1. Which one of the following best describes the purpose of the balance sheet?

a) A financial statement showing the assets, liabilities and net worth of a business at a specific point in time

Correct. Gives the 3 main classifications and snapshot idea.

b) A financial statement showing the assets, liabilities and net worth of a business over a period of time

Incorrect. Over time v. snapshot. Think about sales v. debtors

c) A financial statement showing the balances outstanding on customer’s accounts

Incorrect. This describes the debtors ledger whereas the Balance Sheet will include the total in CAs

d) A comprehensive statement of the financial performance of the business over the year

Incorrect. Too generalised and "over the year" v. specific point in time (snapshot).

2. Which one of the following best describes the purpose of the Profit and Loss Account?

a) A comprehensive statement of the financial performance of the business over the year

Incorrect. Too vague and a better response is offered.

b) A financial statement setting all costs against income over a specified period to show the profit or loss for that period

Correct. It states the purpose, shows how the purpose is achieved and includes a reference to a central condition i.e. that it is measured over a period of time.

c) A financial statement showing the profit or loss of a business by deducting cost of sales from sales

Incorrect. Deducting the "Cost of Sales" from "Sales" will only determine the "Gross Profit" of the business.

d) A statement of the balance remaining after all incomes due to the business have been collected and all expenses due to suppliers have been paid

Incorrect. It confuses cash flow and the "Profit and Loss Account". P & L not drawn on basis of payments and receipts

3. Which one of the following business activities belongs in the Profit and Loss Account?

a) The cost of purchasing a building to house large scale manufacturing operations

Incorrect. This would be capital expenditure and would be charged to the Profit and Loss Account over its useful life in the form of depreciation charges.

b) The cost of insuring that factory against fire

Correct. This is a revenue expenses and would appear in the Profit and Loss Account

c) The value of money outstanding from customers

Incorrect. This would be Debtors and appear in the current assets section of the Balance Sheet.

d) The value of new money invested in the business by the owners

Incorrect. This would be share capital and be shown in the Owners Funds section of the Balance Sheet

4. Which one of the following is the correct term for “X” in the equation “Sales minus X equals Gross Profit”?

a) Overheads Incorrect. Overheads are deducted from the Gross Profit to derive the Net Profit.

b) Cost of Sales Sales less Cost of Sales is the equation for Gross Profit.

c) Purchases Incorrect. The only situation where this would apply is where no stocks are carried.

d) Costs Incorrect. Fails to distinguish between direct costs and indirect Costs.

5. Which one of the following is the correct term for “X” in the equation “Gross Profit minus X equals Net Profit”?

a) Overheads Correct. Overheads are deducted from the Gross Profit to derive the Net Profit.

b) Cost of Sales Incorrect. Cost of Sales is deducted from Sales to derive Gross Profit

c) Purchases Incorrect. Purchases are an element of the calculation of Cost of Sales which is deducted from Sales to derive Gross Profit.

d) Costs Incorrect. Fails to draw the necessary distinction between direct costs and indirect costs.

6. Which one of the following is the correct term for “X” in the equation “Total Assets minus X = Owners’ Funds”?

a) Current Liabilities Incorrect. Current Liabilities is only part of the answer as it fails to include long term creditors.

b) Current Assets Incorrect. This would deliver a result equivalent to the value of Fixed Assets.

c) Total Liabilities Correct. Watch for confused usage of the term – sometimes taken to include owners’ funds.

d) Long Term Creditors Incorrect. This is only part of the answer as it fails to include Current Liabilities"

7. Which one of the following items will be shown in the Balance Sheet?

a) Sales Incorrect. Sales not settled at the balance sheet date will be shown incl. of vat.

b) Purchases Incorrect. Purchases not paid for at the balance sheet date will be shown incl. of vat.

c) Debtors (Accounts receivable) Correct. Debtors will appear in the current asset section of the balance sheet.

d) Loan Interest Incorrect. Loan Interest outstanding at the balance sheet date will be shown in the balance sheet in current liabilities

8. Which one of the following items will be shown in the Profit and Loss Account?

a) Creditors (Accounts payable). Incorrect. Creditors will be shown on the balance sheet under Current Liabilities

b) Fixed Assets Incorrect. Fixed assets appear on the Balance Sheet

c) Cash at Bank Incorrect Cash at Bank is shown on the Balance Sheet under Current Assets when positive and Current Liabilities when negative i.e. when the bank current account is overdrawn.

d) Depreciation Correct. The accumulated depreciation attaching to the Fixed Assets may be shown on the balance sheet but more commonly is shown in the notes to the accounts.

