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financial accounting an introduction

Questions and Answers of Financial Accounting An Introduction

Though income is usually accounted for on an accruals concept, dividends proposed by an entity in which shares are held are not accounted for until received. The accounting convention used is:(a)
To be reliable financial statements must be neutral. This means that when accounting and reporting one has to be objective – avoiding subjective judgement. However, subjective judgement (based on
The expenses relating to the proprietor and his household should be treated as drawings rather than as business expenses on the basis of which of the following accounting concepts?(a) Matching
Faced with uncertainty there is a need to exercise prudence. Which of the following would be excessive use of prudence?(a) Non-recoverability of trade receivables is accounted for based on past
Insisting that financial statements should be a faithful representation of transactions and events during an accounting period, an accountant refuses to present the financial statements until
A non-current asset, acquired for £240,000 and depreciated by £90,000, is reported in the Statement of financial position at the written-down value of £150,000, although, being an item specially
How does the use of the historical cost concept understate assets and overstate profit in times of rising prices?(i) The assets may be reported in terms of pound sterling of a lower value(ii)
£580 paid for a laptop computer is written off as an expense rather than capitalised because the business does not capitalise items that cost less than £1,000. This is an application of which
For identifying the value at which inventory is reported on the Statement of financial position the cost should be compared with the net realisable value of each group of interchangeable (fungible)
Stella’s Confectionery has systematically cultivated good customer relationships both by showing courtesy and by sending Christmas gifts. She feels that the goodwill she has built up is worth
A supermarket uses the FIFO cost-flow assumption when determining the cost of inventory remaining unsold by the year-end. Why is it essential that it should continue with the same practice?(a) This
Capital maintenance means that:(a) All assets of the business are maintained in an excellent state of repair(b) The money capital at the end of the accounting period is the same as at the
The Framework issued by the IASB suggests that to show a true and fair view the information in financial statements should:(a) Comply with Accounting Standards and possess suggested qualitative
Besides identifying materiality as the threshold quality, the Framework issued by IASB identifies four others as primary qualitative characteristics that make financial statements useful. Which are
Which of the following statements is incorrect in relation to financial statements?(a) The information included in it should be relevant and reliable(b) It should convey information in a consistent
Which of the following qualitative characteristics of information included in financial statements have been identified in the IASB’s Framework as desirable for promoting reliability:(i) Faithful
Which of the following statements is incorrect in relation to financial statements?(a) A non-current asset should not be reported at a value higher than what it can be sold for(b) A liability should
In terms of the definition of an asset stated in IASB’s Framework which of the following would you identify as an asset of a business engaged in intercontinental transport of goods?(i) Lease of
Which of the following would be your justification for treating as an asset the amount due from a customer in respect of transport work already carried out?(i) The customer is within our control
The IASB’s Framework defines a liability as:(a) Amounts a business may have to pay after the balance sheet date(b) Obligations to pay which may arise depending on some future events(c) Unpaid
Which of the following statements are correct?(i) Revenue recognition is the determination of the point and the amount at which income is accounted for(ii) Income should not be accounted for unless
The assets and liabilities of a business were £300,000 and £80,000, respectively, at the commencement of an accounting period and £390,000 and £50,000, respectively, a year later. During the year
The IASB’s Framework defines equity interest as:(a) Amount of capital introduced by the owner of the business(b) Opening capital + profit − drawings(c) Residual interest in the assets of an
Ajit commenced business on 1.1.2012 producing designer drawing room suites, selling them to approved retailers on one month credit, at £1,250 per suite. His activities during the first year are
Which of the following statements are correct?(i) Problems of revenue recognition would not have arisen if accounting applied the venture concept or recognised earnings only upon receipt in cash(ii)
