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Chapter 1. Introduction to financial accounting



1. Accounting is the process of:
a. analysing information.
b. identifying and measuring economic information.
c. identifying, measuring and communicating economic information.
d. None of these choices

2. Financial accounting assists:
a. government to assess taxes payable by organisations.
b. an organisation's management to control the organisation and make decisions regarding
day-to-day management.
c. lenders of finance to make decisions regarding the granting of finance.
d. All of these choices

3. Which of the following statements about financial accounting is NOT true?
a. The financial accountant faces a challenge in figuring out which numbers to use.
b. Adding and subtracting is often the easy part of financial accounting.
c. A marketing manager does not need to be concerned with financial accounting.
d. Significant judgement is required in accounting.

4. Which type of information would be of most importance to employees?
a. Proposed expansion of the business
b. Profitability
c. Liquidity
d. Long-term financial stability

5. Which of the following statements about accrual accounting is true?
a. Transactions are recognised at the time when revenue and expenses occur.
b. Revenue is recorded when orders are place by customers.
c. Transactions are recognised when the cash is received or paid.
d. None of these choices

6. Use the following information to answer questions 6 and 7.
$
Cash sales 50,000
Credit sales 15,000
Credit purchases 20,000
Cash purchases 11,000
Wages expense paid 6,000
Wages payable 1,000

What is the net profit under accrual accounting principles?
a. $33 000
b. $27 000
c. $28 000
d. $38 000

7. What is the net profit under cash accounting principles?
a. $33 000
b. $27 000
c. $28 000
d. $38 000







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8. The balance sheet:
a. measures the performance of an organisation over a period of time.
b. shows the resources and claims on resources of an organisation at a particular point in
time.
c. shows the sources and uses of cash during a period of time.
d. summarises the measurements of financial performance and financial position of an
organisation.

9. A statement of cash flows:
a. measures the performance of an organisation over a period of time.
b. shows the resources and claims on resources of an organisation at a particular point in
time.
c. shows the sources and uses of cash during a period of time.
d. summarises the measurements of financial performance and financial position of an
organisation.

10. Which of the following statements regarding the accounting equation is correct?
a. Shareholders' equity equals assets plus liabilities
b. Liabilities equals assets plus liabilities
c. Assets equals liabilities plus shareholders' equity
d. Assets equals liabilities less shareholders' equity

11. Which of the following is an asset?
a. Marketable securities
b. Provision for employee entitlements
c. Retained profits
d. A long-term loan

12. Which of the following is part of shareholders' equity in a business enterprise?
a. Marketable security
b. Retained earnings
c. Wages payable
d. Prepaid rent

13. Use the following information to answer questions 13 and 14.
$
Cash sales 24,000
Credit sales 55,000
Cash received from accounts receivable 32,000
Selling and administration expenses paid 14,000
Selling expenses owing at year-end 4,000
Wages payable 1,000

What is the net profit?
a. $38 000
b. $93 000
c. $61 000
d. $65 000

14. What is the net cash flow from operating activities?
a. $18 000
b. $38 000
c. $10 000
d. $42 000






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15. Refer to the following information.
$
Cash 2,000
Loan payable 5,000
Share capital 10,000
Retained earnings 3,000
Cost of goods sold 4,000
Inventory 1,000
Equipment 6,000

What are the total assets?
a. $12 000
b. $22 000
c. $9000
d. $16 000

16. Refer to the following information.
$
Cash 5,000
Loan payable 3,000
Accounts payable 8,000
Accounts receivable 6,000
Cost of goods sold 4,000
Inventory 2,000
Equipment 6,000

What is the total shareholder' equity?
a. $8000
b. $12 000
c. $4000
d. $11 000

17. GAAP refers to:
a. Generally accounting and auditing principles.
b. Generally accepted accounting principles.
c. Government accounting and auditing procedures.
d. Generally accepted accounting procedures.

18. A computer costing $785 with a useful life of 3 years is recorded at its purchase price. To
what financial statement assumption does this relate?
a. Accrual accounting
b. Monetary value
c. Historical cost
d. Accounting entity

19. The owner of Pat's Party Hire withdrew $500 cash for her own use. To which financial
statement assumption does this relate?
a. Materiality
b. Accounting entity
c. Accounting period
d. Going concern

20. The going concern assumption means that:
a. accounting transactions are measured using a common denominator.
b. assets are initially recorded at cost.
c. the life of the organisation is divided into discrete periods.
d. the organisation will continue operations in the near future



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Chapter 2. Measuring and evaluating financial position and financial performance

1. Which of the following statements is NOT true?
a. If total assets owned by a business total $150 000 and owners' equity totals $60 000, then
liabilities total $90 000.
b. If total assets decreased by $60 000 during a specific period and owners' equity decreased
by $70 000 during the same period, the period's change in total liabilities was a $130 000
increase.
c. If total assets decreased by $80 000 during a specific period and owners' equity decreased
by $90 000 during the same period, the period's change in total liabilities was a $10 000
increase.
d. If total assets increased by $150 000 during a specific period and liabilities decreased by
$20 000 during the same period, the period's change in total owners' equity was a $170
000 increase.

2. Which of the following statements about a balance sheet is NOT true?
a. A balance sheet provides a useful picture of the state of the company.
b. A balance sheet directly states how management has performed in using assets to earn
profits.
c. Many outsiders use the balance sheet to evaluate the quality of management's decisions
on obtaining, deploying and financing assets.
d. Good profit performance is reflected by increased assets and retained profits.

3. Which of the following is a liability?
a. Retained profits
b. Prepaid insurance
c. Accumulated depreciation
d. Rent payable

4. Refer to the following information.
$
Accounts receivable 75,000
Accounts payable 40,000
Revenue received in advance 25,000
Prepayments 20,000
Accrued revenue receivable 10,000

What is the balance of current assets?
a. $95 000
b. $105 000
c. $130 000
d. $120 000

5. The summarised balance sheet of Beta Ltd at 30 June 2012 was as follows:
$ $
Current assets 300,000 Current liabilities 200,000
Noncurrent assets 1,200,000 Noncurrent liabilities 1,000,000
. Share capital 300,000
1,500,000 1,500,000

What was Beta Ltd's working capital at 30 June 2012?
a. $500,000
b. $1,500,000
c. $1,200,000
d. $100,000





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6. Which of the following statements about accumulated depreciation is true?
a. Cost less accumulated depreciation gives net book value.
b. Accumulated depreciation is ignored when an asset is sold.
c. Accumulated depreciation is the amount of depreciation recognised at the date of disposal
of the asset.
d. Accumulated depreciation represents the depreciation charge for the current period.

7. Mary operates a small cafe. On 30 June 2012, she has $600 in her business bank account,
the stall and equipment are worth $7800, ingredients on hand cost $90 and paper cups cost $30.
Customers owe her $180 and she owes her suppliers $500. She also owes $6200, which enabled her
to get started. What is Mary's owners' equity?
a. $8700
b. $2000
c. $2500
d. $600

8. Which of the following statements is true?
a. If the assets owned by a business total $90 000 and liabilities total $50 000, then
shareholders' equity totals $40 000.
b. If the assets owned by a business total $100 000 and expenses total $100 000, then
shareholders' equity totals $100 000.
c. If the assets owned by a business total $500 000, then shareholders' equity also totals
$500 000. d. If the assets owned by a business total $72 000 and liabilities total $40 000,
then shareholders' equity totals $112 000.

9. If Matthews Enterprises pays 12 months rent in advance of $36 000 on 1 June 2012, then at
30 June 2012 the accounts will show:
a. a prepayment of $33 000 in the balance sheet and rent expense of $3000 in the profit and
loss account.
b. a prepayment of $3000 in the balance sheet and rent expense of $33 000 in the profit and
loss account
c. a $36 000 asset in the balance sheet.
d. a $36 000 expense in the profit and loss statement.

10. A company buys 500 computers for $800 each. It sells 100 of the computers for $1200 each.
What is the 'cost of goods sold' expense?
a. $120,000
b. $80,000
c. $400,000
d. $40,000

11. In which of the following circumstances is revenue NOT earned by a company?
a. A customer promised to pay $750 at a later date in return for goods.
b. A customer gave the company $750 in equipment in return for goods supplied.
c. A customer paid $750 cash in return for goods.
d. An amount of $750 was paid by a customer for goods to be supplied in the next accounting
period.

12. Which of the following events does NOT give rise to an expense?
a. A customer returned goods valued at $90 previously purchased.
b. A building depreciated by $600.
c. A customer paid $1000 on account.
d. The company promised to pay an employee $300 in wages at a later stage.





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13. What are total expenses for June 2012 considering wages of $45 000 were paid in June for
work done in June; $7500 of wages were owed at the end of June for work done in June; and an
invoice for $12 000 was received for June advertising to be paid in July.
a. $45,000
b. $52,500
c. $64,500
d. $30,000

14. Which of the following statements about retained profits is true?
a. Retained profits is the current year's profit.
b. If a company does not pay a dividend, the dividend cannot decrease.
c. Retained profits indicates the total profits earned by a company since its inception.
d. Retained profits are the sum of past net profits/losses minus dividends declared.

15. The connecting link between the balance sheet and the income statement is:
a. total shareholders' equity.
b. net profit after tax.
c. the opening balance of retained profits.
d. dividends paid to shareholders.

16. During the year ending 30 June 2012, Mayflower Ltd earned revenue of $2000 and a net
profit of $200. Retained profits at 30 June 2012 were $1080 and dividends declared and paid totalled
$320. At the same date, liabilities were $5200 and assets $3600. There were no transfers to reserves
during the year. What was the balance of Mayflower Ltd's retained profits at 1 June 2012?
a. $1080
b. $1160
c. $800
d. The balance cannot be determined from the above information.

17. Use the following information to answer questions 17 and 18.
On 30 June 2012, Tinto Ltd declared a final dividend. During the year ended 30 June 2012, Tinto Ltd
earned revenues of $2400 and incurred expenses of $1600. Retained profits at 1 July 2011 were
$1400, and at 30 June 2012, $1700. At 30 June 2012, assets totalled $4800 and share capital $3000.
There were no transfers to reserves during the year ended 30 June 2012.

What was the net profit or loss of Tinto Ltd for the year ended 30 June 2012?
a. Net profit $8000
b. Net profit $4800
c. Net loss $800
d. Net profit $800

18. What was the dividend declared by Tinto Ltd during the year?
a. $300
b. $500
c. $1100
d. This cannot be determined from the above information.

19. What is total revenue for the period in which (i) credit sales are $90 000, of which $25 000
was received at year-end; (ii) $30 000 cash was received from customers for work done in the
previous year; (iii) $10 000 was received from customers for work to be done in the next accounting
period?
a. $100 000
b. $120 000
c. $90 000
d. $155 000





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20. Refer to the following information.
$
Cash 25,000
Inventory 50,000
Equipment 180,000
Accounts payable 42,000
Taxes payable 15,000
Loans to the company 140,000

What is the balance of shareholders' equity?
a. $58 000
b. $255 000
c. $155 000
d. $140 000

Chapter 3. The double-entry system

1. The owner contributed a delivery vehicle as additional capital, when:
a. one asset increased and another asset decreased.
b. an asset increased and owners' equity increased.
c. a liability increased and owners' equity decreased.
d. a liability decreased and owners' equity increased.

2. A bill from a consultant was received for work done in February 2012. There was no previous
record of the transaction. It will be paid in March 2012. In February 2012:
a. a liability increased and an expense increased.
b. no entry is required until the next accounting period.
c. an asset decreased and an expense increased.
d. an asset decreased and a liability decreased.