9. Which one of the following items will be shown in the Profit and Loss Account?

a) Capital Incorrect. Capital will be shown in the Owners' Funds section on the Balance Sheet.

b) Bank Loans Incorrect. Bank Loans will be shown in the Long Term Creditors (Liabilities) on the Balance Sheet.

c) Loan Payments Incorrect. Loan Payments are a cash flow transaction, Any interest element will be included in the overall interest expense charged to the Profit and Loss Account.

d) Loan Interest Correct. The interest element of loan repayments is a revenue expense – the “cost” of the loan.

10. Which one of the following would you expect to be included in values shown on a Balance Sheet?

a) Sales Incorrect. Sales are shown in the Profit and Loss Account: debtors in the balance sheet.

b) Opening stocks of finished goods Incorrect. Opening Stocks may be shown on a detailed Profit and Loss Account detailing the computation of Cost of Sales (Opening Stocks + Purchases - Closing Stocks) but will not be shown on the Balance Sheet.

c) Interest paid on long term loans Incorrect. Shown in P&L : outstanding interest at balance sheet date will be shown in the balance sheet in current liabilities.

d) Interest owed but not yet paid Correct. The value of loan interest owed but not paid at the balance sheet date will be shown in the balance sheet in current liabilities.

11. Which one of the following best describes an Asset as the term is used in finance?

a) A valuable employee Incorrect. In the language of finance an asset is "owned" by a business and this, obviously, cannot apply to human beings.

b) An item owned by a business for the purpose of generating sales or converting to cash including cash itself.

Correct. Assets are long term (Fixed Assets) items such as buildings, fittings, equipment, vehicles etc. that help generate sales and short term items (Current Assets) such as stocks, debtors and cash that arise from routine business operations

c) An overdraft Incorrect. This is a current liability appearing on the balance sheet of the business.

d) Good sales leads Incorrect. Not "owned" by a business. However, data bases and client lists on which significant funds have been expended would be classed as fixed assets.

12. Which one of the following could best be described as a Liability in the language of finance?

a) A poorly performing employee Incorrect. In finance-speak a liability is something that is "owed" by the business and this, obviously, cannot apply to human beings.

b) A rival business entering the market Incorrect. The entry of a rival to the market does not create any obligation or debt for incumbent businesses.

c) An overdraft facility Incorrect. This is what it says - a facility. An actual overdraft would be a current liability.

d) A loan from one of the owner/directors Correct. A loan from an owner/director is a liability and different to "Owners' Funds" since the sources of funding to business are classified by their term rather than source.

13. Which one of the following best describes the term Owners’ Equity?

a) The amount of money that would be left for the owners if all other liabilities were discharged (paid in full) i.e. the Net Worth.

Correct. The owners' share in the business is exactly this and may be greater or less than the original capital which they invested.

b) The money invested by the owners in the business

Incorrect. This is only part of the answer. The original investment may have been boosted by profits earned and retained by the business over its life or diminished by losses.

c) The profits retained in the business Incorrect. This is part of the answer. It omits the original investment made by the owners.

d) The right to vote at Annual General Meetings of the business

Incorrect. This is only one aspect of the owners’ “rights” i.e. equity.

14. Which one of the following could best be described as an “Expense” in the language of finance?

a) The cost of a new vehicle Incorrect. It would contravene the accounting principle of "Matching" income and expenditure to the periods where they arise. Charged through "Depreciation".

b) The cost of insuring the vehicle Correct. This is a routine business expense and would be treated as an overhead in the Profit and Loss account.

c) The cost of paying dividends to the shareholders

Incorrect. This is a distribution of profits and would be shown after calculation of Net Profit. It is an occasional and voluntary decision.

d) The regular repayments of a bank loan Incorrect. This is a cash flow transaction and won't be shown explicitly on the Profit and Loss Account or Balance Sheet. The interest element will be included in the total interest charged to the Profit and Loss Account

15. Which one of the following best describes Revenue?

a) The income from sales Correct. Revenue is the income generated by normal selling activities

b) Money coming in from new investors Incorrect. This is new share capital and would not appear in the Profit and Loss Account under sales.

c) An upward revaluation of a fixed asset Incorrect. This would not be revenue but would be treated as an exceptional item and shown as an adjustment to profits and hence brought to reserves in the Balance Sheet to match the increase in value of the fixed assets.

d) Payment of vat (sales taxes) Incorrect. This is a cash flow transaction - the balance due to the state would be a current liability and the payment would reduce that liability with a corresponding reduction the bank balance of the business.

