Fundamentals of Accounting Practice Questions
Course Introduction
Fundamentals of Accounting introduces students to the basic principles, concepts, and procedures underlying the preparation and analysis of financial statements. The course covers essential topics such as the accounting cycle, journal entries, ledger accounts, trial balances, and the preparation of income statements and balance sheets. Emphasis is placed on understanding the double-entry system, accrual versus cash accounting, and the ethical responsibilities of accounting professionals. This foundational knowledge prepares students to interpret financial information and supports informed decision-making in a business context.
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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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Sample Questions
Q1) Revenue from sales decrease assets and decrease equity.
A)True
B)False Answer: False
Q2) If liabilities increase £3,000 during a given period and owner's equity decreases £1,000 during the same period,the assets must have:
A) Increased by £3,000
B) Increased by £2,000
C) Decreased by £3,000
D) Decreased by £2,000
Answer: B
Q3) An example of a long-term liability is:
A) Current taxation payable
B) Mortgage
C) Proposed dividend
D) Accumulated depreciation
Answer: B
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Page 3
Chapter 2: The Income Statement Profit and Loss Account
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Sample Questions
Q1) Which of the following statements is false?
A) The "equity" component of the statement of financial position is increased by the amount of profit earned during the year
B) The "equity" component of the statement of financial position is decreased by the amount of profit earned during the year
C) The "equity" component of the statement of financial position is reduced by the amount of dividend to be paid for the year
D) The "equity" component of the statement of financial position may change as the result of a revaluation of assets
Answer: B
Q2) A company buys in a unit at a cost of £2 per unit.The selling price is £3 per unit.Which of the following statements is correct?
A) Mark up is 67%; Margin is 150%.
B) Mark up is 150%; Margin is 67%
C) Mark-up is 50%; Margin is 33%
D) Mark-up is 33%; Margin is 50%
Answer: C
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Chapter 3: The Development of Financial Reporting
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Sample Questions
Q1) The establishment of the limited liability company made the position of creditors less secure
A)True
B)False
Answer: True
Q2) Which of the following statements is true?
A) The amount of profit a company makes is more important than return on capital employed (ROCE)
B) The amount of profit a company makes is less important than return on capital employed (ROCE)
C) The amount of profit a company makes is not related to return on capital employed (ROCE)
D) Shareholders are only concerned with the amount of profit a company makes Answer: B
Q3) Shareholders wealth consists of two sources:
A) Dividends and share price
B) Profit and share price
C) ROCE and dividends
D) Growth and dividends
Answer: A
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Chapter 4: Ratios and Interpretation: a Straightforward Introduction
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Sample Questions
Q1) One way to improve return on capital employed (ROCE)is to reduce costs and increase sales
A)True
B)False
Q2) If a supplier was interested in whether or not they will be paid on time,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
Q3) One way of assessing if debt is too high is to compare it with equity
A)True
B)False
Q4) A high price/earnings (P/E)ratio suggests:
A) Shareholders are pessimistic about future growth prospects
B) Shareholders are optimistic about future growth prospects
C) Earnings per share is high relative to the share price
D) Statements B and C are correct
6
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Chapter 5: How the Stock Market Assesses Company Performance
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Sample Questions
Q1) Dividend per share expressed as a % of current share price is known as:
A) Dividend cover
B) Price/earnings ratio
C) Dividend yield
D) Earnings per share
Q2) 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
Q3) A high price/earnings (P/E)ratio indicates that a company is profitable
A)True
B)False
Q4) Total profit divided by dividend is known as:
A) Price earnings ratio
B) Dividend cover
C) Dividend yield
D) Earnings per share
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Chapter 6: Cash Flow Statements: Understanding and Preparation
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Sample Questions
Q1) Which of the following statements is false?
A) Not all payments of cash are expenses
B) Some payments are not charged against profits
C) Some receipts do not add to cash
D) All revenues are receipts of cash
Q2) Which of the following statements is false?