3. If a year's depreciation is charged on a piece of equipment, the effect on the accounting
equation is that:
a. an asset increases and another asset decreases.
b. a liability increases and owners' equity decreases.
c. an asset decreases and owners' equity decreases.
d. an asset decreases and a liability decreases.

4. If a company provides for tax at year-end, the effect on the accounting equation is that:
a. an asset decreases and a liability decreases.
b. a liability increases and owners' equity decreases.
c. an asset increases and another asset decreases.
d. an asset decreases and owners' equity decreases.

5. For the transaction below, identify the type of change that would have occurred in the
accounting equation:

Assets = liabilities + issued capital + opening retained profits + revenue

________ - expenses - dividends

Twelve months' depreciation was charged on plant and equipment.
a. An asset decreased and an expense increased.
b. An asset decreased and a liability decreased.
c. An asset increased and another asset decreased.
d. A liability increased and an expense increased.




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6. For the transaction below, identify the type of change that would have occurred in the
accounting equation:

Assets = liabilities + issued capital + opening retained profits + revenue

________ - expenses - dividends

Inventory sold on credit was returned by the customer.
a. An asset decreased and a liability decreased.
b. An asset increased and revenue decreased.
c. An asset decreased and an expense increased.
d. A liability increased and an expense increased.

7. For the transaction below, identify the type of change that would have occurred in the
accounting equation:

Assets = liabilities + issued capital + opening retained profits + revenue

________ - expenses - dividends

Inventory was purchased for cash.
a. An asset decreased and a liability decreased.
b. An asset increased and another asset decreased.
c. A liability increased and an expense increased.
d. An asset decreased and an expense increased.

8. For the transaction below, identify the type of change that would have occurred in the
accounting equation:

Assets = liabilities + issued capital + opening retained profits + revenue

________ - expenses - dividends

A cheque was drawn to pay accounts payable.
a. An asset increased and revenue increased.
b. A liability increased and another liability decreased.
c. An asset decreased and an expense increased.
d. An asset decreased and a liability decreased.

9. For the transaction below, identify the type of change that would have occurred in the
accounting equation:

Assets = liabilities + issued capital + opening retained profits + revenue

________ - expenses - dividends

Commission was earned which will be paid for in two months' time.
a. An asset increased and revenue increased.
b. An asset increased and a liability increased.
c. A liability increased and another liability decreased.
d. An asset decreased and a liability decreased.

10. During the year, the liabilities of a company increased by $25 600 and the assets increased
by $21 400. Consequently, the owners' equity must have:
a. decreased by $4200.
b. increased by $4200.
c. increased by $47 000.
d. decreased by $47 000.


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11. Using the following information, calculate net profit before tax.
$
Credit sales 74,000
Cash sales 67,000
Cash received from accounts receivable 32,000
Cost of goods sold 56,000
Cash purchases of inventory 22,000
Operating expenses 38,000

a. $57 000
b. $47 000
c. $25 000
d. $85 000.

12. Assets at the end of the period are $240 000 and liabilities have increased by $72 000.
Dividends of $24 000 were declared and paid, and no shares were issued during the period. The net
profit or loss during the period is:
a. $192 000 net profit.
b. $144 000 net profit.
c. $242 000 net loss.
d. not determinable from the above information.

13. A company's first event in the year commencing 1 July 2012 was to purchase inventory on
credit for $85 000. Which of the following changes took place as a consequence of this event?
a. Assets decreased by $85 000.
b. Liabilities increased by $85 000.
c. Expenses increased by $85 000.
d. None of the above changes occurred.

14. Given the following information, how much revenue would be recognised in June?
(i) Credit sales of $250 000 in June, 30% to be collected in June
(ii) Collected $65 000 in June from customers for May sales
(iii) Received a deposit in June from a customer for $25 000 for work to be carried out in July
a. $165 000
b. $140 000
c. $75 000
d. $250 000

15. Using the following information, calculate accrual profit for the year ended 30 June 2012.
$
Amounts owing from customers at 30 June 2011 70,000
Amounts received from customers during the year ended 30 June 2012 960,000
Amounts owing from customers at 30 June 2012 54,000
Cash paid for expenses 440,000

a. $520 000
b. $536 000
c. $574 000
d. $504 000











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16. Consider the following information:
(i) $35 000 of accounts payable was paid
(ii) $74 000 from accounts receivable from credit sales was received
(iii) Inventory of $60 000 was purchased on credit
(iv) Credit sales of $135 000 (cost of goods sold was $55 000) were made
(v) $8000 of prepayments expired during the month

Assets increased during the period by:
a. $171 000.
b. $236 000.
c. $97 000.
d. $105 000.

17. Which of the following accounts does NOT normally have a debit balance?
a. Accounts payable
b. Accumulated depreciation
c. Tax payable
d. Accrued expenses

18. Using the following information, what is the balance of retained profits at 1 January 2012?
$
Current assets 70,000
Noncurrent assets 300,000
Current liabilities 55,000
Noncurrent liabilities 160,000
Share capital 100,000
Revenue 130,000
Expenses 85,000
Dividend 20,000

a. $30 000
b. $25 000
c. $155 000
d. $55 000

19. Retained profits of Outback Productions Pty Ltd at 1 July 2011 were $5500. The accounting
records for the year ended 30 June 2012 showed the following information:
$
Revenues earned 110,000
Cash collected from customers 46,000
Expenses incurred 71,500
Expenses paid in cash 68,200
Dividends declared and paid 10,000

What was Outback Productions Pty Ltd net profit for the year ended 30 June 2012?
a. $28 500
b. $16 300
c. $6300
d. $38 500

Chapter 4. Record-keeping

1. Which of the following is an example of an accounting transaction?
a. A bank overdraft limit of $40 000 is arranged with the bank manager.
b. A chief financial officer is hired at an annual salary of $125 000.
c. The company is awarded a contract to provide landscaping services, with the project to
commence in 9 months time.
d. The accounts payable department issues a cheque to pay advertising expenses.


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2. Which of the following is NOT a source document of a business enterprise?
a. Purchase order
b. List of day's collections
c. Cheque duplicate
d. Journal entry

3. What source document supports the payment to accounts payable for the purchase of
inventory?
a. Supplier's invoice received by the business
b. Cheque duplicate
c. Cash receipt
d. Invoice sent by the business to a customer

4. The following are steps in the accounting cycle:
1. Ledger
2. Source documents
3. Journals
4. Pre-closing trial balance
5. Adjusting trial balance
6. Adjusting journal entries
7. Post-closing trial balance
8. Closing journal entries
9. Financial statements

What is the order that is normally followed?
a. 4, 7, 3, 6, 1, 9, 2, 8, 5
b. 4, 7, 3, 6, 8, 9, 1, 2, 5
c. 2, 3, 1, 4, 6, 5, 8, 7, 9
d. None of these choices

5. A chart of accounts is:
a. a list, in some logical form, of all relevant transactions in a business organisation.
b. a chronological record of all transactions.
c. a list of the titles of all accounts in the ledger, together with an appropriate numbering
system for the accounts.
d. a list, in chronological order, of journal accounts used in the accounting system.

6. Identify the correct classification for the following 5 ledger accounts in the chart of accounts:
1. Depreciation
2. Advertising expense
3. Accrued expenses
4. Accumulated depreciation
5. Prepayments

a. 1 asset, 2 expense, 3 expense, 4 asset, 5 expense
b. 1 asset, 2 expense, 3 asset, 4 expense, 5 liability
c. 1 expense, 2 expense, 3 liability, 4 asset, 5 asset
d. 1 expense, 2 expense, 3 expense, 4 expense, 5 expense

7. Refer to the following journal entry:
$
DR Accounts payable 44,000
CR Cash 44,000

Which of the following source documents is most likely to support the above journal entry?
a. Purchase invoice (purchaser's copy)
b. Credit note (purchaser's copy)
c. Cheque butt
d. None of these choices

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8. Stationery purchased on account were incorrectly recorded as office equipment. The correct
entry would be:
a. DR Stationery CR Accounts payable
b. DR Office equipment CR Stationery
c. DR Accounts payable CR Stationery
d. DR Stationery CR Office equipment

9. Bruce Enterprises paid $700 000 for a business and acquired the following assets and
liabilities:
$
Property, plant and equipment 110,000
Accounts receivable 35,000
Inventory 25,000
Accounts payable 20,000
Land & buildings 500,000

Which of these entries would be made for goodwill?
a. DR Goodwill $50 000
b. DR Goodwill $650 000
c. CR Goodwill $50 000
d. Goodwill is not entered in the accounts until the business is sold.

10. Renmark Pty Ltd borrowed $120 000 from the local bank, promising to repay the debt in 5
years' time, together with interest at 6% p.a. Renmark Pty Ltd should record this transaction as:
a. DR Cash DR Interest expense CR Loan
b. DR Cash CR Loan
c. DR Loan CR Cash
d. DR Cash CR Loan CR Interest payable

11. Merchandise purchased by Crawford Sales Pty Ltd on credit for $500 was returned, as it had
been damaged in transit. The transaction would be recorded by Crawford Sales Pty Ltd as:
a. DR Accounts payable CR Cost of goods sold
b. DR Inventory CR Accounts payable
c. DR Cost of goods sold CR Inventory
d. DR Accounts payable CR Inventory

12. Amos Pty Ltd purchased computer equipment, paying a $2000 cash deposit and agreeing to
pay the remainder within 12 months. The transaction would be recorded as:
a. DR Computer equipment CR Accounts payable
b. DR Computer equipment CR Cash
c. DR Computer equipment CR Cash CR Accounts payable
d. DR Accounts payable CR Computer equipment CR Cash

13. On 30 June, Amos Pty Ltd receives an account for TV advertising for the month of June. It is
not due for payment until August. The transaction would be recorded as:
a. DR Expenses payable CR Advertising expense
b. DR Advertising expense CR Prepaid expenses
c. DR Prepaid expenses CR Expenses payable
d. DR Advertising expense CR Expenses payable

14. A set of accounts is called a:
a. general ledger.
b. trial balance.
c. balance sheet.
d. spreadsheet.




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15. Which transaction is an accrual accounting end-of-period adjustment?
a. DR Rent CR Prepaid rent
b. DR Unearned revenue CR Sales
c. Dr Wages CR Accrued expenses
d. DR Sales returns CR Accounts receivable

16. Which of the following errors, each considered individually, would cause the trial balance
totals to be unequal?
a. A transaction was not posted.
b. A payment of $69 for supplies was posted as a debit of $46 to supplies and a credit of $96
to cash.
c. A payment of $250 to a creditor was posted as a debit of $250 to accounts payable and a
credit of $250 to inventory.
d. Cash received from customers on account was posted as a credit of $300 to cash and a
credit of $300 to accounts receivable.

17. A trial balance would detect which of the following errors?
a. A cash purchase of inventory recorded as a debit to plant and a credit to accounts payable

b. A salesman failing to record a cash sale and retaining the proceeds
c. Failure to record depreciation for the year
d. A credit sale recorded in accounts receivable account as $315 instead of $513

18. Which of the following accounts is not closed off at year-end?
a. Cost of goods sold
b. Depreciation
c. Interest revenue
d. Share capital

19. Which of the following statements about closing the accounts is NOT true?
a. Dividends received are credited.
b. Expense accounts are reset at zero.
c. Revenue accounts are debited.
d. A net profit is credited to the retained profits account.

