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KASNEB CS25 practice questions

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Question 1Accountancy

Which accounting concept requires that revenue be recognised when it is earned rather than when cash is received?

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

Explanation

The accrual concept requires transactions to be recorded when they occur, so revenue is recognised when earned and expenses when incurred, regardless of cash timing.

Question 2Accountancy

A business purchases equipment for 500,000 with a residual value of 50,000 and an estimated useful life of 5 years. Under the straight-line method, what is the annual depreciation charge?

  1. 90,000 Correct answer.
  2. 110,000
  3. 50,000
  4. 100,000

Explanation

Straight-line depreciation equals (cost minus residual value) divided by useful life, i.e. (500,000 - 50,000) / 5 = 90,000 per year.

Question 3Accountancy

Which of the following is a current liability?

  1. Retained earnings
  2. Motor vehicles
  3. Trade payables Correct answer.
  4. Long-term bank loan

Explanation

Trade payables are obligations due to suppliers within the normal operating cycle, so they are classified as current liabilities.

Question 4Accountancy

In a trial balance, which of the following errors would still allow the debit and credit totals to agree?

  1. Recording a debit entry as a larger amount
  2. Adding the debit column incorrectly
  3. Recording a sale in the purchases account Correct answer.
  4. Omitting one side of a transaction

Explanation

An error of principle or posting to the wrong account of the same class keeps the trial balance totals equal because both debit and credit entries are still made.

Question 5Accountancy

A firm's inventory at year end has a cost of 80,000 and a net realisable value of 72,000. At what amount should the inventory be reported?

  1. 76,000
  2. 8,000
  3. 72,000 Correct answer.
  4. 80,000

Explanation

Inventory is measured at the lower of cost and net realisable value, so it is reported at 72,000.

Question 6Accountancy

Which document is sent by a supplier to inform a customer of a reduction in the amount owed due to returned goods?

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

Explanation

A credit note is issued by the supplier to reduce the amount receivable when goods are returned or an overcharge is corrected.

Question 7Accountancy

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

  1. To determine the profit for the period
  2. To record unpresented cheques in the ledger
  3. To calculate the bank charges for the period
  4. To reconcile the cash book balance with the bank statement balance Correct answer.

Explanation

A bank reconciliation statement explains the differences between the cash book balance and the bank statement balance, such as unpresented cheques and uncredited deposits.

Question 8Accountancy

Which of the following is a fundamental qualitative characteristic of useful financial information?

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

Explanation

The two fundamental qualitative characteristics are relevance and faithful representation; the others are enhancing characteristics.

Question 9Accountancy

A company issues 100,000 ordinary shares of 10 each at a premium of 2 per share. What amount is credited to the share premium account?

  1. 1,000,000
  2. 20,000
  3. 200,000 Correct answer.
  4. 1,200,000

Explanation

Share premium equals the premium per share multiplied by the number of shares issued: 2 x 100,000 = 200,000.

Question 10Accountancy

Which of the following costs should be capitalised as part of the cost of a purchased machine?

  1. Installation and testing costs Correct answer.
  2. Operator training costs
  3. Insurance for the following year
  4. Annual maintenance contract

Explanation

Directly attributable costs necessary to bring the asset to its location and working condition, such as installation and testing, are capitalised.

Question 11Accountancy

A trader had opening capital of 200,000, drawings of 30,000 during the year, and closing capital of 240,000. Assuming no additional capital was introduced, what was the profit for the year?

  1. 40,000
  2. 30,000
  3. 70,000 Correct answer.
  4. 10,000

Explanation

Profit equals closing capital minus opening capital plus drawings: 240,000 - 200,000 + 30,000 = 70,000.

Question 12Accountancy

Which of the following errors is an error of commission?

  1. Recording a sale of 5,000 as 500
  2. Recording a sale in the purchases account
  3. Failing to record a purchase entirely
  4. Recording a motor vehicle purchase in the office equipment account Correct answer.

Explanation

An error of commission occurs when a transaction is posted to the correct class of account but the wrong account within that class, such as the wrong asset account.

Question 13Accountancy

A firm uses the reducing balance method at 20% per annum. An asset costs 400,000. What is the depreciation charge for the second year?

