Theory

Question 1

State the difference between a trading business and a service business

Answer 1

A trading business buys and sells goods to customers while a service business provide services
to its customers.

Question 2

Give two examples of trading and service business each.

Answer 2

Bookshops and supermarkets are examples of trading businesses. Hair salon and web design
business are examples of service businesses

Question 3

List two features of a sole proprietorship.

Answer 3

It is owned by one person who contributes capital to set up the SP;
*
It is less likely for banks and other lenders to lend money to SP;
When the SP incurs debts and losses, the only owner is obliged to pay them using his
or her personal assets
The only owner usually runs the business by himself or herself and has absolute control
Over it.
The SP exists as long as the owner is alive and desires to continue operation.
The only owner can easily update the particulars of the new owner to notify the
corporate regulatory authority of any transfer of ownership.
SP has minimal administrative duties to adhere to.

Question 4

List two features of a limited liability partnership.

Answer 4

t is owned by twO or more partners where each partner contributes capital to set up the
LLP;
It is more likely for banks and other lenders to lend money to LLP as there are more
sources of personal assets from partners and business assets to serve as collaterals.
When the LLP incurs debts and losses due to the wrongful actions of one of the
partners, the partner who caused it is obliged to pay the debts and losses using his or
her personal assets. Other partners are not affected.
Usually, control over the business is shared among the partners with at least one partner
heavily involved in running the business.
The LLP exísts forever until wound up or strike off.
All partners need to agree to the addition or withdrawal of partner(s) before the
corporate regulatory authority will acknowledge the transfer of ownership.
LLP has few regulatory duties to comply with. However, one of the partners need to
submit an annual declaratíion stating whether it is able to pay its debts during the normal
course of business.

Question 5

List two features of a private limited company.

Answer 5

It is owned by 50 or less shareholders where each investor buys shares and contributes
capital
* It is more likely for banks and other lenders to lend money to PLC as there are more
business assets of high value to serve as collaterals.
* When the company incurs debts and losses, shareholders will most likely not receive
dividends but they are not obliged to pay the debts and losses using their personal
assets. At most, they will only need to forfeit their investments in the company.
The shareholders have no control over the running of the business, unless they are part
of the management team. The company hires professionals to manage the business on
behalf of shareholders.
The company exists forever until wound up or struck off.
Shareholders can pay a stamp duty to the tax authority to give their shares to another
person or organisation.
PLC must comply with statutory requirements for general meetings, directors etc., and
file its annual financial reports.

Question 6

Name two stakeholders and the decision that they might make by using a business’
accounting information.

Answer 6

Stakeholders
Whether to continue to invest in the business or sell the business,
Owners and
depending on the risks and returns related to the business
shareholders
Whether to consider ways to improve the performance of the
Managers
business
Whether to continue working at the business
Employees
Whether to grant loans to the business, depending on the
Lenders
business’ ability to repay the loan principal and pay interest
Whether to sell to the business on credit, depending on its ability
Suppliers
to pay
Whether to buy from the business, depending on the business’
Customers
ability to provide the gods and/or services that they need and
good after-sales service
Whether the business complies with the tax regulations and
Government
decides the amount of tax to collect from the business
Whether they are comparable to the business and how to improve
Competitors
their own performance

Question 7

Give two examples of accounting information that a business
manager may need.

Answer 7

Gross profit margin
Cost of inventory
Credit terms and cash discount
Trade receivables collection period (days)
Price of non-current assets
Cost of maintaining the non-current assets
Trade discount
Cost of ownership versus renting
Business’ current financial situation

Question 8

Give two examples of non-accounting information that a business
manager may need.

Answer 8

Nature of business
Owner/owners’ expertise
Capital commitment for initial set-up
Level of control desired
Lifespan of business
Transferability of ownership
Economic outlook
Specific industry outlook
Reputation of customer/supplier
Customer’s history of repayment
Nature of product
Consumer preference
Warranty
Local vs overseas supplier
Online vs brick and mortar supplier
Customer reviews
After-sales services

Question 9

What are the roles of an accountant?