20. Which of the following is NOT true of journal entries?
a. Journal entries are posted to the general ledger.
b. Journal entries are considered books of original entry.
c. The sum of the debits equals the sum of the credits.
d. A trial balance of all journal entries and their balances is prepared periodically.

Chapter 5. Accrual accounting adjustments

1. Which of the following would be recorded as an asset?
a. Accrued expenses
b. Net profit
c. Prepayments
d. Revenue received in advance

2. Skye Consultants performs services for a client on 30 June 2012 and bills the client $900, to
be paid within 60 days. Payment is duly made on 21 July 2012. Accrual accounting is used by both
parties. What is the journal entry made by Skye Consultants on 30 June 2012?
a. DR Accounts receivable CR Service revenue
b. DR Accounts receivable CR Cash
c. DR Service revenue CR Accounts payable
d. DR Cash CR Service revenue


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3. On 30 June 2012, Johnson RoboToys Ltd, which uses accrual accounting, estimates that it
will incur warranty costs of $24 000 in the next financial year on products sold during the year just
ended. On 2 November 2012, the manufacturer pays $2900 under the warranty.

What is the journal entry made by Johnson RoboToys Ltd on 30 June 2012?
a. DR Warranty liability CR Cash
b. DR Warranty expense CR Warranty liability
c. DR Warranty liability CR Cash
d. DR Warranty liability CR Warranty expense

4. Which of the following does NOT appear in the balance sheet?
a. Rent revenue
b. Rent payable
c. Rent revenue received in advance
d. Prepaid rent

5. In 2011,Otis Productions Ltd paid $36 000 for 2010 expenses, $42 000 for 2011 expenses
and $6000 advance payment for 2012 expenses. In 2012, it paid $10 000 for 2011 expenses.
Depreciation for 2011 was $12 000. What was the accrual accounting expense for 2011?
a. $64 000
b. $94 000
c. $70 900
d. $52 000.

6. At the end of the financial year, the usual adjusting entry for depreciation on a delivery van
was omitted. Which of the following statements is true?
a. The balance sheet and profit and loss statement will be incorrectly stated but equity will be
correct for the current year.
b. Total liabilities and total assets will be understated.
c. Total assets will be understated at the end of the current year.
d. Net profit will be overstated for the current year.

7. The balance in the prepaid rent account before adjustment at the end of the year is $24 000,
which represents 4 months' rent paid on 1 June 2012. The adjusting entry required on 30 June 2012
is:
a. DR Rent expense $6 000 CR Prepaid rent $6 000
b. DR Rent expense $18 000 CR Prepaid rent $18 000
c. DR Prepaid rent $6 000 CR Rent expense $6 000
d. DR Prepaid rent $18 000 CR Rent expense $18 000

8. The stationery account has a balance of $2700 at the beginning of the year and was debited
during the year for $6400, representing the total of stationery purchased during the year. If $1900 of
stationery is on hand at the end of the year, the stationery expense to be reported on the profit and
loss statement for the year is:
a. $1 900
b. $9 100
c. $7 200
d. $5 600.

9. A payment for insurance on 1 January for $18 000, covering the period 1 January 2012 to 31
December 2012, was recorded as a prepayment. No adjusting entry was made at 30 June 2012. As a
result:
a. profit and total assets were understated by $9000.
b. profit was overstated by $5000 and assets understated by $9000.
c. profit was understated by $5000 and assets overstated by $9000.
d. assets overstated by $9000 and net profit overstated by $9000.



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10. Watson Ltd has a $30 000 balance in its unearned service revenue account. Where would
this account appear in the financial statements?
a. It would appear as a current liability in the balance sheet.
b. It would not appear in the balance sheet.
c. It would appear as revenue in the income statement.
d. It would appear as a current asset in the balance sheet.

11. On 30 August 2012, GoGlass received an advance of $20 000 from a client for future work.
The work was completed to the client's satisfaction on 28 September 2012. What is the journal entry
made by GoGlass on 30 August 2012?
a. DR Cash CR Sales revenue
b. DR Customer deposits CR Unearned revenue
c. DR Cash CR Unearned revenue
d. DR Unearned revenue CR Cash

12. Arnott's Ltd pays employees' salaries of $60 000 each Thursday to cover working days for the
week (Monday to Friday). The end of the accounting period falls on a Wednesday. The adjusting
journal entry would be:
a. DR Wages expense $12 000 CR Accrued wages $12 000
b. DR Wages expense $36 000 CR Accrued wages $36 000
c. DR Accrued wages $24 000 CR Wages expense $24 000
d. DR Wages expense $60 000 CR Accrued wages $60 000

13. Wyntex Ltd paid $48 000 in wages during the year. The opening balance of accrued wages
was $16 000 and the closing balance was $20 000. What was the wages expense for the year?
a. $476 000
b. $480 000
c. $484 000
d. $496 000

14. On 30 June 2012, Active Games Ltd estimates that it will incur warranty costs of $54 000 in
the next financial year on products sold during the year just ended. On 1 November 2012, the
manufacturer pays $24 000 under the warranty. Active Games Ltd uses accrual accounting. What is
the journal entry made by Active Games Ltd on 30 June 2012?
a. DR Warranty expense CR Cash
b. DR Warranty expense CR Warranty liability
c. DR Warranty liability CR Cash
d. DR Warranty liability CR Warranty expense

15. Chum Ltd invested $240 000 with a bank for 1 year at 5% on 1 February 2012 (interest
payable at end of loan). What is the adjusting journal entry at the balance date, 30 June 2012?
a. DR Accrued revenue $12 000 CR Interest revenue $12 000
b. DR Accrued revenue $5 000 CR Interest revenue $5 000
c. DR Accrued revenue $7 000 CR Interest revenue $7 000
d. DR Unearned revenue $5 000 CR Interest revenue $5 000

16. The trial balance of Anderson Ltd included the following balances:
Debit Credit
Accounts receivable $28,000 -
Allowance for doubtful debts - $3,000

On 1 June 2012, an account for $1000 was determined to be uncollectable. The journal entry to be
made on that date would include a debit to:
a. allowance for doubtful debts.
b. doubtful debts.
c. bad debts expense.
d. accounts receivable.



16

17. The balance in the allowance for doubtful debts account represents:
a. liquid funds available to meet losses arising from customers becoming insolvent.
b. bad debts written off as accounts receivable considered uncollectable.
c. bad debts written off in the current accounting period.
d. an amount that is deducted from the accounts receivable account to reduce it to the
estimated realisable value.

18. The balance of accounts receivable at 30 June 2012 was $120 000 and the balance of the
allowance of doubtful debts account was $6000. A debt of $4000 was written off as irrecoverable. The
journal entry to write off the debts as irrecoverable is:
a. DR Allowance for doubtful debts $4 000 CR Accounts receivable $4 000
b. DR Bad debts expense $4 000 CR Allowance for doubtful debts $4 000
c. DR Bad debts expense $4 000 CR Accounts receivable $4 000
d. DR Bad debts expense $4 000 CR Cash

19. Brooke Brothers Ltd has the following balance sheet information on 28 February 2012:
$
Accounts receivable 300,000
Allowance for doubtful debts 30,100
Accounts receivable net 269,900

On 28 June 2012, the company receives notification from MJ Corporation that it has filed for
bankruptcy. The controller of Brooke Brothers Ltd decides to write off MJ Corporation's account for
$6400. Which of the following statements is true?
a. No change will occur in net income but net accounts receivable will decrease.
b. Net income and net accounts receivable will decrease.
c. Neither net income nor net accounts receivable will decrease.
d. Net income will decrease but no change will occur in net accounts receivable.


20. Management uses the ageing approach method to calculate the allowance for doubtful debts.
An analysis of the ageing of accounts receivable shows a substantial increase in the accounts
receivable in the over-90-days category. Management does not adjust the allowance for doubtful
debts at year-end. As a result:
a. assets are overstated and net income is understated.
b. assets are understated and net income is understated.
c. assets are understated and net income is overstated.
d. assets are overstated and net income is overstated.

Chapter 6. Financial reporting principles, accounting standards and auditing
1. The letters GAAP stand for:
a. government approved accounting principles.
b. generally accepted accounting principles.
c. generally accepted audit principles.
d. generally accepted audit procedures.

2. Which accounting concept is involved in the requirement that financial statements contain
information that is useful to those who are making decisions?
a. Relevance
b. Reliability
c. Prudence
d. Comparability

3. The decision by a motor repair company to expense small tools immediately on acquisition
rather than depreciate them over their useful lives is an application of the concept of:
a. disclosure.
b. understandability.
c. materiality.
d. timeliness.

17

4. In December 2011, Superfoods was forced to destroy all its dairy inventory as a result of the
refrigeration system failing. In the annual report for the year ended 30 June 2012, published in late
August, a footnote revealed the loss. This is an example of the concept or principle of:
a. disclosure.
b. prudence.
c. consistency.
d. understandability.

5. The application of the lower of cost or market rule in valuing inventory is an example of:
a. disclosure.
b. consistency.
c. materiality.
d. prudence.

6. Which of the following statements about consistency is true?
a. The same accounting methods must be used from year to year, except where a change is
made and the impact on profit is disclosed.
b. The same accounting methods must be used as those used by other companies in the
industry.
c. A company has to use the same accounting methods in all parts of a company.
d. The same depreciation method should be employed for all assets of a company.

7. The agency empowered to prepare and issue accounting standards for the purposes of the
Corporations Act 2001 is the:
a. Australian Securities and Investments Commission.
b. Australian Accounting Standards Board.
c. Australian Accounting Research Foundation.
d. Australian Securities Exchange.

8. Which of the following statements about accounting regulation is NOT true?
a. One of the key functions of the Australian Accounting Standards Board is to oversee the
operation of the Financial Reporting Council.
b. The Australian Securities and Investments Commission monitors compliance with
accounting standards.
c. The Financial Reporting Council is responsible for providing broad oversight of the
accounting standard-setting process in the private and public sectors.
d. The Australian Securities and Investments Commission promotes honesty and fairness in
financial markets.

9. Which of the following are included in the corporate governance statement required under
stock exchange regulations?
(i) composition of audit committee
(ii) statement of ethical standards
(iii) procedures for identifying and managing business risks
a. (i) and (ii) only
b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii) and (iii)

10. Which of the following is NOT true? The external auditor's report provides the auditor's
opinion that:
a. the financial statements are in accordance with applicable accounting standards.
b. the financial statements give a true and fair view.
c. the financial statements are accurate.
d. the financial statements are in accordance with the provisions of the Corporations Act
2001.




18

11. The professional code of ethics of an accountant involves:
(i) behaving in a professional manner.
(ii) maintaining the level of expertise required in order to perform skilfully.
(iii) following procedures that will ensure that high standards of work are met.
a. (i) and (ii) only
b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii) and (iii)

12. Which of the following is an essential requirement for an asset to exist for accounting
purposes?
a. An asset must be under the control of the entity.
b. An asset must have been acquired at a cost to the entity.
c. An asset must be tangible.
d. An asset must have been exchanged for another asset.

13. Which of the following statements about a liability is true?
a. A liability arises when a business creates reserves for contingencies.
b. A liability results even if the entity can avoid the sacrifice of economic reasons.
c. A liability is restricted to being a legal debt.
d. A liability must result from a past transaction or event.

