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NCEA L1 Commerce study materials
NCEA L1 Commerce study resources

NCEA L1 Commerce practice questions

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Question 1Business

A small business records $12,000 of sales, $7,000 of expenses and $2,000 of drawings for the year. What is the owner's equity change from the year's trading?

  1. $5,000 increase
  2. $12,000 increase
  3. $7,000 increase
  4. $3,000 increase Correct answer.

Explanation

Profit is sales minus expenses, which is $12,000 − $7,000 = $5,000. Drawings reduce equity, so the net change is $5,000 − $2,000 = $3,000 increase. Drawings are a distribution to the owner, not an expense.

Question 2Business

In the accounting equation, which item is classified as a liability?

  1. Cash at bank
  2. Accounts payable to a supplier Correct answer.
  3. Inventory held for resale
  4. Owner's capital

Explanation

A liability is an obligation to pay an external party in the future. Accounts payable arises when goods or services are bought on credit, so it is owed to the supplier. Inventory, cash and capital are not external obligations.

Question 3Business

A business pays $900 cash for a one-year insurance policy. What is the effect on the accounting equation?

  1. Assets increase $900 and liabilities increase $900
  2. Assets decrease $900 and liabilities decrease $900
  3. One asset increases and another asset decreases, so total assets are unchanged Correct answer.
  4. Assets decrease $900 and equity decreases $900

Explanation

Prepaid insurance is an asset, and it is bought with cash, which is also an asset. The transaction simply swaps one asset for another, so total assets and total equity stay the same. The expense is recognised later as the cover is used.

Question 4Business

Which document would a business issue when it sells goods on credit to another business?

  1. A bank statement
  2. A receipt
  3. An invoice Correct answer.
  4. A purchase order

Explanation

An invoice is issued by the seller to request payment and records what was sold, the amount and the payment terms. It is the standard evidence for a credit sale. The buyer uses it to confirm the debt owed.

Question 5Business

A firm's bank statement shows a debit balance of $4,200 while its cash book shows $4,600. Outstanding cheques total $600 and there are no other differences. What is the correct reconciled bank balance?

  1. $5,200
  2. $4,200
  3. $4,600
  4. $4,000 Correct answer.

Explanation

Outstanding cheques have been recorded in the cash book but not yet cleared the bank, so they reduce the bank balance. The reconciled figure is $4,600 − $600 = $4,000. The statement balance of $4,200 is not yet adjusted for those unpresented cheques.

Question 6Business

Which pair of accounts is closed off to the profit and loss summary at the end of the year?

  1. Revenue and expenses Correct answer.
  2. Accounts receivable and accounts payable
  3. Cash at bank and inventory
  4. Drawings and capital

Explanation

Revenue and expense accounts measure performance for one period, so they are closed to the profit and loss summary to calculate profit. Their balances then start again at zero for the new year. Asset, liability and equity accounts carry forward.

Question 7Business

A business receives $500 from a debtor whose account was previously written off as bad. Under the allowance method, what is recorded?

  1. Credit sales $500
  2. Debit drawings $500
  3. Debit bad debts expense $500
  4. Debit accounts receivable $500 and credit allowance for doubtful accounts $500, then debit bank $500 and credit accounts receivable $500 Correct answer.

Explanation

Under the allowance method, first reinstate the written-off receivable by debiting accounts receivable and crediting the allowance for doubtful accounts. Then debit bank and credit accounts receivable for the receipt. These entries create neither a new sale nor recovery income and have no immediate effect on profit.

Question 8Business

Which statement best describes the purpose of a trial balance?

  1. It records every transaction in date order
  2. It proves the business made a profit
  3. It checks that total debits equal total credits Correct answer.
  4. It shows the market value of the business

Explanation

A trial balance lists ledger balances and confirms that debits and credits agree in total. Agreement gives arithmetic assurance but does not prove the records are error-free. It does not measure profit or value.

Question 9Business

Goods costing $800 are sold on credit for $1,200. Which entry correctly records the cost of the goods sold?

  1. Debit accounts receivable $800, credit sales $800
  2. Debit purchases $800, credit cash $800
  3. Debit cost of goods sold $800, credit inventory $800 Correct answer.
  4. Debit inventory $800, credit cost of goods sold $800

Explanation

Under the perpetual system, selling goods moves their cost from inventory to the cost of goods sold expense. The expense increases with a debit and inventory decreases with a credit. Sales revenue is recorded separately at the selling price.

Question 10Business

A business has current assets of $30,000 and current liabilities of $20,000. What does a current ratio of 1.5:1 indicate?

