Finance

A company issues a bond with a face value of Sh 1,000 and a coupon rate of 8% paid annually. If the market yield is 10%, the bond will trade at:

  1. A premium to face value
  2. A discount to face value Correct answer.
  3. A price equal to the coupon payment
  4. Par value

Explanation

When the market yield exceeds the coupon rate, investors will pay less than face value so that the bond's yield matches the market. The bond therefore trades at a discount.

Question 47Finance

Which of the following is a source of long-term finance for a company?

  1. Commercial paper
  2. Debenture issue Correct answer.
  3. Bank overdraft
  4. Trade credit

Explanation

Debentures are long-term debt instruments issued to raise finance over many years. Overdrafts, trade credit and commercial paper are short-term sources of finance.

Question 48Finance

A firm calculates the cost of equity using the dividend growth model. If the current dividend is Sh 4, the growth rate is 5% and the current share price is Sh 50, what is the cost of equity?

  1. 13.4% Correct answer.
  2. 8.0%
  3. 13.0%
  4. 18.0%

Explanation

The dividend growth model uses next year's dividend divided by price plus growth. Next year's dividend is 4 × 1.05 = 4.20; 4.20/50 = 8.4%, plus 5% growth gives 13.4%.

Question 49Finance

A company has a beta of 1.2. If the risk-free rate is 6% and the market return is 11%, what is the expected return using the capital asset pricing model?

  1. 17.2%
  2. 13.2%
  3. 11.0%
  4. 12.0% Correct answer.

Explanation

CAPM gives expected return as risk-free rate plus beta times the market risk premium. The premium is 11% − 6% = 5%, so return is 6% + 1.2 × 5% = 12.0%.

Question 50Finance

Which working capital policy holds that permanent current assets should be financed with long-term funds while fluctuating current assets are financed with short-term funds?

  1. Matching approach Correct answer.
  2. Restrictive approach
  3. Conservative approach
  4. Aggressive approach

Explanation

The matching (or maturity matching) approach aligns the maturity of finance with the life of the assets financed, using long-term funds for permanent assets and short-term funds for fluctuating assets.