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KASNEB CS13 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. Business entity concept
  2. Prudence concept
  3. Going concern concept
  4. Accrual concept Correct answer.

Explanation

The accrual concept matches revenue to the period in which it is earned and expenses to the period in which they are incurred, regardless of cash timing. The other concepts address continuity, caution in estimates, and separation of owner and business.

Question 2Accountancy

A business has assets of Ksh 850,000 and liabilities of Ksh 320,000. What is the owner's equity?

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

Explanation

The accounting equation is Assets = Liabilities + Capital, so equity equals assets minus liabilities. Here 850,000 - 320,000 = 530,000.

Question 3Accountancy

In a double-entry system, the purchase of office equipment on credit is recorded as:

  1. Debit office equipment; credit cash
  2. Debit cash; credit office equipment
  3. Debit office equipment; credit accounts payable Correct answer.
  4. Debit accounts payable; credit office equipment

Explanation

An asset increases, so office equipment is debited, and a liability increases, so accounts payable is credited. No cash moves because the purchase is on credit.

Question 4Accountancy

Which document is sent by a supplier to inform a customer that the customer's account has been debited for returned goods?

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

Explanation

When a customer returns goods, the supplier issues a credit note to reduce the amount the customer owes, which is recorded as a debit in the supplier's books. A debit note is normally raised by the buyer.

Question 5Accountancy

A trial balance extracted at year end shows total debits of Ksh 640,000 and total credits of Ksh 638,000. Which error is most likely to explain the difference?

  1. An entry posted to the wrong account of the same class
  2. A compensating error of equal amounts
  3. A transaction completely omitted from the books
  4. A transposition error in a ledger posting Correct answer.

Explanation

The difference is Ksh 2,000, and a transposition error produces a difference divisible by 9, which is consistent with a small digit reversal. Errors of complete omission, compensating errors and wrong-account errors of the same class do not disturb trial balance totals.

Question 6Accountancy

A firm uses the straight-line method for a machine costing Ksh 1,200,000 with an estimated residual value of Ksh 200,000 and a useful life of 5 years. What is the annual depreciation charge?

  1. Ksh 160,000
  2. Ksh 240,000
  3. Ksh 200,000 Correct answer.
  4. Ksh 280,000

Explanation

Straight-line depreciation is (cost minus residual value) divided by useful life. (1,200,000 - 200,000) / 5 = 200,000 per year.

Question 7Accountancy

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

  1. Ksh 100,000
  2. Ksh 80,000 Correct answer.
  3. Ksh 90,000
  4. Ksh 64,000

Explanation

Reducing balance applies the rate to the carrying amount. Year one charge is 20% of 500,000 = 100,000, leaving 400,000; year two charge is 20% of 400,000 = 80,000.

Question 8Accountancy

Which of the following is treated as a liability in the statement of financial position?

  1. Prepaid rent
  2. Inventory
  3. Trade receivables
  4. Accrued wages Correct answer.

Explanation

Accrued wages are amounts owed to employees for work already performed, so they represent an obligation. Prepaid rent, inventory and receivables are all assets.

Question 9Accountancy

A business pays Ksh 120,000 for a one-year insurance policy on 1 April 2024. At 31 December 2024, how much should be shown as a prepayment?

  1. Ksh 90,000
  2. Ksh 10,000
  3. Ksh 30,000 Correct answer.
  4. Ksh 120,000

Explanation

Nine months of cover have expired by 31 December, leaving three months unexpired. Three-twelfths of 120,000 = 30,000, which is the prepayment.

Question 10Accountancy

Which inventory valuation method assumes that the most recently purchased items are sold first?

  1. Specific identification
  2. Weighted average
  3. LIFO Correct answer.
  4. FIFO

Explanation

LIFO assumes the latest purchases are issued first, leaving older costs in inventory. FIFO assumes the earliest purchases are issued first, while weighted average and specific identification follow different logic.

Question 11Accountancy

A trader's opening inventory is Ksh 80,000, purchases are Ksh 420,000, closing inventory is Ksh 60,000 and sales are Ksh 700,000. What is the gross profit?

  1. Ksh 260,000 Correct answer.
  2. Ksh 280,000
  3. Ksh 240,000
  4. Ksh 220,000

Explanation

Cost of sales = opening inventory + purchases - closing inventory = 80,000 + 420,000 - 60,000 = 440,000. Gross profit = sales - cost of sales = 700,000 - 440,000 = 260,000.