  1. The business has $1.50 of profit for every $1 of sales
  2. The business holds $1.50 of cash for every $1 of inventory
  3. The business owes $1.50 for every $1 it owns
  4. The business has $1.50 of current assets for every $1 of current liabilities Correct answer.

Explanation

The current ratio divides current assets by current liabilities, so 30,000 ÷ 20,000 = 1.5. It shows short-term liquidity, meaning $1.50 of near-term resources backs each $1 of near-term debt. It says nothing directly about profitability.

Question 11Business

Which factor would most directly increase the break-even quantity for a product?

  1. A fall in fixed costs
  2. A fall in the selling price per unit with costs unchanged Correct answer.
  3. An increase in the selling price per unit
  4. A fall in variable cost per unit

Explanation

Break-even quantity equals fixed costs divided by contribution per unit. A lower selling price reduces contribution per unit, so more units must be sold to cover the same fixed costs. The other changes raise contribution or lower the target.

Question 12Business

A business sells 2,000 units at $15 each with variable costs of $9 per unit and fixed costs of $8,000. What is the margin of safety in units?

  1. 333 units
  2. 2,000 units
  3. 667 units Correct answer.
  4. 1,333 units

Explanation

Contribution per unit is $15 − $9 = $6, so break-even is $8,000 ÷ $6 ≈ 1,333 units. Margin of safety is actual sales minus break-even: 2,000 − 1,333 ≈ 667 units. This is the cushion before losses begin.

Question 13Business

Which of these is a fixed cost for a bakery in the short term?

  1. Weekly rent for the shop Correct answer.
  2. Flour used in baking
  3. Packaging for each cake
  4. Electricity that rises with each oven batch

Explanation

A fixed cost does not change with output over the short term, and shop rent is paid regardless of how much is baked. Flour, packaging and batch-linked electricity all vary with production volume.

Question 14Business

A business owner wants to limit personal liability while raising capital by selling shares to the public. Which structure best fits?

  1. Sole trader
  2. Limited partnership
  3. Ordinary partnership
  4. Public limited company Correct answer.

Explanation

A public limited company can offer shares to the public and gives shareholders limited liability. Sole traders and partners generally bear unlimited personal liability and cannot sell shares publicly. This structure suits large-scale capital raising.

Question 15Business

Which statement describes an advantage of a franchise for the franchisee?

  1. The franchisee gains a proven brand and operating system Correct answer.
  2. The franchisee keeps all profits without paying fees
  3. The franchisee avoids any start-up costs
  4. The franchisee has complete freedom over branding

Explanation

A franchisee buys the right to use an established brand and a tested way of operating, which reduces some start-up risk. In return, fees and royalties are paid to the franchisor and branding rules must be followed. Start-up costs are not avoided.

Question 16Business

A firm's market share falls from 25% to 20% while total market sales rise. What is the most likely explanation?

  1. The firm's own sales grew faster than the whole market
  2. The firm's fixed costs increased
  3. The firm's own sales grew more slowly than the whole market Correct answer.
  4. The firm reduced its prices

Explanation

Market share is the firm's sales divided by total market sales. If the market expands faster than the firm's own sales, the firm's proportion of that larger market falls. Price and cost changes alone do not determine share without knowing relative sales growth.

Question 17Business

Which element of the marketing mix deals with how a product reaches the customer?

  1. Promotion
  2. Product
  3. Price
  4. Place Correct answer.

Explanation

Place covers distribution channels and how the product gets from producer to customer, including retailers and online stores. Product concerns features, price concerns what is charged, and promotion concerns communication. Each element must support the others.

Question 18Business

A new competitor opens nearby and a cafe's sales fall. Which response best reflects a marketing orientation?

  1. Research customer needs and adjust the offer Correct answer.
  2. Raise prices without changing anything else
  3. Cut all staff training to save money
  4. Ignore the competitor and keep trading unchanged

Explanation

A marketing orientation puts customer needs at the centre of decisions. Researching what customers want and adapting the product, price or service responds to the competitive threat. Cost-cutting or ignoring the market does not address why customers leave.

Question 19Business

What is the main purpose of a business preparing a cash flow forecast?

  1. To determine the tax rate for the year
  2. To calculate the depreciation of equipment
  3. To estimate the timing of cash inflows and outflows Correct answer.
  4. To record the market value of shares

Explanation

A cash flow forecast projects when money will come in and go out over a period, helping the business plan for shortages. It supports decisions such as arranging overdrafts in advance. It is not an accounting record of past transactions.

