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MATSEC AM Accounting study materials
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MATSEC AM Accounting practice questions

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Question 1Financial Accounting

Under the accruals (matching) concept, when should a company recognise revenue from the sale of goods?

  1. When the sales invoice is printed and posted to the customer
  2. When the customer's payment is physically received in the bank account
  3. When the order is confirmed by the sales department
  4. When the goods are transferred to the buyer and the performance obligation is satisfied Correct answer.

Explanation

The accruals concept requires income to be recognised when it is earned, not when cash is received. Under accrual accounting revenue arises when control of the goods passes to the buyer and the performance obligation is satisfied. The timing of cash settlement or of paperwork is irrelevant to recognition.

Question 2Financial Accounting

A trader purchases goods with a list price of €8,000 and receives a trade discount of 20% plus a settlement discount of 5% for prompt payment. What amount is recorded as the purchase cost in the ledger at the date of purchase?

  1. €6,080
  2. €7,600
  3. €8,000
  4. €6,400 Correct answer.

Explanation

Trade discounts are deducted before the transaction is recorded, so the invoice is entered at €8,000 less 20% = €6,400. A settlement discount is only taken if payment is made within the agreed period, so it is not deducted at the date of purchase. The purchase is therefore recorded at €6,400.

Question 3Financial Accounting

Which document is sent by a supplier to a customer to correct an overcharge on a previously issued invoice?

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

Explanation

A credit note is issued by the seller to reduce the amount owed by the buyer, for example after goods are returned or an overcharge is corrected. It records a reduction in the receivable and in sales. A debit note is normally raised by the buyer, and a statement is a periodic summary of transactions.

Question 4Financial Accounting

In a two-column cash book, a cheque received from a credit customer is later dishonoured. How is this recorded?

  1. On the debit side of the cash book and as a credit in the customer's account
  2. On the credit side of the cash book and as a debit in the customer's account Correct answer.
  3. Only on the credit side of the cash book, with no entry in the customer's account
  4. Only as a debit in the customer's account, with no cash book entry

Explanation

When a cheque is dishonoured the original receipt must be reversed. The cash book is credited because the bank balance falls, and the customer's personal account is debited to restore the receivable. Both entries are needed to keep the double entry complete.

Question 5Financial Accounting

The following balances are available: opening inventory €12,000, purchases €85,000, closing inventory €15,000. What is the cost of goods sold?

  1. €85,000
  2. €82,000 Correct answer.
  3. €88,000
  4. €112,000

Explanation

Cost of goods sold equals opening inventory plus purchases less closing inventory. Here €12,000 + €85,000 − €15,000 = €82,000. Closing inventory is deducted because it remains an asset rather than an expense of the period.

Question 6Financial Accounting

A business receives an invoice for electricity covering the three months to 31 December, but the meter reading period ends on 20 December. The amount relating to 21–31 December has not yet been invoiced. How should this be treated in the financial statements for the year ended 31 December?

  1. Record it as a sundry creditor only when the next invoice arrives
  2. Create a prepayment, debiting prepayments and crediting electricity expense
  3. Create an accrual, debiting electricity expense and crediting accruals Correct answer.
  4. Ignore it, because no invoice has been received

Explanation

The accruals concept requires expenses to be matched to the period they relate to. Electricity consumed but not yet invoiced at the year end is an accrued expense, so expense is debited and a current liability is credited. This ensures profit and liabilities are not understated.

Question 7Financial Accounting

Which of the following is capital expenditure rather than revenue expenditure?

  1. Repainting the office interior every three years
  2. Replacing a broken window in the warehouse
  3. Installation costs of a new machine that are necessary to bring it into working condition Correct answer.
  4. Paying the annual insurance premium on delivery vehicles

Explanation

Capital expenditure is incurred to acquire or improve a non-current asset and to bring it into the location and condition needed for use. Installation costs of a new machine meet that definition and are capitalised. Repairs, maintenance and running costs are revenue expenditure.

