General

Question 1

One advantage of operating a partnership would include

a) Limited Liability for all partners
b) Being able to raise capital through Share issues
c) Access to a larger amount of initial capital
d) Greater power than a sole trader for decision making

Answer 1

c) Access to a larger amount of initial capital

Question 2

What does SOFA stand for

Answer 2

Statement of Financial Activities

Question 3

What does GAAP stand for

Answer 3

Generally Accepted Accounting Principles

Question 4

What does FRS Stand for

Answer 4

Financial Reporting Standards

Question 5

Define lower or net realisable value of stock

Answer 5

The value of stock should not be over stated or understated and the net realisable value reflects the selling price less any selling costs to complete and sell the goods

Question 6

Name several methods of stock take

Answer 6

First in First Out FIFO
Last in First Out
Average Cost

Question 7

How is stock valued on the First In First Out Method

Answer 7

Stock is based on the last quantities purchased on the assumption that the stock purchased earlier has been sold. In inflationary times this gives a higher closing stock value than Last in First Out.

Question 8

How is stock valued on in the Last In First Out Method

Answer 8

Closing stock is valued on the basis of the earliest stock purchased i.e. assuming all the newer stock sold recently. In times of inflation this gives the effect of lowering the value and depressing the profits

Question 9

How is the stock valued on the Average Cost Method

Answer 9

Taken as the average price at which units have been purchased over a period. The total cost of units in stock is divided by the total number of units in stock. This method is a compromise between LIFO and FIFO and gives a more realistic figure. Common in computerised systems where the computer normally calculates a new value for a stock item each time an issue or purchase is made. Rarely used in manual systems

Question 10

Goodwill may or not be recorded in the books. What happens if goodwill is recorded

Answer 10

Goodwill account is opened and is debited with the amount of goodwill. The partners already in the business then have this credited to their capital accounts a proportion of the goodwill according to their profit sharing ratio at the time the goodwill is created

Question 11

What happens if goodwill is not recorded

Answer 11

No goodwill account is opened. The amount of the goodwill is first divided between the partners as to their profit sharing agreement. It is then reapportioned on the basis of the new agreement. THE DIFFERENCE BETWEEN THE TWO APPORTIONMENTS IS ENTERED IN THE CAPITAL ACCOUNTS

Question 12

What does the entity concept mean

Answer 12

The business is regarded as a separate entity distinct form its owner owners.

Question 13

What does the materiality concept mean

Answer 13

A disproportionate amount of time should not be spent recording trivial or minor items. For example the cost of a pen would be treated as a revenue expense in the year it was purchased even though it may still be in use in subsequent years because spreading the cost over the period of use would not be worth the trouble

Question 14

What does the prudence concept mean

Answer 14

a conservative approach should be applied in preparing information for profit and loss items and that where there are areas of doubt it is always advisable to understate profits rather than potentially overstate them and to overstate losses rather than run the risk of understating them. This cautious approach will ensure that financial statements do not give an over-optimistic view of a business financial performance and position

Question 15

What is the matching concept

Answer 15

All relevant expenses should be matched against all income which they relate

Question 16

Describe what is meant by error of ommission

Answer 16

entry has been completely omitted from the ledger. There is no Dr or Cr on Trial Balance for example an invoice not received for input

Question 17

Describe what is meant by error of original entry

Answer 17

When in the original entry into the ledger is incorrect both in the debit and credit section eg entering 54 instead of 45. When error comes to light adjusted on both sides

Question 18

Describe what is meant by error of commission

Answer 18

Where the correct amount is entered but to the wrong account eg Debiting D White instead of L white

Question 19

Describe what is meant by error of principle

Answer 19

When entries are made to the wrong type of account eg motor car brought for 2000 but posted to motor vehicle expenses as opposed to motor vehicle accounts. Doesn’t affect trial balance

Question 20

Describe what is meant by compensating errors

Answer 20

Where the ledger contains two or more errors which by chance cancel each other out For example a customers account is credited 10 when it should have been debited resulting in the ledger being overstated