A) An increase in trade receivables is treated as an outflow of cash
B) Interest paid is an outflow of cash
C) An increase in trade payables is treated as an outflow of cash
D) An increase in inventory is treated as an outflow of cash
Q3) The annual depreciation expense is an outflow of cash
A)True
B)False
Q4) The purchase of fixed assets 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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Sample Questions
Q1) A one-off loss is likely to be a major problem for company
A)True
B)False
Q2) Which of the following z-scores would suggest a company was not likely to fail? A) 1.86
Q3) 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
Q4) 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) A company can reduce its reported salary expense by paying some employees with share options instead of money
A)True
B)False
Q2) Which of the following statements would normally be associated with a "right wing" proposal to curtail creative accounting practice?
A) Remove legislation and public involvement in company accounting
B) Develop more rigorous legislation and public involvement in company accounting
C) Develop more rigorous regulation and public involvement in audit practice
D) Statements B & C are both correct
Q3) Managers who want to manipulate accounts to make return on capital employed (ROCE)look more favorable are likely to take which of the following courses of action?
A) Find ways to reduce asset values
B) Find ways to boost profit and increase asset values
C) Find ways to increase asset values
D) Find ways to increase capital employed
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Chapter 9: Bookkeeping to Trial Balance
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Sample Questions
Q1) A cash account shows all receipts of cash on the right hand side and all payments of cash on the left hand side
A)True
B)False
Q2) P.Rudd company received and paid an electricity bill for £300.How would this transaction be recorded?
A) Debit cash and credit retained earnings
B) Debit electricity and credit retained earnings
C) Debit electricity and credit cash
D) Debit cash and credit electricity
Q3) Which of the following statements about double-entry bookkeeping is correct?
A) Recording a transaction on the left hand side of an account is called debiting it
B) Recording a transaction on the right hand side is debiting it
C) If an account has more debited to it than credited to it, it is said to have a credit balance
D) If an account has more credited to it than debited to it, it is said to have a debit balance
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11
Chapter 10: Trial Balance to Final Accounts
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Sample Questions
Q1) The following information is available from the trial balance of Powerage Ltd as at 31 Dec Year 2:
\[\begin{array} { l c c }
& \text { Debit } & \text { Credit } \\
&£& £ \\
\text { Sales revenue }&& 260,000\\
\text { Inventory at 31st Dec Year 1 } & 9,000 \\
\text { Purchases } & 29,000 & \end{array}\]
Closing inventory as at 31st Dec year 2 is £6,000.Calculate the cost of goods sold
A) £38,000
B) £32,000
C) £228,000
D) £44,000
Q2) If the provision for bad debt is increased,the accounting adjustment will be:
A) Dr: Bad debt expense Cr: Provision for bad debts
B) Dr: Provision for bad debts Cr: Bad debt expense
C) Dr: Bad debt expense Cr: Trade receivables
D) Dr: Trade receivables
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Page 12
Chapter 11: Financing a Business
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Sample Questions
Q1) Which of the following is not a source of raising finance?
A) preference shares
B) scrip issues
C) loans
D) retained earnings
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) Dividend Policy decides what proportion of the profits to pay out as dividends. Which of the following is the best policy?
(i) Pay out all profits as dividends
(ii) Pay out no profit as dividend,but use all the profit to expand the company
(iii)Pay out the same £ value as dividends every year
A) (i) is the best, as it rewards shareholders for their investment.
B) Something between (i) and (ii) is the best, as it allows shareholders to receive some dividend and the company to retain earnings to grow. (ii) is unfair to the shareholder.
C) (iii) is best, as it allows shareholders to plan for the dividend received.
D) None of them are "best". It depends upon what shareholders prefer.
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Page 13
Chapter 12: Management of Working Capital
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Sample Questions
Q1) 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
Q2) Which of the following is a limitation of Economic Order Quantity?