14. A liability should only be recognised in the financial statements when:
(i) reserves have been set aside by the entity.
(ii) the amount can be measured reliably.
(iii) it is probable that the future sacrifice of economic benefits will be required.
a. (i) and (ii) only
b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii) and (iii)

15. Which of the following items would be recognised as a liability?
a. Accumulated depreciation
b. Advances from customers for goods and services to be provided next year
c. The estimated cost of maintenance of plant deferred from this year to next year
d. Interest earned but not yet received

16. Which of the following is NOT true of capital markets?
a. Capital markets operate in conjunction with organisations that initially issue the securities.

b. Capital markets include trading in shares and other securities.
c. Capital markets operate somewhere in the world pretty much 24 hours a day.
d. Some bonds traded in capital markets carry the right to be converted into shares at the
option of the holder.

17. Systemic effects arise when:
a. the shares of a deceased estate are sold to enable a distribution to be made to
beneficiaries.
b. the takeover of a large public company is announced.
c. market-wide changes in share prices come from the economic system.
d. an announcement is made regarding the future prospects of a particular company.

18. Which of the following statements about capital markets is true?
a. Returns of high-beta stocks tend to vary less than overall market prices.
b. If the efficient market hypothesis were true, it would be impossible to make money in the
stock market.
c. Systematic risk refers to the risk arising from a firm's financing decision.
d. The efficient market hypothesis states that it is not possible to consistently 'beat the
market' by using publicly available information.

19

19. Which of the following is NOT a policy of stock exchanges?
a. To ensure that all persons investing in securities listed on the exchange have equal
access to information that may affect investment decisions
b. To enable companies to maximise profits
c. To protect investors and retain their confidence
d. To regulate the conduct of securities markets

20. Agency theory tends to focus on:
a. future-orientated decision making.
b. the decision-making role of accounting information.
c. the role of accountants.
d. the stewardship role of accounting information.

Chapter 7. Sustainability reporting

1. Sustainability management is concerned with:
a. maximising the net returns to shareholders.
b. maximising the net profits of the organisation.
c. reducing carbon emissions produced by the organisation.
d. the maintenance and long-term enhancement of an organisation's overall impact and health.

2. Which of the following statements regarding corporate sustainability is NOT true?
a. Corporate sustainability involves reducing and avoiding sustainability costs and risks.
b. Corporate sustainability is primarily concerned with maximising the returns to shareholders.
c. Corporate sustainability creates long-term value to shareholders.
d. Corporate sustainability manages risks from economic, social and environmental developments.

3. Which of the following is NOT disclosed in sustainability reports?
a. Accounting policies and estimates
b. Assessments of the impact on the local community
c. Policies and practices regarding sourcing from local suppliers
d. Initiatives to reduce greenhouse gas emissions

4. Disclosure of information in sustainability reports is determined by:
a. the Australian Securities Industry Commission.
b. company law reporting requirements.
c. the organisation's reporting.
d. accounting standards.

5. The Global Reporting Initiative sets out:
a. principles to measure and report economic, environmental and social performance.
b. how organisations should behave ethically in regard to carbon emissions.
c. guidelines on how to reduce carbon emissions.
d. principles to measure and report actions used to reduce carbon emissions.

6. Which of the following is an environment performance indicator?
a. Development and impact of infrastructure investments and services
b. Policy, practices and spending on locally based suppliers
c. Direct economic value generated
d. Total direct and indirect gas emissions

7. Which of the following is not a recent trend in sustainability reporting?
a. Corporate responsibility reporting guarantees that dividends will be paid to shareholders.
b. Corporate responsibility reporting has been combined with financial reporting.
c. Corporate responsibility reporting provides financial value.
d. Corporate responsibility reporting helps companies grow their businesses and increase their value.




20

8. The measurement and reporting of climate changerelated information is of use to
stakeholders to:
a. identify and evaluate sustainability issues.
b. measure the impact of the business operations on the environment.
c. understand the impact of the business operations on the environment.
d. evaluate the level of dividend they may receive.

9. Energy and greenhouse gas disclosure involves the reporting of:
a. energy greenhouse gas emissions and climate change information.
b. greenhouse gas emissions.
c. the organisation's commitment to managing the environment.
d. climate change information.
10. Which of the following approaches for measuring energy usage is NOT allowed by
international reporting standards?
a. Financial control approach
b. Operational control approach
c. Equity share approach
d. Proportionate share approach

11. The equity share approach:
a. reflects the authority to introduce and implement operating, environmental and health and safety
policies.
b. reflects the ability to direct financial policies to gain economic benefits.
c. is associated with an organisation's percentage ownership.
d. reflects the organisation's use of accounting standards in regard to sustainability reporting.

12. The indirect approach to the calculation of greenhouse emissions:
a. measures the energy used and emissions generated at the source.
b. uses default energy content and emission factors determined by an external body.
c. uses the measurement of energy used and emissions generated at the source by an external
independent body.
d. uses information from global sources to determine the average energy used and emissions
generated.

13. The direct approach to the calculation of greenhouse emissions:
a. uses information from global sources to determine the average energy used and emissions
generated.
b. uses default energy content and emission factors determined by an external body.
c. measures the energy used and emissions generated at the source.
d. uses the measurement of energy used and emissions generated at the source by an external
independent body.

14. Which of the following is NOT an example of an energy and fossil fuel emissions source?
a. Solid fuels
b. Liquid fuels
c. Gaseous fuels
d. Carbon capture and storage

15. An organisation has direct control over the amount of emissions it creates through:
a. use of electricity supplied by an electrical company.
b. its use of fuel to operate machinery.
c. outsourcing printing activities
d. An organisation does not have direct control over emissions.

16. The measurement of energy requires:
a. measuring the energy stored in that fuel.
b. evaluating the energy content of a particular fuel.
c. understanding how much fuel has been consumed or produced and how much energy is stored in
that fuel.
d. understanding how much fuel has been consumed.
21

17. The Energy Efficiency Opportunities Act requires:
a. large energy-using organisations to identify and evaluate cost-effective opportunities.
b. large energy-using organisations to evaluate and implement cost-effective opportunities.
c. that measures be evaluated and determined to reduce energy and greenhouse emissions.
d. None of these options companies are not required to reduce energy emissions

18. Which of the following does A Framework for Greenhouse Gas Reporting NOT recommend
be required?
a. Management discussion and analysis
b. An independent assurance statement
c. A statement of greenhouse gas emissions
d. Stand-alone sustainability reports

19. Absolute targets:
a. measure the efficiency of a process relative to its energy or emissions.
b. express the energy or emission reduction target to be achieved by an organisation.
c. are expressed as a reduction of a specific quantity of emissions or energy over time.
d. are expressed as a ratio, emissions or energy relative to another measure.

20. Integrated reporting:
a. reflects the commercial, social and environmental setting in which the organisation operates.
b. is additional information regarding energy emissions included in the direct report of an
organisation's annual statement.
c. includes a sustainability report regarding energy reduction and greenhouse emissions in an
organisation's annual report.
d. is an additional report to be prepared by organisations as required by accounting standards.

Chapter 8. Internal control and cash

1. Which of the following is NOT true of a sound system of internal control?
a. Implementation of controls involves costs.
b. A sound system of internal control is fundamental to the production of reliable financial reports.
c. A sound system of internal control is the responsibility of management.
d. All errors and irregularities should be eliminated.

2. Which of the following is NOT correct? An effective internal control system for any
organisation is one that:
a. prevents collusion between employees.
b. assists management in controlling the enterprise.
c. discourages inefficient use of resources.
d. helps management safeguard assets.

3. Segregation of duties involves:
a. physically protecting sensitive assets.
b. clearly establishing responsibility lines.
c. maintaining effective records.
d. separating record-keeping from handling of assets.

4. Which of the following is NOT a way that management can establish proper control over the
enterprise's affairs?
a. Insurance is carried on assets.
b. Staff are required to take annual leave.
c. Record-keeping is combined with handling of assets.
d. There is a rotation of employees through a range of jobs.

5. Which of the following is NOT a significant feature of a system of internal control over cash?
a. Bank reconciliation statements are prepared at regular intervals.
b. More than one person opens mail.
c. The person who does bank reconciliations should not be the cashier.
d. The staff member responsible for approving invoices for payment should sign cheques.
22


6. The statement that compares the balance as shown in the bank's records with the balance in
the cash at bank account at a particular date is known as the:
a. bank control account.
b. cash flow statement.
c. bank reconciliation statement.
d. bank statement.

7. Accompanying a bank statement was a debit memorandum for an NSF (not sufficient funds)
cheque received from a customer. What entry is required in the company's accounts?
a. DR Accounts receivable CR Cash
b. DR Other revenue CR Cash
c. DR Cash CR Other revenue
d. DR Cash CR Accounts receivable

8. In preparing a bank reconciliation statement for a business with a substantial bank balance,
the appropriate treatment for a deposit for $2300 not appearing on the bank statement is to:
a. deduct it from the balance per company records.
b. add it to the balance per bank statement.
c. deduct it from the balance per bank statement.
d. add it to the balance per company records.

9. In preparing a bank reconciliation statement for a business with a substantial bank balance,
the appropriate treatment for a customer's cheque for $135 that was returned because of insufficient
funds is to:
a. deduct it from the balance per company records.
b. add it to the balance per bank statement.
c. deduct it from the balance per bank statement.
d. add it to the balance per company records.

10. In preparing a bank reconciliation statement for a business with a substantial bank balance,
the appropriate treatment for a cheque for $259 in payment of a supplier's account that was
erroneously entered as $592 in the company's books is to:
a. deduct it from the balance per company records.
b. add it to the balance per bank statement.
c. deduct it from the balance per bank statement.
d. add it to the balance per company records.

11. In preparing a bank reconciliation statement for a business with a substantial bank balance,
the appropriate treatment for $650 that a customer paid directly into the company's bank account is
to:
a. deduct it from the balance per company records.
b. add it to the balance per bank statement.
c. deduct it from the balance per bank statement.
d. add it to the balance per company records.

12. In preparing a bank reconciliation statement for a business with a substantial bank balance,
the appropriate treatment for a receipt from an account receivable deposited directly into the bank
account of $3200 appearing on the bank statement is to:
a. deduct it from the balance per company records.
b. add it to the balance per bank statement.
c. deduct it from the balance per bank statement.
d. add it to the balance per company records.






23

13. Tell Ltd's bank statement showed a credit balance of $5000 at 30 November 2012. It also
showed bank service charges of $30 and the collection of a note for the company amounting to $600.
Unpresented cheques were $2100 and there was an outstanding deposit for $3000. What was the
final bank balance in Tell Ltd's ledger at 30 November 2012?
a. $4730 CR
b. $5270 DR
c. $5270 CR
d. $4730 DR CR.

14. For which of the following adjustments would NO journal entry be required following
completion of the bank reconciliation?
a. Error by the company
b. Error by the bank
c. Note collected by the bank
d. NSF cheque

15. In preparing the monthly bank reconciliation, Jon Ltd ascertains that there is a note collected
by the bank for $600 and an interest on overdraft charge of $75. Outstanding cheques total $2600
and there is a deposit in transit for $1700. It will be necessary to make journal entries for:
a. the outstanding cheques of $2600 and the deposit in transit of $1700.
b. the note collected for $600 and the interest charge of $75.
c. only the interest on overdraft charge of $75.
d. the note collected for $600, the interest charge of $75 and outstanding cheques of $2600.