16. Which one of the following best describes a Fixed Asset?

a) An asset that cannot be moved Incorrect. Tangible, intangible immobile (buildings) mobile (vehicles)

b) An asset which will help generate revenues for the business for a number of years

Correct. A Fixed Asset is an asset intended for use in a business over a number of years.

c) An item in the product range which delivers the same sales volume year after year

Incorrect. A spurious coincidental event.

d) A cost that does not change Incorrect. There is no such concept in finance as a cost which does not change. The nearest would be a Fixed Cost meaning a cost that does not respond in direct proportion to changes in output but all costs in business will change over time or in response to changes in output.

17. Which one of the following best describes a Current Asset?

a) An asset which the business expects to convert to cash within a year

Correct. These would be assets such as Debtors (Accounts Receivable), stocks (Inventory) and cash (Bank Balance if positive)

b) An asset which has been acquired within the last year

Incorrect. The test for a Current Asset is forward looking not retrospective.

c) A sales order to be delivered within the next year

An order has to be completed and invoiced before it becomes a Debtor and thus qualify as a Current Asset.

d) A delivery truck about to be sold and replaced by a newer model

Incorrect. The truck would have been carried in the books as a fixed asset and the transaction would be a disposal of a Fixed Asset. There would be no sense in having it reclassified as a current asset simply because it is about to be sold.

18. Which one of the following best fits into the category Long Term Liabilities?

a) The profits built up by the business over the years

Incorrect. These would be long term sources of funding but are shown in the "Owners Funds" section on the Balance Sheet

b) The value of debtors carried each year who are not paying on time

Incorrect. Debtors are an asset of the business and are shown in the Current Asset section of the Balance Sheet.

c) The risk of stocks of materials and finished good becoming obsolete or damaged

Incorrect. In situations where there are grounds to suspect that there might be exceptionally large losses at some time in the future then the practice would be to create a specific "Provision" to cover that eventuality. A Provision is an accounting device to ring-fence profits to meet a future estimated liability.

d) A liability which will remain outstanding after twelve months have elapsed

Correct. This describe the principal elements of a creditors repayable after twelve months from the Balance Sheet date.

19. Which one of the following best fits into the category “Current Liabilities?

a) The total amount of a bank loan outstanding at this moment

Incorrect. This could be a Current Liability if the total will be repaid within twelve months of the Balance Sheet date but there is a better answer offered.

b) The overdrawn balance on the businesses’ current account

Correct. An unsanctioned overdraft is payable on demand and the purpose of an agreed overdraft is that it will be repayable within twelve months so an overdraft clearly fits into the Current Liabilities classification.

c) The amount owed by customers to the business (Debtors)

Incorrect. Debtors are an asset of the business and are shown in the Current Asset section of the Balance Sheet.

d) The amount of depreciation on fixed assets due to be charged over the next twelve months

Incorrect. This is an expense item and would appear in the Profit and Loss Account not the balance sheet.

20. Which one of the following best describes Owners Funds?

a) The share capital and retained profits appearing on the Balance Sheet

Correct. This is the net worth of the business and called "Owners' Funds"

b) The money invested in the business by the owners

Incorrect. This is the share capital and represents only part of the "Owners' Funds"

c) The amount of money appearing on the Balance Sheet as “Authorised Share Capital”

Incorrect. This is a technical statement of the maximum number of shares that the business is legally entitled to issue and is merely a memorandum or note on the accounts. It is not used in any "Balance Sheet" calculations and has no impact on "Owners Funds"

d) The difference between the "Authorised Share Capital" and the amount already invested in the business by the shareholders

Incorrect. This is merely a calculation showing the additional share capital that the business is entitled to issue and has nothing to do with the value of "Owners Funds"

21. Which one of the following is included in calculating “Owners’ Funds”?

a) Bank Loans outstanding Incorrect. Bank Loans outstanding are included in the "Long Term Liabilities" aka "Long Term Creditors" section of the balance sheet.