Question 8Financial Accounting

A non-current asset costs €40,000 with an estimated residual value of €4,000 and a useful life of six years. Using the straight-line method, what is the annual depreciation charge?

  1. €7,333
  2. €4,000
  3. €6,667
  4. €6,000 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. Here (€40,000 − €4,000) ÷ 6 = €6,000 per year. Residual value must be deducted before dividing.

Question 9Financial Accounting

An asset was bought for €50,000 and depreciated at 20% per annum on the reducing-balance basis. What is the depreciation charge for the second year?

  1. €8,000 Correct answer.
  2. €10,000
  3. €12,000
  4. €6,400

Explanation

Under reducing balance the rate is applied to the carrying amount. Year one charge is €50,000 × 20% = €10,000, leaving €40,000. Year two charge is therefore €40,000 × 20% = €8,000.

Question 10Financial Accounting

A company issues 100,000 ordinary shares of nominal value €1 each at €1.60 per share. How should the proceeds be recorded?

  1. €100,000 to share capital and €60,000 to retained earnings
  2. €160,000 to share premium and nothing to share capital
  3. €160,000 to share capital and nothing to share premium
  4. €100,000 to share capital and €60,000 to share premium Correct answer.

Explanation

Shares must be recorded initially at their nominal value in share capital. Any excess received over nominal value is credited to the share premium (share premium reserve) account. Here €100,000 is nominal and the €60,000 excess is premium.

Question 11Financial Accounting

Which of the following best describes the purpose of a suspense account?

  1. To accumulate profits that have not yet been distributed to shareholders
  2. To hold a temporary difference while the location of an error in the trial balance is investigated Correct answer.
  3. To record amounts owed to suppliers pending agreement of statements
  4. To record cash received in advance from customers

Explanation

A suspense account is opened when a trial balance fails to agree, so that a draft set of accounts can be prepared. The difference is posted to suspense and investigated, and the account is cleared once the errors are found and corrected. It is not a permanent ledger account for trading balances.

Question 12Financial Accounting

A purchase of office equipment for €900 was correctly entered in the equipment account but was recorded as €90 in the payables account. Which type of error is this?

  1. An error of commission affecting one side of the entry Correct answer.
  2. An error of principle
  3. A complete reversal of the entries
  4. An error of original entry affecting both accounts

Explanation

The correct account was used but the wrong amount was entered on one side, so the trial balance will not agree. This is an error of commission, and the difference of €810 is posted to a suspense account until corrected. An error of principle would involve the wrong class of account.

Question 13Financial Accounting

Which error will cause a trial balance to disagree?

  1. Recording a sale of goods on credit as a sale of a non-current asset
  2. Correctly recording a transaction in the wrong customer's account
  3. Entering a purchase of €500 in both the purchases and payables accounts as €50
  4. Recording a cash sale by debiting cash and also debiting sales Correct answer.

Explanation

A trial balance disagrees only when the total debits and credits are unequal. Debiting both cash and sales produces two debits with no credit, so the totals will differ. Errors that affect both sides equally, or that use wrong accounts but keep the double entry, leave the trial balance in agreement.

Question 14Financial Accounting

A business has current assets of €48,000 and current liabilities of €30,000. It then pays a trade payable of €6,000 in cash. What is the current ratio immediately after the payment?

  1. 2.00:1
  2. 1.40:1
  3. 1.75:1 Correct answer.
  4. 1.60:1

Explanation

Before payment the ratio is €48,000 ÷ €30,000 = 1.60:1. Paying a payable reduces both current assets and current liabilities by €6,000, giving €42,000 ÷ €24,000 = 1.75:1. Settling a liability with cash improves the ratio when it was already above 1:1.

Question 15Financial Accounting

Which of the following would be classified as a current liability in a company's statement of financial position?

  1. Share premium arising on a rights issue
  2. A bank loan repayable in five equal annual instalments beginning next year Correct answer.
  3. A long-term loan repayable in full after eight years
  4. A mortgage secured on freehold property repayable in 2035

Explanation

A liability is current when the obligation is due to be settled within twelve months. The instalment payable next year meets this test and is shown as a current liability, while the remaining instalments are non-current. Obligations falling due beyond one year are non-current liabilities.