Question 20Business

A business expects cash outflows of $40,000 and inflows of $35,000 next quarter, with an opening bank balance of $2,000. What is the closing balance?

  1. $7,000 overdrawn
  2. $5,000 positive
  3. $3,000 overdrawn Correct answer.
  4. $2,000 positive

Explanation

Net cash movement is $35,000 − $40,000 = −$5,000. Adding the opening balance of $2,000 gives $2,000 − $5,000 = −$3,000, a $3,000 overdrawn position. The business needs to arrange short-term finance before the shortfall occurs.

Question 21Business

Which of these is an example of internal finance for a business?

  1. A bank loan
  2. A government grant
  3. Issuing new shares
  4. Retained profits Correct answer.

Explanation

Internal finance comes from within the business, and retained profits are earnings kept rather than distributed. Bank loans, grants and share issues bring in money from external parties. Internal funds avoid interest and ownership dilution.

Question 22Business

A business with high fixed costs and low variable costs operates in a volatile market. Which risk is greatest?

  1. Low operating gearing means small losses in a downturn
  2. The business cannot calculate contribution per unit
  3. Variable costs will always exceed fixed costs
  4. High operating gearing means profits fall sharply when sales drop Correct answer.

Explanation

High fixed costs create high operating gearing, so once sales fall below break-even, losses grow quickly. Contribution per unit is high, which magnifies the effect of sales changes on profit. Volatile markets make this risk harder to manage.

Question 23Business

Which statement best explains why businesses segment a market?

  1. To increase costs by making more product versions
  2. To sell one standard product to everyone
  3. To avoid gathering customer information
  4. To target groups with similar needs more effectively Correct answer.

Explanation

Market segmentation groups customers by shared characteristics such as age, income or location. Targeting these groups lets a business tailor the marketing mix and compete more effectively. It is not about avoiding information or simply adding cost.

Question 24Business

A business switches from paying staff a fixed wage to paying per item produced. What is the most likely effect on its cost structure?

  1. Fixed costs rise and variable costs fall
  2. Both fixed and variable costs fall
  3. Fixed costs fall and variable costs rise Correct answer.
  4. Total costs become fixed

Explanation

Paying per item turns labour from a fixed wage into a cost that varies with output. Fixed costs therefore fall while variable costs per unit rise. This shifts risk onto employees and links pay to productivity.

Question 25Business

Which of these best describes the role of an entrepreneur in a new business?

  1. To follow only instructions set by the government
  2. To guarantee that the business will make a profit
  3. To organise resources and take calculated risks Correct answer.
  4. To avoid any personal financial commitment

Explanation

An entrepreneur combines land, labour and capital to create a product or service and accepts the risk of loss. Profit is a possible reward, not a guarantee. Taking calculated risks and organising resources are central to the role.

Question 26Business

A sole trader earns revenue of $85,000 and has expenses of $61,000 for the year. What is the owner's profit?

  1. $61,000
  2. $85,000
  3. $24,000 Correct answer.
  4. $146,000

Explanation

Profit is calculated as total revenue minus total expenses, so $85,000 minus $61,000 gives $24,000. This figure represents the income the owner retains before drawings and tax.

Question 27Business

What is the accounting equation that a balance sheet is built on?

  1. Assets = Liabilities + Equity Correct answer.
  2. Assets = Liabilities − Equity
  3. Liabilities = Assets + Equity
  4. Equity = Assets + Liabilities

Explanation

The accounting equation states that everything a business owns (assets) is funded either by outsiders (liabilities) or by the owner (equity). It must always balance because the two sides describe the same resources from different viewpoints.

Question 28Business

A business buys equipment for $6,000 paying by cheque. How does this transaction affect the balance sheet?

  1. Equipment increases and bank decreases, so total assets fall
  2. Equipment increases and bank decreases, so total assets are unchanged Correct answer.
  3. Equipment increases and equity increases by $6,000
  4. Equipment increases and liabilities increase by $6,000

Explanation

One asset (equipment) rises by $6,000 while another asset (bank) falls by the same amount. Because assets are swapped rather than gained or lost, total assets and total equity stay the same.

Question 29Business

Which document is sent by a seller to a buyer to request payment for goods supplied on credit?

  1. Purchase order
  2. Receipt
  3. Statement of account
  4. Invoice Correct answer.

Explanation

An invoice itemises the goods or services supplied, the amount owed and the payment terms. It acts as the seller's formal request for payment and is the source document for recording a credit sale.

Question 30Business

A business records a credit sale of $900. Which double-entry is correct?