16. Which of the following items would require a journal entry following preparation of the bank
reconciliation statement?
a. Unpresented cheques at end of the month
b. Receipts not yet banked
c. Error by the company
d. Error by the bank

17. The debit recorded in the journal to reimburse the petty cash fund is to:
a. various accounts for which the petty cash was disbursed.
b. petty cash.
c. accounts receivable.
d. cash.

18. Which of the following is NOT a common feature of a petty cash system?
a. When the fund is replenished, petty cash is credited.
b. Cash in the fund plus vouchers held equals the amount advanced to the petty cashier.
c. When the fund is replenished, the expenses account is debited.
d. When the fund is replenished, the cash account is credited.

19. On 30 June 2012, the petty cash fund of Rusty Ltd was replenished when the count of petty
cash on hand totalled $100. Vouchers revealed that postage expenses of $70 had been incurred. The
journal entry to record replenishment was:
a. DR Postage expense $30 CR Petty cash $30
b. DR Postage expense $30 CR Cash $30
c. DR Petty cash $30 CR Cash $30
d. none of the above.

20. The purpose of preparing a bank reconciliation statement is to:
a. check up on the bank.
b. check up on the business.
c. determine the cash on hand.
d. All of these choices




24

Chapter 9. Inventory

1. Which of the following statements about the perpetual inventory control method is NOT true?
a. A separate record is kept for each item of inventory.
b. An inventory count can reveal inventory losses.
c. When inventory is purchased, it is treated as an expense.
d. When a sale is made, two journal entries are required.

2. The perpetual accounting control method has which of the following advantages over the
periodic count method?
a. Details of the number of items on hand is available.
b. A physical count is not required.
c. Stock shortages are eliminated.
d. The cost of operation is lower.

3. It is necessary to use a purchases account with:
a. only the perpetual accounting control method.
b. only the periodic count method.
c. both the periodic count and the perpetual accounting control methods.
d. either method, if the system designer has included it in the chart of accounts.

4. During the year ended 30 June 2012, Rico Ltd had net sales of $800 000 and net purchases
of $340 000. Cost of goods sold was $510 000. What was Rico Ltd's gross profit for the year ended
30 June 2012?
a. $460 000
b. $290 000
c. $510 000
d. $340 000

5. A company discovered that inventory that cost $1500 and normally sells for $1800 has
become obsolete and will be scrapped next month. The effect of the adjusting journal entry is to:
a. decrease profit by $1500 and decrease total assets by $1500.
b. decrease profit by $1800 and decrease total assets by $1500.
c. decrease profit by $1800 and decrease total assets by $1800.
d. decrease profit by $1500 and not affect total assets.

6. The closing entry to close beginning inventory using the periodic method is:
a. DR Inventory CR Profit and loss summary
b. DR Purchases CR Inventory
c. DR Profit and loss summary CR Inventory
d. DR Cost of goods sold CR Inventory

7. A cost of goods sold account is used in:
a. the periodic system only.
b. both the periodic and the perpetual systems.
c. the perpetual system only.
d. either system if provision has been made in the chart of accounts.

8. The following information relates to Moderate Ltd:
$
Net sales 450,000
Beginning inventory 70,000
Ending inventory 55,000
Cost of goods sold $310,000
What were the purchases for the period?
a. $325 000
b. $295 000
c. $310 000
d. $255 000

25


9. The following details relate to a perpetual inventory system:
$
Purchases on credit 650,000
Cost of goods sold 978,000
Inventory at end 190,000

What was the value of opening inventory?
a. $328 000
b. $650 000
c. $1 168 000
d. $788 000

10. The following lots of a particular commodity were available for sale during the year:
Beginning inventory 10 units at $50
First purchase 25 units at $55
Second purchase 30 units at $60
Third purchase 15 units at $75

The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the
year. What is the amount of inventory at the end of the year, according to the first-in, first-out method?
a. $1050
b. $2850
c. $1425
d. $1125

11. Which, if any, of the following cost flow assumptions is NOT affected by the inventory control
method employed; that is, periodic or perpetual?
a. LIFO
b. Weighted average cost
c. FIFO
d. Moving weighted average cost

12. Which of the following statements about the use of the weighted average assumption is true?
a. When prices are falling, it shows lower balance sheet figures than the FIFO method.
b. The balance sheet figure is between the LIFO and FIFO figures.
c. When prices are rising, it shows lower balance sheet figures than the LIFO method.
d. The weighted average cost is recalculated after each transaction.

13. A company purchases and sells Roofoo. It began last year with 5 units of Roofoo on hand at
a cost of $10 each, and during the year its purchases and sales were as follows:
Date Units purchased Units sold Units on hand Purchase price
July 1 - - 100 $10
Sept 10 100 - 200 $20
Dec 20 - 120 80 -
Mar 3 200 - 280 $30
June 10 - 230 50

What was the value of cost of goods sold of Roofoo, using the annual weighted average in a periodic
inventory system?
a. $6000
b. $750
c. $15
d. $5250





26

14. Diligent Ltd had 10 units of the commodity Algo on hand at 1 September 2012. The following
purchases and sales were made during September:
Opening Balance Purchases Sales
September 110 units @ $200 September 310 units @ $240 September 714 units
September 126 units @ $260 September 2710 units
September 2512 units @ $200

What was the value of ending inventory of Algo, using the FIFO assumption?
a. $2920
b. $2800
c. $2400
d. $3000

Opening Balance Purchases Sales
September 110 units @ $200 September 310 units @ $240 September 714 units
September 126 units @ $260 September 2710 units
September 2512 units @ $200

What was the value of ending inventory of Algo, using the LIFO assumption?
a. $2920
b. $3000
c. $2400
d. $2800

16. A company has four products and has 100 units of each in stock. The cost and net realisable
value of each of the products are:
Product Cost NRV
$ $
V 100 8
X 80 7
Y 80 9
Z 50 10

The value of inventory in the balance sheet should be:
a. $31 000.
b. $34 000.
c. $28 000.
d. $37 000.

17. Which of the following would produce the highest net profit in periods of falling prices if
inventory levels are not decreasing?
a. FIFO
b. LIFO
c. Weighted average
d. Moving weighted average cost

18. Raw materials of inventory were purchased on credit for $200 000 on 10 June. The company
uses the perpetual method. This transaction will:
a. increase assets and increase liabilities.
b. increase assets, liabilities and shareholders' equity
c. increase assets and liabilities but reduce shareholders' equity.
d. increase liabilities but have no effect on assets or shareholders' equity.


19. Inventory with a value of $450 000 was written down to $300 000 in June 2012 because of
falling prices in the industry. This transaction will:
a. decrease assets and shareholders' equity but not profit.
b. decrease assets, profit and shareholders' equity.
c. decrease assets and decrease shareholders' equity.
d. decrease assets and profit, but not shareholders' equity.
27

Chapter 10. Noncurrent assets

1. Which of the following would NOT be included in the cost of a new building?
a. Building insurance
b. Demolition of old building
c. Excavation costs
d. Installation costs

2. A used machine with a purchase price of $120 000, and requiring alterations costing $12 000,
installation costs of $5000 and testing costs of $3000, would have a cost basis of:
a. $120 000.
b. $140 000.
c. $128 000.
d. $137 000.

3. Consider the following transactions:
(i) Equipment with a book value of $120 000 is sold for $150 000 cash.
(ii) Land is revalued upwards from $300 000 to $380 000. The land has not previously been revalued
downwards.
Which of the above transactions increases or decreases profits?
a. (i) and (ii) only
b. (i) only
c. (ii) only
d. Neither of the transactions

4. Which of the following is NOT depreciated under GAAP?
a. An office building
b. A computer
c. A motor vehicle
d. Land

5. The purpose of depreciation is to:
a. measure the current value of assets in the balance sheet.
b. allocate cost in order to measure profit.
c. track value changes in the assets.
d. record the fair value of the asset.

6. Jacques Ltd purchased a computer for $5000 on 1 July 2010. It had an estimated useful life
of 3 years. It was depreciated using the straight-line method. What was the balance of accumulated
depreciation at 30 June 2012?
a. $2000
b. $4000
c. $3000
d. $5000

7. On 1 January 2012, a new motor vehicle with a useful life of 5 years and an estimated trade-
in value of $10 000 was purchased by a business for $60 000. The straight-line method is employed.
What was the depreciation expense for the year ended 30 June 2012?
a. $510 000
b. $5000
c. $15 000
d. $6000







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8. Creep Ltd purchased a machine for $120 000 on 1 July 2010. It has an estimated useful life of
8 years and a residual value $10 000. Creep Ltd's financial period ends on 30 June. The machine was
depreciated using the reducing balance method at 25%. What was the depreciation expense for the
year ended 30 June 2012?
a. $30 000
b. $27 000
c. $27 500
d. $20 625

9. A building with a cost of $500 000, an estimated residual value of $50 000 and an estimated
useful life of 20 years was depreciated by the straight-line method for 10 years. In the 11th year, it
was determined that the useful life should be extended by 10 years (that is, from 20 years to 30
years). The residual value was to remain the same. The depreciation expense for the current and
future years is:
a. $13 750
b. $15 000
c. $11 250
d. $12 500

10. Squires Ltd purchased equipment for $80 000 on 1 July 2011. It had an estimated life of 500
000 units and scrap value of $20 000. The machine was depreciated using the units of production
method. The financial period of Squires Ltd ends on 30 June. The estimated number of kilometres
travelled was 25 000. What was the depreciation expense for the year ended 30 June 2012?
a. $4000
b. $5000
c. $2500
d. $80 000

11. A company purchases equipment on 1 January 2012. The following costs are incurred:
$
Cost of equipment 70,000
Delivery freight 5,000
Installation costs for the equipment 15,000
Testing of the equipment 10,000
Annual insurance 2,000

The equipment has an estimated life of 5 years and no salvage value. What is the depreciation
expense in 2012 if the straight-line method is used?
a. $20 400
b. $14 000
c. $20 000
d. $18 000

12. When a company discards machinery that is fully depreciated, this transaction will be
recorded with which of the following entries?
a. DR Depreciation expense CR Accumulated depreciation
b. DR Accumulated depreciation CR Machinery
c. DR Machinery CR Accumulated depreciation
d. DR Cash CR Accumulated depreciation

13. Equipment that cost $500 000 and had accumulated depreciation of $300 000 was sold for
$220 000. This results in a:
a. $320 000 loss.
b. $20 000 loss.
c. $180 000 gain.
d. $20 000 gain.



29

14. A truck that cost $300 000 and had accumulated depreciation of $216 000 was sold for $60
000 cash in June 2012. This transaction will:
a. decrease assets and decrease profits.
b. decrease assets and increase profits.
c. increase assets and decrease profits.
d. increase assets and increase profits.

15. Equipment with a cost of $30 000 and accumulated depreciation of $25 000 was sold for
$3400. The journal entry to record the disposal would include:
a. CR Cash, $3400
b. CR Loss on sale, $1600
c. DR Accumulated depreciation, $25 000
d. CR Equity $30 000

16. Which of the following assets can be revalued upwards
a. Small tools
b. Deferred charges
c. Buildings
d. Goodwill

17. Which of the following statements about the capitalisation of goodwill is true?
a. Neither internally generated nor purchased goodwill may be capitalised.
b. Internally generated goodwill is never capitalised, but purchased goodwill is capitalised.
c. Internally generated goodwill may be capitalised, but purchased goodwill is never capitalised.
d. Both internally generated and purchased goodwill may be capitalised.