Question 16Financial Accounting

A company's gross profit is €90,000 and revenue is €300,000. Operating expenses total €54,000. What is the operating profit margin?

  1. 30%
  2. 24%
  3. 12% Correct answer.
  4. 18%

Explanation

Operating profit is gross profit less operating expenses: €90,000 − €54,000 = €36,000. The operating profit margin is operating profit divided by revenue, so €36,000 ÷ €300,000 = 12%. Gross profit margin would be 30%.

Question 17Financial Accounting

Which of the following is the correct double entry to record an issue of ordinary shares at a premium?

  1. Debit bank, credit share capital with nominal value and credit share premium with the excess Correct answer.
  2. Debit share capital, credit bank and credit share premium
  3. Debit bank, credit share premium with the full amount received
  4. Debit share premium, credit share capital with the full amount received

Explanation

Cash received increases the bank balance, so bank is debited. The nominal value of the shares is credited to share capital and the amount received above nominal value is credited to share premium. Total credits therefore equal the total cash received.

Question 18Financial Accounting

A sole trader made a profit for the year of €24,000 and had drawings of €31,000. Opening capital was €60,000. What is the closing capital?

  1. €115,000
  2. €67,000
  3. €53,000 Correct answer.
  4. €84,000

Explanation

Closing capital equals opening capital plus profit less drawings. Here €60,000 + €24,000 − €31,000 = €53,000. Drawings reduce capital because they represent resources withdrawn by the owner.

Question 19Financial Accounting

A company's trade receivables at the year end are €120,000. It decides to create an allowance for doubtful debts of 5%. What is the effect on the financial statements?

  1. Irrecoverable debts expense increases by €6,000 and receivables are shown net at €114,000 Correct answer.
  2. An allowance is credited to the receivables account and debited to sales
  3. Receivables are reduced by €6,000 and cash is credited with €6,000
  4. No entry is required until a specific customer defaults

Explanation

Creating an allowance recognises the expected loss from receivables that may not be collected. The expense is debited and the allowance credited, and receivables are presented net of the allowance. Here 5% of €120,000 gives €6,000, so net receivables are €114,000.

Question 20Financial Accounting

A business uses the imprest system with a float of €200. Vouchers totalling €150 are presented for reimbursement. What is the amount of the reimbursement and the balance in the imprest after reimbursement?

  1. €200 reimbursed; balance becomes €350
  2. €150 reimbursed; balance remains €50
  3. €50 reimbursed; balance remains €50
  4. €150 reimbursed; balance restored to €200 Correct answer.

Explanation

Under the imprest system the float is periodically restored to the fixed amount by reimbursing exactly the total of the vouchers. Reimbursing €150 brings the balance back to €200. The float therefore always returns to its original figure.

Question 21Financial Accounting

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

  1. Debit drawings and credit inventory at selling price
  2. Debit drawings and credit sales at selling price
  3. Debit drawings and credit purchases at cost Correct answer.
  4. Debit purchases and credit drawings at selling price

Explanation

Goods withdrawn by the owner are treated as drawings, valued at cost, because no sale has occurred. Purchases are credited to remove the cost from the trading account. Recording the transaction at selling price would overstate drawings and recognise profit that has not been earned.

Question 22Financial Accounting

A company has a bank overdraft of €15,000, inventory of €40,000, trade receivables of €25,000 and trade payables of €20,000. What is the acid test (quick) ratio?

  1. 3.25:1
  2. 0.71:1 Correct answer.
  3. 0.29:1
  4. 1.86:1

Explanation

The acid test excludes inventory because it may not be quickly converted to cash. Quick assets are receivables of €25,000, and current liabilities are the overdraft plus payables of €35,000, giving 25,000 ÷ 35,000 = 0.71:1. The current ratio using all current assets would be higher.

