Business Accounting
Midterm Exam
Course Introduction
Business Accounting is an essential course that introduces students to the fundamental concepts and practices of financial and managerial accounting within a business context. The course covers key topics such as the accounting cycle, preparation and analysis of financial statements, principles of double-entry bookkeeping, and the role of accounting in decision making. Students will also examine internal controls, budgeting, cost behavior, and performance evaluation, equipping them with the skills necessary to interpret financial information and apply it to real-world business scenarios. Through hands-on exercises and case studies, students gain a practical understanding of how accounting supports organizational strategy and financial health.
Recommended Textbook
Accounting Understanding and Practice 4th Edition by Danny Leiwy
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19 Chapters
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492 Flashcards
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Chapter 1: The Statement of Financial Position Balance
Sheetand What It Tells Us
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Sample Questions
Q1) The accounting equation can be stated as:
A) Owner's Equity = Assets - Liabilities
B) Assets + Liabilities = Owner's Equity
C) Liabilities = Owner's Equity + Assets
D) Assets = Liabilities - Owner's Equity
Answer: A
Q2) The statement of financial position of Rosie Ltd.includes the following entries: inventory £25,000,trade receivables £12,000,cash £11,000 and current liabilities £25,000 (made up of trade payables £16,000,short-term borrowing £800 and £8,200 current tax payable).Calculate the current ratio.
A) 0.9: 1
B) 1:1
C) 0.4:1
D) 1.9:1
Answer: D
Q3) Non-current liabilities include long-term borrowings such as mortgages.
A)True
B)False
Answer: True
Page 3
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Chapter 2: The Income Statement Profit and Loss Account
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Sample Questions
Q1) A company buys a new piece of machinery for £55,000 cash.It is expected to last for 8 years and will have a scrap value of £7,000 The company uses straight line depreciation
A) In the year of purchase, there is a cash movement of £55,000 and a depreciation charge and therefore a reduction in profit of £6,000.
B) In the year of purchase, there is a cash movement of £49,000 which is £55,000 paid for the machine and £6,000 depreciation charge.
C) In the year of purchase, there is a cash movement of £6,875 which is the depreciation charge.
D) In the year of purchase, there is a net cash movement of £48,125. This is the £55,000 paid for the machine and £6,875 depreciation charge.
Answer: A
Q2) Depreciation is not a process of valuing assets
A)True
B)False
Answer: True
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Chapter 3: The Development of Financial Reporting
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Sample Questions
Q1) Which of the following statements is false?
A) The auditors prepare the financial statements
B) Auditors are responsible for finding fraud
C) The financial statements show what a company is worth
D) All of the above
Answer: D
Q2) The four main accounting principles for Financial Reporting established in SSAP 2 "Accounting Concepts" (1971)are:
A) Going Concern, Accruals, Consistency and Prudence
B) Relevance, Reliability, Comparability and Understandability
C) Going Concern, Relevance, Consistency and Comparability
D) Accruals, Prudence, Reliability and Understandability
Answer: A
Q3) During the year,the total amount for equity can change because:
A) Additional shares are issued
B) Property has been revalued
C) Dividends are paid
D) All of the above
Answer: D
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Page 5
Chapter 4: Ratios and Interpretation: a Straightforward Introduction
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Q1) Which of the following statements is correct?
A) Shareholders motivated by the prospects of higher future share price growth tend to invest in companies with low dividend cover
B) Shareholders motivated by the prospects of higher future share price growth tend to invest in companies with a low P/E ratio
C) Shareholders who buy shares for a regular income tend to invest in companies with low dividend cover
D) Shareholders who buy shares for a regular income tend to invest in companies with high dividend cover
Q2) Which of the following rations considers the relationship between profit,equity and long-term borrowing?
A) Quick ratio
B) Current ratio
C) Capital gearing ratio
D) ROCE
Q3) One way of assessing if debt is too high is to compare it with equity
A)True
B)False
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Chapter 5: How the Stock Market Assesses Company Performance
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Q1) The only factor that influences a companies share price is the profit it has made
A)True
B)False
Q2) Which of the following can influence a companies share price?
