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NSSCAS Accounting (8244) study materials
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NSSCAS Accounting (8244) practice questions

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Question 1Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A business has assets of $85,000 and liabilities of $32,000. What is the amount of capital?

  1. $85,000
  2. $117,000
  3. $53,000 Correct answer.
  4. $32,000

Explanation

The accounting equation states that assets equal capital plus liabilities, so capital is found by deducting liabilities from assets. Here $85,000 minus $32,000 gives capital of $53,000.

Question 2Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which statement correctly describes the effect of a business paying a supplier's account by bank transfer?

  1. Liabilities decrease and capital increases
  2. Assets increase and liabilities increase
  3. Assets decrease and liabilities decrease Correct answer.
  4. Assets decrease and capital decreases

Explanation

Settling a trade payable reduces the bank balance, so assets fall, and removes the obligation, so liabilities fall by the same amount. Capital is unaffected because no profit or loss arises from repayment.

Question 3Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

In double-entry bookkeeping, which rule applies when recording a purchase of goods on credit?

  1. Debit purchases, credit cash
  2. Debit purchases, credit trade payable Correct answer.
  3. Debit cash, credit purchases
  4. Debit trade payable, credit purchases

Explanation

Purchases are an expense, and expenses are debited. The matching credit records the increase in the amount owed to the supplier as a trade payable.

Question 4Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A sole trader takes goods from the business for personal use. Which double entry records this?

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

Explanation

Goods withdrawn by the owner reduce business resources and increase drawings. Drawings are debited and the goods are removed from purchases by a credit.

Question 5Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which book of prime entry is used to record credit notes received from suppliers?

  1. General journal
  2. Sales journal
  3. Purchases returns journal Correct answer.
  4. Purchases journal

Explanation

A credit note received relates to goods returned to a supplier, which is a purchase return. These are listed in the purchases returns journal before posting to the ledgers.

Question 6Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which document is sent by a seller to a customer to correct an overcharge on an earlier invoice?

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

Explanation

A credit note reduces the amount owed by the customer and is issued when goods are returned or an invoice was overstated. It is recorded in the seller's sales returns journal.

Question 7Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trial balance extracted at 31 March balances. Which error would still allow the trial balance to balance?

  1. Only the debit side of a transaction was posted
  2. The bank column was added $100 too high
  3. A payment for rent was debited to insurance in error Correct answer.
  4. A sale of $450 was recorded as $540 in both accounts

Explanation

Posting the correct amount to the wrong expense account is a commission error, which keeps debits and credits equal. The trial balance therefore still balances even though the ledger is wrong.

Question 8Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which of the following would appear as a credit balance in a trial balance?

  1. Inventory
  2. Motor vehicles
  3. Trade receivables
  4. Bank loan Correct answer.

Explanation

A bank loan is a liability, and liabilities carry credit balances. Assets such as motor vehicles, receivables and inventory normally carry debit balances.

Question 9Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A business receives a bank loan of $20,000. What is the effect on the accounting equation?

  1. Liabilities increase and capital decreases
  2. Assets increase and liabilities increase Correct answer.
  3. Assets increase and capital increases
  4. Assets decrease and liabilities decrease

Explanation

The bank balance rises, increasing assets, while the obligation to repay rises, increasing liabilities. Capital is unaffected because a loan is not owner's equity.

Question 10Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trader's sales journal totals $12,000 for the month. How is this total posted to the nominal ledger?

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

Explanation

Credit sales increase what customers owe, so trade receivables are debited, and the income is credited to sales. The journal total is posted as a single double entry.

Question 11Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which entry records a contra between the sales ledger and the purchases ledger?

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

Explanation

A contra offsets a balance owed by a customer against a balance owed to the same party as a supplier. The payable is debited to reduce it and the receivable is credited to reduce it.

Question 12Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which of these errors would be revealed by preparing a trial balance?