Question 23Financial Accounting

Which of the following is the correct journal entry to record an irrecoverable debt written off using the direct write-off method?

  1. Debit allowance for doubtful debts and credit sales
  2. Debit sales and credit the customer's account
  3. Debit irrecoverable debts expense and credit the customer's account Correct answer.
  4. Debit the customer's account and credit irrecoverable debts expense

Explanation

Writing off a bad debt removes the amount from receivables and recognises an expense in the statement of profit or loss. The customer's personal account is credited to clear the balance and the expense account is debited. The allowance account is not used unless an allowance had already been created for that debt.

Question 24Financial Accounting

A trial balance has total debits of €184,600 and total credits of €184,240. Which of the following would be the correct first step in dealing with the difference?

  1. Post €360 to the capital account as a balancing figure
  2. Adjust the purchases account by €360 to make the trial balance agree
  3. Open a suspense account and credit it with €360 pending investigation Correct answer.
  4. Debit the suspense account with €360 and close it immediately

Explanation

When the credit column is lower than the debit column by €360, the difference is entered on the credit side of a suspense account so that a draft trial balance can be produced. The underlying error is then located and corrected, and the suspense balance cleared. Adjusting a real account without identifying the error would conceal it.

Question 25Financial Accounting

A company's statement of cash flows shows a profit before tax of €80,000, depreciation of €18,000 and an increase in trade receivables of €12,000. What is the net cash generated from operating activities before tax paid?

  1. €86,000 Correct answer.
  2. €50,000
  3. €74,000
  4. €110,000

Explanation

Depreciation is added back because it is a non-cash expense, and an increase in receivables is deducted because cash collected is less than revenue recognised. The calculation is €80,000 + €18,000 − €12,000 = €86,000.

Question 26Financial Accounting

Under the accruals basis, in which period should a sale be recognised when goods are delivered to the customer in December but the invoice is issued and paid in January?

  1. In December, when the goods were delivered and the performance obligation was satisfied Correct answer.
  2. In January, when the invoice is issued to the customer
  3. In January, when the customer settles the invoice
  4. Equally across December and January, since the transaction spans both months

Explanation

The accruals basis recognises revenue when the goods or services are transferred to the customer, not when cash or an invoice changes hands. Delivery in December satisfies the performance obligation, so the sale belongs to that period. January entries then simply record the receivable settlement.

Question 27Financial Accounting

A business pays an annual insurance premium of €2,400 on 1 October for the twelve months to the following 30 September. What is the prepayment reported at the 31 December year end?

  1. €600
  2. €200
  3. €2,400
  4. €1,800 Correct answer.

Explanation

Nine months of the premium (January to September) relate to the following accounting period and are therefore a prepayment. Nine-twelfths of €2,400 is €1,800. The three months consumed in the current year, €600, is the expense charged to profit or loss.

Question 28Financial Accounting

Which of the following best describes the accounting treatment of a provision under IAS 37?

  1. It is recognised only when the amount has been settled in cash
  2. It is recognised when a present obligation from a past event is probable and can be reliably estimated Correct answer.
  3. It is recognised as a deduction from the related non-current asset
  4. It is recognised whenever management expects a future outflow, regardless of whether an obligation exists

Explanation

IAS 37 requires recognition of a provision when a present obligation exists as a result of a past event, an outflow of resources is probable, and the amount can be estimated reliably. If any of these conditions is absent, no provision is recognised, although a contingent liability may be disclosed.

Question 29Financial Accounting

A company's statement of financial position shows total assets of €500,000 and total liabilities of €300,000. It then declares a dividend of €40,000 that remains unpaid at the year end. What is equity immediately after the declaration?

  1. €200,000
  2. €120,000
  3. €240,000
  4. €160,000 Correct answer.

Explanation

Equity before the dividend is assets less liabilities, €500,000 − €300,000 = €200,000. Declaring an unpaid dividend creates a liability and reduces retained earnings by €40,000, giving equity of €160,000. Total assets remain unchanged at the moment of declaration.