Answer 9

Accountants are stewards of businesses who set up the accounting information system to
provide relevant timely information and insights to stakeholders for decision-making.

Question 10

What is the role of accounting?

Answer 10

Accounting is an information system that provides accounting information for stakeholders to
make informed decisions regarding the management of resources and performance of
businesses.

Question 11

Explain how accountants exercise integrity.

Answer 11

Accountants can exercise integrity by being straightforward and honest in all professional
relationships.

Question 12

Explain how accountants remain objective.

Answer 12

Accountants is objective when he or she will not let bias, conflict of interest or undue influence
of others override his or her professional judgement.

Question 13

Explain the importance of an accountant’s professional ethics.

Answer 13

As accountants provide information to stakeholders for decision-making purposes, the
information needs to be truthful and accurate. Accountants who do not have integrity and is
not objective may provide information that mislead users to make poor decisions. Thus, it is
important for accountants to have integrity and is objective.

Question 14

State the accounting entity theory

Answer 14

Assets of the business and the owner are considered to be
separate. All transactions are recorded from the point of view of
the business.

Question 15

State the Accounting period theory

Answer 15

Life of a business is divided into regular time intervals

Question 16

state the accrual basis of accounting theory

Answer 16

Business activities that have occurred, regardless of whether cash
is paid or received, should be recorded in the relevant accounting
accounting
period.

Question 17

consistency

Answer 17

Once an accounting method is chosen, this method should be
applied to all future accounting periods to enable meaningful
comparison.

Question 17

Going concern

Answer 17

A business has an indefinite economic life unless there is credible
evidence that it may close down

Question 18

Matching

Answer 18

Expenses incurred must be matched against in come earned in the
same period to determine the profit for that period.

Question 18

Historical cost

Answer 18

Transactions should be recorded at their original costs.

Question 19

Materiality

Answer 19

Relevant ínformation should be reported in the financial
statements if it is likely to make a difference to the decision-making
process. Materiality is dependent on size of the business in terms
of equity, assets and income.

Question 20

Objectivity

Answer 20

Accounting information recorded must be supported by reliable
and verifiable evidence so that financial statements will be free
from opinions and biases

Question 20

Monetary

Answer 20

Only business transactions that can be measured in numerical
currency/monetary terms are recorded.

Question 20

Revenue recognition

Answer 20

Revenue is earned when goods have been delivered or services
have been provided.

Question 21

Prudence

Answer 21

The accounting treatment chosen should be the one that least
overstates assets and profits and least understates liabilities and
losses.

Question 21

Explain the difference in extent of liability between a sole proprietorship and a private
limited company.

Answer 21

When a sole proprietorship incurs debts and losses, the sole owner is obliged to pay them
using his or her personal assets, i.e. personally liable.
When a private limited company incurs debts and losses, shareholders are not personally
liable. In the worst-case scenario, shareholders will only need to forfeit their investments.

Question 22

Explain the difference in transferability of ownership between a limited liability
partnership and private limited company.

Answer 22

In a limited liability partnership, all partners need to agree to the addition or withdrawal of
partner(s) before the corporate requlatory authority will acknowledge the transfer of
ownership.
In a private limited company, shareholders can pay a stamp duty to the tax authority to give
their shares to another person or organisation.

Question 23

Explain the difference between a cash transaction and a credit transaction.

Answer 23

Cash transactions refer to events where payment is made at the same time during a cash sale
or purchase while credit transactions refer to events where payment is delayed during a credit
sale or purchase.

Question 24

What is an accounting information system?

Answer 24

Accounting information system is a computerised structure that a business uses to collect,
store, process accounting data and prepare financial reports so that the information can be
used by stakeholders for decision making.

Question 25

Receipt

Answer 25

Acknowledge payment received from customers immediately after goods were sold or services were provided

Question 25

List the stages of the accounting cycle.