  1. A credit sale was recorded in the sales journal twice
  2. A purchase of equipment was debited to motor expenses
  3. A transaction was completely omitted from the books
  4. A debit entry of $90 was posted as $900 Correct answer.

Explanation

Posting different amounts to the debit and credit sides of one transaction leaves the two totals unequal, so the trial balance reveals the error. The other errors keep debits and credits equal.

Question 13Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

What is the purpose of the purchases returns journal?

  1. To record cash purchases of goods
  2. To record goods returned to suppliers on credit Correct answer.
  3. To record discounts received from suppliers
  4. To record goods returned by customers on credit

Explanation

The purchases returns journal lists credit notes received for goods returned to suppliers. Its total is posted to the credit of the purchases returns account and the debit of trade payables.

Question 14Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trader pays $600 for rent by cheque. Which accounts are affected and in which direction?

  1. Debit rent, credit cash
  2. Debit bank, credit cash
  3. Debit rent, credit bank Correct answer.
  4. Debit bank, credit rent

Explanation

Rent is an expense, so it is debited, and the bank balance falls, so bank is credited. Paying by cheque means the bank account, not the cash account, is used.

Question 15Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

The trial balance shows a difference of $45, which is a multiple of 9. Which error is most likely?

  1. A transposition error Correct answer.
  2. A complete omission of a transaction
  3. A posting to the wrong account of the same class
  4. A compensating error

Explanation

A difference divisible by nine often indicates two digits have been transposed, such as $54 written as $45. Omissions and commission errors do not create an imbalance at all.

Question 16Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which statement about the general journal is correct?

  1. It records transactions for which no other book of prime entry exists Correct answer.
  2. It is used only to record cash transactions
  3. It replaces the sales journal when sales are numerous
  4. It contains only the trade receivables ledger

Explanation

The general journal is used for entries such as corrections of errors, opening entries and adjustments that do not fit the other day books. Each entry includes a narration explaining it.

Question 17Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A business has capital of $40,000, liabilities of $15,000 and drawings of $5,000. What are its assets?

  1. $55,000
  2. $50,000 Correct answer.
  3. $60,000
  4. $45,000

Explanation

Assets equal capital plus liabilities, and drawings do not change total assets directly here. Capital of $40,000 plus liabilities of $15,000 gives assets of $55,000 only if drawings are ignored, but drawings reduce capital to $35,000, giving assets of $50,000.

Question 18Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which of these is recorded in the sales journal?

  1. Sales returns from customers
  2. Credit sales of goods Correct answer.
  3. Sale of a delivery van on credit
  4. Cash sales of goods

Explanation

The sales journal records credit sales of goods in the ordinary course of trading. Cash sales go in the cash book and sales returns in the sales returns journal.

Question 19Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A customer's account in the sales ledger shows a credit balance of $80. What does this indicate?

  1. The customer owes the business $80
  2. The customer has been given a trade discount
  3. The customer has been overpaid or has returned goods after paying Correct answer.
  4. The customer has been written off as a bad debt

Explanation

A credit balance on a receivable account is abnormal and means the business owes the customer money, usually through overpayment or a credit note issued after settlement. It should be reclassified as a payable.

Question 20Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which accounting concept supports recording a sale when goods are delivered to the customer, even if payment is received later?

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

Explanation

Under the accruals concept, income is recognised when it is earned rather than when cash is received. Delivery of the goods means the sale has occurred and should be recorded then.

Question 21Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trader pays an insurance premium of $1,200 on 1 January covering twelve months. The trader initially records insurance payments as expenses and adjusts for prepayments at period end. What is the correct double entry on 1 January?

  1. Debit insurance $1,200, credit bank $1,200 Correct answer.
  2. Debit bank $1,200, credit insurance $1,200
  3. Debit insurance $100, credit bank $100
  4. Debit prepaid insurance $1,200, credit bank $1,200

Explanation

The full amount is initially recorded as an expense when paid, and any unused portion is transferred to prepayments at period end. Under the stated policy, the insurance account is debited and bank credited on 1 January.

