Course Introduction
Principles of Accounting Study Guide
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Principles of Accounting introduces students to the fundamental concepts and techniques used in the field of accounting. The course covers the basics of financial and managerial accounting, including the accounting cycle, preparation and analysis of financial statements, and an overview of key accounting principles such as accruals, matching, and consistency. Students learn how accounting information is used for decision-making by internal and external stakeholders and acquire practical skills in recording and reporting financial transactions. The course lays a foundation for advanced studies in accounting and equips students with essential knowledge for business or finance-related careers.
Recommended Textbook
Accounting Understanding and Practice 4th Edition by Danny Leiwy
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19 Chapters
492 Verified Questions
492 Flashcards
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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) An example of a current asset is:
A) Inventory
B) Equipment
C) Retained earnings
D) Owner's equity
Answer: A
Q2) Which of the following statements is correct?
A) Assets are future cash outflows
B) Liabilities are future cash inflows
C) Assets are the sum of liabilities and owner's equity
D) Assets are the difference between liabilities and owner's equity
Answer: C
Q3) 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
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Chapter 2: The Income Statement Profit and Loss Account
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Q1) Depreciation is not a process of valuing assets
A)True
B)False
Answer: True
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) The part of a company's group accounts that reports income from a small investment in another company,of which it has little influence,is known as:
A) Dividends receivable
B) Minority interest
C) Exceptional item
D) Segmental disclosure
Answer: A
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Chapter 3: The Development of Financial Reporting
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Sample Questions
Q1) Which of the following statements is correct?
A) In a period of rising prices, cost of sales is overstated
B) In a period of rising prices, return on capital employed (ROCE) is understated
C) In a period of rising prices, asset values are understated
D) In a period of rising prices, depreciation is overstated
Answer: D
Q2) 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
Q3) 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
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5
Chapter 4: Ratios and Interpretation: a Straightforward Introduction
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Sample Questions
Q1) 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
Q2) Non-current liabilities are used in the calculation of the current ratio
A)True
B)False
Q3) 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
Q4) The price earnings ratio,dividend cover and dividend yield provide information on:
A) Stock market performance
B) Liquidity
C) Profitability
D) Utilization of assets
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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) Which of the following statements is correct?
A) A bull market is when share prices are rising
B) A bull market is when share prices are falling
C) A bear market is when share prices are rising
D) Statements B and C are both correct
Q3) 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
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Chapter 6: Cash Flow Statements: Understanding and Preparation
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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) Generating lots of cash is a definite sign of success
A)True
B)False
Q3) All receipts of cash are treated as revenues
A)True
B)False
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Chapter 7: Advanced Interpretation of Company and Group Accounts
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Sample Questions
Q1) Which of the following z-scores would suggest a company was not likely to fail?
A) 1.86
B) 2.99
C) 1.72
D) 1.90
Q2) A one-off loss is likely to be a major problem for company
A)True
B)False
Q3) 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
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Page 9
Chapter 8: Current Issues in Financial Reporting
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Sample Questions
Q1) Which of the following is not a measure to improve auditor independence?
A) Audit fees set by an independent body
B) Prohibit senior audit rotation, to enable auditors to work more closely with management
C) Prohibit auditors from undertaking non-audit services for their clients
D) Auditors appointed by independent body
Q2) A company can reduce its reported salary expense by paying some employees with share options instead of money
A)True
B)False
Q3) Which of the following statements about The Corporate Report (1975)is false?
A) The Corporate Report recommended a statement of value-added
B) The Corporate Report recommended an employment report
C) The Corporate Report recommended a Corporate Social Responsibility report
D) The Corporate Report recommended a statement of future objectives
Q4) The term "creative accounting" is used to describe the development of accounting techniques which more accurately reflect the economic reality of a company
A)True
B)False
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Chapter 9: Bookkeeping to Trial Balance
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Q1) At the end of a financial year,businesses often have "prepayments" which are amounts paid in advance,and "Accruals" which are amounts owing.For example,the business may have prepaid a month's rent.It may also have used some utilities that it has not yet paid for.The accounting treatment is as follows:
A) Adjust the relevant accounts in the Income Statement. Prepayment is a current asset. An Accrual is a current liability, both of which are shown on the Statement of Financial Position.
B) Do nothing. The money will eventually catch up with the accrued transactions, and the prepaid items will be used in the next financial year.
C) Adjust only the accrued amounts - show the additional utilities on the Income Statement and show an Accrual as a current liability on the Statement of Financial Position. Prepayments should be ignored
D) Adjust only the prepaid amounts - reduce the rent on the income statement and show the prepayment as a current asset on the Statement of Financial Position. Accruals should be ignored
Q2) In general,a sales account has a credit balance
A)True
B)False
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Page 11
Chapter 10: Trial Balance to Final Accounts
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Q1) 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
Q2) If a bad debt is written off,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
Q3) 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
Q4) 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) 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.
Q2) A company can reduce its share capital by buying back some of its own shares
A)True
B)False
Q3) The three main sources of funds for companies are:
A) Share capital, fixed assets and revenue
B) Share capital, borrowing and retained earnings
C) Share capital, dividends and net assets
D) Share capital, borrowing and operating profit
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Chapter 12: Management of Working Capital
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Sample Questions
Q1) One of the risks associated with holding large amounts of inventory is:
A) Obliquity
B) Obeisance
C) Obsolescence
D) Obscurement
Q2) Which of the following statements is false?