b) Creditors (Accounts payable) Incorrect. These are included in "Current Liabilities"

c) Retained profits Correct. Retained Profits are included in the computation of "Owners' Funds" along with Share capital.

d) Money owed to the business by customers (Debtors)

Incorrect. "Debtors" are included in "Current Assets"

22. Which one of the following best defines the meaning of the term Long to Long and Short to Short?

a) The practice of matching the term of funding assets to the time they are expected to be held by the business

Correct. The term refers to prudent funding strategies to avoid the risk of a "Liquidity" crisis through depleting cash and other liquid assets needed to meet short term liabilities.

b) Locating all liabilities which extend over twelve months in the “Long Term Liabilities” section of the Balance Sheet

Incorrect. This is an accurate statement of the location of "Long Term Liabilities" but is not the correct response to the question.

c) Locating all short term liabilities under the heading “Current Liabilities” in the Balance Sheet

Incorrect. This is a statement of the location of "Current Liabilities" but is not the correct response to the question.

d) The ranking of debts outstanding into categories less than one month, less than two months and so on

Incorrect. This simply describes the business practice of "aging" creditors and debtors to help manage working capital.

23. Which one of the following best defines the meaning of the term Liquidity?

a) The surplus of current assets over current liabilities existing in a business

Correct. The term "Liquidity" is used to describe the ability of a business to meet its day-to-day financial obligations. In the normal course of business, if current assets equal or exceed current liabilities then the business is deemed to have liquidity.

b) The amount of cash held by a business Incorrect. This is an important part of liquidity but ignores debtors and stocks.

c) The relationship between owners’ funds and borrowings

Incorrect. This refers to “Gearing”

d) The amount of current assets made up of cash as opposed to debtors and stocks

Incorrect. Cash can be all important in duress but a business can also rely on converting debtors and stocks into cash to meet its obligations.

24. Which one of the following best defines the meaning of the term Working Capital?

a) The capital applied to buy stock Incorrect. This just describes an application of funds.

b) The difference between current assets and current liabilities

Correct. It accurately describes the surplus of current assets available to the business to continue to trade without recourse to additional funding.

c) The difference between Total assets and total Liabilities

Incorrect. This defines "Owners Funds" aka "Net Worth" not "Working Capital"

d) The capital lodged to a deposit account and earning interest

Incorrect. This would be a "Current Asset" and is just one of the assets used in calculating "Working Capital".

25. Which one of the following best defines the meaning of the term Capital Employed?

a) The money invested by owners in the business

Incorrect. This is the "Share Capital" invested in the business.

b) The difference between Current Assets and Current Liabilities

Incorrect. This is the calculation of "Working Capital"

c) The difference between Total Assets and Current Liabilities

Correct. This is the correct calculation of "Capital Employed" and will leave "Owners Funds" and "Long Term Liabilities" i.e. all the long term funding or "Capital" used in the business.

d) The capital held in pension funds for employees

Incorrect. This is simply what it says and the term "Capital Employed" would not apply.

26. Which one of the following best defines the meaning of the term Gearing?

a) The relationship between current assets and current liabilities

Incorrect. This defines “Working Capital”

b) The leverage offered by the gross profit margin

Incorrect. This determines the ability of the company to recover its “Overheads” expenses and generate profit

c) The ratio of fixed costs to sales Incorrect. This ratio could be a useful indicator of a company’s break-even level but nothing to do with gearing.

d) The relationship between owners’ funds and external funds invested in the business

Correct. It measures the stability of the business in terms of its capacity to borrow additional funds if required.

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27. Which one of the following best defines the meaning of the term Revenue Expenditure?

a) Tax payments Incorrect. Tax payments are made to the “Revenue Commissioners” in some countries but this is not the correct response.

b) Repetitive expenditure on day to day items such as wages, goods for resale and overheads

Correct. This is the definition of “Revenue Expenditure”

c) Expenditure that can be directly linked to revenues from sales

Incorrect. This defines “Direct Expenses” which are included in but do not make up the whole of “Revenue Expenditure”.

d) Large scale expenditure on assets such as vehicles

Incorrect. Expenditure such as this is classified as “Capital Expenditure”

28. Which one of the following best defines the meaning of the term Capital Expenditure?

a) Payments of interest and dividends to providers of capital

Incorrect. This describes distributions of profits not “Capital Expenditure”

b) Repetitive expenditure on day to day items such as wages, goods for resale and overheads

