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A collection of financial accounting exam questions and answers from a May 2001 post-exam guide. The questions cover various topics such as stock valuation methods, prime cost of production, employee costs, and profit and loss account preparation. Students preparing for financial accounting exams may find this document useful for studying and reviewing key concepts.
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Typology: Exams
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© The Chartered Institute of Management Accountants 2001
Objective test questions are awarded 2 marks each. Explanations are provided for answers to objective test questions involving calculations.
Question 1.
The fundamental objective of an external audit of a limited company is to
A give advice to shareholders B detect fraud and errors C measure the performance and financial position of a company D provide an opinion on the financial statements
The answer is D.
Question 1.
A receives goods from B on credit terms and A subsequently pays by cheque. A then discovers that the goods are faulty and cancels the cheque before it is cashed by B.
How should A record the cancellation of the cheque in his books?
A Debit creditors Credit returns outwards B Credit bank Debit creditors C Debit bank Credit creditors D Credit creditors Debit returns outwards
The answer is C.
Question 1.
The profit of a business may be calculated by using which one of the following formulae?
A Opening capital - drawings + capital introduced - closing capital B Closing capital + drawings - capital introduced - opening capital C Opening capital + drawings - capital introduced - closing capital D Closing capital - drawings + capital introduced - opening capital
The answer is B.
Question 1.
A business purchases a machine on credit terms for £15,000 plus value added tax (VAT) at 15%. The business is registered for VAT. How should this transaction be recorded in the books? Dr Cr A Machinery 15, Creditors 15,
B Machinery 17, Creditors 17,
C Machinery 15, VAT 2, Creditors 17,
D Machinery 17, VAT 2, Creditors 15,
The answer is C.
Question 1.
Which one of the following statements most closely expresses the meaning of “true and fair”?
A There is only one true and fair view of a company’s financial statements. B True and fair is determined by compliance with accounting standards. C True and fair is determined by compliance with company law. D True and fair is largely determined by reference to generally accepted accounting practice.
The answer is D.
Question 1.
On 1 May 2000, A Ltd pays a rent bill of £1,800 for the period to 30 April 2001. What are the charge to the profit and loss account and the entry in the balance sheet for the year ended 30 November 2000?
A £1,050 charge to profit and loss account and prepayment of £750 in the balance sheet. B £1,050 charge to profit and loss account and accrual of £750 in the balance sheet. C £1,800 charge to profit and loss account and no entry in the balance sheet. D £750 charge to profit and loss account and prepayment of £1,050 in the balance sheet.
The answer is A.
Workings
£1,800 for one year is £150 per month £ Charge to profit and loss account 7 x £150 = 1, Prepaid 5 x £150 = 750
Question 1.
S Ltd exchanged stock for a delivery vehicle with T Ltd. The stock had cost S Ltd £10, and the normal selling price was £12,000; the delivery vehicle had cost T Ltd £9,000 and the normal selling price was £13,000.
How should S Ltd value the vehicle in its balance sheet?
A £9,000 B £10,000 C £12,000 D £13,
The answer is C.
Question 1.
Z’s bank statement shows a balance of £825 overdrawn. The bank statement includes bank charges of £50, which have not been entered in the cash book. There are unpresented cheques totalling £475 and deposits not yet credited of £600. The bank statement incorrectly shows a direct debit payment of £160, which belongs to another customer.
The figure for the bank balance in the balance sheet should be
A £590 overdrawn. B £540 overdrawn. C £790 overdrawn. D £840 overdrawn.
The answer is B.
Question 1.
A car was purchased for £12,000 on 1 April 1997 and has been depreciated at 20% each year straight line, assuming no residual value. The company policy is to charge a full year’s depreciation in the year of purchase and no depreciation in the year of sale. The car was traded in for a replacement vehicle on 1 August 2000 for an agreed figure of £5,000.
What was the profit or loss on the disposal of the vehicle for the year ended 31 December 2000?
A Loss £2, B Loss £1, C Loss £ D Profit £
The answer is D.
Workings
£ £ 1 April 1997 Cost 12, Depreciation charge at 20% 1997 2, 1998 2, 1999 2, 7, Net book value 1 August 2000 4, Proceeds 1 August 2000 5, Profit 200
Question 1.
A company includes in stock goods received before the year end, but for which invoices are not received until after the year end. This is in accordance with
A the historical cost convention. B the accruals concept. C the consistency concept. D the materiality concept.