18. ABC Ltd acquires all the business assets and liabilities of Sails Ltd for $600 000 cash. The
best estimates of the fair market values of the assets and liabilities are:
$
Receivables 36,000
Payables 41,000
Inventories 75,000
Property 320,000
Equipment 160,000

What is the value of goodwill acquired by ABC Ltd?
a. $480 000
b. $70 000
c. $50 000
d. $550 000

19. Which of the following statements regarding leased assets is NOT correct?
a. The cost of the lease asset is not recorded in the balance sheet.
b. The principal portion is deducted from the lease and the interest is an expense.
c. The expenses for using the leased asset are amortisation and interest.
d. Lease assets are amortised.

20. Which of the following do NOT need to be disclosed in financial statements?
a. Details concerning revaluation
b. Reasons for assets not being revalued
c. Cost and accumulated depreciation by major classes of assets
d. A description of the enterprise's accounting policies with respect to depreciation/amortisation








30

Chapter 11. Liabilities

1. Which of the following is a liability?
a. Accrued revenue
b. Revenue received in advance
c. Prepayments
d. Accumulated depreciation

2. Which of the following is NOT a liability?
a. Reserves
b. Provision for warranty
c. Accrued expenses
d. Revenue received in advance

3. When unearned revenue increases:
a. an expense decreases.
b. revenue increases.
c. cash increases.
d. an expense increases.

4. Which of the following is NOT true? When a liability increases:
a. another liability may decrease.
b. expenses may increase.
c. cash may increase.
d. expenses may decrease.

5. Future warranty costs related to this year's sales will appear in the balance sheet under:
a. a contingent liability in the notes to the accounts.
b. a contingent liability on the balance sheet.
c. a provision on the balance sheet.
d. an accrual on the balance sheet.

6. Amounts owing to an accounting company as per an invoice received would appear on the
balance sheet as:
a. contingent liability.
b. accounts payable.
c. accruals.
d. provisions.

7. Dividends declared but not yet paid would be included under:
a. contingent liability.
b. accounts payable.
c. accruals.
d. provisions.

8. Which of the following items would NOT be recognised as a liability?
a. A dispute with a customer where there is some possibility that the company could lose the dispute
b. Advances from customers for goods and services to be delivered later
c. Warranty on products sold during the year
d. Final dividend recommended by directors, prior to the annual meeting

9. An employee earns $1200 a week and the following deductions are made: income tax $300,
superannuation $50 and union dues $10. The journal entry to record this transaction would include:
a. DR Union dues due, $10
b. DR Wages expense, $900
c. DR Wages expense, $1200
d. CR Wages payable, $1200



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10. Lord Ltd borrowed $100 000 from the bank at an interest rate of 6% on 1 January 2012. The
balance sheet at 30 June 2012 would show:
a. a current liability of $6000.
b. accrued interest of $500.
c. a noncurrent liability of $94 000.
d. a current liability of $3000.

11. On 1 January 2012, Jonestown Limited issued $100 000 10-year bonds with a 10% coupon
rate paid semi-annually. The bond is issued to yield a 12% return to investors selling for $88 529.
What would be the debit journal entry to record the sale of the bond on 1 January 2012?
a. DR Bonds, $88 529
b. DR Cash, $88 529
c. DR Cash, $100 000
d. DR Bonds, $100 000

12. The auditors informed the company that the provision for long service leave was understated
by $46 000 at 30 June 2012 and that the account should be adjusted. The company adjusted the
account so that:
a. profit increases but there is no effect on liabilities.
b. there is no effect on either profit or liabilities.
c. liabilities increase and profit decreases.
d. liabilities increase but profit is unaffected.

13. Stingray has been sued by a competitor for a potential copyright infringement. Legal advice is
uncertain over the likelihood of the success of the claim and the likely damages, if any. It would be
shown as:
a. a contingent liability on the balance sheet.
b. a contingent liability in the notes to the accounts.
c. an accrual on the balance sheet.
d. a provision on the balance sheet.

14. A contingent liability should be shown by way of a note to the accounts when:
a. there is significant uncertainty as to whether a sacrifice of future economic benefits will be required
and the amount of the obligation cannot be measured reliably.
b. estimation procedures were necessary to determine its amount.
c. there is significant uncertainty as to whether a sacrifice of future economic benefits will be
required.
d. the amount of the obligation cannot be measured reliably.

15. When a business acquires the right to use property by way of a finance lease, it will record on
the balance sheet as:
a. a footnote only.
b. an asset only.
c. an asset and a liability.
d. neither an asset nor a liability.

16. Which of the following statements relating to a finance lease is NOT true?
a. The present value of future lease payments is recorded as a liability.
b. Finance leases are not reported in the balance sheet.
c. The leased asset is amortised.
d. All risks and benefits incidental to ownership are substantially transferred to the lessee.








32

17. An operating lease is a 3-year lease commencing on 1 January 2012 with payments of $20
000 on 31 December in each of the 3 years. Assume the lease had been treated as a capital lease
instead of an operating lease (using a 12% discount rate, the present value of the lease payments is
$48 036; the company uses straight-line depreciation for its capital leases). If the lease is treated as a
capital lease, what would be the total expense reported in 2009 related to the lease?
a. $32 024
b. $20 000
c. $16 012
d. $21 776

18. When a business collects GST from customers, it records:
a. an asset.
b. a contra asset.
c. a liability.
d. an expense.

19. Cummins Ltd provides a service on credit, charging $3000 + $300 GST. The journal entry
would include:
a. DR Accounts receivable, $3000
b. CR Sales, $3000
c. DR GST payable, $300
d. CR Sales, $3300

20. A retailer buys 100 desks at $990 each (including GST of $90) and sells all of them for $1320
each (including GST of $120). How much needs to be remitted to the Tax Department?
a. $3000
b. $12 000
c. $3000
d. $21 000

Chapter 12. Completing the balance sheet

1. Acme Ltd acquired short-term investments for $200 000 on 31 May 2012. By 30 June 2012
(balance sheet date), the market value had slipped to $175 000. Briar Ltd uses the lower of cost or
net realisable value rule. How would the reduction in value of $25 000 be recorded in the accounts for
year ended 30 June 2012?
a. the transaction would not be recorded.
b. as an expense
c. as a charge against retained profits
d. as a reduction in share capital

2. When the cost method of accounting for long-term investment in shares is employed, the
receipt of a dividend on those shares is recorded as a credit to:
a. dividend declared
b. retained profits.
c. dividend revenue
d. the investment asset

3. Beta buys a 25% share in XYZ for $100m. XYZ's total net profit is $40m and it pays $2m in
dividends to Beta. Using the cost method, what would be the revenue and investment amounts at
year-end for this investment?
a. $2m, $100m
b. $2m, $102m
c. $10m, $100m
d. $10m, $110m




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4. Beta buys a 25% share in XYZ for $100m. XYZ's total net profit is $40m and it pays $2m in
dividends to Beta. Using the equity method, the revenue recognised for this investment during the
year would be:
a. $2m
b. $10m
c. $40m
d. $0

5. On 1 January 2012, Leon Ltd acquired 100 000 shares (30% of the voting interest) in Outback
Ltd for $600 000 cash. On 30 June 2012, Outback Ltd announced its earnings per share for the first 6
months of 2012 at $1.50 per share. On 20 November, Outback Ltd paid dividends to shareholders at
$0.90 per share. On 31 December 2012, Outback Ltd announced its earnings per share for 2012 at
$2.80 per share (i.e., $1.30 additional since 30 June).

If Leon Ltd used the cost basis, what was the balance sheet value of investment in Outback Ltd at 31
December 2012?
a. $510 000
b. $600 000
c. $690 000
d. $880 000.

6. On 1 January 2012, Leon Ltd acquired 100 000 shares (30% of the voting interest) in Outback
Ltd for $600 000 cash. On 30 June 2012, Outback Ltd announced its earnings per share for the first 6
months of 2012 at $1.50 per share. On 20 November, Outback Ltd paid dividends to shareholders at
$0.90 per share. On 31 December 2012, Outback Ltd announced its earnings per share for 2012 at
$2.80 per share (i.e., $1.30 additional since 30 June).

If Leon Ltd used the equity basis, what revenue would it record for the year ended 31 December 2012
in respect of its investment in Outback Ltd?
a. $90 000
b. $150 000
c. $190 000
d. $280 000.

7. Harry has control over another entity, Colours; Colours is referred to as the:
a. associate entity
b. minority interest.
c. subsidiary entity
d. economic entity

8. Which of the following is NOT omitted from the consolidated accounts?
a. intercompany sales
b. credit sales of the subsidiary
c. debt owing to parent company by subsidiary company
d. management fees charged to the subsidiary by the parent company

9. Glama Ltd paid $1 000 000 for 80% of the voting shares of Deon Ltd, and evaluated Deon's
assets to be worth $1 500 000 and its liabilities $300 000. What was the goodwill on consolidation at
the date of acquisition?
a. $40 000
b. $100 000
c. $75 000.
d. It cannot be determined from the above information






34

10. Which of the following are NOT eliminated in the preparation of consolidated financial
statements?
a. assets of the subsidiary
b. intercompany payables
c. the account for the parent company's investment in the subsidiary
d. intercompany sales and expenses

11. Springtown Ltd issued 10 000 ordinary shares for $5.00 each, payable $2 on application,
$1.50 on allotment and 0.50 cents in calls as required. The journal entries to record the allotment of
10 000 shares would include a:
a. credit to cash, $15 000
b. debit to allotment, $20 000
c. credit to share capital, $10 000
d. credit to share capital, $15 000

12. The journal entry to record the amount due on application would include:
a. DR Share capital, $110 000
b. DR Share capital, $110 000
c. CR Application, $110 000
d. CR Share capital, $150 000

13. The entry to create a general reserve is usually:
a. DR Profit and loss CR General reserve
b. DR General reserve CR Retained profits
c. DR Retained profits CR General reserve
d. DR Expense CR General reserve

14. Which of the following statements about the general reserve account is NOT true?
a. The general reserve account provides an indication of where funds are invested.
b. The general reserve account appears under shareholders' equity in the balance sheet
c. A transfer to this account may be used to indicate to shareholders that it is unlikely to be paid out
in dividends.
d. Funds can be transferred back from it to retained profits.

15. A debit balance in the retained profits account indicates that the company has:
a. made a loss in the current period
b. paid a dividend
c. made a loss in at least one period
d. never made a profit

16. Neerim Ltd declared an interim dividend on 12 February 2012 of 5 cents per share (500 000
issued shares) and paid it on 3 March 2012. The journal entry on 3 March 2012 would include:
a. CR Interim dividend payable, $25 000
b. CR Retained profits, $25 000.
c. DR Interim dividend declared, $25 000
d. CR Cash, $25 000

17. Cash dividends may NOT be paid out of:
a. general reserve
b. share capital
c. this year's profit
d. previous years' profits.

18. Bonus share issues may increase:
a. dividends
b. total shareholders' equity
c. total liabilities
d. total assets


35

19. Which of the following statements about a bonus issue is NOT true?
a. Total shareholders' equity remains constant
b. If a shareholder owned 15% of the company before the bonus issue, she or he would still own 15%
after the bonus issue.
c. Shareholders will only gain if the market value of the combined shares is greater than it was before
the bonus issue.
d. The total value of the firm must increase.