Question 30Financial Accounting

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

  1. The cost of relocating the machine three years after it entered service
  2. The cost of testing whether the machine operates correctly Correct answer.
  3. The cost of an advertising campaign announcing the new machine
  4. The cost of training staff to operate the machine

Explanation

IAS 16 includes in the cost of an asset any directly attributable costs of bringing it to the location and condition necessary for its intended use, which includes initial testing. Training, advertising and later relocation are not part of the initial cost. Relocation after use is generally expensed.

Question 31Financial Accounting

A machine costing €60,000 has an estimated residual value of €6,000 and a useful life of nine years. Using the straight-line method, what is the annual depreciation charge?

  1. €7,333
  2. €5,400
  3. €6,000 Correct answer.
  4. €6,667

Explanation

Straight-line depreciation is the depreciable amount divided by the useful life. The depreciable amount is €60,000 − €6,000 = €54,000, and €54,000 ÷ 9 = €6,000 per year. The residual value is never depreciated.

Question 32Financial Accounting

An asset is revalued upwards under the IAS 16 revaluation model. Where there is no previous revaluation deficit for that asset, where should the surplus be recognised?

  1. In profit or loss as a gain for the year
  2. Directly in retained earnings through the statement of changes in equity
  3. In other comprehensive income and accumulated in a revaluation reserve Correct answer.
  4. As a reduction of the asset's accumulated depreciation only

Explanation

An upward revaluation surplus with no prior impairment of the same asset is recognised in other comprehensive income and accumulated in equity as a revaluation reserve. It is not reported in profit or loss. The reserve may later be transferred to retained earnings as the asset is used.

Question 33Financial Accounting

Which of the following is the correct double entry to record an irrecoverable debt written off using the allowance method?

  1. Dr Irrecoverable debts expense; Cr Trade receivables
  2. Dr Allowance for doubtful debts; Cr Trade receivables Correct answer.
  3. Dr Trade receivables; Cr Allowance for doubtful debts
  4. Dr Allowance for doubtful debts; Cr Irrecoverable debts expense

Explanation

Under the allowance method the receivable is removed and the existing allowance absorbs the loss, so the allowance account is debited and trade receivables credited. No expense arises at the moment of write-off because the expense was recognised when the allowance was created. The direct write-off method would instead debit an expense.

Question 34Financial Accounting

A company has profit before tax of €90,000. Depreciation was €12,000, an asset with carrying amount of €5,000 was sold for €8,000, and trade receivables increased by €7,000. What is the net cash inflow from operating activities before tax?

  1. €104,000
  2. €98,000 Correct answer.
  3. €92,000
  4. €86,000

Explanation

Start with profit before tax of €90,000, add back depreciation of €12,000, and deduct the €3,000 gain on disposal (proceeds €8,000 less carrying amount €5,000) since it is an investing item. Deduct the €7,000 increase in receivables. This gives €90,000 + €12,000 − €3,000 − €7,000 = €92,000.

Question 35Financial Accounting

Which of the following items would be added back to profit before tax when preparing a statement of cash flows using the indirect method?

  1. A decrease in trade payables
  2. An increase in inventory
  3. A gain on the disposal of a non-current asset
  4. An increase in the allowance for doubtful debts Correct answer.

Explanation

An increase in the allowance for doubtful debts is a non-cash charge against profit, so it is added back in the reconciliation to operating cash flow. Increases in inventory and decreases in payables consume cash and are deducted, while gains on disposal are removed.

Question 36Financial Accounting

A company's gross profit margin fell from 30% to 24% while revenue remained constant. Which of the following most directly explains this movement?

  1. A rise in administrative salaries
  2. An increase in the depreciation of office equipment
  3. An increase in the cost of goods sold without a corresponding rise in selling prices Correct answer.
  4. A reduction in the tax charge for the year

Explanation

Gross profit is revenue less cost of goods sold, so a falling margin at constant revenue points to a higher cost of sales or lower selling prices. Administrative costs, office depreciation and tax affect net profit, not gross profit. The analysis therefore isolates the trading activity.