A) Other companies in the same sector reporting poor results
B) Scandal and gossip
C) Financial journalist offering share tips to readers
D) All of the above
Q3) Current share price divided by earnings per share is known as:
A) Price/earnings ratio
B) Dividend yield
C) Dividend cover
D) Market capitalization
Q4) Which of the following statements is correct?
A) You can buy shares by directly contacting the company you want to buy shares in
B) It is usually quite difficult to buy the shares of unlisted companies
C) It is difficult for investors to make profits when share prices are rising
D) All of the above statements are correct
7
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Chapter 6: Cash Flow Statements: Understanding and Preparation
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Sample Questions
Q1) From the following information,calculate the cash flow from operating activities: \[\begin{array} { l c }
\text { Net Income } & 80,000 \\
\text { Depreciation } & 15,000 \\
\text { Increase in accounts receivable } & 5,000 \\
\text { Decrease in accounts payable } & 5,000 \\
\text { Increase in inventory } & 5,000 \end{array}\]
A) £80,000 net cash inflow
B) £70,000 net cash inflow
C) £75,000 net cash inflow
D) £110,000 net cash inflow
Q2) Which of the following statements is false?
A) Payment for inventory not sold until the next period, is an example of a payment of cash which is not an expense
B) Borrowing money is an example of a receipt of cash which is not revenue
C) Discount allowed to customers for prompt payment, is an expense that is treated as a payment of cash
D) Depreciation is an expense which is not a payment of cash
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Chapter 7: Advanced Interpretation of Company and Group Accounts
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Q1) According to Altman (1983)the amount of working capital in relation to total assets is an important component in predicting the failure of a company,while measures of return on capital employed (ROCE)can not help predict failure
A)True
B)False
Q2) Which of the following are potential indicators of financial distress?
(i) A sudden drop in share price
(ii) Increased turnover
(iii) Increased gearing ratio
(iv)Fall in profits
A) All of them could indicate financial problems
B) None of these factors would cause much concern, especially in isolation
C) (i), (iii) and (iv) are bad news, but increased turnover would be good news
D) (i) and (iv) are indicators, but (ii) and (iii) are improvements to the financial position
Q3) The International Accounting Standards Board (IASB)require companies to publish information related to business or geographical segments
A)True
B)False
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Chapter 8: Current Issues in Financial Reporting
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Sample Questions
Q1) According to IAS 37 (provisions,contingent liabilities and contingent assets)for a provision to be recognized there must be:
A) A proven outflow of economic resources which has been independently valued
B) A probable outflow of economic resources which has been independently valued
C) A probable outflow of economic resources of which a reliable estimate can be made
D) A definite outflow of economic resources of which an accurate valuation can be made
Q2) When auditors audit the company,what are they looking for with regards to fraud?
A) The auditors systematically search for any fraudulent activity across the whole company
B) Auditors will compare company profits to company tax payments
C) Auditors look for fraudulent activity not only of the company they audit, but suppliers, customers and employee activity is also investigated
D) The auditors are not responsible for detecting all fraud in the company
Q3) A company can reduce its reported salary expense by paying some employees with share options instead of money
A)True
B)False
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Chapter 9: Bookkeeping to Trial Balance
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Sample Questions
Q1) Which of the following is expected to have a debit balance?
A) Trade payables
B) Trade receivables
C) Sales
D) All of the above
Q2) In general,a sales account has a credit balance
A)True
B)False
Q3) Which of the following is expected to have a credit balance?