20. Share splits increase:
a. the number of shares on issue
b. total shareholders' equity
c. total assets
d. total liabilities

Chapter 13. Revenue and expense recognition: additional concepts

1. Revenue should be recognised when:
(i) it can be reasonably measured in dollar terms.
(ii) cash, a promise of cash, or other asset, has been received.
(iii) most of the costs of generating the revenue have been incurred, and those remaining can be
measured with reasonable accuracy.
a. (i) and (ii) only
b. (i) and (iii) only
c. (i), (ii) and (iii)
d. (ii) and (iii) only

2. Revenue should not be recognised unless:
a. it is certain that the goods will not be returned.
b. the amount can be reasonably measured.
c. the goods have been paid for.
d. the warranty period has expired.

3. Under which of the following circumstances would revenue normally be recognised?
a. A customer pays for goods in advance of production.
b. The business makes a cash purchase of merchandise.
c. The business makes a cash sale of merchandise.
d. A customer pays an overdue account.

4. Which of the following statements about the percentage of completion method of revenue
recognition is NOT true?
a. The percentage of completion method is more conservative than the completion of production
method.
b. The percentage of completion method reflects the economics of what is happening.
c. Total costs must be reasonably determinable.
d. The use of this method requires considerable judgement.

5. Which of the following is one of the key criteria that must normally be met in order that
revenue may be recognised?
a. All costs of generating the revenue must have been paid in full.
b. The amount of revenue can be precisely measured in dollar terms.
c. The economic benefit will probably flow to the seller.
d. Cash must have been received.







36

6. Multi-Storey Builders Ltd had a large 3-year project with total revenue of $9 600 000 and
estimated total costs of $7 800 000. The project was 25% complete at the end of the first year, 50%
complete at the end of the second year and 100% complete at the end of the third year. Revenues
and costs were as estimated. What profit was earned during the first year if the percentage of
completion method was used?
a. $450 000
b. $1 550 000
c. $2 400 000
d. $3 100 000

7. Complete Constructions Ltd had a large 3-year project with total revenue of $5 000 000 and
estimated total costs of $4 200 000. The project was 25% complete at the end of the first year, 55%
complete at the end of the second year and 100% complete at the end of the third year. Revenues
and costs were as estimated. What profit was earned during the first year if the percentage of
completion method was used?
a. $250 000
b. $800 000
c. $240 000
d. $200 000

8. Which of the following statements about the concept of revenue is true?
a. Estimates are not permitted in the measurement of revenue.
b. An inflow of future economic benefits may be considered revenues.
c. Contributions by owners may be considered revenues.
d. Revenue cannot be measured at fair value of the amount receivable.

9. Complete Constructions Ltd had a large 3-year project with total revenue of $5 000 000 and
estimated total costs of $4 200 000. The project was 25% complete at the end of the first year, 55%
complete at the end of the second year and 100% complete at the end of the third year. Revenues
and costs were as estimated. What profit was earned during the third year if the completion of
production method was used?
a. $440 000
b. $800 000
c. $400 000
d. $360 000

10. On 1 January 2010, Peter Ltd signed a contract worth $128 000 000 to construct a basketball
stadium. The stadium was to be built over 3 years, with progress payments as follows:
$
31 December 2010 $30,000,000
31 December 2011 $40,000,000
31 December 2012 $58,000,000

Estimated costs were $100 000 000. The project was 35% complete at the end of 2010, 75%
complete at the end of 2011 and 100% complete at the end of 2012. Revenues and costs were as
estimated. What profit was earned during 2012 if the percentage of completion method was used?
a. $7 000 000
b. $11 200 000
c. $12 687 500
d. $28 000 000










37

11. Toy Company manufactures toy koalas. Transactions for the year 2012 were as follows:
(i) 12 000 koalas were manufactured at a cost of $30 each
(ii) 10 000 koalas were sold for $50 each
(iii) Cash was collected on 6000 of the items sold

What was the reported profit for the year 2012 if revenue was recognised at the point of sale?
a. $140 000
b. $120 000
c. $200 000
d. $320 000

12. Holidays Ltd manufactures caravans. Transactions for the year ended 30 June 2012 were as
follows:
(i) 600 caravans were manufactured at a cost of $15 000 each
(ii) 500 caravans were sold for $20 000 each
(iii) Cash was collected on 475 of the caravans sold

What was the reported profit for the year ended 30 June 2012 if revenue was recognised when cash
was received?
a. $2 500 000
b. $3 000 000
c. $5 000 000
d. $2 375 000

13. At what point would you expect revenue from sales of software by a computer store to be
recognised?
a. When cash is received
b. At point of sale or delivery
c. During production
d. On completion of production

14. Which of the following transactions may NOT give rise to revenues?
a. Disposing of assets for book value
b. Receiving government grants
c. Forgiveness of liabilities
d. Cash received for services provided

15. Happy Days Company had the following transactions, among others, during August. Which
transaction represented an expense during August?
a. It paid dividend to shareholders.
b. It purchased $750 of repairs on account for the delivery truck; account will be paid during
September.
c. It paid $5600 in settlement of a loan obtained 3 months earlier.
d. It paid $1500 for advertising performed in June.

16. When research and development costs are incurred in the expectation of future benefits, but it is
not possible, at the reporting date, to establish that it is probable that future economic benefits will
eventuate, then:
a. the costs should be recognised as expense prior to recognition of revenues.
b. no action should be taken.
c. the costs should be recognised as an asset.
d. the costs should be recognised as expense together with estimated revenue.







38

17. Julienne Ltd decided to change its accounting for long service leave in order to accrue expense
sooner than had been done previously. The effect on provision for employee entitlements as at the
end of 2011 was to increase it by $17 500. By the end of 2012, the liability would go up by $24 000.
The company's income tax rate is 30%. What would be the effect of the change on 2012 net profit?
a. It would be $16 800 higher.
b. It would be $16 800 lower.
c. It would be $24 000 higher.
d. It would be $24 000 lower.

18. The profit for a particular project of Grenadier Ltd, using the percentage of completion method,
was $470 000 for year 1 and $690 000 for year 2 (completion). What difference would there be to
profit for year 1 if the completion of production method was used?
a. Profit would be $470 000 higher.
b. Profit would be $470 000 lower.
c. There would be no difference.
d. It cannot be determined from the above information.

19. The income statement of Barbies Ltd is:
$
Revenue 22,000
Expense 12,000
Profit before income tax 10,000
Income tax expense (30%) 3,000
Net profit 7,000

If revenue decreased by 10%, with no effect on expenses other than income tax, what would be the
effect on net after-tax profit?
a. It would increase by $2200.
b. It would decrease by $2200.
c. It would increase by $1540.
d. It would decrease by $1540.

20.n Caravelle Ltd has found an error in its revenue account: an invoice for $6600 was recorded as
revenue in 2011 when it should have been recorded in 2012. The company's income tax rate is 30%
and there was no corresponding error in cost of goods sold. What is the effect of the error on the 2012
net profit?
a. It is $6600 too high.
b. It is $1980 too high.
c. It is $1980 too high.
d. It is $6600 too low.

Chapter 14. The statement of cash flows

1. Which of the following, if repeated for several consecutive years, would indicate financial
distress?
a. Negative net financing cash flows
b. Negative net operating cash flows
c. Positive net investing cash flows
d. Negative net investing cash flows

2. Which of the following transactions does NOT involve a cash flow?
a. Issue of bonus shares
b. Prepayment of insurance
c. Issue of shares
d. Revenue received in advance





39

3. Which of the following is an operating cash flow?
a. Purchase of equipment
b. Repayment of a loan
c. Taxes paid
d. Issue of shares

4. Which of the following is NOT an investing cash flow?
a. Purchase of another company
b. Repayment of debentures
c. Proceeds from the sale of equipment
d. Purchase of shares on the stock market

5. What effect does increasing depreciation expense have on cash flows?
a. It increases operating cash flows.
b. It decreases operating cash flows.
c. It decreases investing cash flows.
d. It has no effect.

6. Use the following information to answer questions 6 and 7.

During the year, Penso Ltd received $60 000 from its customers, $7000 for the sale of a motor vehicle
and $50 000 for the issue of shares. It paid $34 000 to suppliers and employees, $4000 for income
tax and $40 000 for new machinery. In addition, it paid out $8000 to redeem bonds. Its cash balance
at the commencement of the year was $12 000.

What were the cash flows from operating activities?
a. $25 000
b. $17 000
c. ($5000)
d. $22 000

7. What were the cash flows from investing activities?
a. ($13 000)
b. ($35 000
c. ($43 000)
d. ($45 000)

8. Determine the cash received from customers on account during July, based on the following
data:
$
Accounts receivable account balance, July 1 $11,100
Accounts receivable account balance, July 31 $9,600
Credit sales during July $48,000

a. $38 400
b. $48 000
c. $49 500
d. $46 500

9. If a gain of $20 000 is incurred in selling machinery that has a book value of $75 000, the total
amount reported in the cash flows from the investing activities section of the statement of cash flows
is:
a. $50 000.
b. $55 000.
c. $95 000.
d. $75 000.



40

10. The cost of merchandise sold during the year was $30 000. Merchandise inventories were
$9000 and $10 500 at the beginning and end of the year, respectively. Accounts payable were $6000
and $5000 at the beginning and end of the year, respectively. Using the direct method of reporting
cash flows from operating activities, cash payments for merchandise would total:
a. $32 500.
b. $31 000.
c. $29 000.
d. $30 500.

11. The net profit reported on the income statement for the current year was $76 000.
Depreciation on property, plant and equipment and amortisation of goodwill were $8000 and $2000,
respectively. What is the amount of cash flows from operating activities that would appear on the
statement of cash flows prepared using the indirect method?
a. $56 000
b. $75 000
c. $96 000
d. $94 000

12. The following information is taken from the accounts of Registration Ltd for the year ended 30
June 2012.
$
Accounts receivable, 1 July 2011 $67,000
Allowance for doubtful debts, 1 July 2011 $20,000
Allowance for doubtful debts, 30 June 2012 $6,000
Credit sales $290,000
Cash sales $210,00
Bad debts expense $18,000

What was the value of debts written off as irrecoverable during the year?
a. $18 000
b. $14 000
c. $25 000
d. $6000

13. The prepaid insurance account showed an opening balance of $12 500 and a closing balance
of $10 000. Insurance expense was $37 000. What was the cash payment for insurance?
a. $37 000
b. $27 000
c. $34 500
d. $39 500

14. The wages payable account showed an opening balance of $8400 and a closing balance of
$17 100. Wages expense was $260 000. What was the cash payment for wages?
a. $251 300
b. $285 500
c. $242 900
d. $260 000













41

15. The following information was taken from the accounts of Rex Ltd:
$
Prepaid expenses, 1 July 2011 $85,000
Prepaid expenses, 30 June 2012 $100,000
Expenses payable, 1 July 2011 $25,000
Expenses payable, 3o June 2012 $20,000
Total expenses incurred year ended 30 June 2012 (including depreciation $75 000) $375,000

What were the cash payments for expenses year ended 30 June 2012?
a. $440 000
b. $470 000
c. $395 000
d. $450 000

16. Consecutive balance sheets of Crow Ltd showed the following balances:

30 June 2012 30 June 2011
Land $850,000 $500,000
Asset Revaluation Reserve $150,000 -

During the year ended 30 June 2012, land was revalued upwards by $150 000 and $120 000 was
borrowed to acquire land. What was the value of land purchased for cash?
a. $80 000
b. $270 000
c. $200 000
d. $350 000

17. Dividends of $50 000 were declared during the year, and the balances in the dividends
payable account at the beginning and end of the year were $7500 and $12 500, respectively. What
amount would be reported as payment of dividends in the cash flows from the financing activities
section of the statement of cash flows?
a. $45 000
b. $55 000
c. $50 000
d. $37 500

18. Which of the following statements about the indirect method of presenting cash flow from
operations is NOT true?
a. Depreciation expense is added back to operating profit in the indirect method.
b. Decreases in accounts payable are deducted from operating profit in the indirect method.
c. The direct and indirect methods give the same cash flow from operations.
d. Australian companies do not need to report information about the indirect method.