As a financial consultant, your advice is sought on whether and to what extent revenue may be recognised in each of the following independent circumstances:(i) Your client A publishes medical
Which of the following statements are correct in respect of a business which produces goods to be held as inventory, ready for sale?(i) Sales income should not be recognised until a buyer is found
A firm produces a standard product. The stages of production and sale of the product are as follows:Required:(a) What general rules do accountants apply when deciding when to recognise revenue on any
(a) What do you understand by the term revenue recognition?(b) Briefly outline a policy on revenue recognition for each of the following:(i) Magazine subscription received by a publisher;(ii) The
A trader sells computer hardware with a warranty that he is responsible for any repair within a yearof sale. He may recognise the sales income at the point of sale because:(a) That is usually the
It is usual for a retail shop to recognise revenue when:(a) The customer pays for the goods sold(b) The goods for sale have arrived from the supplier(c) The goods have been delivered to the
With regard to accounting concepts which of the following statements are correct?(i) The realisation concept requires that income should not be accounted for until it is received in cash(ii)
Rachel manufactures surgical gloves. Upon receiving an order from a hospital for supplying them with their requirements for three years ending on 31 December 2012, she raised an invoice for £15,000
The most appropriate definition of an imprest system of petty cash control is that it is a system where:(a) An assistant is appointed to help with the work of the cashier(b) The amount available for
Which of the following attributes are essential for a resource to be recognised as an asset?(i) It must be owned by the entity and remain in its custody(ii) It must be within the entity’s
Do you regard each of the following as an asset of a business for accounting purposes? Explain your answer:(a) A screwdriver bought in 2012;(b) A machine hired by the business;(c) Good reputation of
(a) Explain why you would regard the following accounting treatments to be incorrect:(i) £14,200 paid during the year for the monthly servicing of machinery was capitalised.(ii) When the motor in a
Would you classify the following as assets?(i) A property leased for ten years.(ii) An amount paid for a machine which has yet to be manufactured.(iii) An amount receivable from a customer for goods
Even when a resource has all the attributes necessary for recognition as an asset, a business has a policy of treating the resource as an expense unless it costs £1,000 or more. This is an example
Sema plc, a company in the heavy engineering industry, carried out an expansion programme in the 2012 financial year, in order to meet a permanent increase in contracts. The company selected a
Exeter plc acquired land for £400,000 and related expenses on conveyancing and stamp duty amounted to £50,000. The construction of the company headquarters commenced on 1 February 2012, and with an
A business engaged in intercontinental transport of heavy goods makes the following payments during its financial year ended 30.9.20X0:Payments relating to the property:(i) £585,500 to acquire the
Would you classify the following as PPE?(i) A standby machine intended to maintain rather than enhance production capacity.(ii) Premises which are used to store goods rather than for producing
Which of the following transactions results in the acquisition of an asset?(a) £45,000 spent on providing computer training for all members of the staff(b) £4,500 paid on a contract to service all
Identify the cost (to be capitalised) of the following items related to acquisition of PPE:(a) Selma Ltd paid £480,000 for a property, spent £15,000 on demolishing a dilapidated building on it and
An airline commenced business on 1 April 2010, and on the same day acquired a single aircraft for £3 million. However, it had to pay £240,000 for a major inspection without which the aviation
A new business paid £128,000 (5% of its first year’s turnover) to an agent on an advertising contract in the hope that it will generate sales over the next few years. Identify one of the following
A business manufacturing machine tools entered into the following transactions in the year ending 30 June 2012:(a) £246,500 was paid for computerising the design of machine tools.(b) Machinery used
Your advice is sought as to how the following payments should be dealt with when preparing financial statements for the year ended 31 December 2012:(i) £1,200 paid for replacing a vehicle’s
In addition to £98,400 already paid in 2012, the advertising agent has sent an invoice for a further amount of £61,800. £45,000 of the invoice is for a television campaign commencing January 2013.