Answer 25

The first stage of the acoounting cycle involves the identifying and recording of transactions in
the journal and post the journal entries to the ledger accounts Stage 2 involves adjusting the
accounts. Stage 3 involves preparation of the financial statements based on the adjusted trial
balance. Stage 4 involves closing the temporary accounts by passing additional journal entries.

Question 26

What are source documents?

Answer 26

Source documents are reliable and verifiable evidences that contain particulars of business
transactions.

Question 27

Rernittance advice

Answer 27

Inform credit supplier that payment by cheque has been made for
a specific invoice

Question 28

Invoice

Answer 28

States the amount the buyer owes the seller for goods or services
provided on credit

Question 29

Credit note

Answer 29

States the amount to be reduced from the invoice issued earlier
due to overcharged or goods returned

Question 30

Debit note

Answer 30

States the amount to be added on to the invoice issued earlier due
to undercharged

Question 31

Payment voucher

Answer 31

Process payment to credit suppliers

Question 32

1. Define assets

Answer 32

Assets are resources a business owns or controls that are expected to provide future benefits.

Question 33

Bank statement

Answer 33

Check and tally against the business bank records of its cash at
bank account

Question 34

Define liabilities

Answer 34

Liabilities are obligations owed by a business to others that are expected to be settled in the
future.

Question 35

Define income

Answer 35

Income refers to amounts earned from the activities of a business.

Question 36

Define expenses

Answer 36

Expense are costs incurred to earn income in the same accounting period.

Question 37

Define capital

Answer 37

Contributions of personal assets by the owner for business use

Question 38

State the accounting equation.

Answer 38

Assets = Liabilities + Equity

Question 39

State the expanded accounting equation for a sole proprietorship.

Answer 39

Assets = Liabilities + Capital + (Income Expenses) - Drawings

Question 40

Distinguish between a cash discount and a trade discount.

Answer 40

Trade discount is a reduction to the list price to encourage bulk purchase, custonmer patronage
and customer loyalty while cash discount is a reduction to the invoiced price to encourage
prompt payment.

Question 41

Explain why trade discounts and cash discounts are given.

Answer 41

Trade discounts are given to encourage customers to buy in bulk and to encourage Customer
patronage and loyalty while cash discounts are given to encourage credit customers to pay
promptly.

Question 42

State the two rules of double entry system

Answer 42

• It is a system of recording transactions using debit and credit.
  A transaction is debited to one or more accounts and credited to one or more accounts and
  the total dollar amount of debits and total dollar amount of credits are the same.
  Trial Balance and Financial Statements

Question 43

Explain the purpose of a trial balance. / Explain why a business prepares a trial balance
at the end of the financial year.

Answer 43

A trial balance is prepared to
facilitate the preparation of financial statements; and
ensure arithmetic accuracy in recording.

Question 44

When a trial balance is balanced, there are no errors in the accounts. Is this true or
false? Explain your answer.

Answer 44

False. It is because even though a trial balance is balanced, there may be errors that are not
revealed by trial balance.

Question 45

Explain the limitation of a trial balance.

Answer 45

A trial balance is not an absolute proof of accuracy of transactions recorded in ledger accounts
because there may be errors which would not affect the balancing of the trial balance and thus.
would not be revealed

Question 45

Explain the differences between current and non-current assets

Answer 45

Current assets are resources owned or controlled by a business where its benefits are used
within one financial year. These assets are easily converted to cash.
Non-current assets are resources owned or controlled by a business where its benefits last
beyond one financial year and cannot be easily converted into cash.

Question 46

Explain the differences between current and non-current liabilities.

Answer 46

Current liabilities are obligations owed by a business to others that are expected to be paid
within one financial year.
Non-current liabilities are obligations owed by a business to others that are expected to be paid
beyond one financial year.

Question 47

Explain why trade receivable is a current asset.

Answer 47

Trade receivable is a current asset because trade receivables are amounts collectible from
Credit customers within the next financial year.