Question 22Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trial balance has total debits of $96,400 and total credits of $96,040. Where should the difference be entered?

  1. Directly into the profit and loss account
  2. Directly into the capital account
  3. In a suspense account as a debit of $360
  4. In a suspense account as a credit of $360 Correct answer.

Explanation

When the trial balance does not agree, the difference is placed in a suspense account so that the statement totals agree. Debits are lower by $360, so the suspense account needs a credit of $360.

Question 23Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which of these transactions affects only the composition of assets, leaving total assets unchanged?

  1. Receiving a loan from a bank
  2. Paying wages in cash
  3. Buying equipment for cash Correct answer.
  4. Buying inventory on credit

Explanation

Buying equipment for cash swaps one asset for another, so total assets are unchanged. The other transactions change total assets or introduce liabilities.

Question 24Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which entry correctly records a discount allowed to a credit customer?

  1. Debit discount allowed, credit trade receivables Correct answer.
  2. Debit trade receivables, credit discount allowed
  3. Debit discount allowed, credit cash
  4. Debit cash, credit discount received

Explanation

Discount allowed is an expense to the seller, so it is debited, and the amount owed by the customer falls, so receivables are credited. No cash is involved in the discount itself.

Question 25Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A business records a credit sale of $500 in the sales journal but posts it to the sales account as $50. Which statement is correct?

  1. The trial balance will balance because both sides are affected equally
  2. The error is a complete reversal of entries
  3. This is an error of principle requiring no correction
  4. The trial balance will not balance and a suspense account is needed Correct answer.

Explanation

The debit to receivables is $500 while the credit to sales is only $50, so debits exceed credits by $450. The trial balance will not agree and the difference is held in a suspense account until corrected.

Question 26Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trader purchases office equipment for $2,400 on credit from a supplier. Which double entry records this transaction in the trader's nominal ledger?

  1. Debit office equipment $2,400; credit cash $2,400
  2. Debit office equipment $2,400; credit payables $2,400 Correct answer.
  3. Debit purchases $2,400; credit payables $2,400
  4. Debit payables $2,400; credit office equipment $2,400

Explanation

Office equipment is an asset, and assets increase on the debit side, so the equipment account is debited. The supplier is owed money, so the payable (a liability) increases and is credited. Because the purchase is on credit, cash is not involved.

Question 27Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

Which book of prime entry is used to record a credit note received from a supplier for goods returned?

  1. Purchases journal
  2. Sales returns journal
  3. General journal
  4. Purchases returns journal Correct answer.

Explanation

Goods returned to a supplier are recorded in the purchases returns journal (also called the returns outwards journal). Each credit note received from a supplier is listed there before being posted to the purchases returns account and the supplier's account.

Question 28Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trader's trial balance balances, yet the rent account has been understated by $900 because a cheque payment of $900 was completely omitted from the records. Which statement explains why the trial balance still balances?

  1. The trial balance is only a listing of balances and never reveals errors of principle
  2. The error is a compensating error that cancels a separate mistake in the bank account
  3. The omission affects both the debit and credit sides equally, so total debits still equal total credits Correct answer.
  4. The rent account is a nominal account, and nominal accounts are excluded from the trial balance

Explanation

A complete omission means neither the debit entry nor the credit entry was made, so the totals of both sides of the trial balance are reduced by the same amount. Equality between total debits and total credits is therefore preserved. This is why a balanced trial balance does not prove that the ledger is free from error.

Question 29Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trader's cash book shows a debit balance of $3,200, and the bank column of the cash book has been posted correctly. In the nominal ledger, which account is credited when the cash book balance is transferred to the trial balance?

  1. The sales account is credited with $3,200
  2. The bank account is credited with $3,200
  3. The capital account is credited with $3,200
  4. The cash book is not posted to the nominal ledger at all, since it is itself a book of prime entry Correct answer.