  1. 60,000
  2. 80,000
  3. 64,000 Correct answer.
  4. 72,000

Explanation

First-year charge is 20% of 400,000 = 80,000, leaving a carrying amount of 320,000; the second-year charge is 20% of 320,000 = 64,000.

Question 14Accountancy

Which of the following is included in the statement of cash flows under operating activities?

  1. Purchase of non-current assets
  2. Repayment of a bank loan
  3. Proceeds from the issue of shares
  4. Cash paid to suppliers Correct answer.

Explanation

Operating activities include cash flows from the entity's principal revenue-producing activities, such as payments to suppliers for goods and services.

Question 15Accountancy

A business receives a bank statement showing a credit balance of 50,000 while its cash book shows a debit balance of 55,000. Unpresented cheques total 8,000. What is the amount of uncredited deposits?

  1. 5,000
  2. 13,000 Correct answer.
  3. 3,000
  4. 8,000

Explanation

Starting from the cash book balance of 55,000, deduct unpresented cheques of 8,000 to get 47,000, then add uncredited deposits to reach the bank statement credit of 50,000, giving 3,000. Wait: recompute - 55,000 - 8,000 = 47,000; 50,000 - 47,000 = 3,000. The correct amount is 3,000.

Question 16Accountancy

Which of the following would be recorded in the general journal rather than in a specialised journal?

  1. Correction of an error in the ledger Correct answer.
  2. Sale of goods on credit
  3. Return of goods to a supplier
  4. Purchase of goods on credit

Explanation

The general journal records non-routine transactions such as corrections of errors, whereas purchases, sales and returns are entered in specialised day books.

Question 17Accountancy

A company's profit before tax is 300,000 and the tax charge is 60,000. What is the profit for the year?

  1. 360,000
  2. 240,000 Correct answer.
  3. 300,000
  4. 60,000

Explanation

Profit for the year equals profit before tax less the tax charge: 300,000 - 60,000 = 240,000.

Question 18Accountancy

Which of the following is true of a provision, as distinct from a contingent liability?

  1. It is only disclosed in the notes and never recognised
  2. It arises only from future operating losses
  3. It is always recognised at the maximum possible amount
  4. It is recognised in the financial statements where the obligation is probable and can be reliably estimated Correct answer.

Explanation

A provision is recognised as a liability when a present obligation exists, an outflow is probable, and the amount can be reliably estimated.

Question 19Accountancy

A firm's gross profit is 150,000, operating expenses are 90,000, and it earns interest income of 10,000. What is the profit before tax?

  1. 60,000
  2. 50,000
  3. 80,000
  4. 70,000 Correct answer.

Explanation

Profit before tax equals gross profit less operating expenses plus other income: 150,000 - 90,000 + 10,000 = 70,000.

Question 20Accountancy

Which of the following best describes the matching concept?

  1. Revenue is recognised only when cash is received
  2. Expenses are recognised in the same period as the revenue they helped to generate Correct answer.
  3. Assets are recorded at their original cost
  4. The business is treated as separate from its owners

Explanation

The matching concept requires expenses to be recognised in the period in which the related revenue is earned, so profit reflects the true effort against the benefit.

Question 21Accountancy

A trader's sales for the year are 500,000, opening inventory is 40,000, purchases are 320,000 and closing inventory is 60,000. What is the cost of goods sold?

  1. 360,000
  2. 280,000
  3. 300,000 Correct answer.
  4. 320,000

Explanation

Cost of goods sold equals opening inventory plus purchases minus closing inventory: 40,000 + 320,000 - 60,000 = 300,000.

Question 22Accountancy

Which of the following would appear on the debit side of a partner's current account?

  1. Interest on capital
  2. Share of profit
  3. Salary from the partnership
  4. Drawings Correct answer.

Explanation

Drawings reduce the amount owed to a partner and are therefore debited to the partner's current account.

Question 23Accountancy

Which of the following statements about a suspense account is correct?

  1. It is a permanent liability account
  2. It is used to record all cash transactions
  3. It is used to record depreciation
  4. It is opened temporarily when a trial balance does not agree Correct answer.