Question 21

Describe what is meant by error of duplication

Answer 21

When the same entry is entered in twice

Question 22

In a Trading Profit and Loss account where is the bank interest received shown

Answer 22

After Gross Profit ie
Sales			                        124300
Opening Stock	8250		
Purchases	        92800		
Good Returned	1320		
Closing Stock	        8580		
Cost of Goods Sold		91150	
Gross Profit			                  33150
Bank Interest Received		              230
Cash Discount Received			30
Profit			                           33410

Question 23

Where is Cash discount allowed showed

Answer 23

Within the expenses section of the Trading Profit and Loss

Question 24

Where is Carriage inward shown in the Trading Profit and Loss

Answer 24

Within the Cost of Goods Sold Calculation
Opening Stock	  31500		
Purchases	        221800		
Carriage Inwards	     1200		
Purchases Returns    -3260		
Closing Stock	          -33500		
Cost of Goods Sold		217740

Question 25

Which of the following concepts would apply to the accounts of a sole trader:
Accruals, entity, prudence, consistency, limited liability

Answer 25

All of them except the limited liability

Question 26

What does AVCO stand for and does a calculation have to be made after each entry

Answer 26

Average Cost Method on stock valuation
e.g. Balance 10 @ 30 purchased 10 * 34 average is 32 (300 plus 340=640/20)then purchased another 40 average would then be average of 1920/60

Question 27

What is Capital employed

Answer 27

Capital Employed = TOTAL ASSETS LESS CURRENT LIABILITIES

Long term Liabilities are excluded

Question 28

What are gross and net profit margins measures of

Answer 28

Profitability

Question 29

What is the return of capital employed a measure of

Answer 29

Profitability

Question 30

What is referred to as a realisation account in partnerships

Answer 30

Realisation account is opened when a partnership is dissolved to ascertain the net gain or loss on realisation of the assets and to apportion the balance between the partners in their profit sharing ratio.

Question 31

Define Shareholders Equity

Answer 31

Issued Ordinary Share Capital plus the Reserves that represent the investment in the company by the ordinary shareholders

Question 32

x + profit = Sales
What is x
x+25=125

Answer 32

Cost of Sales

100 + 25 = 125

Question 33

When profit is expressed as a percentage of sales what would that be regarded as

Answer 33

Profit Margin
25/125 = 20% or
Selling Price 100% less 
Profit 25%
Cost of Sales 80%
Selling Price always 100%

Question 34

Define provision under financial reporting standards 12 “provisions contained in liabilities and contingent assets”

Answer 34

A provision arises when there is an obligation as a result of the past event, it is probable that transfer of economic benefits will be required to settle obligation and a reliable estimate can be made of the accounts of the obligation a provision must be recognised i.e. provided for in the accounts

Question 35

Define contingent liability under the financial reporting standards 12 “provisions contingent liabilities and contingent assets”

Answer 35

A contingent liability arises from an event where it is possible but not probable that the transfer of the economic benefits will be required to settle the obligation and a reliable estimate of the liability is not possible. Such liability should not be provided in the accounts as such but it maybe disclosed and the notes to the accounts

Question 36

Define Carriage Inwards and would they be a D or a C in profit and loss

Answer 36

A charge for delivery of goods purchased

Debit

Question 37

Define Carriage Outwards and would they be a D or a C in balance sheet

Answer 37

A charge for goods sent out to a customer

Debit

Question 38

Define Returns Inwards and would they be a D or C in profit and loss

Answer 38

Goods returned by customers

Debit

Question 39

Define Returns Outwards and would they be a D or C in balance sheet

Answer 39

Goods returned to Suppliers

Debit

Question 40

Which of the following statements best describes a Trial balance

a) It checks the arithmetic accuracy of double entry transactions
b) it is always prepared by an accountant
c) it is correct if the two sides balance
d) it is essential statement for users

Answer 40

a) It checks the arithmetic accuracy of double entry transactions

Question 41

Stock previously cost 750 and sold for 1000 - it was damaged and can now sell for 600 and it will cost 50 to prepare stock for sale what is the net realisable value

Answer 41

550

Question 45

When does capital expenditure occur

Answer 45

When a business purchase non current assets or adds value to existing non-current assets - this does not include repairs and maintenance