Foundations of Accounting Chapter Exam Questions
Course Introduction
Foundations of Accounting introduces students to the fundamental principles and practices of accounting. This course covers essential concepts such as the accounting cycle, double-entry bookkeeping, preparation and analysis of financial statements, and the regulatory environment governing accounting practices. Students will learn how accounting information is recorded, classified, and reported, and will develop critical thinking skills in using this information for decision-making purposes in both personal and business contexts. The course provides a solid grounding for further studies in accounting and equips students with practical skills applicable to various professional settings.
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Accounting Understanding and Practice 4th Edition by Danny Leiwy
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Page 2
Chapter 1: The Statement of Financial Position Balance
Sheetand What It Tells Us
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Q1) An example of a long-term liability is:
A) Current taxation payable
B) Mortgage
C) Proposed dividend
D) Accumulated depreciation
Answer: B
Q2) Suppose a company purchases a van for £21,000 with the intention of using it for three years and selling it for £6,000 at the end of the three years.The company uses straight line depreciation.Which of the following statements is correct?
A) The annual depreciation charge is £7,000
B) The annual depreciation charge is £21,000
C) The annual depreciation charge is £5,000
D) The annual depreciation charge is £15,000
Answer: C
Q3) An example of a current liability is:
A) Retained earnings
B) Accumulated depreciation
C) Owner's equity
D) Bank overdraft
Answer: D
Page 3
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Chapter 2: The Income Statement Profit and Loss Account
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Q1) In a company's group accounts,the part of the groups profits that belongs to shareholders outside the group (for example,shareholders of a subsidiary)is known as:
A) Dividends receivable
B) Minority interest
C) Exceptional item
D) Segmental disclosure
Answer: B
Q2) Which of the following statements is false?
A) A depreciation expense is not paid out in cash
B) Depreciation is not a process for valuing assets
C) A depreciation expense is paid out in cash
D) A provision for depreciation is a bookkeeping entry, not an allocation of cash
Answer: C
Q3) Gross profit is the difference between sales and the cost of goods sold
A)True
B)False
Answer: True
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4
Chapter 3: The Development of Financial Reporting
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Q1) Which of the following statements is correct?
A) Retained earnings are usually available as a cash reserve
B) Retained earnings equal the total amount of equity in a company
C) Retained earnings are defined as operating profit plus proposed dividend
D) Retained earnings are not usually available as cash
Answer: D
Q2) Which of the following statements is correct?
A) Inventories should be shown at the lower of cost and net realizable value
B) Inventories should be shown at net realizable value
C) Inventories should be shown at cost
D) Inventories should be shown at the higher of cost and net realizable value
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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Chapter 4: Ratios and Interpretation: a Straightforward Introduction
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Q1) If a company reported a profit for the year of £90m,share capital of £200m and a share price of £9.00 - what is the earnings per share (EPS)?
A) 20p per share
B) 10p per share
C) 45p per share
D) 22p per share
Q2) A gearing ratio of above 50% suggests:
A) The company is profitable
B) The company is over-reliant on borrowing
C) The company is financed mostly by equity
D) The company is almost bankrupt
Q3) If a company was interested in calculating how long it takes to receive payment from customers,which of the calculations would they make?
A) Trade receivables/sales revenue x 365
B) Sales revenue/trade receivables x 365
C) Trade payables/cost of sales x 365
D) Cost of sales/trade payables x 365
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Page 6
Chapter 5: How the Stock Market Assesses Company Performance
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Q1) Which of the following statements is false?
A) "tracker" investment funds buy shares in the companies that make up an index, such as the FTSE 100
B) The performance of "tracker" funds is often better than funds where the managers use their own expertise to select the best investments
C) Inclusion on the FTSE 100 will not affect demand for a companies shares
D) When a company is about to be removed from the FTSE 100 its share price is likely to fall
Q2) The only factor that influences a companies share price is the profit it has made
A)True
B)False
Q3) A balanced portfolio can eliminate unsystematic risk
A)True
B)False
Q4) A high price/earnings (P/E)ratio indicates that a company is profitable
A)True
B)False
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Chapter 6: Cash Flow Statements: Understanding and Preparation
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Q1) Which of the following would not be included on the operating activity section of a cash flow statement?
A) Payment to suppliers
B) Purchase of inventory
C) Payment of loan
D) Payment of tax
Q2) Not all revenues are receipts of cash
A)True
B)False
Q3) Which of the following statements is false?