Question 37Financial Accounting

Which of the following best describes the role of the International Accounting Standards Board?

  1. It sets the tax rates applied to corporate profits in member countries
  2. It develops and issues IFRS Accounting Standards for use internationally Correct answer.
  3. It enforces accounting standards through statutory audits of listed companies
  4. It approves the financial statements of individual companies before publication

Explanation

The IASB is an independent standard-setting body that develops IFRS Accounting Standards. It does not audit companies, set tax rates or approve individual financial statements. Enforcement is carried out by national regulators and securities authorities.

Question 38Financial Accounting

Which of the following is the correct accounting treatment when a company issues shares at a premium?

  1. Debit bank with the nominal value only and credit share capital with the same amount
  2. Debit share capital with the total proceeds and credit bank with the same amount
  3. Debit bank with the total proceeds, credit share capital with nominal value and credit share premium with the excess Correct answer.
  4. Debit bank with the total proceeds and credit share premium with the whole amount

Explanation

The proceeds received increase the bank balance. The nominal value of the shares issued is credited to share capital and any excess over nominal value is credited to share premium. The two credit entries together equal the total proceeds.

Question 39Financial Accounting

A company has an issued share capital of 200,000 ordinary shares of €1 each. It makes a 1-for-4 bonus issue. What is the effect on the statement of financial position?

  1. Share capital rises by €50,000 and total equity rises by €50,000
  2. Share capital rises by €250,000 and bank falls by €250,000
  3. Share capital is unchanged and reserves fall by €50,000
  4. Share capital rises by €50,000 and reserves fall by €50,000, with total equity unchanged Correct answer.

Explanation

A bonus issue converts reserves into share capital, so share capital increases by 50,000 shares at €1, funded from reserves. No cash is received and total equity is unchanged. Only the composition of equity alters.

Question 40Financial Accounting

Which of the following would be recorded in the partnership appropriation account rather than as an expense in the profit or loss account?

  1. Rent paid for the partnership's office premises
  2. Interest on capital credited to each partner Correct answer.
  3. Wages of the partnership's sales staff
  4. Insurance of the partnership's delivery vehicles

Explanation

The appropriation account distributes profit among partners and includes interest on capital, partners' salaries and interest on drawings. Ordinary business costs such as rent, wages and insurance are expenses deducted before profit is appropriated.

Question 41Financial Accounting

A partnership agreement provides for interest on capital at 5% per annum. Partner A has capital of €80,000 and partner B has capital of €40,000. What is the total interest on capital charged in the appropriation account?

  1. €4,000
  2. €2,000
  3. €6,000 Correct answer.
  4. €12,000

Explanation

Interest on capital is calculated on each partner's capital balance. For A, 5% of €80,000 is €4,000, and for B, 5% of €40,000 is €2,000, giving a total of €6,000. This amount is credited to the partners and deducted from profit available for sharing.

Question 42Financial Accounting

Which of the following costs is treated as part of the cost of inventory under IAS 2?

  1. Abnormal wastage of materials during production
  2. Selling commission paid to the sales team
  3. Storage costs of finished goods held after production is complete
  4. Freight inwards incurred to bring purchased goods to the warehouse Correct answer.

Explanation

IAS 2 requires inventory cost to include purchase price, import duties, transport and other costs directly attributable to bringing the goods to their present location and condition. Abnormal wastage, selling costs and post-production storage are excluded and expensed.

Question 43Financial Accounting

A company holds 300 units of inventory that cost €20 each. At the year end the net realisable value is €17 per unit. What is the inventory value in the statement of financial position?

  1. €900
  2. €6,000
  3. €5,100 Correct answer.
  4. €5,550

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Since net realisable value of €17 is below cost of €20, each unit is written down to €17, giving 300 × €17 = €5,100. The €900 difference is recognised as an expense.

Question 44Financial Accounting

Which of the following best describes the purpose of the statement of changes in equity?