Explanation

The cash book is a book of prime entry and also part of the double-entry system, so its balance is already a ledger balance. It is listed in the trial balance as a debit balance rather than being posted to a separate nominal account. No additional credit entry arises when the trial balance is prepared.

Question 30Accounting fundamentals: the accounting equation, double-entry bookkeeping, books of prime entry, and the trial balance

A trader discovers that a credit sale of $750 to a customer was entered in the sales journal as $570 and posted to both the sales account and the customer's account at that amount. Which correcting entry is required?

  1. Debit the sales account $750; credit the customer's account $750
  2. Debit the customer's account $180; credit the sales account $180 Correct answer.
  3. Debit the sales account $180; credit the customer's account $180
  4. Debit the customer's account $570; credit the sales account $570

Explanation

The sale was understated by $180 ($750 minus $570), so the customer owes more and sales are higher than recorded. The customer's account (a receivable) must be debited with the increase, and the sales account credited with the same amount. This restores both the ledger and the trial balance.

Question 31Preparation and presentation of financial statements for sole traders and limited companies

A sole trader's trial balance shows a debit balance on the drawings account. How is this balance treated when preparing the financial statements?

  1. Shown as a current asset in the statement of financial position
  2. Shown as an expense in the statement of profit or loss
  3. Deducted from capital in the statement of financial position Correct answer.
  4. Added to revenue in the statement of profit or loss

Explanation

Drawings represent resources taken by the owner for personal use, so they reduce the owner's equity rather than being an expense of the business. In the statement of financial position the drawings balance is deducted from opening capital together with any loss.

Question 32Preparation and presentation of financial statements for sole traders and limited companies

A sole trader has opening capital of $40,000, profit for the year of $18,000 and drawings of $7,000. What is the closing capital balance?

  1. $51,000 Correct answer.
  2. $47,000
  3. $29,000
  4. $65,000

Explanation

Closing capital equals opening capital plus profit for the year less drawings: $40,000 + $18,000 − $7,000 = $51,000. This is the standard capital account reconciliation used in the statement of financial position.

Question 33Preparation and presentation of financial statements for sole traders and limited companies

Which item appears in a statement of profit or loss but never in a statement of financial position?

  1. Accumulated depreciation
  2. Inventory at the year end
  3. Trade payables
  4. Depreciation charge for the year Correct answer.

Explanation

The depreciation charge is an expense allocated to the current period and is closed to profit or loss. Accumulated depreciation, inventory and payables are all balances carried forward and reported in the statement of financial position.

Question 34Preparation and presentation of financial statements for sole traders and limited companies

A limited company issues 100,000 ordinary shares of $1 each at a premium of $0.40 per share, fully paid. How is the transaction recorded?

  1. Share capital $140,000 only
  2. Share capital $40,000 and share premium $100,000
  3. Share capital $100,000 and share premium $40,000 Correct answer.
  4. Share capital $100,000 and retained earnings $40,000

Explanation

The nominal value of $1 per share is credited to share capital, giving $100,000, and the excess of $0.40 per share is credited to share premium, giving $40,000. Share premium is a capital reserve and is never treated as revenue.

Question 35Preparation and presentation of financial statements for sole traders and limited companies

Which statement correctly describes the purpose of the statement of changes in equity for a limited company?

  1. It reconciles opening and closing equity by showing movements in share capital, reserves and retained earnings Correct answer.
  2. It records the market value of the company's shares at the reporting date
  3. It lists the non-current assets acquired during the year and their carrying amounts
  4. It shows the cash generated from operating, investing and financing activities

Explanation

The statement of changes in equity explains how each component of equity moved during the period, including share issues, transfers to reserves, dividends and total comprehensive income. It links the statement of financial position at the start and end of the year.

Question 36Preparation and presentation of financial statements for sole traders and limited companies

A company's trial balance has a debit balance on the income tax account. How should this be presented?