A) Trade payables
B) Trade receivables
C) Rent
D) Inventory
Q4) Sales made on credit are shown on the left-hand side of the sales account and on the right hand side of the trade receivables account
A)True
B)False
Q5) In general,an asset account has a debit balance
A)True
B)False
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Chapter 10: Trial Balance to Final Accounts
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Sample Questions
Q1) Closing inventory appears twice in the final accounts,as a debit on the balance sheet and a credit on the income statement
A)True
B)False
Q2) When drawing up accounts for Partnerships,additional personal accounts must be shown:
(i)Individual Current Accounts
(ii)Individual Capital Accounts
(iii)Individual Drawings Accounts
(iv)Individual Revenue Accounts
A) All of the above
B) (ii) only
C) (i) and (ii) only
D) (i), (ii) and (iii) only
Q3) On a trail balance,almost all debit items are either assets to be shown on the balance sheet or expenses to be shown on the income statement
A)True
B)False
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12
Chapter 11: Financing a Business
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Sample Questions
Q1) Large company agrees to pay £1,750,000 to take over small company.Large company's shares have a market value of £1.75.The £1,750,0000 is paid by the issue of 1 million £1 shares.
What share premium will Large report?
A) £1,750,000
B) £1,000,000
C) £750,000
D) £0
Q2) A "rights issue" refers to the issue of shares which give the owners of these shares additional voting rights at the Annual General Meeting
A)True
B)False
Q3) Which of the following statements is false?
A) Preference shareholders take less risk
B) A shareholders liability is limited
C) Dividends are allowable as an expense to be charged against taxation
D) Companies usually pay an interim dividend part of the way through the year
Q4) Preference shares are excluded in the calculation of earnings per share
A)True
B)False
Page 13
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Chapter 12: Management of Working Capital
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Sample Questions
Q1) The definition of "Working Capital" is:
A) Non-Current Assets - Non-Current Liabilities
B) Bank + Cash
C) Non-Current Assets + Current Assets - Current Liabilities
D) Current Assets - Current Liabilities
Q2) A company can limit the amount of credit allowed to customers in which of the following ways?
A) Impose a time limit for payment
B) Limit the amount of credit available for each customer
C) Estimate the maximum total receivable figure the company can afford to finance
D) All of the above
Q3) Which of the following is not an approach to dealing with liquidity problems?
A) Pay suppliers by check
B) Pay suppliers by bank transfer
C) Sell off surplus assets
D) Sell off inventory at low price
Q4) High levels of working capital are associated with insolvency
A)True
B)False
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Chapter 13: Introduction to Management Accounting
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Sample Questions
Q1) Which of the following statements are correct?
(i)Financial Accounting is required by law
(ii)Financial Accounting includes budgeting,forecasting and decision making
(iii)Management Accounting must follow a set pattern
(iv)Management Accounting includes budgeting,forecasting and decision making
A) (i) and (iv) are correct
B) (i), (ii) and (iii) are correct
C) (i), (ii) and (iv) are correct
D) All of them are correct
Q2) Operating expenses are period costs,which means they must be charged as an expense during the period in which they are incurred
A)True
B)False
Q3) Knowing the cost of producing a product helps determine the price to be charged for it
A)True
B)False
Q4) Companies are not legally required to produce management accounting information
A)True
B)False
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Chapter 14: Investment Appraisal
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Sample Questions
Q1) The difference between "Risk" and "Uncertainty" is:
A) "Risk" is quantifiable and can be estimated, with the use of probability. "Uncertainty" is unknown
B) "Risk" always exists. No investment can be "risk-free". But there are things that can be "certain"
C) There is no difference. The terms are interchangeable
D) "Risk" cannot be measured. "Certainty" can be estimated with the use of probability
Q2) Annual cash flows from a project are usually lower than the annual profits,because depreciation is not paid in cash
A)True
B)False
Q3) One of the key advantages of using "payback" as a method of investment appraisal is that it considers cash flows after the initial investment has been paid back
A)True
B)False
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Chapter 15: Budgetary Planning and Control
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Sample Questions
Q1) Which of the following is not an advantage of zero-based budgeting?
A) Easy to apply
B) Helps identify inefficient operations
C) Can increase staff motivation towards greater efficiency
D) Ensures alternatives, such as outsourcing, are considered
Q2) Which of the following statements is false?