Question 48

Explain why machinery is a non-current asset.

Answer 48

Machinery is a non-current asset because it is a resource owned or controlled by a business
where the benefits of using it lasts more than one financial year and they cannot be easily sold
for cash.

Question 49

Explain why trade payable is a current liability.

Answer 49

Trade payable is a current liability as it is an obligation owed by a business to credit suppliers that is expected to be paid within one fianancial year

Question 50

Explain why bank loan isa non-current liability.

Answer 50

Bank loan is a non-current liability because it is an obligation owed by a business to the bank
that is expected to be paid beyond one financial year.

Question 51

Explain the difference between revenue and other income.

Answer 51

Revenue are amounts earmed from slling goods and providing services while other income
are amounts earned from activities other than selling goods and providing services.

Question 52

Explain the difference between cost of sales and other expenses.

Answer 52

Cost of sales are costs of the inventory that was sold while other expenses are other costs
incurred during the operation of the business.

Question 53

State two reasons why cheques are rejected by banks.

Answer 53

Cheque has expired.
Cheque is post-dated.
Information on cheque is not consistent. For example, the amount written in numbers
does not match with the amount written in words or the signature is different from the
authorised version in the bank’s records.
Information on cheque is not complete. For example, there is no date, amount to be
paid or signature.
Payer’s bank account does not have enough money/ is closed/ is frozen.

Question 54

Explain the purpose of internal controls in a business.

Answer 54

safeguard assets of the business;
ensure business transactions are recorded accurately; and
ensure that the business complies with laws and requlation

Question 55

Explain why internal controls are needed to protect cash.

Answer 55

Cash is highly portable and has a high chance of geting. stolen. Internal controls are needed
to reduce the possibility for theft or the likelihood of error in order to ensure that the cash is
well-prote cted and accurately reported. Otherwise, errors, discrepancies, or irregularities may
not be detected on time and cash may be misappropriated.

Question 56

Name and explain two types of internal controls.

Answer 56

Segregation of duties
It involves the separation of cash handling and cash recording duties among different
employees so that no single person has control over the entire cash process. or
example, businesses can ensure different employees receive and deposit cash,
authorise invoices for payment and process payment to suppliers and write and sign
cheques.
Custody of cash
Cash and cheques should be secured in a locked storage and the business should
provide access of cash to authorised personnel only. The business should also deposit
cash daily into the bank to minimise the amount of cash kept overnight at the business
location.
Authorisation
It refers to obtaining proper approvals for all payments from authorised personnel. A
business may require at least two persons to review and approve payments involving
large amounts that the business consider as significant to decision-making and require
valid supporting documents for all payments.
Bank reconciliation
Bank reconciliation statements are prepared to compare the business’ records with
bank’s records to identify items that caused the diference between the ending balances
in the business cash at bank account and the bank statement. Examples of such items
include direct deposits, direct payments, cheques not yet presented, and deposits in
transit, dishonoured cheques and errors made by the business or the bank.

Question 57

. Name three items which cause the difference between the ending balances of a bank
statement and business’ cash at bank account.

Answer 57

direct deposits
direct payments
cheques not yet presented
deposits in transit
dishonoured cheques
errors made by the business or the bank

Question 58

Explain why bank reconciliation is done.

Answer 58

Bank reconciliation statements are prepared to compare the business’ records with bank’s
records to identify items that caused the difference between the ending balances in the
business cash at bank account and the bank statement.

Question 59

State two items that causes the bank statement balance to be greater than the cash
book balance.

Answer 59

Electronic transfers
Direct credits
Interest received
Dividends received

Question 60

Explain the First – In –First – Out (FIFO) method.

Answer 60

Goods that are purchased first are assumed to be sold first and goods that are purchased last
are assumed to remain in the business as the ending inventory.

Question 60

State two types of item paid or received directly through the bank for which a bank
statement may be used as proof.