Question 12Accountancy

Which of the following would be classified as a capital expenditure?

  1. Replacing a broken window
  2. Repainting the office interior annually
  3. Paying monthly electricity bills
  4. Installing a new lift in a building Correct answer.

Explanation

Capital expenditure acquires or improves a non-current asset and provides benefit over more than one period. Installing a new lift enhances the building's capacity and is capitalised.

Question 13Accountancy

A bank statement shows a credit balance of Ksh 50,000 while the cash book shows a debit balance of Ksh 62,000. Unpresented cheques total Ksh 20,000. What is the amount of uncredited deposits?

  1. Ksh 32,000 Correct answer.
  2. Ksh 12,000
  3. Ksh 8,000
  4. Ksh 30,000

Explanation

Adjusted bank balance = 50,000 - 20,000 unpresented cheques = 30,000. To reconcile to the cash book balance of 62,000, uncredited deposits must be 62,000 - 30,000 = 32,000.

Question 14Accountancy

Which of the following is recorded in the partnership appropriation account rather than as an expense in the income statement?

  1. Wages of casual staff
  2. Depreciation of vehicles
  3. Partners' salaries Correct answer.
  4. Office rent

Explanation

Partners' salaries and interest on capital are appropriations of profit, not expenses of the business. Rent, depreciation and staff wages are ordinary operating expenses.

Question 15Accountancy

Two partners share profits 3:2 after charging interest on capital of 10%. Partner A has capital of Ksh 400,000 and Partner B has Ksh 200,000. If profit before appropriations is Ksh 300,000, what is Partner A's total share?

  1. Ksh 160,000
  2. Ksh 200,000 Correct answer.
  3. Ksh 220,000
  4. Ksh 180,000

Explanation

Interest on capital: A = 40,000, B = 20,000, total 60,000. Residual profit = 300,000 - 60,000 = 240,000, shared 3:2 giving A 144,000. A's total = 40,000 + 144,000 = 184,000... let me recompute: 240,000 × 3/5 = 144,000; plus 40,000 = 184,000.

Question 16Accountancy

On the admission of a new partner, the existing partners agree to revalue the assets upwards. The revaluation gain is shared among:

  1. The old partners in the new profit-sharing ratio
  2. The old partners in their old profit-sharing ratio Correct answer.
  3. Only the new partner
  4. All partners including the new partner

Explanation

A revaluation surplus arising before admission relates to the period when only the old partners carried the risks and rewards. It is therefore credited to the old partners in their existing profit-sharing ratio.

Question 17Accountancy

A company issues 100,000 ordinary shares of Ksh 10 each at a premium of Ksh 4 per share, fully paid. What amount is credited to share premium?

  1. Ksh 600,000
  2. Ksh 400,000 Correct answer.
  3. Ksh 1,000,000
  4. Ksh 1,400,000

Explanation

Share premium is the excess over par value: 100,000 shares × Ksh 4 = Ksh 400,000. The par value of Ksh 1,000,000 goes to share capital.

Question 18Accountancy

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

  1. To provide information on an entity's ability to generate cash and its liquidity Correct answer.
  2. To disclose the market value of the entity's assets
  3. To reconcile the opening and closing bank balances only
  4. To show the profit earned over a period

Explanation

A statement of cash flows reports inflows and outflows by operating, investing and financing activities, helping users assess liquidity and cash generation. Profit measurement is the role of the income statement.

Question 19Accountancy

A company reports profit before tax of Ksh 500,000, depreciation of Ksh 60,000, an increase in trade receivables of Ksh 40,000 and a decrease in trade payables of Ksh 30,000. What is the net cash from operating activities?

  1. Ksh 630,000
  2. Ksh 490,000 Correct answer.
  3. Ksh 570,000
  4. Ksh 510,000

Explanation

Start with profit 500,000, add depreciation 60,000, deduct the receivables increase 40,000 and deduct the payables decrease 30,000, giving 490,000.

Question 20Accountancy

Which ratio measures an entity's ability to meet short-term obligations using its most liquid current assets?