Explanation

A suspense account is opened temporarily to hold the difference when trial balance totals do not agree, and is cleared once the errors are located and corrected.

Question 24Accountancy

A firm has current assets of 180,000 and current liabilities of 90,000. It then pays a trade payable of 30,000 in cash. What is the current ratio after this transaction?

  1. 1.67:1
  2. 2.0:1
  3. 1.5:1
  4. 2.5:1 Correct answer.

Explanation

Paying a payable reduces both current assets and current liabilities by 30,000, giving 150,000 / 60,000 = 2.5:1.

Question 25Accountancy

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

  1. Add it to the expense and show it as a liability
  2. Deduct it from the expense in the statement of profit or loss and show it as a current asset Correct answer.
  3. Ignore it until the following year
  4. Show it as a non-current asset

Explanation

A prepayment is an amount paid in advance for a future period; it is removed from the current year's expense and carried forward as a current asset.

Question 26Accountancy

Which accounting concept requires that a business's financial statements include only transactions that can be measured in monetary terms?

  1. Accruals
  2. Going concern
  3. Money measurement Correct answer.
  4. Business entity

Explanation

The money measurement concept states that accounting records only those transactions that can be expressed in monetary units. Items that cannot be reliably measured in money, such as employee morale, are excluded. The other concepts deal with continuity, separation of business and owner, and timing of recognition.

Question 27Accountancy

A company has 1,000,000 ordinary shares in issue. It makes a 1-for-4 bonus issue. How many ordinary shares are in issue after the bonus issue?

  1. 1,040,000
  2. 1,400,000
  3. 1,000,000
  4. 1,250,000 Correct answer.

Explanation

A 1-for-4 bonus issue means one new share for every four existing shares. The number of new shares is 1,000,000 × 1/4 = 250,000, so total shares become 1,000,000 + 250,000 = 1,250,000. No cash is received; reserves are capitalised.

Question 28Accountancy

Which of the following is the correct double entry to record a credit sale of goods in the accounting records of the seller?

  1. Debit cash, credit sales
  2. Debit sales, credit receivables
  3. Debit receivables, credit sales Correct answer.
  4. Debit sales, credit cash

Explanation

A credit sale increases the asset receivables (debit) and increases income sales (credit). Cash is not involved because the sale is on credit. Debiting sales would reduce income, which is incorrect.

Question 29Accountancy

A firm's trial balance at 31 December shows debit balances of 500,000 and credit balances of 496,000. The difference is entered in a suspense account. What is the amount of the suspense account balance?

  1. 4,000 credit Correct answer.
  2. 4,000 debit
  3. 2,000 credit
  4. 996,000 debit

Explanation

The trial balance totals differ by 500,000 − 496,000 = 4,000. Since debits exceed credits, a suspense account with a credit balance of 4,000 is opened to make the trial balance agree. The suspense account is later cleared when the error is found.

Question 30Accountancy

A machine costing 800,000 with accumulated depreciation of 300,000 is sold for 450,000. What is the profit or loss on disposal?

  1. Loss of 50,000 Correct answer.
  2. Profit of 50,000
  3. Loss of 350,000
  4. Profit of 150,000

Explanation

The carrying amount is cost less accumulated depreciation: 800,000 − 300,000 = 500,000. Proceeds of 450,000 are less than the carrying amount, giving a loss on disposal of 500,000 − 450,000 = 50,000. The loss is recognised in profit or loss.

Question 31Accountancy

Which of the following costs is treated as revenue expenditure?

  1. Installing a new production line
  2. Legal fees for acquiring a new building
  3. Constructing an extension to a warehouse
  4. Repainting the exterior of a building Correct answer.

Explanation

Revenue expenditure is incurred to maintain an asset's existing condition and is charged to profit or loss. Repainting maintains the building and does not enhance its value or life. The other costs are capital in nature because they acquire or improve non-current assets.

Question 32Accountancy

A company has profit before tax of 250,000. It pays tax at 30% and has an outstanding tax liability of 20,000 from the previous year. What is the tax charge for the current year?