  1. Debit bank $900, credit sales $900
  2. Debit accounts receivable $900, credit bank $900
  3. Debit accounts receivable $900, credit sales $900 Correct answer.
  4. Debit sales $900, credit accounts receivable $900

Explanation

A credit sale increases the asset accounts receivable, and assets increase on the debit side. Sales income increases on the credit side, so the matching credit entry goes to the sales account.

Question 31Business

Which of these is a current liability for a retail business?

  1. A bank overdraft repayable on demand Correct answer.
  2. Shop fittings owned outright
  3. Inventory held for resale
  4. A mortgage repayable in 15 years

Explanation

A current liability is a debt due within the next twelve months, and a bank overdraft repayable on demand fits that definition. It must be settled in the short term using current assets.

Question 32Business

A business has current assets of $48,000, inventory of $18,000 and current liabilities of $24,000. What is the liquid (acid-test) ratio?

  1. 0.75:1
  2. 1.25:1 Correct answer.
  3. 2:1
  4. 1.5:1

Explanation

The liquid ratio excludes inventory because it may be slow to convert to cash, so ($48,000 − $18,000) ÷ $24,000 = 1.25:1. A result above 1:1 suggests the business can meet short-term debts without selling stock.

Question 33Business

What does a gross profit margin of 20% mean for a business?

  1. Operating expenses equal 20% of sales
  2. For every $100 of sales, $20 is left as net profit
  3. The business keeps 20% of its inventory each year
  4. For every $100 of sales, $20 remains after deducting cost of goods sold Correct answer.

Explanation

Gross profit margin compares gross profit with sales revenue, so 20% means $20 of gross profit is earned per $100 of sales. It is measured before operating expenses such as rent and wages are deducted.

Question 34Business

A business has a high inventory turnover ratio compared with its industry. What is the most likely interpretation?

  1. Stock is selling quickly, reducing the risk of holding obsolete inventory Correct answer.
  2. The business is holding too much stock relative to sales
  3. The business has an excessive level of accounts receivable
  4. The business is charging prices well above its competitors

Explanation

Inventory turnover measures how many times stock is sold and replaced in a period, so a high figure indicates fast-moving stock. Rapid turnover lowers storage costs and the risk of stock becoming outdated.

Question 35Business

Which statement best describes the purpose of a budget for a small business?

  1. It guarantees the business will make a profit
  2. It sets planned income and spending targets that actual results can be compared against Correct answer.
  3. It records the actual transactions that have already occurred
  4. It replaces the need to keep financial statements

Explanation

A budget is a forward-looking plan of expected receipts and payments or revenues and expenses. Comparing actual figures with the budget allows the owner to identify variances and take corrective action.

Question 36Business

A firm's cash budget shows a closing balance of −$3,000 for March. What does this indicate?

  1. The business is forecast to have a bank overdraft by the end of March Correct answer.
  2. The business has overstated its forecast sales
  3. The business is forecast to make a loss in March
  4. The business will have surplus cash to invest in March

Explanation

A negative closing cash balance means forecast payments exceed forecast receipts plus the opening balance. The business would need overdraft facilities or extra finance to cover the shortfall.

Question 37Business

Which of these is an example of equity finance for a sole trader?

  1. A hire purchase agreement for a delivery van
  2. A loan from a bank repayable over five years
  3. The owner investing personal savings into the business Correct answer.
  4. A supplier allowing 30 days to pay for stock

Explanation

Equity finance comes from the owner's own funds and does not need to be repaid with interest. Owner's savings therefore increase the capital (equity) of the business.

Question 38Business

A business wants to expand but is unwilling to give up any control or share ownership. Which source of finance best suits this goal?

  1. Issuing new shares to outside investors
  2. Bringing in a business partner
  3. A term loan from a bank Correct answer.
  4. Listing on the share market

Explanation

A bank loan provides funds while the lender has no ownership stake or voting rights, so the owner keeps full control. The business must repay the loan plus interest according to the agreed terms.

Question 39Business

A business has fixed costs of $30,000, a selling price of $25 per unit and variable cost of $15 per unit. How many units must it sell to break even?

  1. 1,200 units
  2. 3,000 units Correct answer.
  3. 7,500 units
  4. 2,000 units

Explanation

Contribution per unit is $25 − $15 = $10, so break-even is $30,000 ÷ $10 = 3,000 units. At this level of sales total contribution exactly covers fixed costs.

Question 40Business

A business increases its selling price while variable and fixed costs stay the same. What happens to the break-even quantity?

  1. It stays the same because costs have not changed
  2. It falls because fixed costs are spread over more units
  3. It rises because higher prices reduce demand
  4. It falls because each unit sold contributes more towards fixed costs Correct answer.