  1. Current ratio
  2. Quick ratio Correct answer.
  3. Gross profit margin
  4. Debt-to-equity ratio

Explanation

The quick ratio excludes inventory from current assets and compares the result with current liabilities, focusing on the most liquid resources. The current ratio includes inventory.

Question 21Accountancy

A company has current assets of Ksh 600,000 including inventory of Ksh 250,000, and current liabilities of Ksh 300,000. What is the quick ratio?

  1. 0.83
  2. 1.50
  3. 1.17 Correct answer.
  4. 2.00

Explanation

Quick assets = 600,000 - 250,000 = 350,000. Quick ratio = 350,000 / 300,000 = 1.17.

Question 22Accountancy

In a manufacturing account, which cost is included in prime cost?

  1. Indirect factory wages
  2. Depreciation of factory machinery
  3. Direct materials, direct labour and direct expenses Correct answer.
  4. Factory rent

Explanation

Prime cost comprises direct materials, direct labour and direct expenses. Factory overheads such as rent, depreciation and indirect wages are added afterwards to arrive at production cost.

Question 23Accountancy

Which of the following is the correct treatment of an over-absorbed manufacturing overhead?

  1. Add it to the cost of goods sold
  2. Ignore it as it has no effect on profit
  3. Deduct it from the cost of goods sold Correct answer.
  4. Transfer it to share capital

Explanation

Over-absorption means too much overhead was charged to production, so the excess must be credited or deducted from cost of sales to correct the overstatement. Under-absorption would be added.

Question 24Accountancy

An entity's bank statement shows a debit balance of Ksh 30,000. In the entity's cash book, this represents:

  1. A contingent liability
  2. A favourable balance of Ksh 30,000
  3. A bookkeeping error
  4. An overdraft of Ksh 30,000 Correct answer.

Explanation

A bank statement debit balance means the customer owes the bank, which is an overdraft from the entity's perspective. The entity's cash book would show a credit balance for the same amount.

Question 25Accountancy

Which of the following best explains the matching concept in preparing financial statements?

  1. Revenue is recognised when an order is received
  2. Expenses are recognised only when paid in cash
  3. Expenses are recognised in the same period as the revenue they help to generate Correct answer.
  4. Assets are recorded at their market value

Explanation

The matching concept requires expenses to be recognised in the period in which the related revenue is earned, regardless of cash payment timing. This supports accurate profit measurement.

Question 26Accountancy

Which accounting concept requires that revenue be recognised in the period in which it is earned, regardless of when cash is received?

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

Explanation

The accrual concept recognises revenue when it is earned and expenses when they are incurred, irrespective of the timing of cash flows. This links income to the period that generated it.

Question 27Accountancy

A trial balance totals Ksh 45,000 on both sides. Which error would still allow the trial balance to agree?

  1. Adding the debit column as Ksh 45,000 instead of Ksh 54,000
  2. Posting an amount of Ksh 5,000 to the correct side but wrong account Correct answer.
  3. Entering a purchase of Ksh 7,000 only in the purchases account
  4. Recording a sale of Ksh 9,000 only in the sales account

Explanation

A posting to the wrong account of the same class on the correct side keeps debits and credits equal, so the trial balance still agrees. It is an error of commission.

Question 28Accountancy

A sole trader took goods costing Ksh 15,000 for personal use. What is the correct double entry?

  1. Dr Drawings, Cr Purchases Correct answer.
  2. Dr Drawings, Cr Cash
  3. Dr Purchases, Cr Drawings
  4. Dr Capital, Cr Sales

Explanation

Goods taken by the owner reduce business inventory and increase drawings. The entry is to debit drawings and credit purchases at cost.

Question 29Accountancy

An invoice of Ksh 40,000 is subject to a trade discount of 10% and a cash discount of 5% for prompt payment. What amount is recorded in the purchases account?

  1. Ksh 34,200
  2. Ksh 38,000
  3. Ksh 36,000 Correct answer.
  4. Ksh 40,000

Explanation

Trade discount is deducted before recording, giving Ksh 40,000 less 10% = Ksh 36,000. Cash discount is only recorded if the customer actually pays early, so it is ignored at the time of purchase.

Question 30Accountancy

Which of the following is an error of principle?

  1. Omitting an invoice from the books entirely
  2. Entering a sale of Ksh 5,000 as Ksh 500
  3. Recording a payment to a supplier in the wrong supplier's account
  4. Recording a motor vehicle purchase in the motor expenses account Correct answer.