  1. To list the non-current assets held at the reporting date
  2. To reconcile the opening and closing balances of each component of equity Correct answer.
  3. To show the cash generated from operating activities during the year
  4. To disclose the accounting policies applied to revenue

Explanation

The statement of changes in equity reconciles opening and closing equity by showing total comprehensive income, transactions with owners such as dividends and share issues, and transfers between reserves. It does not report cash flows or list assets. Accounting policies are disclosed in the notes.

Question 45Financial Accounting

Which of the following items should be presented as a non-current liability?

  1. Trade payables due within 60 days
  2. A bank overdraft repayable on demand
  3. A bank loan repayable in five years' time Correct answer.
  4. Accrued electricity for the current quarter

Explanation

A liability is classified as non-current when the entity has an unconditional right to defer settlement for at least twelve months after the reporting date. A five-year loan meets this criterion. Payables, accruals and overdrafts are settled in the short term.

Question 46Financial Accounting

A company's trade receivables ledger shows a debit balance of €84,000 while the statement of financial position reports trade receivables of €79,800. Which of the following would explain the difference?

  1. Cash received from customers of €4,200 has been recorded twice
  2. An irrecoverable debt of €4,200 has been written off against the allowance
  3. An allowance for doubtful debts of 5% has been deducted Correct answer.
  4. A contra entry against trade payables of €4,200 has been omitted

Explanation

The receivables ledger records the gross amount owed by customers. An allowance for doubtful debts of 5% of €84,000 is €4,200, and deducting this gives the net carrying amount of €79,800. The allowance is presented as a deduction from receivables rather than posted to individual customer accounts.

Question 47Financial Accounting

Which of the following best explains why a trial balance may still balance even when errors have been made?

  1. Errors of principle and errors of omission affect both sides of the double entry equally Correct answer.
  2. The trial balance checks the arithmetical accuracy of the statement of financial position
  3. A trial balance is prepared before the double entries are posted
  4. All errors are automatically detected by the trial balance

Explanation

A trial balance only proves that total debits equal total credits. Errors such as errors of principle, omission, commission and compensating errors keep the entries in balance and therefore go undetected. It does not test the statement of financial position or precede posting.

Question 48Financial Accounting

A business's bank statement shows a credit balance of €3,200 while its cash book shows a debit balance of €2,900. Cheques paid to suppliers totalling €1,100 have not yet been presented. What is the correct adjusted cash book balance if no other differences exist?

  1. €2,100
  2. €2,900 Correct answer.
  3. €1,800
  4. €4,300

Explanation

Unpresented cheques are a timing difference recorded in the cash book but not yet on the bank statement, so they are dealt with in the bank reconciliation rather than by adjusting the cash book. With no errors identified, the cash book balance of €2,900 stands. The reconciliation then explains the gap to the bank statement balance.

Question 49Financial Accounting

Which of the following is the correct treatment of an increase in the allowance for doubtful debts?

  1. Debit allowance for doubtful debts and credit trade receivables
  2. Debit allowance for doubtful debts and credit irrecoverable debts expense
  3. Debit irrecoverable debts expense and credit allowance for doubtful debts Correct answer.
  4. Debit trade receivables and credit allowance for doubtful debts

Explanation

Increasing the allowance raises the credit balance in the allowance account, so that account is credited. The matching debit is to the irrecoverable debts expense in profit or loss. A decrease would reverse the entries.

Question 50Financial Accounting

Which of the following statements about the going concern assumption is correct?

  1. It applies only to companies listed on a stock exchange
  2. It supports preparing financial statements on the basis that the entity will continue in operation for the foreseeable future Correct answer.
  3. It means that the entity must never make a loss
  4. It requires all assets to be measured at their liquidation value

Explanation

Going concern means the financial statements are prepared on the assumption that the entity will continue in operation for the foreseeable future, with no intention or need to liquidate. If the assumption is not appropriate, a different basis is used and this is disclosed. It applies to all entities preparing financial statements.