On 1 January 2012 Falkirk plc moved into its new premises acquired at a cost of £500,000 and wishes to depreciate it using the straight-line method. Its structural engineer reports as
Sawa plc commenced construction of its head offices on 1 March 2012. Construction was completed by 1 December at a cost of £324,000. Because of local flooding, construction work was suspended for a
Dunkirk plc acquired a plane on 1 January 2012 for £6 million. It has been advised that the plane has a useful life of ten years, but its seats and galleys will require replacement every two years
(a) A vintner buys two casks of wine at £50 each. One he sells for £75, and the other, remaining in hand, has a market value of £80. Is it acceptable for him to capitalise (i.e. to report as an
Which of the following costs relating to acquisition of a machine cannot be included in its cost?(a) Cost of reinforcing the factory floor and fitting shatterproof glass to factory windows(b) Cost of
Which of the following statements is correct? It is permitted to add to the cost of the corresponding asset the cost incurred for:(i) Restoring to working condition a factory gutted by fire(ii)
Which of the following is not a necessary attribute of a tangible non-current asset?(a) Physical existence(b) Possibility of selling in the open market without selling the whole business(c)
Which of the following relating to construction of office premises cannot be included in its cost?(a) Legal expenses and stamp duty incurred in checking on and transferring the title to the
To finance the construction of its office premises a mortgage loan of £4,000,000 was raised on 1 February 2012, at 9% interest per annum. The property was acquired on 15 February for £1,500,000.
(i) When its airport terminals and runways were constructed at a cost of £476 million, an Airport Authority estimated the economic life at 40 years and depreciated them from 1 January 1997, the date
Which of the following would you regard as the threshold criteria when deciding whether or not to capitalise any part of borrowing costs?(a) Is the asset financed by the borrowing an acquired one or
A company operating a minicab service depreciates its vehicles over four years using the sum of the year’s digits method. Its vehicles were all acquired on 1 March 2011 for £180,000, except a
On 6 January 2011 £580,000 was paid for a property. The amount includes £20,000 for a building located in the property but in a state of disrepair. The building was refurbished at a cost of
A manufacturer acquired a machine for £50,000 on 1 January 2012 and estimates the economic life as four years and scrap value as £10,000. Calculate the depreciation expense in the first year, if
Which of the following statements is correct?(a) Normally land need not be depreciated(b) Difficulty of estimating economic life is a valid reason for not depreciating airline terminals(c) In view of
Place a tick in the appropriate grid to identify whether each of the following statements is more suited as reference to the straight-line method (X) or reducing balance method (Y):(a) Once computed
Identify whether each of the following statements is true or false by placing a tick in column X if true and column Y if false:(a) By depreciation an entity sets aside cash resources which will be
A freight hauler acquired a truck for £90,000 on 1 January 2010 and another for £70,000 on 30 June 2011. He estimates the economic life of each truck at four years and scrap value as 10% of cost.
In keeping with IAS 16 requirement that each component that is significant in relation to the total should be treated separately, the total cost of self-constructed office premises has been broken
A machine acquired on 1.1.2004 for £320,000 is being depreciated using the straight-line method, assuming 20 years economic life and a scrap value of £20,000. Calculate the depreciation to be
A business engaged in providing water supply to a community has incurred £280,000 on laying a network of underground pipes. During the current year it incurred £18,000 on replacing a few lines. In
A machine acquired for £480,000 on 1 January 2006 and depreciated using the straight-line method, assuming 20 years’ life and 10% scrap value, was damaged in an accident on 1 January 2012. Though
The following information relates to the personal accounts of a trader during March 2012:Required:(a) The Trade receivables control account(b) The Trade payables control account
Jerry Smith’s trade receivables as at 1 January 2012 were £12,500 and his transactions in the two months commencing on that date include those stated.Required: Ascertain the balance he would
The financial year of The Better trading Company ended on 30 November 2012. You have been asked to prepare a Total receivables account and a Total payables account. You are able to obtain the
Barney Ltd has recently appointed a new accountant who has produced a Sales ledger control account for the month of May 2012 as follows:The actual list of Trade receivables ledger balances at 31 May,
Prepare the Trade receivables control account for the month of March 2012. Totals for March 2012: Sales Day Book Sales Returns Day Book Discount column (in Cash Book receipt side) Receipts from
The information for preparing a Control account is obtained from:(a) The Cash Book(b) The ledger(c) The books of prime entry(d) The General Journal
A new member of accounting staff prepared the Trade receivables control account as shown. Every amount stated on it, other than the closing debit balance, is correct. However, the amount stated as
The following errors have been discovered:(a) An invoice for £654 has been entered in the Purchases Day Book as £456.(b) A prompt payment discount of £100 from a supplier has been completely
Which of the following will not appear in the Trade receivables control account?(a) Amounts received from credit customer(b) Cash sales(c) Credit sales(d) Bad debts written off
Carmen owes his suppliers £224,200 on 1 March 2012. His transactions include those stated.Required: Ascertain the Purchase ledger control account balances as at 31 March and 30 April 2012.