A) A capital expenditure budget will show costs not directly linked to production such as distribution costs
B) A capital expenditure budget will show costs not directly linked to production such as administration costs
C) A capital expenditure budget will show the planned expenditure associated with an increase in production facilities
D) A capital expenditure budget will show the planned expenditure for direct materials
Q3) Budgetary control includes all of the following except:
A) The development and implementation of a budget by one key individual
B) The continuous comparison of actual with budget results
C) Providing a basis for revising the budget
D) Establishing the responsibilities of executives
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Chapter 16: Absorption Costing
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Q1) Which of the following statements is correct?
A) Closing inventory should be shown at the higher of cost and net realizable value
B) Manufacturing costs include administration costs
C) In determining the cost of producing something, costs have to be allocated between cost of sales and closing inventory
D) All of the above statements are correct
Q2) Possible methods of charging production overheads to different products include charging a percentage of direct material costs and price per mile.
A)True
B)False
Q3) Which of the following statements is false?
A) One approach charging direct materials to a job is to use a standard price, regardless of the cost of different purchases made
B) One approach to charging direct materials to a job is to use replacement cost
C) Replacement cost is equal to the cost initially paid for stock
D) The average price could be used in charging direct materials to a job
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Chapter 17: Marginal Costing and Decision-Making
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Q1) Which of the statements is correct?
A) In the short term direct labour costs may be more like fixed costs
B) In the long run most fixed costs behave more like variable costs
C) If production is to increase above existing production capacity , then fixed costs will have to increase
D) All of the above statements are correct
Q2) WhoMadeWho Ltd.is planning to reduce the selling price of one of its products from £80 to £60.Fixed costs are £1.1m per annum; variable costs £40 per unit; 70,000 units per annum are made and sold.
How many additional units must be sold to make up for the price reduction?
A) 10,000 units
B) 600,000 units
C) 140,000 units
D) 70,000 units
Q3) "Contribution" can be defined as sales minus variable costs
A)True
B)False
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Chapter 18: Standard Costing and Variance Analysis
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Q1) An adverse variable overhead cost variance might mean that some item of variable overhead,such as cleaning costs,has cost more than expected
A)True
B)False
Q2) The direct labour rate variance can be expressed as:
A) Actual hours x (actual rate - standard rate)
B) Standard rate x (actual hours - standard hours)
C) Actual hours x (standard rate x standard hours)
D) Standard rate x (actual hours/standard hours)
Q3) The Standard Cost Card for a batch of 3,000 bottles of shampoo includes the following:
1,500 litres of liquid S at £0.30 per litre
1)5kg of powder P at £1.20 per kg
A batch of 3,000 bottles had the following usage:
1,700 litres of liquid S which cost £476 and 1.2kg of powder which cost £1.80
What are the material price and usage variances for the liquid?
A) The Usage Variance is £30 Favourable and the Price Variance is £56 Adverse
B) The Usage Variance is £56 Adverse and the Price Variance is £30 Favourable
C) The Usage Variance is £60 Adverse and the Price Variance is £34 Favourable
D) The Usage Variance is £34 Adverse and the Price Variance is £60 Favourable
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Chapter 19: Incomplete Records
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Q1) At the beginning of the financial year,trade receivables are £4,560 and trade payables are £3,780.Cash received from receivables in the year are £38,240 and cash paid to payables are £18,040.Closing receivables are £2,268 and closing payables are £4,040.
What are the purchases of the business in the year?
A) £40,508
B) £22,080
C) £35,948
D) £18,300
Q2) It is essential that every business keeps a complete record of ALL transactions
A)True
B)False
Q3) Robert's bank statements show he had an opening bank balance of £13,000 and a closing bank balance of £16,000.Robert knows he paid £12,000 to suppliers and that he took drawings of £3,000.Calculate what Robert received from debtors.
A) £18,000
B) £8,000
C) £31,000
D) £13,000
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Page 21