A) Not all revenues are receipts of cash
B) Some receipts of cash do not add to profits
C) Not all expenses are payments of cash
D) All payments of cash are expenses
Q4) The redemption of a loan would appear on the cash flow statement as a:
A) Financing activity
B) Operating activity
C) Investing activity
D) Debt activity
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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) High levels of debt in a company is always a cause for concern
A)True
B)False
Q3) When a company is in financial distress,creditors may suffer direct financial loss,but shareholders can not loose their investment because they have limited liability
A)True
B)False
Q4) If one company buys another for less than the net book value of its assets,this is regarded as "negative goodwill" and does not require that the assets and liabilites be revalued at "fair value"
A)True
B)False
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Chapter 8: Current Issues in Financial Reporting
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Q1) Which of the following statements is true regarding the treatment for research and development (R & D)expenditure as stipulated in IAS 38?
A) Research expenditure should be written off as it occurs
B) Development expenditure should be recognized as an internally generated intangible asset
C) Development expenditure can be carried forward on the balance sheet if certain criteria can be demonstrated (such as, the project is technically feasible and that when it is completed can be used or sold)
D) All of the above
Q2) It is easier to generate "fictitious" cash flow figures than to produce "fictitious" profit figures
A)True
B)False
Q3) Creative accounting is sometimes used to:
A) Reduce reported losses
B) Manipulate accounting ratios
C) Make management look successful
D) All of the above
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10
Chapter 9: Bookkeeping to Trial Balance
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Q1) In general,a sales account has a credit balance
A)True
B)False
Q2) In general,an asset account has a debit balance
A)True
B)False
Q3) Powerage Ltd.purchased goods for £1,700 from RiffRaff plc.Having noticed that the goods were faulty,they were returned to the supplier.How would the return of the goods be recorded?
A) Debit payables (RiffRaff's personal account), credit purchases
B) Credit payables (RiffRaff's personal account), debit purchases
C) Credit sales, debit payables (RiffRaff's personal account)
D) Debit sales, credit returns
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
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Chapter 10: Trial Balance to Final Accounts
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Q1) Which of the following statements is correct?
A) Sole traders pay income tax as individuals but there is no taxation on the profits of the business itself
B) On the accounts of a sole trader, retained earnings and capital are usually kept separate
C) The owners of limited companies receive payment as "drawings"
D) None of the above statements are correct
Q2) If it is known that a debtor cannot pay because of bankruptcy,the amount to be written off is shown as:
A) A credit on the income statement, as a negative expense, and as a debit on the balance sheet
B) A credit on the income statement and as a debit on the statement of financial position by increasing the amount shown for receivables
C) A debit on the income statement and as a credit on the statement of financial position by reducing the amount shown for receivables
D) None of the above statements are correct
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Chapter 11: Financing a Business
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Q1) If a business has both Ordinary Shares and Preference Shares,which of the following statements are correct?
(i)Ordinary Shareholders have the right to vote at the AGM,but Preference Shareholders do not
(ii)Ordinary Shareholders will always get higher dividends
(iii)Preference Shareholders receive the same dividend year on year
(iv)Ordinary Shareholders are paid first upon liquidation of the company
A) All of them are true
B) (i), (ii) and (iii) are true
C) (i) and (iii) are true
D) (ii) and (iv) are true
Q2) Which of the following statements is false?
A) Investors may view companies with high levels of debt as too risky
B) It is not easy to borrow money secured on land and buildings
C) The more a company gets into debt, the more difficult it becomes to borrow
D) High levels of borrowing can effect the share price
Q3) A company can reduce its share capital by buying back some of its own shares
A)True B)False
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Page 13
Chapter 12: Management of Working Capital
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Q1) 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
Q2) If trade receivables is reduced,the amount of capital employed is reduced and profitability is increased
A)True
B)False
Q3) The Dingle company uses 12,000 units of dingits each year,and pays 75p each for them.The administration costs associated with each order is £175 and the shareholder costs are estimated at 20% per annum.Calculate the economic order quantity (EOQ).