Prepare the Trade payables control account for the month ending on 31 July. Balances in suppliers' accounts as at 1 July 2012: Debit balances Credit balances Journal information: Offset by
As at 31 May 2012 the Sales ledger control account debit balance was £408,900, whereas the sum of the individual trade receivables accounts was £407,360. Investigations revealed the following
In the books of Morden Textiles, the Trade payables ledger control account reports as at 31.12.2012 a credit balance of £326,200 and a debit balance of £4,500. The list of individual trade payable
Which of the following will not appear in the Trade payables control account?(a) Discount allowed(b) Credit purchases(c) Returns outwards(d) Amounts paid to trade creditors
The Receivables control account of C Ltd is. A list of individual customer balances at the month-end shows debit balances as £54,468.59 and credit balances as £520.80. The following facts have now
Camberwell Ltd’s Trade receivables control account balances as at 31 March 2012 were as stated in the box on the right; whereas the sum of the individual account balances in the Sales ledger was
Simon’s year-end Trial Balance (with other items reported in summary) is shown below. Although the totals on both sides of the Trial Balance are the same, the sum of the list of individual trade
The periodical totals of the Returns Inwards Day Book are:(a) Debited to the Trade receivables control account(b) Credited to the Trade receivables control account(c) Debited to the Trade payables
As at 30 June 2012 an amount of £24,500 owed to City Stores is reported in the Trade payables control account and £7,200 due from the same party reported in the Trade receivables control account,
The periodic totals of the Discount column on the receipt side of the Cash Book are:(a) Debited to the Trade payables control account(b) Credited to the Trade payables control account(c) Credited to
At 30 November 2012 the balance on the Trade receivables control account in Elizabeth’s General ledger was £39,982. The total of the list of balances on the customers’ personal accounts was
On 31 March 2012, the Trade receivables control account, maintained as part of the double-entry system by Bruce Stationers, showed a debit balance of £346,800 and a credit balance of £16,200. These
Offset by contra is accounted for by:(a) A debit in the Trade payables control and a credit in the Trade receivables control accounts(b) A debit in the Trade receivables control and a credit in the
(a) An inexperienced bookkeeper has drawn up a Trial Balance for the year ended 30 June 2012.Required: Draw up a ‘corrected’ Trial Balance, debiting or crediting any residual error to a
As at 1.8. 2012 the Trade receivables ledger had £216,400 debit balances and £11,450 credit balances. Credit sales in August were £582,550 and sales returns £31,600. £498,200 has been received
A Trial Balance has an excess of debits over credits of £14,000 and a Suspense account has been opened to make it balance. It is later discovered that:(a) The discounts allowed balance of £3,000
Place a tick in one of the following grids to identify which of the four alternatives is the correct analysis of the side in which the items listed below will appear in a Trade receivables control
During October 2012, purchases, purchases returns and amounts paid to suppliers were £728,450, £11,200 and £682,500 respectively. As at 1 October a list of Trade payables ledger balances included

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