Accounting Past Papers

Question 1

Identify three accounting concepts/principles that are applied when preparing financial statements.

Answer 1

Business Entity also known as Accounting Entity Concept.

Accruals Concept and the Matching Principle.

Dual Aspect Concept.

Question 2

Explain what Business Entity )also known as Accounting Entity Concept) is.

Answer 2

The owner and the business are considered as two different persons, distinct from each other.

Transactions are recorded from the point of view of the business and not the owner. As such, any amount invested by the owner in the business is considered as a liability by the business.

Also, only those transactions that concern the business are recorded.

Question 3

Explain what Accruals Concept and the Matching Principle is.

Answer 3

According to the Accruals concept, when calculating the profit of a given period, revenues earned in that period need to be matched against expenses incurred for that same period. This is done irrespective of amount received as revenue or amount paid for the expenses.

According to the matching principle, when calculating profit, revenues need to be matched against those expenses incurred to earn the revenues.

Question 4

Explain what the Dual Aspect Concept is.

Answer 4

This concept takes into account the two aspects of a accounting represented on one side by the assets of the business and on the other by the claims against those assets.

This duality is also explained by the accounting equation as follows:

Assets = Capital + Liabilities

Question 5

Explain the purpose of the bank reconciliation.

Answer 5

A bank reconciliation is a process performed by a company to ensure that the company’s records (check register, general ledger account, balance sheet, etc.) are correct and that the bank’s records are also correct.

Question 6

Explain fully the findings of the bank reconciliation will have on the financial statements.

Answer 6

As mentioned above, performing a bank reconciliation is necessary for the accuracy of the accounting records and for the company’s financial statements.

Bank reconciliations are also associated with a company’s internal controls over cash.

If the bank reconciliation is performed by someone other than the authorized check signers and record keepers, the company has improved its internal control over cash.

Question 7

Define the term ‘contribution’.

Answer 7

Contribution is the amount of earnings remaining after all direct costs have been subtracted from revenue.

This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs equals the profit earned.

Question 8

How do you calculate the contribution margin?

Answer 8

Contribution Margin = Sales - Variable Costs

Question 9

How do you calculate the break-even point in UNITS?

Answer 9

Fixed Cost / (Sales Price - Variable Cost)

Question 10

How do you calculate the break-even point for REVENUE?

Answer 10

Break-even point (units) X Sales Price

Question 11

Explain the term ‘margin of safety’.

Answer 11

Margin of safety is a principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value.

In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk.

Question 12

How do you calculate the margin of safety in UNITS terms?

Answer 12

Margin of Safety = Total budgeted or actual sales − Break even sales.

Question 13

How do you calculate the margin of safety in PERCENTAGE terms?

Answer 13

Margin of Safety / Actual Sales X 100

Question 14

Outline and explain the assumptions of the break-even analysis.

Answer 14

(1) All costs can be categorized as fixed or variable costs.
(2) Total fixed costs remain unchanged for all output levels.
(3) Total variable costs fluctuate proportionately with output level resulting in no change in per unit variable cost.
(4) Sale price per unit remains the same for each output level.
(5) Costs and revenue behave in a linear fashion within a relevant range.
(6) No factor other than sales volume can affect costs and sales revenue.
(7) The analysis relates to businesses producing one product only or a constant product mix.
(8) The technology, production methods and efficiency remain unchanged.
(9) There are no inventories at start or at end of the accounting period or inventory levels are expected to remain constant.

Question 15

What’s the definition of an asset?

Answer 15

“a resource controlled by the entity as a result of past
events and from which future economic benefits are
expected to flow to the entity”

Question 16

What are liabilities?

Answer 16

“a present obligation of the entity arising from past
events, the settlement of which is expected to result in
an outflow from the entity of resources”

Question 17

What is Capital/Equity/Ownership Interest?

Answer 17

“the residual interest in the assets of the entity after deducting all its liabilities”

the amount(s) invested by the owner(s) of the entity

(amounts owed to owners)

Question 18

Define Expenses/Loss.

Answer 18

“decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants”

Question 19

Define Income / Revenue / Gains?

Answer 19

“increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”

Question 20

Distinguish between variable costs and fixed costs.

Answer 20

A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.

A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.

Semi-variable = fixed + variable.

Step cost = fixed cost increases by steps.

Question 21

What are Sunk Costs?