Incorrect. This is the definition of “Revenue Expenditure”

c) Expenditure on maintaining head office Incorrect. This expenditure could be classified as “Revenue Expenditure” or “Capital Expenditure” describing on the amount and company policy.

d) Large scale expenditure on acquiring or upgrading fixed assets

Correct. This is a clear definition of “Capital Expenditure”

29. Which one of the following best defines the meaning of the term Fixed Cost?

a) A cost which never changes Incorrect. This is not the definition of a “Fixed Cost” There are very few costs if any in business that never change.

b) A cost that does not change in direct proportion to sales

Correct. All costs will eventually have to respond to changes in output and sales and “Fixed Costs” respond in lead-lag pattern often described as being like step of stairs if they are tracked over time against sales values.

c) A cost which, in aggregate, changes in direct proportion to changes in sales volume

Incorrect. This is a definition of “Variable Costs” i.e. ones which change in direct proportion to output changes.

d) A cost related to acquiring and maintaining fixed assets

Incorrect. This is “Capital Expenditure”.

30. Which one of the following best defines the meaning of the term Direct Cost?

a) A cost that may be directly related to sales e.g. materials

Correct.

b) A cost where the supplier insists on cash with order

Incorrect. This is just a description of a supplier’s terms of trade with the customer

c) A cost that does not change in direct proportion to sales

Incorrect. This is a definition of a “Fixed Cost” not of a “Direct Cost”

d) An overhead cost such as rent Incorrect. This is an “Indirect Cost” as it would have to be apportioned to sales units i.e. divided by the number of units sold rather than directly attributed to any specific unit of sales.

31. Which one of the following best defines the meaning of the term Indirect Cost?

a) Any cost that can’t be directly related to sales e.g. audit fees

Correct. This is a sound definition of “Indirect Costs”

b) A cost which the supplier offsets against a credit note

Incorrect. This is simply the description of an event and not a definition of “Indirect Costs”

c) A cost that responds in direct proportion to changes in sales

Incorrect. This is a description of a “Variable Cost”

d) A cost which was not incurred in the normal course of business for example a parking fine incurred by an employee while driving a company vehicle

Incorrect. This is an example of, rather than a definition of an “Indirect Cost”

32. Which one of the following best defines the meaning of the term Variable Cost?

a) A cost which changes every day Incorrect. This describes a cost changing in response to time or unspecified events not a definition of a “Variable Cost”

b) A cost that does not change in direct proportion to sales

Incorrect. This is a description of a “Fixed Cost”

c) A cost which, in aggregate, changes in direct proportion to changes in sales volume

Correct. This is a clear definition of a “Variable Cost”

d) A cost related to acquiring fixed assets Incorrect. This is an example of “Capital Expenditure”

33. Which one of the following best defines the meaning of the term “Amortisation”?

a) The process of writing off bad or doubtful debts

Incorrect. This is a decision made by the management and its advisers to avoid misrepresenting the financial status of the business not the technique of “Amortisation”

b) A systematic process of “killing-off” obsolete products in the range

Incorrect. This is a decision made by the management to avoid wasting effort on products which no longer contribute significantly to revenues.

c) A systematic method of charging or crediting a predetermined amount to the Profit and Loss Account over a period of years

Correct.

d) The time a debt is outstanding over the agreed terms

This describes the period of delinquency of a debt and bears no relation to the technique of “Amortisation”

34. Which one of the following best defines the meaning of the term “Capital Employed”?

a) The net value of “Fixed Assets” employed in the business

Incorrect. The net value of “Fixed Assets” is the original cost of the fixed assets less accumulated “Depreciation” and not the definition of “Capital Employed”

b) The breakdown of the funding deployed in the business between Owners Funds, Long Term Loans and Current Liabilities

Incorrect. This is a breakdown of the “Funding Structure” and would not be a correct response.

c) The total long term funding in a business i.e. the owners’ funds + long term liabilities

Correct. It will be equal to “Total Assets” less “Current Liabilities”

d) The owners’ funds Incorrect. This is just one element of the “Capital Employed” along with “Long Term Liabilities”

35. Which one of the following best defines the meaning of the term “Depreciation”?

a) A drop in value of assets Incorrect. “Depreciation” will lead to a reduction the value of “Assets” but it is a systematic process which this response does not accurately describe.

b) The reduction in value of the Owners’ Funds

Incorrect. “Depreciation” is a charge against profits and so will lead to a reduction in the value of “Owners’ Funds” but it is an effect of depreciation and not a reasonable definition as requested

c) A systematic process of writing down the value of a fixed asset over its useful life

Correct. This is a reasonable definition of “Depreciation”

d) A negative advertising campaign targeting direct competitors

Incorrect. Deprecating the competition is not a particularly edifying business tactic and has nothing to do with the concept of “depreciation” as used in finance.