A) It is weak in assessing the appropriate order quantity
B) It fails to consider inventory holding costs
C) It does not take quantity discounts into account
D) It fails to consider ordering costs
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
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14
Chapter 13: Introduction to Management Accounting
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Sample Questions
Q1) Absorption costing requires fixed costs to be separated from variable costs in order to aid decision making
A)True
B)False
Q2) Financial accounting is predominantly forward looking and includes forecast and plans,while management accounting is about recording past events
A)True
B)False
Q3) Comparing planned costs with actual costs is associated with:
A) Variance analysis
B) Flexible analysis
C) Break-even analysis
D) Costing analysis
Q4) Production overheads are charged as an expense in the income statement as part of costs of sales
A)True
B)False
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Chapter 14: Investment Appraisal
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Sample Questions
Q1) 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
Q2) 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
Q3) ROI stands for:
A) Residual or Other Income
B) Return On Investment
C) Revenue Over Investment
D) Revenue Only Income
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16
Chapter 15: Budgetary Planning and Control
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Sample Questions
Q1) A cash budget does not include tax and interest to be paid
A)True
B)False
Q2) 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
Q3) An approach to producing a budget which encourages managers to justify a budget for their department and to justify each item in its entirety is called:
A) Planning, programming budgeting system (PPBS)
B) Zero-based budgeting (ZBB)
C) Incremental budget
D) Performance budget
Q4) Which of the following is not an advantage usually associated with budgeting?
A) Can be used to motivate staff
B) Can be used to evaluate performance
C) Encourages managers to "spend up to budget"
D) Helps identify "limiting factors", such as production capacity
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Chapter 16: Absorption Costing
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Sample Questions
Q1) The FlyOnTheWall company made the following purchases of camera components: \[\begin{array} { l l l l r }
\text { Date } & \text { Units } & \text { Cost price per unit } & \text { Amount } & \text { Total } \\
1 \text { st Feb } & 800 & £ 10 & 8,000 & 8,000 \\
15 \text { th Feb } & 1,000 & f 9 & 9,000 & 17,000 \\
25 \text { th Feb } & 6,000 & £ 11 & 6,600 & 23,600 \end{array}\]
The company took out a job on the 27th February,using 1,200 components.Show the price charged for the job under the first in first out approach (FIFO)
A) £11,800
B) £12,000
C) £11,600
D) £12,800
Q2) Under recovery of overheads occurs when:
A) Actual overhead incurred is less than the overhead charged to the product
B) Budgeted levels of production have decreased
C) The overhead charged to production is lower than the actual overhead incurred
D) Budget levels of production have increased
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Page 18
Chapter 17: Marginal Costing and Decision-Making
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Sample Questions
Q1) "Contribution" can be defined as sales minus variable costs
A)True
B)False
Q2) During the Summer,Paul sells ice creams from a van in a park at weekends. His fixed costs for running the van are £200 per weekend.He buys ice cream ingredients from a wholesaler at a cost of 40p per ice cream,and sells them for £2.00 each.
If he wants to make a profit of £280,how many ice creams should he sell over the weekend?
A) 175
B) 300
C) 125
D) 140
Q3) The break-even point can be expressed as:
A) Fixed costs/contribution per unit
B) Fixed costs-variable costs/contribution
C) Fixed costs - variable costs
D) Contribution/fixed costs
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Chapter 18: Standard Costing and Variance Analysis
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Q1) Standard costing can help establish variances in costs,but does not consider the volume of production
A)True
B)False
Q2) Fixed overhead expenditure variance can be expressed as:
A) Actual fixed overhead - budget fixed overhead
B) Actual fixed overhead/budget fixed overhead
C) Actual fixed overhead x budget fixed overhead
D) Budget fixed overhead/actual fixed overhead
Q3) Which of the following statements is INCORRECT?
A) Variances are often inter-related and must never be considered in isolation
B) Standards are difficult to set
C) A favourable sales variance is always good news
D) Variances are useful for monthly reporting to various managers across the business
Q4) Direct labour efficiency variance can be expresses as:
A) Standard hours x (actual rate - standard rate)
B) Standard rate x (actual hours - standard hours)
C) Standard rate x (actual hours + standard hours)
D) Actual rate x (actual hours - standard hours)
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Chapter 19: Incomplete Records
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Sample Questions
Q1) Debits are increases to assets and expenses
A)True
B)False
Q2) At the beginning of the financial year,trade receivables are £6,000 and trade payables are £4,000.Cash received from receivables in the year are £40,000 and cash paid to payables are £20,000.Closing receivables are £3,000 and closing payables are £5,000.
What are the purchases of the business in the year?
A) £43,000
B) £37,000
C) £25,000
D) £19,000
Q3) At the end of the year,NewBiscuit company has inventory in hand at a selling price of £10,500.What was the cost of inventory assuming inventory is marked up at 50%?
A) £5,250
B) £8,000
C) £3,000
D) £7,000
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