Answer 21

Costs created by a decision made in the past and cannot be changed by any future decisions.

Sunk Costs are irrelevant costs
(not all irrelevant costs are sunk costs)

Question 22

Distinguish between relevant and irrelevant costs and revenues.

Answer 22

Relevant Costs / Revenues
future costs / revenues that will be changed by a decision

Irrelevant Costs / Revenues
will not be affected by a decision

Example: Going to Glasgow to watch the football and do some shopping.
Do I take my own car or go by train?
Relevant costs – fuel for car, car parking
Irrelevant costs – car tax, car insurance

Question 23

What are examples of fixed costs?

Answer 23

Salary paid to a supervisor.

Advertising in the trade journals.

Business rates paid to the local authority.

Depreciation of machinery calculated on the straight-line basis.

Question 24

What are Period and Product Costs?

Answer 24

for profit measurement and stock valuation

Product Cost

identified with goods purchased / produced for sale (include direct & indirect production costs)
Period Cost

not included in the inventory valuation and are treated as expenses in the period in which they are incurred

Question 25

How do you calculate the gross profit?

Answer 25

Sales - Cost of Goods Sold

Question 26

How do you calculate the selling price for a unit?

Answer 26

(Total fixed costs + Total variable costs) / Total units produced

Question 27

How do you calculate the net profit?

Answer 27

Total Revenue -Total Expenses = Net Profit

Question 28

Distinguish between marginal costing and fixed costing.

Answer 28

Marginal costing is a technique of costing in which allocation of expenditure to production is restricted to those expenses which arise as a result of production, e.g., materials, labor, direct expenses and variable overheads.

Fixed overheads are excluded in cases where production varies because it may give misleading results. The technique is useful in manufacturing industries with varying levels of output.

The practice of charging all costs both variable and fixed to operations, products or processes is termed as absorption costing. (Fixed Costing)

Question 29

Distinguish between Financial Accounting and Managerial Accounting.

Answer 29

Aggregation. Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.
Efficiency.

Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.

Question 30

Distinguish between Financial Accounting and Managerial Accounting. (2)

Answer 30

Efficiency. Financial accounting reports on the profitability (and therefore the efficiency) of a business,

whereas managerial accounting reports on specifically what is causing problems and how to fix them.

Question 31

Distinguish between Financial Accounting and Managerial Accounting. (3)

Answer 31

Proven information. Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct.

Managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

Question 32

Distinguish between Financial Accounting and Managerial Accounting. (4)

Answer 32

Reporting focus. Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company.

Managerial accounting is more concerned with operational reports, which are only distributed within a company.

Question 33

Distinguish between Financial Accounting and Managerial Accounting. (5)

Answer 33

Standards. Financial accounting must comply with various accounting standards,

whereas managerial accounting does not have to comply with any standards when it compiles information for internal consumption.

Question 34

What is a budget?

Answer 34

“is a plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by zero-based budgeting.”

Question 35

What is the cash budget?

Answer 35

One of the most important budgets

Objective – to ensure sufficient cash to meet the organisations needs

Rolling Budget

Cash Flow Management
to manage cash to achieve maximum interest and cash availability
plan for deficits
plan for cash surplus

Question 36

What is the cash budget? (2)

Answer 36

Receipts include: Cash sales, receipts from debtors, sale of assets, dividends received, interest received, new share issue etc.

Payments include: Payments to creditors for stock, and material purchases, wages, dividend payments, loan repayment

Some receipts/payments are not in Profit & Loss e.g. purchase of fixed assets, cash from new share issue

Some payments in P/L are not in cash budget – non-cash e.g. depreciation

Question 37

Why do we produce budgets?

Answer 37

Planning
annual operations – long term plans
encourages managers to anticipate problems
Coordination
activities of various parts of organisation
managers to examine relationship between own operations and those of other departments
Communication
plans & policies & constraints
ensure appropriate individuals accountable
top management – lower management
during budget preparation
Motivation
can influence managerial behaviour
participation assists managing departments
provides a target
Control
compare actual with budgets
management by exception:
investigating significant deviations
identifying inefficiencies
take appropriate action
Performance Evaluation
assess managers performance against targets

Question 38

How could a business improve their financial position?

Answer 38

Recover outstanding debt
Reduce/rearrange expenses
Sell assets
Increase prices
Look for government grants
Use new marketing techniques

Question 39

What impact do bad debts have on financial statements?