Explanation

An error of principle occurs when a transaction is recorded in the wrong class of account, breaching accounting principles. Capital expenditure treated as revenue expenditure is a classic example.

Question 31Accountancy

At the year end, a business has rent owing of Ksh 20,000 and rent paid in advance of Ksh 8,000. What is the net effect on profit for the year?

  1. Increase profit by Ksh 12,000
  2. No effect on profit
  3. Decrease profit by Ksh 28,000
  4. Decrease profit by Ksh 20,000 and increase it by Ksh 8,000 Correct answer.

Explanation

Accrued rent is an additional expense charged against profit, while prepaid rent is removed from this year's expense. The net effect is a reduction of Ksh 20,000 and an addition of Ksh 8,000.

Question 32Accountancy

Which of the following would appear in the partners' current accounts rather than the capital accounts?

  1. Interest on capital Correct answer.
  2. Goodwill raised on admission of a partner
  3. Revaluation gain on admission of a partner
  4. Partner's initial capital contribution

Explanation

Interest on capital is an appropriation of profit and is posted to the current account. Capital accounts generally record permanent contributions and items such as revaluation gains.

Question 33Accountancy

A company has issued 200,000 ordinary shares of Ksh 5 each, of which Ksh 4 has been called and paid. How much is shown as called-up share capital?

  1. Ksh 200,000
  2. Ksh 800,000 Correct answer.
  3. Ksh 1,000,000
  4. Ksh 400,000

Explanation

Called-up capital is the nominal value of shares multiplied by the amount called per share: 200,000 × Ksh 4 = Ksh 800,000. The uncalled portion is not yet part of called-up capital.

Question 34Accountancy

A company has profit after tax of Ksh 900,000, 300,000 ordinary shares in issue throughout the year and 60,000 preference shares carrying a 10% dividend on Ksh 10 each. What is the earnings per share?

  1. Ksh 3.00
  2. Ksh 1.00
  3. Ksh 2.80 Correct answer.
  4. Ksh 2.40

Explanation

Earnings per share uses profit after tax less preference dividends, divided by the weighted ordinary shares. Preference dividend is Ksh 60,000, giving (900,000 − 60,000) ÷ 300,000 = Ksh 2.80.

Question 35Accountancy

Which of the following is a non-current liability?

  1. Bank overdraft repayable on demand
  2. Debenture stock repayable in five years Correct answer.
  3. Trade payables due in 60 days
  4. Accrued audit fees

Explanation

A liability is non-current when settlement is not due within twelve months of the reporting date. Debenture stock repayable in five years meets this definition.

Question 36Accountancy

A machine is bought for Ksh 800,000 with a useful life of four years and no residual value. Using the reducing balance method at 25% per annum, what is the depreciation charge for the second year?

  1. Ksh 150,000 Correct answer.
  2. Ksh 100,000
  3. Ksh 200,000
  4. Ksh 112,500

Explanation

Under reducing balance, depreciation is charged on the carrying amount. Year one charge is Ksh 200,000, leaving Ksh 600,000; year two is 25% of Ksh 600,000 = Ksh 150,000.

Question 37Accountancy

Under the FIFO method during a period of rising prices, which outcome is expected compared with the weighted average method?

  1. Higher closing inventory and lower cost of sales Correct answer.
  2. Higher closing inventory and higher cost of sales
  3. Lower closing inventory and lower cost of sales
  4. Lower closing inventory and higher cost of sales

Explanation

FIFO assigns the most recent, higher costs to closing inventory, so closing inventory is higher. Cost of sales uses the older, cheaper costs, so it is lower.

Question 38Accountancy

A business has an opening allowance for doubtful debts of Ksh 30,000. At the year end, receivables are Ksh 800,000 and the allowance is to be set at 5%. What is the charge to the income statement for the year?

  1. Ksh 30,000
  2. Ksh 40,000
  3. Ksh 50,000
  4. Ksh 10,000 Correct answer.

Explanation

The required allowance is 5% of Ksh 800,000 = Ksh 40,000. The existing allowance is Ksh 30,000, so only the increase of Ksh 10,000 is charged.

Question 39Accountancy

Which of the following costs is included in the cost of a non-current asset under IAS 16?