Answer 60

Direct debit
Electronic transfers
Direct credits
Bank charges
Interest paid
Interest received
Dishonoured cheques

Question 61

State the valuation rule for inventory

Answer 61

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

Question 62

Explain what is meant by perpetual inventory system.

Answer 62

Perpetual inventory system is a system whereby the quantity and availability of inventories are
updated on a continuous basis.
It provides computerised records for the business to monitor the inventory balances so that the
business can maintain just enough inventories to meet customer demand.

Question 63

Define allowance for impairment of trade receivables.

Answer 63

Allowance for impairment of trade receivables is the amount of trade receivables estimated to
be uncollectible.

Question 64

Explain why a business may decide to make an allowance for impairment of trade
receivables.

Answer 64

At the end of each period, a business may review how much it may not be able to collect from
its outstanding receivables. It may estimate the amount that is not likely to be collectible in order
to ensure that trade receivables and profits are not overstated.

Question 65

Distinguish between capital expenditure and revenue expenditure.

Answer 65

Capital expenditure are amounts spent on a non-current asset that provides benefits for more
than one year whích includes costs to buy and bring the non-current asset to its intended use.
On the other hand, revenue expenditure are amounts spent on a non-current asset that
provides benefits that last for the current year which includes costs to operate, repair and
maintain the non-current asset in working condition.

Question 66

Suggest how a business can reduce the risk of irrecoverable debts.

Answer 66

Improve credit granting process by
Granting credit to customers who are financially able
- Monitoring collection patterns closely
Providing cash discounts for prompt payment
Increase debt collection efforts by
Sending regular reminders to credít customers who delay payment
- Engage professional debt recovery agencies to collect payment from financially distressed
credit customers.

Question 67

Explain the meaning of capital expenditure.

Answer 67

capital expenditure is money spent on buying or extending or improving a non-Current 2ssel.
Capital expenditure provides benefits which last for more than one year.
Cost of non-current assets that are considered material to the business are classified as capital
expenditure.

Question 68

Explain the meaning of revenue expenditure.

Answer 68

Revenue expenditure is money spent on operating or maintaining a non-current asset OR
money spent on running a business on a day-to-day basis. Revenue expenditure provides
benefits that last only for the current year.

Question 69

State four causes of depreciation.

Answer 69

Usage
Wear and tear
Obsolescence
Legal limits

Question 70

Explain how a business should decide whether the straight-line method or the reducing balance method is more suitable in depreciating NCA

Answer 70

A business should decide on the depreciation method based on how the non-current asset WIll
be used by the business. If the business expects to use the non-current asset uniformly
throughout the estimated useful life, straight-line method should be used.
On the other hand, if the business expects to use the non-current asset more in the early years
and less as the non-current asset gets older and become less efficient, then reducing balance
method should be used.

Question 71

Suggest a reason why a business buys inventory/buys services on credit instead of
paying cash for them.

Answer 71

The business buys inventory/services on credit so that payments can be made later and cash
can be used for other operations of the business.

Question 72

State the differences between a bank loan and a bank overdraft.

Answer 72

How it arise
A bank loan is an amount borrowed from the bank for a fixed period and has to be repaid
on a regular basis on a particular date while a bank overdraft is an arrangement made
with the bank to allow the business to withdraw more money than they have from their
bank account.
Purpose
Long-term borrowing is a deliberate loan taken up by the business usually to fund non-
current asset purchase or business expansion plans while bank overdraft is short-term
loan from the bank for the business to overcome a temporary cash shortage in the
business bank account.
Repayment
For bank loans, the business makes regular cash payments in equal instalments over
the loan period or a one-time lump-sum payment at the end of the loan period to reduce
the principal sum. For bank overdraft, the business deposits cash into the bank account
within the year to reduce the overdraft.
Classification in the statement of financial position
Long term borrowings (bank loans) are classified as a non-current liability in the
statement of financial position while the current portion of the long term borrowings is
classified as a current liability in the statement of financial position. Bank overdraft is
classified as a current liability in the statement of financial position.

