Introduction to Accounting Chapter -01

INTRODUCTION TO ACCOUNTING
PRACTICE QUESTIONS
1) Which of the following statements is true?
a) The directors of a company are liable for any losses of the company.
b) A sole trader business is owned by shareholders and operated by the proprietor.
c) Partners are liable for losses in a partnership in proportion to their profit sharing ratio.
d) A company is run by directors on behalf of its members.

2) Which of the following best describes management accounts?

a) Management accounts are mandatory accounts which reflect the past performance of a
business and are prepared in accordance with strict accounting requirements.
b) Management accounts are normally prepared monthly on a rolling basis and include details of
past performance as well as budgets and forecasts.
c) Management accounts are required by law and include sufficient details for managers control the
business and prepare for the future.
d) Management accounts include information computed to be relevant to managers and are
generally prepared annually.

3) Which of the following best explains why employees are interested in the financial
statements of their employer?
a) To compare the business with its competitors in order to decide whether to seek employment with
one of those competitors.
b) To assess the effect of the business on the local economy, community and environment.
c) To assess whether the business will continue into the foreseeable future.
d) To assess the profitability of the business in order to decide whether to invest in it.

4) Which of the following user groups require the most detailed financial information?
a) The management
b) Investors and potential investors
c) Government agencies

5) Which of the following statements are true?

1. Accounting can be described as the recording and summarizing of transactions
2. Financial accounting describes the production of a statement of financial position and Statement
of Profit or Loss for internal use.

a) 1 only
b) 2 only

6) The main aim of financial accounting is to;

a) Record all transactions in the books of account.
b) Provide management with detailed analyses of costs.
c) Present the financial results to the organization by mean of recognized statements.
Introduction to Accounting Chapter -01

d) Calculate profit.

7) 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.

8) The following information relates of Minnie’s hairdressing business in the year ended
31 August 20X7:
$
Expenses 7,100
Opening inventory 1,500
Closing inventory 900
Purchases 12,950
Gross profit 12,125
Inventory drawings of shampoo 75

What is the sales figure for the business?

a) $32,700
b) $25,600
c) $25,675
d) $25,750

9) An asset is:
a) An item owned by an entity.
b) An item controlled by an entity.

10) Arthur had net assets of $19,000 at 30 April 20X7. During the year to 30 April 20X7, he
introduced $9,800 additional capital into the business. Profits were $8,000, of which
he withdrew $4,200.

What was the balance on Arthur’s capital account at 1 May 20X6?

a) $5,400
b) $13,000
c) $16,600
d) $32,600

11) The capital of a business would change as a result of:

a) A supplier being paid by cheque
b) Raw material being purchased on credit
c) Non-current assets being purchased on credit
d) Wages being paid in cash
Introduction to Accounting Chapter -01

12) A draft statement of financial position had been prepared for Lollipop, a sole trader. It
is now discovered that a loan due for repayment by Lollipop fourteen months after the
reporting date has been include in trade payables.
The necessary adjustment will:
a) Have no effect on net current assets
b) Increase net current assets
c) Reduce net current assets
d) Increase current assets but reduce net current assets

13) The profit of a business may be calculated by using 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

14) Which accounting concept requires that amounts of goods taken from inventory by the
proprietor of a business are treated as drawings?
a) Accruals
b) Prudence
c) Separate entity
d) Substance over form

15) Classify the following into capital and revenue expense for a car dealer company
a) Purchase of cars
b) Purchase of car carriage truck
c) Payment of office workers wages
d) Payment of legal expenses
e) Purchase of computer equipments
f) Purchase of furniture
g) Purchase of accounting software
h) Installation of fire extinguishers
i) Purchase of printer papers
j) Construction of 2 more rooms in the office building
k) Repair of office basement destroyed due to fire
l) Purchase of LCD screen for display center
m) Redecoration of manager’s office