A) 3672
B) 2050
C) 5292
D) 1184
Q4) There is no relationship between a companies turnover and their working capital
A)True
B)False
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Chapter 13: Introduction to Management Accounting
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Q1) Comparing planned costs with actual costs is associated with:
A) Variance analysis
B) Flexible analysis
C) Break-even analysis
D) Costing analysis
Q2) Standard costing is the most appropriate approach where actual costs do not fluctuate much
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) The term "prime costs" refers to the operating costs which are charged as an expense during the period in which they are incurred
A)True
B)False
Q5) 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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Q1) Which of the following statements is correct?
A) ARR includes the timing of cash flows and profits
B) ARR addresses the problems associated with the assumptions in profit measurement
C) ARR does not use profit figures
D) ARR can be calculated in a number of different ways
Q2) A company is evaluating an investment in a piece of machinery.The machine costs
£10,000 and is expected to generate cash flows of £3,000 in year 1,£4,300 in year 2 and £5,800 in year 3.The discount rate is 10% and the relevant discount factors are:
\[\begin{array} { c c }
\text { Year 1 } & 0.909 \\
\text { Year 2 } & 0.826 \\
\text { Year 3 } & 0.751
\end{array}\]
Calculate the NPV
A) £13,100
B) £10,634.60
C) £634.60
D) £0
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Page 16
Chapter 15: Budgetary Planning and Control
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Q1) Which of the following statements are correct,with regards to budgeting?
(i) The budget must be set centrally
(ii)Budgets should never be exceeded
(iii)There are financial rules governing the layout and calculations of a budget,eg once set,a budget cannot be altered
A) (ii) only
B) (ii) and (iii)
C) They are all false
D) They are all true
Q2) Usually the actual results achieved by an organization will be different from what had been planned
A)True
B)False
Q3) Which of the following is not an advantage associated with a budget control system?
A) Ensures competition for resources within an organization
B) Ensures the objectives of an organization are defined
C) Facilitates the delegation of responsibility
D) Improves communication and coordination
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Page 17
Chapter 16: Absorption Costing
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Q1) A small company has one factory but produces several different products. It has direct material and direct labour costs which are allocated to the different products directly.
The factory is machine intensive,rather than labour intensive. It also has overheads such as rent,rates and electricity costs.
As well as the factory,it also has a staff canteen and a maintenance department. Which of the following statements about Absorption Costing is INCORRECT?
A) Where possible, costs should be directly allocated, such as direct material and direct labour in producing each product.
B) Costs that cannot be allocated may be apportioned, for example rent based on floor area.
C) Other overheads such as maintenance and canteen costs may be absorbed using machine hours.
D) Overheads that are incurred in overhead areas cannot be absorbed - eg maintenance of the canteen
Q2) The amount of overheads charged to jobs during the year is likely to be different from the amounts actually incurred
A)True
B)False
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Page 18
Chapter 17: Marginal Costing and Decision-Making
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Q1) Which of the following statements is false?
A) One of the limitations of marginal costing is that it is difficult to assess profitability when there are limiting factors such as machine capacity
B) Marginal costing can identify the minimum selling price that would not produce a loss
C) Marginal costing focuses on how costs will behave as a result of changes in the volume of production
D) Marginal costing focuses on the contribution each product can make towards fixed costs and towards profit
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
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Chapter 18: Standard Costing and Variance Analysis
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Q1) Which of the following would be the most likely cause of an adverse material usage variance?
A) Use of cheaper (lower quality) of materials
B) Having to purchase materials at short notice (and higher price)
C) Increase in market prices
D) Labour overtime
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) Direct materials usage variance can be expressed as:
A) Actual quantity x (standard price - actual quantity)
B) Actual quantity x (standard price x standard quantity)
C) Standard price x (actual quantity x standard quantity)
D) Standard price x (actual quantity - standard quantity)
Q4) The sales margin volume variance measures the effect of a change in sales price
A)True
B)False
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Chapter 19: Incomplete Records
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Q1) Tom's bank statements show he had an opening bank balance of £3,000 and a closing bank balance of £7,000.Tom knows he paid £5,000 to suppliers and that he took drawings of £1,200.Calculate what Tom received from debtors.
A) £13,200
B) £5,000
C) £9,800
D) £10,200
Q2) The opening capital of Overdrive Ltd at 1st January was £31,000.At 31st December the capital figure was £45,000.How much profit had been earned?
A) It is not possible to tell from the information provided
B) £14,000
C) (£14,000)
D) £45,000
Q3) Debits are increases to assets and expenses
A)True
B)False
Q4) Assets = Liabilities - Capital
A)True
B)False
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