  1. 20,000
  2. 75,000 Correct answer.
  3. 55,000
  4. 95,000

Explanation

The tax charge for the year is based on the current year's taxable profit: 250,000 × 30% = 75,000. The outstanding prior-year liability is a balance sheet item and does not affect the current year's charge unless there is an under/over provision adjustment.

Question 33Accountancy

Which of the following is an advantage of the imprest system of petty cash?

  1. It makes the petty cashier's responsibility clear Correct answer.
  2. It removes the need for a petty cash book
  3. It allows unlimited spending by the petty cashier
  4. It eliminates the need for receipts

Explanation

Under the imprest system, the petty cashier is given a fixed float and must account for all spending before reimbursement. This clearly fixes responsibility and provides control over small cash payments. Receipts and a petty cash book are still required.

Question 34Accountancy

Which of the following is the correct accounting treatment for an issue of shares at a premium?

  1. Debit share premium, credit bank
  2. Debit share premium, credit share capital
  3. Debit share capital, credit share premium
  4. Debit bank, credit share capital and share premium Correct answer.

Explanation

When shares are issued at a premium, the cash received (debit bank) is split between the nominal value (credit share capital) and the premium (credit share premium). The share premium account is a capital reserve and cannot be used to pay dividends.

Question 35Accountancy

Which of the following best describes the purpose of a sales ledger control account?

  1. To record cash sales only
  2. To calculate the gross profit on sales
  3. To record the details of each individual customer's transactions
  4. To provide a summary of total receivables and check the arithmetic accuracy of the sales ledger Correct answer.

Explanation

A sales ledger control account is a summary account in the general ledger that records totals from the books of prime entry. It provides the total receivables figure and helps verify the accuracy of the individual customer accounts in the sales ledger. It does not replace the individual accounts.

Question 36Accountancy

A company's statement of financial position shows total assets of 900,000 and total liabilities of 400,000. It then issues ordinary shares for cash of 100,000. What is the total equity immediately after the issue?

  1. 600,000 Correct answer.
  2. 900,000
  3. 400,000
  4. 500,000

Explanation

Equity before the issue is assets minus liabilities: 900,000 − 400,000 = 500,000. Issuing shares for cash increases both assets (cash) and equity by 100,000, so equity becomes 600,000. The accounting equation remains balanced.

Question 37Accountancy

Which of the following costs is included in the valuation of inventory under IAS 2?

  1. Selling costs
  2. Storage costs for finished goods
  3. Freight inwards on raw materials Correct answer.
  4. Abnormal waste

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Cost includes purchase price, import duties, and transport costs directly attributable to bringing materials to their present location, such as freight inwards. Abnormal waste, storage of finished goods, and selling costs are excluded.

Question 38Accountancy

A company's gearing ratio is 40%, calculated as debt divided by debt plus equity. It then converts some debt into equity. What is the effect on the gearing ratio?

  1. It remains unchanged
  2. It decreases Correct answer.
  3. It increases
  4. It becomes negative

Explanation

Gearing measures the proportion of debt in the capital structure. Converting debt to equity reduces debt and increases equity by the same amount, so the numerator falls and the denominator stays the same, lowering the ratio. This reduces financial risk.

Question 39Accountancy

Which of the following best describes the treatment of an overprovision for taxation from the previous year?

  1. It is debited to share premium
  2. It is ignored in the current year's financial statements
  3. It is added to the current year's tax charge
  4. It is deducted from the current year's tax charge Correct answer.

Explanation

An overprovision means the previous year's tax charge was higher than the actual liability. The excess is credited back, reducing the current year's tax expense in the statement of profit or loss. This is shown as a deduction from the current charge.

Question 40Accountancy

A sole trader's bank statement shows a balance of 62,000 at 31 March. Cheques paid to suppliers totalling 9,000 have not yet been presented, and a customer's cheque for 5,000 paid directly into the bank has not yet been credited. What is the cash book balance at 31 March?

  1. 58,000 Correct answer.
  2. 76,000
  3. 48,000
  4. 66,000

Explanation

The cash book balance is found by adjusting the bank statement for items not yet reflected in it: unpresented cheques reduce the bank statement balance and uncredited deposits increase it. Thus 62,000 + 5,000 − 9,000 = 58,000.