  1. As a current liability for income tax payable Correct answer.
  2. As a current asset for income tax recoverable
  3. As a deduction from retained earnings only
  4. As an expense within cost of sales

Explanation

A debit balance on the tax account means more tax has been paid in instalments than is currently charged, so the unpaid amount is owed to the tax authority. It is presented as a current liability in the statement of financial position.

Question 37Preparation and presentation of financial statements for sole traders and limited companies

Which characteristic distinguishes a limited company's financial statements from those of a sole trader?

  1. The company prepares a trial balance before the financial statements
  2. The company reports share capital and retained earnings within equity Correct answer.
  3. The company recognises depreciation on non-current assets
  4. The company reports drawings as a deduction from equity

Explanation

A company's equity is divided into share capital, reserves and retained earnings because ownership is represented by shares. A sole trader's equity is a single capital account adjusted for profit and drawings.

Question 38Preparation and presentation of financial statements for sole traders and limited companies

A sole trader's statement of financial position shows capital of $60,000 and liabilities of $25,000. What is the total value of assets?

  1. $35,000
  2. $25,000
  3. $85,000 Correct answer.
  4. $60,000

Explanation

The accounting equation states that assets equal capital plus liabilities, so $60,000 + $25,000 = $85,000. Every statement of financial position must balance on this identity.

Question 39Preparation and presentation of financial statements for sole traders and limited companies

A company declares an ordinary dividend of $12,000 during the year, of which $4,000 remains unpaid at the year end. How is this presented?

  1. $12,000 deducted from share premium and $4,000 shown as a current liability
  2. $12,000 deducted from retained earnings and $4,000 shown as a current liability Correct answer.
  3. $8,000 deducted from retained earnings and no liability recognised
  4. $4,000 deducted from retained earnings and $12,000 shown as a current liability

Explanation

A declared dividend is recognised in full against retained earnings through the statement of changes in equity. The unpaid portion is a present obligation and is reported as a current liability at the reporting date.

Question 40Preparation and presentation of financial statements for sole traders and limited companies

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

  1. Retained earnings
  2. Share premium Correct answer.
  3. General reserve created from profits
  4. Revaluation surplus realised through sale of the asset

Explanation

Share premium arises from the issue of shares above nominal value and is treated as a capital reserve, so it is not available for distribution as dividends. Retained earnings and reserves created from profits are distributable.

Question 41Preparation and presentation of financial statements for sole traders and limited companies

A company has profit before tax of $90,000 and an income tax charge of $22,000. It paid tax instalments of $15,000 during the year. What is the closing tax liability?

  1. $7,000 Correct answer.
  2. $22,000
  3. $15,000
  4. $37,000

Explanation

The liability is the tax charge for the year less instalments already paid: $22,000 − $15,000 = $7,000. This balance is presented as a current liability in the statement of financial position.

Question 42Preparation and presentation of financial statements for sole traders and limited companies

A company's retained earnings opened at $80,000. Profit after tax was $35,000, a transfer of $10,000 was made to a general reserve and dividends of $18,000 were paid. What is closing retained earnings?

  1. $87,000 Correct answer.
  2. $77,000
  3. $107,000
  4. $97,000

Explanation

Closing retained earnings are $80,000 + $35,000 − $10,000 − $18,000 = $87,000. The transfer to general reserve moves equity between components and reduces retained earnings even though total equity is unchanged.

Question 43Preparation and presentation of financial statements for sole traders and limited companies

Which item would be classified as a distribution cost in a company's statement of profit or loss?

  1. Carriage inwards on raw materials purchased
  2. Wages of assembly line workers
  3. Depreciation of factory machinery used in production
  4. Carriage outwards on goods sold to customers Correct answer.

Explanation

Distribution costs are expenses incurred in delivering goods to customers and storing finished goods, so outward carriage belongs there. Costs of bringing goods in and converting them are part of cost of sales.