Answer 39

This results in an expense on the income statement (sooner than would occur under the direct write-off method) and a reduction of the current assets on the balance sheet.

Question 40

What are examples of variable costs?

Answer 40

materials used to manufacture a unit of output or to provide a type of service.

labour costs of manufacturing a unit of output or providing a type of service.

commission paid to a salesperson.

fuel used by a haulage company.

Question 41

Distinguish between variable costs and fixed costs.

Answer 41

A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.

A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.

Semi-variable = fixed + variable.

Step cost = fixed cost increases by steps.

Question 42

Identify groups of users who are known to examine published financial statements and why they have an interest in such statements.

Answer 42

Customers.

When a customer is considering which supplier to select for a major contract, it wants to review their financial statements first, in order to judge the financial ability of a supplier to remain in business long enough to provide the goods or services mandated in the contract.

Question 43

Identify groups of users who are known to examine published financial statements and why they have an interest in such statements. (2)

Answer 43

Employees. A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain. This can be used to increase the level of employee involvement in and understanding of the business.

Question 44

Identify groups of users who are known to examine published financial statements and why they have an interest in such statements. (3)

Answer 44

Governments. A government in whose jurisdiction a company is located will request financial statements in order to determine whether the business paid the appropriate amount of taxes.

Question 45

Identify groups of users who are known to examine published financial statements and why they have an interest in such statements. (4)

Answer 45

Investment analysts. Outside analysts want to see financial statements in order to decide whether they should recommend the company’s securities to their clients.

Question 46

Identify groups of users who are known to examine published financial statements and why they have an interest in such statements. (5)

Answer 46

Investors. Investors will likely require financial statements to be provided, since they are the owners of the business, and want to understand the performance of their investment.

Question 47

Explain the term ‘Principal Budget Factor’.

Answer 47

The principal budget factor is the factor that limits the activities of functional budgets of the organisation.

The early identification of this factor is important in the budgetary planning process because it indicates which budget should be prepared first.

Question 48

Define the Going Concern Concept.

Answer 48

It is assumed that the business will continue to operate in the foreseeable future (as far as one can predict). Therefore, there is no intention of closing down.

This concept may not be applied if there are evidences or conditions requiring the ceasing of business – for example persistent losses or liquidity problem.

Question 49

How can accounting concepts be seen as helpful?

Answer 49

Accounting concepts are very helpful in applying commonly established procedures in preparing financial statements.

Question 50

Distinguish between relevant and irrelevant costs and revenues.

Answer 50

Relevant Costs / Revenues
future costs / revenues that will be changed by a decision

Irrelevant Costs / Revenues
will not be affected by a decision

Example: Going to Glasgow to watch the football and do some shopping.
Do I take my own car or go by train?
Relevant costs – fuel for car, car parking
Irrelevant costs – car tax, car insurance

Question 51

What are limitations of the break-even analysis?

Answer 51

Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too

Variable costs do not always stay the same. For example, as output rises, the business may benefit from being able to buy inputs at lower prices (buying power), which would reduce variable cost per unit.

Most businesses sell more than one product, so break-even for the business becomes harder to calculate

Question 52

Discuss the criticisms of budgeting in modern organisations.

Answer 52

Demotivational budgets

Setting unrealistic targets

Budgetary Slack

Incremental approach – budget ratcheting

Use it or lose it – budget lapsing

Name, Blame & Shame

Time consuming

Unethical behaviour

A yearly rigid ritual

Cost

Question 53

What are limitations of using financial ratios?

Answer 53

Many large firms operate different divisions in different industries. For these companies it is difficult to find a meaningful set of industry-average ratios.

Inflation may have badly distorted a company’s balance sheet. In this case, profits will also be affected. Thus a ratio analysis of one company over time or a comparative analysis of companies of different ages must be interpreted with judgment.

Seasonal factors can also distort ratio analysis. Understanding seasonal factors that affect a business can reduce the chance of misinterpretation. For example, a retailer’s inventory may be high in the summer in preparation for the back-to-school season. As a result, the company’s accounts payable will be high and its ROA low.

Question 54

What are examples of current assets?

Answer 54

Cash, including foreign currency
Investments, except for investments that cannot be easily liquidated
Prepaid expenses
Accounts receivable 
Inventory