36. Which one of the following best defines the meaning of the term “Insolvent”?

a) Sustained inability to satisfy creditors or pay liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature

This is a clear definition of the term “Insolvent”

b) Failure to return profits for a period of three years

Incorrect. Loss making will eventually lead a business to insolvency but if it has adequate “Reserves” and “Liquidity” …

c) Incurring a “judgement” in favour of a creditor.

Incorrect. This would be a clear sign of difficulty but would not be comprehensive proof of “Insolvency” as the business may continue to trade.

d) Having too much funding tied up in inventory (stocks) rather than cash

Incorrect. An error if he business bought too much: a problem if its customers bought too little. Might contribute to but is not the meaning of “Insolvency”.

37. Which one of the following best defines the meaning of the term “Operating Lease”?

a) A financial arrangement to fund the use of an asset which will become the property of the business at the end of the agreed term

Incorrect. This is the definition of a “Financial Lease” not an “Operating Lease”

b) A financial arrangement to allow a business to use an asset but where the asset remains in the ownership of provider of the leaser

Correct. This is the correct definition of an “Operating Lease”

c) An agreement entitling a business to use a brand name for an agreed period

Incorrect. This would describe a royalty arrangement rather than an “Operating Lease”

d) An agreement entitling a business to use a software application

Incorrect. would be a licence rather than an “Operating Lease”

38. Which one of the following best defines the meaning of the term “Financial Lease”?

a) A financial arrangement to fund the use of an asset which will become the property of the business at the end of the agreed term

Correct.

b) A financial arrangement to allow a business to use an asset but where the asset remains in the ownership of provider of the lease

Incorrect. This is the definition of an “Operating Lease”

c) An agreement entitling a business to use a brand name for an agreed period

Incorrect. This would describe a royalty arrangement rather than a “Financial Lease”

d) An agreement entitling a business to use a software application.

Incorrect. This would be a licence rather than a “Financial Lease”

39. Which one of the following best defines the meaning of the term “Loan Capital”?

a) The funds invested by the owners in the business

Incorrect. This is the "Share Capital" invested in the business.

b) The funds borrowed from banks and/or others which is to be repaid over a number of years

Incorrect. This accurately describes “Loan Capital”

c) The funding provided by suppliers in the form of credit

Incorrect. This source of funding would usually be called “Creditors” unless it was intended to be paid after twelve months.

d) None of the above Correct. This would be incorrect as the correct responses to the options are “Share Capital”, “Loan Capital” and “Creditors”

40. Which one of the following best defines the meaning of the term “Long Term” as used in a financial context?

a) Greater than a month Incorrect. This would be short term

b) Greater than twelve months Correct

c) Greater than three years Incorrect. This would be long term but the correct definition is greater than twelve months.

d) Greater than five years Incorrect. This would be long term but the correct definition is greater than twelve months.

41. Which one of the following best defines the meaning of the term “Gross Margin”?

a) The ratio of the surplus remaining after cost of sales has been deducted from sales revenues to sales

Correct i.e. Gross Profit/Sales expressed as a percentage

b) The surplus remaining after overheads have been deducted from Gross Profit

Incorrect. This is the “Net Margin” i.e. Net Profit/Sales expressed as a percentage

c) The surplus remaining if current liabilities were deducted from current assets

Incorrect. This describes “Working Capital”

d) An excessive net profit margin Incorrect. This is not a concept used in finance.

42. Which one of the following best defines the meaning of the term “Marginal Cost”?

a) The costs of borrowing small additional amounts of money to top up earlier borrowings

Incorrect. This is simply describing an activity. One which might indicate poor financial planning in the first instance but it is not a financial term.

b) The small and immaterial costs of production often grouped under terms like “Sundries” and “Miscellaneous”

Incorrect. These would be marginal in the everyday usage of the term but would be what is meant by the financial term “Marginal Cost”

c) A cost such as depreciation which does not have a cash flow association

Incorrect. This is simply a non cash item and is not a “Marginal Cost”

d) The additional cost of producing and selling one additional unit

Correct response – it is the incremental cost associated with the sale of an extra unit.