The answer is B.
Question 1.
I Ltd operates the imprest system for petty cash. At 1 July there was a float of £150, but it was decided to increase this to £200 from 1 August onwards. During July, the petty cashier received £25 from staff for using the photocopier and a cheque for £90 was cashed for an employee. In July, cheques were drawn for £500 for petty cash.
How much cash was paid out as cash expenses by the petty cashier in July?
A £ B £ C £ D £
The answer is A.
Workings
£ £ 1 July balance b/d 150 Cheques banked credit control 90 Photocopying 25 Cash paid out (balancing figure) 385 Cash from bank 500 31 July balance c/d 200 675 675
Question 1.
Which one of the following sentences does NOT explain the distinction between financial accounts and management accounts?
A Financial accounts are primarily for external users and management accounts are primarily for internal users. B (^) Financial accounts are normally produced annually and management accounts are normally produced monthly. C Financial accounts are more accurate than management accounts. D Financial accounts are audited by an external auditor and management accounts do not normally have an external audit.
The answer is C.
Question 1.
When reconciling the creditors’ ledger control account with the list of creditors’ ledger balances of M, the following errors were found:
What adjustment must be made to correct these errors?
Control account List of creditor balances A Cr £500 decrease by £ B Dr £500 increase by £ C Dr £400 increase by £ D Cr £400 decrease by £
The answer is B.
Question 1.
Extracts from the financial statements of CFS Ltd are set out below:
Profit and loss account for the year ended 31 December 2000
£000 £ Turnover 300 Cost of sales 150 Gross profit 150 Profit on sale of fixed asset 75 225 Expenses 15 Depreciation 30 45 Net profit 180
Balances at 31 December 1999 2000 £000 £ Stock, debtors, current liabilities (net)
What figure would appear in the cash flow statement of CFS Ltd for the year ended 31 December 2000 in respect of net cash flow for cash from operating activities?
A £125,000 B £145,000 C £215,000 D £235,
The answer is A.
Workings (Question 1.19)
£ Net profit 180 Add back: Depreciation 30 Less: Profit on sale (75) 135 Increase in working capital (10) Cash from operations 125
Question 1.
B is a builder with a staff of ten employees. In April 2001, he paid the following amounts:
He owes the following amounts in respect of tax and national insurance for April 2001:
The correct expense for employee costs to be shown in the profit and loss account for April 2001 is
A £19, B £20, C £20, D £21, The answer is D.
Workings
£ Net salaries for April 14, Tax and employees’ national insurance 6,
Employer’s national insurance 1,
21,
Question 1.
A fixed asset register is
A an alternative name for the fixed asset ledger account. B a list of the physical fixed assets rather than their financial cost. C a schedule of planned maintenance of fixed assets for use by the plant engineer. D a schedule of the cost and other information about each individual fixed asset.
The answer is D.
Question 1.
The difference between a profit and loss account (which may also be referred to as an “income statement”) and an income and expenditure account is that
A an income and expenditure account is an international term for a profit and loss account. B a profit and loss account is prepared for a business and an income and expenditure account is prepared for a not-for-profit making organisation. C a profit and loss account is prepared on an accruals basis and an income and expenditure account is prepared on a cash flow basis. D a profit and loss account is prepared for a manufacturing business and an income and expenditure account is prepared for a non-manufacturing business.
The answer is B.
Question 1.
In a debtors’ report, which one of the following would you NOT expect to see?
A Total debtor balances outstanding for current and previous months. B Debtor balances excluding VAT. C Credit limit. D Sales to date. The answer is B.
Question 2
A sole proprietor produces a trial balance at the year end and some information about adjustments, from which financial statements should be prepared.
(a) Prepare a trading, profit and loss account for the year ended 31st July 2000 and a balance sheet at that date. (14 marks)
(b) Calculate the following, as at 31 July 2000:
Total marks = 20
Rationale
The purpose of this question is: (a) To test a candidate's ability to prepare final statements from a trial balance, after making adjustments. (b) To test a candidate's knowledge of ratios and their calculations.
Suggested Approach
Part (a)
Part (b)
Marking Guide Marks awarded
Part (a) The question requires the correct identification of which items in the trial balance are entered into the profit and loss account or balance sheet.
