Set 2

Question 1

What does the Statement of Changes in Equity show?

Answer 1

The Statement of Changes in Equity shows the reasons for the changes in share capital and reserves during the accounting period.

Question 2

What is the definition of an associate?

Answer 2

An associate is an entity over which the investor has significant influence but which is not a subsidiary (usually due to a shareholding of 20% to 50%).

Question 3

What is the definition of a subsidiary?

Answer 3

A subsidiary is an entity that it is controlled by another entity (usually with a shareholding of more than 50%).

Question 4

What is the purpose of depreciation?

Answer 4

Depreciation is used to reflect the cost of using a non-current asset. It matches the cost of using the assets to the revenues generated by the asset over its useful life.

Question 5

What is the straight-line method of depreciation?

Answer 5

The depreciation charge is the same each year – the cost is spread over the expected useful life.

Question 6

Do we depreciate Land and Buildings?

Answer 6

Buildings will be depreciated because they have a limited useful life.Land will not normally be depreciated because it has an unlimited life.

Question 7

What is the non-current asset register?

Answer 7

The non-current asset register is a record of the non-current assets held by the business. It is for internal control purposes and is not part of the double entry bookkeeping.

Question 8

What is the difference between tangible and intangible non-current assets?

Answer 8

Tangible assets can be touched (have a physical substance) e.g. machines, buildings, motor vehicles.Intangible assets cannot be touched (do not have a physical substance) e.g. goodwill, development expenditure.

Question 9

What is meant by revenue expenditure?

Answer 9

Revenue expenditure refers to expenses of running the business (will appear on the Income Statement).

Question 10

What is meant by capital expenditure?

Answer 10

Capital expenditure refers to the purchase of non-current assets and expenditure that enhances the asset (will appear on the Statement of Financial Position).

Question 11

What is meant by a credit limit?

Answer 11

A credit limit is the maximum amount of credit that the business is prepared to allow to the customer.

Question 12

What is the purpose of an aged receivables analysis?

Answer 12

To help keep track of outstanding debts and follow up on any that are overdue.

Question 13

What is an aged receivables analysis?

Answer 13

An aged receivables analysis is a list showing how much each customer owes and how old their debts are.

Question 14

What is the purpose of the allowance for receivables?

Answer 14

The allowance for receivables is made to recognise the possibility that some of the receivables might not be received (because they are doubtful).

Question 15

What is meant by an irrecoverable debt?

Answer 15

An irrecoverable debt is an amount owing to the business that will not be received.

Question 16

What is meant by prepaid income?

Answer 16

Prepaid income is income for the next year that has been received in the current year.

Question 17

What is meant by accrued income?

Answer 17

Accrued income is income for this year that has not been received by the year end.

Question 18

What is meant by a prepaid expense?

Answer 18

A prepaid expense occurs when some of the next years expense has been paid in the current year.

Question 19

Is the net selling price the selling price including or excluding sales tax?

Answer 19

The net selling price is the selling price excluding sales tax.

Question 20

Is the gross selling price the selling price including or excluding sales tax?

Answer 20

The gross selling price is the selling price including sales tax.

Question 21

Is output sales tax the tax charged on purchases or the tax charged on sales?

Answer 21

Output tax is the tax charged on sales.

Question 22

Is input sales tax the tax charged on purchases or the tax charged on sales?

Answer 22

Input tax is the tax charged on purchases.

Question 23

Is sales tax a form of direct or indirect taxation?

Answer 23

Sales tax is a form of indirect taxation.

Question 24

What methods of calculating the cost of inventory are allowed by the accounting standard?

Answer 24

FIFO (first in first out)AVCO (average cost_Unit cost (actual cost)

Question 25

In the context of inventory valuation, what is meant by net realisable value?

Answer 25

Net realisable value is the expected selling price less any expected future costs there will be before sale.

Question 26

Inventory is value at the lower of ___ and ___?

Answer 26

Inventory is valued at the lower of cost and net realisable value.

Question 27

What is the main purpose of a trial balance?

Answer 27

A trial balance checks that for every debit entry made, there has been an equal credit entry.