A) Trade payables, if managed appropriately, can be a cost-free source of finance
B) An excessive delay in paying creditors is a good way to extend a cost-free source of finance
C) Deferment in the payment of taxes is one way of addressing liquidity problems
D) None of the above statements are false
Q3) Economic order quantity means:
A) Ordering small quantities at frequent intervals
B) Ordering large quantities less frequently
C) Outsourcing inventory management
D) To balance inventory ordering costs and holding costs
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) A company manufactures furniture.Which of the following costs would be included in the production of a piece of furniture as a direct cost,and used to calculate the cost per unit,when making tables?
(i) The wood used to make the table tops
(ii)The varnish and paint used
(iii)The wages of the workers on the assembly line,paid per table manufactured.
(iv)The salary of the supervisor of the assembly line
(v) The salary of the accountant producing the annual accounts for the company.
A) (i) and (ii) only as these are used in the product
B) (i) - (iv) as these are part of production. The accountant is not
C) (i) and (iii) only. The others are indirect costs
D) All of them. The company cannot exist without all of these costs and more
Q2) Production overheads are charged as an expense in the income statement as part of costs of sales
A)True
B)False
Q3) Absorption costing is closely linked to financial accounting and the calculation of profit
A)True
B)False
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Chapter 14: Investment Appraisal
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Sample Questions
Q1) In order to convert a future cash flow into a present value,you need to:
A) Divide by a discount factor
B) Divide by the current investment rate
C) Multiply by a discount factor
D) Multiply by the current investment rate
Q2) A company with a 12% cost of capital will consider pursuing a project which yields a 10% return per annum because it will increase the value of the company
A)True
B)False
Q3) The internal rate of return (IRR)calculates the discount rate at which the net present value (NPV)of the project is zero
A)True
B)False
Q4) The accounting rate of return (ARR)calculation uses accounting profits as opposed to cash flows
A)True
B)False
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Chapter 15: Budgetary Planning and Control
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Q1) The most important part of budgeting is:
A) The budget itself
B) Review of actual results against the budget
C) Knowing how much each manager has available to spend in their department
D) Communication between managers and finance in setting the budget
Q2) ZBB is:
A) Zero Based Budgeting. Every budget is built from scratch.
B) Zero Based Budgeting. Used in not-for-profit organisations where profit should be zero.
C) Zion Budgeting Basis. A technique originally developed by a group of American Corporations
D) Zero Budgeting Bias. A technique where there is no bias in the budgeting process.
Q3) A budget includes all of the following except:
A) A plan, quantified in monetary terms
B) A plan outlining income generated and/or expenditure incurred during a period of time
C) A plan which guarantees future profit
D) A plan outlining capital employed in obtaining a given objective
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17
Chapter 16: Absorption Costing
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Q1) When issuing inventory,what are the correct abbreviations and definitions for the distribution of inventory to production?
A) LILO means Last in, Last out and FIFO means First in, First Out
B) LIFO means Last in, First out and FIFO means First in, First Out
C) FILO means First in, Last Out and FIFO means First in, First Out
D) FILO means First in, Last Out and LILO means Last in, Last Out
Q2) The budget of Daydream plc shows total production overheads of £39m.They plan to work 3m hours and total labour cost for the year are £48m.
Calculate the average wage rate per hour.
A) £16 per hour
B) £13 per hour
C) £1.20 per hour
D) £3 per hour
Q3) The cost of goods that have not been sold are carried forward to be shown as an expense in the following period
A)True
B)False
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Chapter 17: Marginal Costing and Decision-Making
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Q1) It is known that a factory has some fixed and some variable costs.In one month,the output was 12,000 units and the cost £30,000.The following month,output had increased to 15,000 units and the cost was £36,000.
How much are the fixed and variable elements of production?
A) The fixed costs are £6,000 and the variable costs are £2 per unit
B) The variable costs are £2.50 in month 1 and £2.40 in month 2
C) The fixed costs are £6,000 and the variable costs are £0.50 per unit
D) The variable costs are £0.40 in month 1 and £0.42 in month 2
Q2) The MoneyTalks company produces and sells 125,000 units a year for £50 each.Variable costs are £40 and annual fixed costs are £600,000. Calculate the break-even point in units.
A) 60,000 units
B) 6,666 units
C) 40,540 units
D) £112,000 units
Q3) Marginal costing information can only be presented for business as a whole and not for each product
A)True
B)False
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Page 19
Chapter 18: Standard Costing and Variance Analysis
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Q1) What might you assume if a company had a favourable material price variance and an unfavourable material usage variance?
A) Direct labour rate was higher than standard
B) The actual material cost per unit was less than the standard cost per unit
C) Less material per unit was used than the standard usage per unit
D) All of the above
Q2) The LAH company produces product BG,which includes variable overhead standard cost of 5 hours at £15 per hour,based on a budget production of 3,000 units.The actual results for the last period were as follows:
\[\begin{array} { l c }
\text { Production } & 3,100 \\
\text { Hours incurred } & 16,000 \\
\text { Variable overhead } & £ 235,00
\end{array}\]
Calculate the variable overhead efficiency variance.
A) £5,000 favorable
B) £5,000 adverse
C) £7,500 favorable
D) £7,500 adverse
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Page 20
Chapter 19: Incomplete Records
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Q1) Bloom has sales of £12,000.The gross profit percentage is 25% of sales.If opening stock was £300 and closing stock £250,what were Bloom's purchases?
A) £3,000
B) £2,050
C) £4,050
D) £3,050
Q2) Assets = Liabilities - Capital
A)True
B)False
Q3) At the end of the year,Terraplane company has inventory in hand at a selling price of £20,600.What was the cost of inventory assuming inventory is marked up at 60%?
A) £12,875
B) £8,000
C) £8,240
D) £12,360
Q4) Debits are increases to assets and expenses
A)True
B)False
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