Question 44Preparation and presentation of financial statements for sole traders and limited companies

A company revalues its building upwards by $50,000. How does this affect the financial statements?

  1. Other comprehensive income increases and a revaluation surplus is added to equity Correct answer.
  2. The revaluation surplus is shown as a non-current liability
  3. Profit for the year increases by $50,000
  4. A gain is recognised in administrative expenses

Explanation

An upward revaluation is recognised in other comprehensive income and accumulated in a revaluation surplus within equity. It does not pass through profit or loss for the year.

Question 45Preparation and presentation of financial statements for sole traders and limited companies

Which statement about the presentation of a company's statement of financial position is correct?

  1. Only assets with a market value above cost are reported
  2. Assets are always listed in alphabetical order of their account names
  3. Liabilities are deducted from the related asset to show a net figure in equity
  4. Current assets and current liabilities are presented separately from non-current items Correct answer.

Explanation

IAS 1 requires a classified statement of financial position in which current and non-current assets and liabilities are shown separately. This helps users assess liquidity and the timing of obligations.

Question 46Preparation and presentation of financial statements for sole traders and limited companies

A sole trader's trial balance includes a credit balance of $2,400 on the bank loan account and a debit balance of $1,800 on the bank current account. How are these presented?

  1. Net non-current liability of $4,200
  2. Bank of $1,800 as a current asset and loan of $2,400 as a current liability
  3. Bank overdraft of $1,800 as a current liability and loan of $2,400 as a non-current liability Correct answer.
  4. Net current liability of $600

Explanation

A debit balance on the bank account indicates an overdraft, which is repayable on demand and therefore a current liability. The loan is presented separately as a non-current liability unless it is due within twelve months.

Question 47Preparation and presentation of financial statements for sole traders and limited companies

A company has 200,000 ordinary shares of $1 each in issue and makes a 1-for-4 bonus issue. What is the effect on equity?

  1. Share capital increases by $50,000 and total equity increases by $50,000
  2. Share capital increases by $50,000 and retained earnings decrease by $50,000 Correct answer.
  3. Share capital increases by $50,000 and share premium increases by $50,000
  4. Share capital is unchanged and retained earnings decrease by $50,000

Explanation

A bonus issue converts reserves into share capital, issuing 50,000 new shares at $1 each. Total equity is unchanged because retained earnings fall by exactly the amount added to share capital.

Question 48Preparation and presentation of financial statements for sole traders and limited companies

A company's statement of profit or loss shows revenue of $500,000 and cost of sales of $320,000. Administrative expenses are $90,000 and distribution costs $40,000. What is the operating profit?

  1. $90,000
  2. $140,000
  3. $50,000 Correct answer.
  4. $180,000

Explanation

Operating profit is gross profit less operating expenses: ($500,000 − $320,000) − $90,000 − $40,000 = $50,000. Both administrative and distribution costs are deducted to arrive at operating profit.

Question 49Preparation and presentation of financial statements for sole traders and limited companies

Which item would correctly appear under administrative expenses rather than cost of sales?

  1. Factory supervisor's salary
  2. Depreciation of production machinery
  3. Freight charges on raw materials received
  4. Audit fee for the statutory audit Correct answer.

Explanation

Administrative expenses cover the general running of the company, including the statutory audit fee. Costs incurred in acquiring or converting inventory are classified within cost of sales.

Question 50Preparation and presentation of financial statements for sole traders and limited companies

A company's retained earnings are $120,000 and it makes a 1-for-3 rights issue at $2 per share on 150,000 existing $1 ordinary shares. What is the amount credited to share premium?

  1. $100,000
  2. $50,000 Correct answer.
  3. $75,000
  4. $25,000

Explanation

A 1-for-3 rights issue creates 50,000 new shares. Each raises $2, of which $1 is nominal value and $1 is premium, giving share premium of 50,000 × $1 = $50,000.