Explanation

A higher selling price raises the contribution per unit, so fewer units are needed to cover the same fixed costs. Break-even quantity is fixed costs divided by contribution per unit.

Question 41Business

Which of these is a variable cost for a furniture manufacturer?

  1. Salary of the factory manager
  2. Interest on a long-term loan
  3. Timber used in each piece of furniture Correct answer.
  4. Annual insurance on the factory building

Explanation

A variable cost changes in direct proportion to output, and timber is consumed with every item produced. More furniture means more timber purchased.

Question 42Business

A business moves its production to a larger factory, raising fixed costs but lowering variable cost per unit. What is the most likely effect?

  1. Break-even quantity falls and profit grows at every sales level
  2. The business becomes less risky because fixed costs are higher
  3. Both fixed and variable costs per unit fall
  4. Break-even quantity rises but profit grows faster once sales exceed break-even Correct answer.

Explanation

Higher fixed costs push the break-even point up because more contribution is needed to cover them. However, the lower variable cost raises contribution per unit, so profit increases more steeply beyond break-even.

Question 43Business

Which statement best explains why a business sets a price below its competitors when launching a new product?

  1. To signal that the product is premium quality
  2. To recover research and development costs as fast as possible
  3. To reduce the quantity of stock it must produce
  4. To attract customers quickly and build market share before raising the price later Correct answer.

Explanation

Penetration pricing uses a low initial price to encourage trial and win customers from rivals. Once demand and market share are established, the price may be increased.

Question 44Business

A cafe decides to open earlier to capture commuters buying breakfast. Which element of the marketing mix is being changed?

  1. Price
  2. Product
  3. Promotion
  4. Place Correct answer.

Explanation

Place covers how and where a product is made available to customers, including opening hours and location. Serving commuters earlier changes the availability of the service.

Question 45Business

A business collects data showing that customers aged 18–24 buy mainly online while those over 50 prefer in-store shopping. What is the best use of this information?

  1. Target each group with a different channel and promotional approach Correct answer.
  2. Raise prices for both groups to increase revenue
  3. Use the same marketing message for all customers
  4. Stop selling to one group to simplify operations

Explanation

Market segmentation groups customers with similar needs so marketing can be tailored to each. Using different channels for each segment should improve response rates and sales.

Question 46Business

Which of these is a benefit of operating as a company rather than a sole trader?

  1. The company pays no tax on its profits
  2. Shareholders have limited liability for the company's debts Correct answer.
  3. The owners can withdraw profits without any record
  4. Financial statements do not need to be prepared

Explanation

A company is a separate legal entity, so shareholders are generally liable only up to the amount they invested. This limited liability protects personal assets if the company fails.

Question 47Business

A partnership has two partners but one contributes most of the capital and does more of the work. What is a key risk of this structure?

  1. Profits are taxed twice, once for the firm and once for the partners
  2. Disagreement over profit sharing and decision-making between the partners Correct answer.
  3. The partners automatically have limited liability
  4. The partnership must issue shares to the public

Explanation

In a partnership, profits and decisions are shared according to the partnership agreement, and unequal contributions can cause conflict. A written agreement helps clarify how profits and duties are divided.

Question 48Business

A business's sales are seasonal, with high demand in summer and low demand in winter. Which action best helps manage the resulting cash flow problem?

  1. Build up cash reserves during the busy season to cover the quiet months Correct answer.
  2. Ignore the pattern because annual sales are stable
  3. Increase fixed costs by hiring permanent staff for winter
  4. Spend all summer profits immediately on new equipment

Explanation

Seasonal businesses face months where outflows exceed inflows, so holding reserves from peak periods smooths cash flow. This reduces the need for expensive short-term borrowing.

Question 49Business

A business's website shows a product is out of stock for three weeks. Which consequence is most likely?

  1. The business's break-even quantity falls
  2. Customers switch to a competitor, reducing future sales and market share Correct answer.
  3. The business's fixed costs fall during the stockout
  4. The product's variable cost per unit increases

Explanation

Unavailable stock means willing buyers cannot purchase, so they may buy from rivals instead. Lost sales reduce revenue and can damage customer loyalty and market share.

Question 50Business

What is the main reason a business keeps a record of its accounts receivable?

  1. To track how much customers owe and when payment is due Correct answer.
  2. To determine the value of its inventory
  3. To record the wages paid to employees
  4. To calculate the depreciation of its equipment

Explanation

Accounts receivable records amounts owed by credit customers, allowing the business to follow up overdue payments. Effective monitoring helps maintain healthy cash flow.