43. Which one of the following would not be directly determined from an analysis of the financial statements of a business?

a) Money provided by owners Incorrect. This would be shown in the “Owners Funds” section of the “Balance Sheet”

b) The capability of the assets employed in the business to generate sales

Incorrect. This could be measured by computing the “Asset Turn” ratio using the “Sales” from the “Profit and Loss Account” and “Total Assets” from the “Balance Sheet.

c) The image and standing of the business in the market place

Correct. As, while high levels of sales might indicate a positive company profile in the market place an objective assessment would require a specific attitudinal market study

d) Money owed to suppliers Incorrect. This is shown in the “Debtors” section of the “Balance Sheet”

44. Which one of the following best describes an underlying principle used in the preparation of financial statements?

a) Stocks are valued at current market value Incorrect. This is not the best response as it only covers part of the principle

b) Stocks are valued at the cost of the most recent purchase in that category

Incorrect. This is used in budgeting but does not describe the principle for valuing stocks in the financial accounts

c) Stocks are valued at the cost of the oldest item in that category

Incorrect. This is used in budgeting but does not describe the principle for valuing stocks in the financial accounts

d) Stocks are valued at cost or market value whichever is the lesser

Correct. This is the correct definition of the principle determining the practice of stock valuation in financial accounts

45. Which one of the following best describes an underlying principle used in the preparation of financial statements?

a) Take a positive view to ensure that profits are not understated

Incorrect. Positive would not be the perspective advocated by accounting principles

b) Take a neutral view Incorrect. This would be close to but not the best response to the question

c) Take a conservative view to ensure that profits are not overstated

Correct. A prudent and conservative view should be taken to ensure that the accounts do not mislead by recognising profits that may not accrue.

d) Take no view and just accept whatever numbers appear in the records of the business

This would be a total abdication of responsibility by anyone preparing accounts and could have legal consequences for directors and advisers

46. Which one of the following best describes an underlying principle used in the preparation of financial statements?

a) Values of fixed assets are based on their current market value

Incorrect. Current cost accounting – using replacement values for assets – has its advocates in financial circles but it is unreliable and not approved under Generally Accepted Accounting Principles

b) Values of fixed assets are based on auditors’ valuations each year

Incorrect. Auditors certify that the method of valuation conform to accepted principles but the valuations will be based on their historical costs.

c) Values of fixed assets are based on historical cost and the assumption that the business will continue as a going concern in the same activity

Correct.

d) Values of fixed assets are as valued by the managing director each year

Incorrect response and would describe a very arbitrary and unacceptable practice

47. Which one of the following best describes an underlying principle used in the preparation of financial statements?

a) The goal is to provide a true and fair view of the financial position of the business

Correct

b) The goal is to provide a reasonably accurate picture of the financial position of the business

Incorrect. This would not be an acceptable standard for the preparation of financial statements

c) The goal is to provide a completely accurate picture of the financial position of the business

Incorrect. An absolute goal such as “completely accurate” would be too high a standard and lead to situations of “paralysis by analysis” and delays in production which would radically dilute the benefits of financial reporting

d) The goal is to provide a fair and reasonable picture of the financial position of the business

Incorrect. Close but there is a better response in the options offered

48. Which one of the following best describes an underlying principle used in the preparation of financial statements?

a) Expenditure on an item e.g. a printer which will be used for a few years must be treated as a capital expenditure irrespective of cost

Incorrect. An “Immaterial” expense may be fully charged to the “Profit and Loss Account” even if the item will provide benefits for a number of accounting periods

b) The expenditure must be treated as capital expenditure if it is expected to last for three years or more

Incorrect as the test is that the asset will be in use for more than one year

c) The expenditure may be treated as revenue if the cost is minor and can fairly be regarded as immaterial in the context of the financial statements

Correct and is covered by the principle of “Immateriality”

d) The expenditure can be treated as capital or revenue as determined by the managing director

Incorrect. Managing Directors would not be the sole arbiter – their argument will have to be based on accounting principles in the same way as anyone else