It requires adjustments for stock, accruals, prepayments, doubtful debts and depreciation. In each case, the correct adjustment must be made in the profit and loss account and in the balance sheet. 2
The profit and loss account and the balance sheet should each be set out with titles and major headings These headings include gross profit, net profit, fixed assets, current assets, current liabilities, capital and long-term liabilities.
The balance sheet should articulate with the profit and loss account using the ‘own number rule’.
‘Own number rule’: the balance sheet should be consistent with the candidate’s own results from the profit and loss account.
6 (Balance sheet) 6 (Profit & Loss)
Question 3
The trial balance of E Ltd did not balance and the following errors have been discovered: (i) A cheque for £1,000 received from a debtor had been credited to the sales account and debited to the bank account. (ii) The cash book had been undercast by £250. (iii) A machine costing £5,000 had been debited to the machinery repairs account. Machinery is depreciated at 10% on cost and no residual value is assumed.
(a) Correct the above errors by showing which ledger accounts should be debited or credited. (4 marks)
(b) Explain why financial controls are necessary and give TWO examples. (6 marks)
Total marks = 10
Rationale
(a) The purpose of the question is to test a candidate's understanding of errors and their correction using principles of double entry. (b) The purpose of this question is to test a candidate's understanding of financial controls.
Suggested Approach
Part (a)
Part (b)
Marking Guide Marks awarded
Part (a) It is important both to identify the ledger account and the amount to be debited or credited.
It is important to recognise where a one-sided entry may be required.
It is important to identify situations where the error may have a secondary effect – in part (iii) the error affects the machinery account and the depreciation charge. 4
Part (b) There are two parts to this question – an explanation and two examples. These are marked as overlapping parts; it is therefore possible to gain extra marks for a good explanation and vice versa for good examples_._ Furthermore, there are separate marks for each example. 6
Examiner’s Comments
The answers to part (a) were acceptable, although the answers to (i) and (iii) were better than (ii). This was probably because it was necessary to recognise in (ii) that the error would affect the trial balance balancing.
Many candidates provided a very full answer to part (b) and a large variety of acceptable examples was given. The suggested answer should therefore be seen as only indicative of what was expected in an answer to a six mark question.
Part (c) This is a comprehensive question. It includes:
These are recorded in the: motor vehicle cost account provision for depreciation account motor vehicle disposal account
A correct answer would show that the candidate could account for all of these situations.
The ‘own number’ rule will apply; where, for example, a candidate calculates a depreciation charge on a vehicle incorrectly, but then shows this figure correctly in the ledger accounts, marks will only be forgone once.
Examiner’s Comments
A majority of candidates were able to provide a satisfactory definition of depreciation in part (a). However, a minority did make the mistake of defining depreciation as a means of replacing an asset or valuing an asset, which is not correct.
In part (b), most candidates referred to the allocation of the cost of a fixed asset over its useful economic life. Fewer candidates made reference to the matching of this expense to the benefits from using the asset.
Part (c) is a traditional question on depreciation and it was surprising how many candidates did not comply with the question. The question asked for the ledger accounts; too many candidates provided workings in a columnar format but did not transfer these to ledger accounts. The question also asked for separate vehicle cost accounts and provision for depreciation accounts. Some candidates attempted to combine these and in doing so made mistakes.
Question 5
(a) State the rule for valuing stock. (2 marks)
(b) Explain the purposes of the rule for valuing stock. (8 marks)
(c) Trading and stock figures are given for a limited company.
(i) Calculate gross profit if the trading account was prepared using a stock valuation basis of LIFO. (2 marks) (ii) Calculate ‘stock days’, using the average method, on the assumption that stock is valued:
Total marks = 20
Rationale
The purpose of this question is to test whether a candidate is able to state the rule for valuing stock and then relate this to the purpose of valuing stock. The candidate is then required to apply this knowledge and understanding to a practical situation, with reference to the FIFO and LIFO methods of stock valuation.
Suggested Approach
Parts (a) and (b)
Part (c)
Marking Guide Marks awarded
There is no single definition of the rule for valuing stock and a direct quotation from a standard is not required. The important points are that cost and net realisable value are two possible methods, and these are combined in a single rule. 2
An explanation of the purposes of the rule for valuing stock should include the fact that it is necessary both to measure the expense of cost of sales in the trading account and to measure the asset of stock in the balance sheet. This treatment is supported by the concepts of matching and prudence. 8