Question 41Finance

A firm's current assets total KES 480,000 and its current liabilities total KES 300,000. What is the firm's current ratio?

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

Explanation

The current ratio is current assets divided by current liabilities, so 480,000 / 300,000 = 1.60. It measures the number of times short-term obligations are covered by short-term resources.

Question 42Finance

Which financial statement reports a firm's cash inflows and outflows classified into operating, investing and financing activities?

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

Explanation

The statement of cash flows explains movements in cash by classifying flows into operating, investing and financing activities. The other statements report balances or performance rather than cash movements.

Question 43Finance

A company has a dividend payout ratio of 40 percent and a return on equity of 15 percent. Using the sustainable growth rate formula, what is the firm's sustainable growth rate?

  1. 15.0 percent
  2. 24.0 percent
  3. 6.0 percent
  4. 9.0 percent Correct answer.

Explanation

Sustainable growth equals retention ratio multiplied by return on equity. The retention ratio is 60 percent, so 0.60 x 15 percent = 9.0 percent.

Question 44Finance

Which concept states that a shilling received today is worth more than the same shilling received in the future?

  1. The prudence concept
  2. The going concern concept
  3. The matching principle
  4. The time value of money Correct answer.

Explanation

The time value of money holds that money available now can be invested to earn a return, making it worth more than an equal amount received later. This underlies discounting and compounding in finance.

Question 45Finance

A project requires an initial outlay of KES 200,000 and generates annual cash inflows of KES 50,000 for six years. What is the payback period?

  1. 3 years
  2. 4 years Correct answer.
  3. 6 years
  4. 5 years

Explanation

The payback period is the initial outlay divided by the constant annual inflow: 200,000 / 50,000 = 4 years. It measures how long it takes to recover the investment from cash flows.

Question 46Finance

A bond with a face value of KES 1,000 pays a coupon of 8 percent annually and currently trades at KES 950. What is the bond's current yield?

  1. 7.60 percent
  2. 8.00 percent
  3. 9.50 percent
  4. 8.42 percent Correct answer.

Explanation

Current yield equals the annual coupon divided by the market price: 80 / 950 = 8.42 percent. It reflects the income return at the prevailing price rather than the coupon rate.

Question 47Finance

Which risk is eliminated when an investor holds a well-diversified portfolio?

  1. Unsystematic risk Correct answer.
  2. Market risk
  3. Interest rate risk
  4. Systematic risk

Explanation

Unsystematic (specific) risk arises from firm-level factors and can be diversified away by holding many securities. Systematic risk affects the whole market and cannot be eliminated through diversification.

Question 48Finance

A firm has a beta of 1.4, the risk-free rate is 6 percent and the expected market return is 12 percent. Using the CAPM, what is the firm's required return on equity?

  1. 16.8 percent
  2. 14.4 percent Correct answer.
  3. 12.0 percent
  4. 13.2 percent

Explanation

CAPM gives required return = risk-free rate + beta x (market return minus risk-free rate). Here 6 + 1.4 x (12 - 6) = 6 + 8.4 = 14.4 percent.

Question 49Finance

What does the weighted average cost of capital (WACC) represent for a firm?

  1. The average cost of its short-term trade credit
  2. The minimum return required by all providers of long-term capital Correct answer.
  3. The rate of return on its most profitable project
  4. The interest rate charged by its commercial bank

Explanation

WACC blends the after-tax cost of debt and the cost of equity in proportion to their market values. It represents the minimum return the firm must earn on investments to satisfy all long-term capital providers.

Question 50Finance

A company earns a net operating profit after tax of KES 900,000 and has invested capital of KES 6,000,000. If its WACC is 12 percent, what is its economic value added (EVA)?

  1. KES 180,000 Correct answer.
  2. KES 720,000
  3. KES 108,000
  4. KES 900,000

Explanation

EVA equals NOPAT minus the capital charge (invested capital x WACC). The capital charge is 6,000,000 x 12 percent = 720,000, so EVA = 900,000 - 720,000 = KES 180,000.