Question 73

Define retained earnings

Answer 73

retained earnings is the accumulation of past profit/loss less declared dividends.

Question 73

Define dividends

Answer 73

Dividends is the return on shareholders’ interests in the business.

Question 74

Define drawings

Answer 74

Drawings refer to withdrawal of business assets by the owner for his personal use.

Question 74

State three reasons why the shareholders’ equity in a private limited company may be
different at the end of the financial year from that at the beginning.

Answer 74

Increase in share capital due to issuance of new shares during the financial year
Profit or loss made during the period
Dividends declared to shareholders during the year

Question 75

Explain what is meant by the liquidity of a business.

Answer 75

Liquidity is the ability of the business to repay its current liabilities when they fall due.It
measures how able a business is to convert current assets into cash to pay for current liabilities.

Question 76

state two reasons why liquidity is important to a business.

Answer 76

• not be able to settle its immediate debts
• not be able to make prompt payments and enjoy cash discount
• not be able have enough cash to meet their needs for daily operations

Question 77

Suggest ways to improve liquidity

Answer 77

Increase sources of cash through issuance of shares (for private linited company) or
obtain cash contribution from owner.
Obtain long-term loans
Sell excess non-current assets for cash
Reduce operating expenses
Negotiate for better credit terms from supplier.

Question 78

Name one profitability ratio

Answer 78

Gross profit margin
Mark-up on cost
Profit margin
Return on equity

Question 79

Suggest ways to improve profitability

Answer 79

Sell goods at a higher price
Buy goods in bulk to obtain trade discount (lower the cost price)
Switch to a supplier that offers lower prices, without compromising on quality (lower the
cost price)
Sublet excess pace to another business to earn rental income
Pay early to take advantage of cash discounts
Reduce the use of electricity appliances to lower utilities expenses

Question 79

Maggi is considering to change her sales policy to include credit terms rather than on
cash basis only.
Advise Maggi as to whether this would improve the profitability of the business. Justifvy
your answer.

Answer 79

Including credit sales might improve the profitability of the business as the customer base ig
Increase to include customers who are unable to nay the goods on a cash basis or who mignt
prefer to buy on credit terms. This would lead to a higher demand for Magg’s goods an egs
would be able to increase the seling price of her goods. As such, profitabilty would improve.
OR
Including credit sales might not improve the profitability of the business. There is a risk that
credit customersS may default on payment and the business will need to write off these debts.
As such, the increase in impairment loss on trade receivables would worsen profitability.

Question 80

Explain the difference between profitability and liquidity.

Answer 80

Profitability refers to the ability of a business to generate excess income to cover
its expenses.
OR Profitability measures the ability of a business to earn revenue and manage expenses.
In contrast, liquidity is the ability of the business to convert current assets into cash to pay
for its current liabilities when they fall due.
OR Liquidity measures the ability of a business to meet its short-term financial obligations.

Question 81

Suggest ways to improve efficiency in trade receivables

Answer 81

Monitor collection patterns closely
Ensure credit is granted to customers who are financially able
Offer cash discounts to encourage credit customers to pay early.
Send regular reminders to credit customers who delay payment or refuse to pay.
Engage professional debt recovery agencies to collect payment from financiall
distressed credit customers.

Question 81

Suggest ways to improve efficiency in inventory management

Answer 81

Reduce seling price of slow-moving goods
Provide trade discounts to encourage customers to buy in bulk
Attract customers through marketing campaigns
Keep sufficient inventory on hand by using technological tools to improve the accuracy
of predictions about customer demand in order to know when and how much inventory
to buy.

Question 82

define equity

Answer 82

equity refers to claim by the owners on net asset of a business

Question 83

define depreciation

Answer 83

allocation of the cost of non current asset over ite estimated useful life

Question 84

double entry for debit note

Answer 84

Dr trade payable
Cr sales returns