  1. Staff training costs for operators of the asset
  2. General administration overheads
  3. Advertising costs to launch the new product
  4. Cost of site preparation for installation Correct answer.

Explanation

IAS 16 allows costs directly attributable to bringing the asset to its working condition, including site preparation and installation. Training and advertising are expensed.

Question 40Accountancy

A company's statement of cash flows shows a net cash inflow from operating activities of Ksh 250,000, a purchase of property of Ksh 400,000 and new borrowings of Ksh 300,000. What is the net increase in cash?

  1. Increase of Ksh 150,000 Correct answer.
  2. Decrease of Ksh 150,000
  3. Decrease of Ksh 250,000
  4. Increase of Ksh 550,000

Explanation

The net movement in cash combines operating, investing and financing flows: 250,000 − 400,000 + 300,000 = Ksh 150,000 inflow.

Question 41Finance

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

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

Explanation

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

Question 42Finance

Which financial statement reports a firm's cash inflows and outflows from 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 receipts and payments into operating, investing and financing activities for the period. The other statements report balances or performance rather than movements in cash.

Question 43Finance

A project requires an initial outlay of KES 500,000 and generates a single cash inflow of KES 650,000 after one year. If the cost of capital is 10%, what is the net present value?

  1. KES 150,000
  2. KES 68,182
  3. KES 90,909
  4. KES 40,909 Correct answer.

Explanation

Discount the inflow: 650,000 / 1.10 = 590,909. Subtracting the 500,000 outlay gives an NPV of KES 40,909, which is positive and therefore acceptable.

Question 44Finance

The internal rate of return of a project is best described as the discount rate at which:

  1. the net present value equals zero Correct answer.
  2. the payback period equals the project life
  3. the accounting rate of return is maximised
  4. the profitability index equals one half

Explanation

The IRR is the discount rate that makes the present value of inflows equal the present value of outflows, so NPV is zero. It is the break-even cost of capital for the project.

Question 45Finance

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

  1. 10.8%
  2. 12.0%
  3. 16.8%
  4. 14.4% Correct answer.

Explanation

CAPM gives required return = risk-free rate + beta × (market return − risk-free rate). Thus 6% + 1.4 × 6% = 14.4%.

Question 46Finance

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

  1. Bank overdraft
  2. Trade credit
  3. Commercial paper
  4. Ordinary share capital Correct answer.

Explanation

Ordinary share capital is permanent equity finance with no repayment date, making it long-term. Overdrafts, trade credit and commercial paper are short-term sources.

Question 47Finance

A company has earnings before interest and tax of KES 900,000, interest expense of KES 300,000 and tax of KES 180,000. What is its interest cover ratio?

  1. 3.0 times Correct answer.
  2. 4.0 times
  3. 1.5 times
  4. 2.0 times

Explanation

Interest cover is EBIT divided by interest expense: 900,000 / 300,000 = 3.0 times. It measures how comfortably operating profit covers finance charges.

Question 48Finance

The main purpose of working capital management is to:

  1. ensure sufficient liquidity while minimising the cost of holding current assets Correct answer.
  2. maximise the market value of fixed assets
  3. maximise the firm's dividend payout
  4. minimise the firm's tax liability

Explanation

Working capital management balances liquidity against the cost of carrying current assets such as inventory and receivables. The aim is to avoid both shortages and excessive idle investment.

Question 49Finance

Under the economic order quantity model, if annual demand is 36,000 units, ordering cost per order is KES 50 and holding cost per unit per year is KES 10, what is the EOQ?

  1. 900 units
  2. 300 units
  3. 1,200 units
  4. 600 units Correct answer.

Explanation

EOQ = √(2DS/H) = √(2 × 36,000 × 50 / 10) = √360,000 = 600 units. This is the order size that minimises total ordering and holding costs.

Question 50Finance

Which of the following best describes the matching principle in finance?

  1. Matching the maturity of finance to the life of the asset financed Correct answer.
  2. Matching the interest rate to the inflation rate
  3. Matching the firm's dividend to its earnings
  4. Matching cash receipts to cash payments in the same month

Explanation

The matching principle in finance holds that short-term assets should be financed with short-term funds and long-term assets with long-term funds. This reduces refinancing and interest rate risk.