19. Which of the following is NOT added back to net income to obtain cash flow from operations?
a. Gain on sale of investment
b. Depreciation
c. Decrease in accounts receivable
d. Increase in accounts payable

20. The net operating profit of Imagination Ltd was $31 000. Depreciation expense was $10 000
and gain on sale of equipment was $2000. Accounts receivable increased by $15 000 and inventory
decreased by $7000. Accounts payable decreased by $8000. What was the cash flow from
operations?
a. $25 000
b. $47 000
c. $23 000
d. $39 000



42

Chapter 15. Financial statement analysis

1. Which of the following statements about a ratio is NOT true?
a. A ratio is always expressed as a percentage.
b. A ratio has little meaning on its own.
c. A ratio can be interpreted and used meaningfully only with a good understanding of the company
d. Ratios are indicators that can be interpreted.

2. Which of the following is NOT true of common size statements?
a. Common size statements enable trends over time for a single company to be detected.
b. Common size statements assist in comparing companies of different sizes.
c. All figures in the income statement are expressed as a percentage of operating profit before tax. d.
All balance sheet figures are expressed as a percentage of total assets.

3. Sales of TopCoat Ltd are $250 million and the operating profit after tax is $25 million. Asset
turnover is 4 times p.a. What is the value of TopCoat Ltd's total assets?
a. $6.25 million
b. $10 million
c. $100 million
d. $62.5 million

4. Which of the following statements about the profit margin is NOT true?
a. The profit margin is a useful measure of performance.
b. A supermarket would be expected to have a high profit margin.
c. The profit margin indicates the percentage of sales revenue that ends up as profit.
d. The profit margin gives some indication of pricing strategy or competition intensity.

5. Which of the following statements about earnings per share (EPS) is NOT true?
a. EPS relates the accounting earnings and market price of the shares.
b. The ratio can be difficult to calculate for consolidated companies.
c. Accounting standards require it to be disclosed in every set of accounts.
d. EPS is calculated as: (net operating profit - dividends on preference shares) / (weighted average
number of ordinary shares outstanding).

6. Which of the following statements about the interest coverage ratio is NOT true?
a. A low coverage ratio may be a warning of solvency problems.
b. A high interest coverage ratio indicates the company is not operating at sufficient profitability
levels.
c. The interest coverage ratio is calculated as: (earnings before interest and tax) / (interest expense).
d. The interest coverage ratio indicates the degree to which a commitment to pay interest on debts is
covered by the company's ability to generate profit.

7. Which of the following could NOT explain an increase in the return on equity ratio?
a. A write-down in the value of land that reverses a previous revaluation increment
b. Share buyback
c. Declaring a final dividend
d. Increase in profits

8. The average inventory of Astin Ltd for the year ended 30 June 2012 was $70 000. The
number of days' inventory on hand was 91.25 days. What was the cost of goods sold for the year?
a. $259 000
b. $140 000
c. $280 000
d. It cannot be determined from the information provided.





43

9. Alda Ltd's average trade debtors for the year ended 30 June 2012 was $150 000. Cost of
goods sold was $382 500 and the gross margin was 15%. All sales are made on credit. What was the
number of days' sales in receivables?
a. 143.1 days
b. 121.7 days
c. 301.4 days
d. It cannot be determined from the information provided.

10. Which of the following statements about the current ratio is NOT true?
a. An extremely high ratio is always a favourable sign.
b. The current ratio indicates whether the company has enough short-term assets to cover its short-
term debts.
c. A ratio above 1 indicates that working capital is positive.
d. The current ratio is calculated as current assets divided by current liabilities.

11. Which of the ratios listed helps to indicate the ability of a company to generate a return on its
assets before considering the cost of financing those assets?
a. Current ratio
b. Quick ratio
c. Return on assets
d. Profit margin

12. Which of the ratios listed helps to indicate pricing strategy or competition intensity?
a. Current ratio
b. Quick ratio
c. Return on assets
d. Profit margin

13. Which of the ratios listed helps to indicate the efficiency with which the resources of the
company are being utilised to generate profit?
a. Return on asset
b. Profit margin
c. Current ratio
d. Quick ratio

14. The operating profit after tax of Calculus Ltd is $10 million and sales are $100 million. Asset
turnover is 1.25 times p.a. What is Calculus Ltd's ROA?
a. 0.0125
b. 0.125
c. 1.25
d. 0.1

15. Fuego Ltd has a current ratio of 0.75. Its current liabilities amount to $200 000. It borrows $75
000 from a finance company, repayable in 5 years. What is the effect of the loan on working capital?
a. There is an increase of $75 000.
b. There is a decrease of $75 000.
c. There is no effect.
d. It cannot be determined from the above information.

16. Constable Ltd has decided to change its depreciation method from straight-line to reducing
balance, with the agreement of its auditors and taxation authorities. As a result, its annual
depreciation expense increases by $200 000. The company's income tax rate is 40%. What is the
effect on ROE?
a. It decreases
b. It increases
c. It is not affected.
d. It cannot be determined from the information provided.



44

17. Which of the following could explain a decrease in the quick ratio?
a. A change from FIFO to LIFO
b. A change in the depreciation method used
c. An increase in accounts payable
d. Slow-moving inventory

18. The following questions relate to PQR, which has the following ratios: return on assets (ROA)
12%, return on equity (ROE) 14% and current ratio (CR) of 2:1. Additional credit sales of $2 million
(cost price $1.5 million) are made. This transaction will:
a. increase ROA and ROE but not CR.
b. increase ROA, ROE and CR.
c. increase ROA and CR but not ROE.
d. increase ROA, increase ROE and decrease CR.

19. The company changed accounting methods by deciding to capitalise rather than expense a
research and development outlay. This will:
a. have no effect on ROA, ROE or CR.
b. increase ROE, but have no effect on ROA and CR.
c. increase ROA, ROE and CR.
d. increase ROA and ROE, but have no effect on CR.

20. Which of the following statements is true?
a. If the current ratio increases, the quick ratio will also increase.
b. If the asset turnover ratio remains constant and the profit margin increases, return on assets must
have increased.
c. If return on assets decrease, return on equity will increase.
d. If return on assets increases, return on equity must increase.

Chapter 16. Accounting policy choices

1. Which of the following is NOT an area in which companies typically make policy accounting
choices?
a. Dividend policy
b. How to value inventories
c. When and how to recognise revenue
d. How to compute depreciation on plant and equipment assets

2. In which of the following areas has choice largely been made by a standard-setting body,
legislators or by accepted practice, so that companies are NOT free to make their own decisions?
a. How to determine allowance for doubtful debts
b. Selection of depreciation method
c. Whether to include goodwill in the balance sheet
d. Inventory valuation method

3. Which of the following is NOT an accounting method that could be chosen by a company to
increase reported profits?
a. Changing estimates of the useful life of plant and equipment
b. Changing from the weighted average to the FIFO method of inventory valuation in a period of
rising prices
c. Understating allowance for doubtful debts
d. Classifying longer-term receivables as current assets

4. Most accounting policy choices affect both the income statement and the balance sheet.
Select the income statement account(s) that would be affected by a policy choice at the same time as
the accounts receivable balance sheet account.
a. Various expense accounts
b. Revenue, bad debts expense
c. Cost of goods sold expense
d. Depreciation or amortisation expense

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5. Which of the following is NOT normally a significant accounting estimate involved in financial
measurement?
a. What portion of credit sales will be uncollectable
b. Which period a fixed asset is depreciated over
c. Which product warranty claims will have to be paid
d. How many financial periods will benefit from research and development expenditure

6. Most accounting policy choices affect both the income statement and the balance sheet.
Select the income statement account(s) that would be affected by a policy choice at the same time as
the allowance for doubtful debts balance sheet account.
a. Cost of goods sold expense
b. Revenue, bad debts expense
c. Depreciation or amortisation expense
d. Various expense accounts

7. Most accounting policy choices affect both the income statement and the balance sheet.
Select the balance sheet account(s) that would be affected by a policy choice at the same time as the
cost of goods sold income statement account.
a. Property, plant and equipment; intangible and leased assets
b. Prepaid expenses, accrued expenses and liabilities
c. Inventories
d. Accounts receivable

8. Most accounting policy choices affect both the income statement and the balance sheet.
Select the income statement account(s) that would be affected by a policy choice at the same time as
the goodwill balance sheet account.
a. Amortisation expense
b. Various expense accounts
c. Revenue, bad debts expense
d. Cost of goods sold expense

9. Which of the following would be increased by an accounting policy change involving the
accrual of greater employee benefits expense?
a. Net profit
b. Assets
c. Liabilities
d. Owners' equity

10. Which of the following would be increased by an accounting policy change involving the
declaration of a final dividend?
a. There would be no effect on net profit.
b. Revenue
c. Expense
d. Net profit

11. Which of the following would be increased by an accounting policy change involving transfer
from retained profits to general reserve?
a. There would be no effect on net profit.
b. Revenue
c. Expense
d. Net profit

12. Which of the following would be increased by an accounting policy change involving the
recognition of accounts receivable sooner?
a. Noncurrent assets
b. Liability
c. Revenue
d. Expense

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13. Which of the following would be increased by an accounting policy change involving the
capitalisation of some repairs expenses?
a. Revenue
b. Expense
c. Net profit
d. Liabilities

14. Gainsborough Ltd uses moving weighted average for its inventory, which is valued at $325
000. It is considering a change to FIFO, which would decrease the valuation to $280 000. Which of
the following would be decreased by the change?
a. There would be no effect on net profit.
b. Revenue
c. Expense
d. Net profit

15. Changing the rate of depreciation affects:
a. net profit.
b. cash.
c. other working capital accounts.
d. no accounts.

16. Cranbourne Ltd is trying to decide whether to change from the reducing balance method of
depreciation to the straight-line method for both accounting and tax purposes. Using the reducing
balance method at the rate allowable for taxation purposes, the expense would be $1 020 000. If it
changed to the straight-line method, depreciation expense would be $680 000. If the straight-line
method were used instead of the reducing balance method, what would be the effect on the net book
value of assets?
a. There would be a $217 600 reduction.
b. There would be a $217 600 increase.
c. There would be a $340 000 reduction.
d. There would be a $340 000 increase.

17. Paterson Ltd is trying to decide whether to use straight-line or reducing balance depreciation
for its assets for both accounting and tax purposes. If it used straight-line, the depreciation expense
for the first year would be $750 000, but if it used reducing balance at the rate allowable for taxation
purposes, the expense would be $1 125 000. The company's income tax rate is 40%. What would be
the effect on the net book value of assets if the reducing balance method were used rather than the
straight-line method?
a. There would be a $225 000 reduction.
b. There would be a $375 000 reduction.
c. There would be a $150 000 reduction.
d. There would be no effect.

18. Changing the period of amortisation does NOT affect:
a. cash flow from operations.
b. amortisation expense.
c. net profit.
d. income tax liability.

19. Cherry Rentals Ltd has been in business for 1 year. The company makes it a practice to
capitalise a portion of its advertising costs as a 'deferred asset' and to amortise them at 25% per
annum. The accountant has suggested to the general manager that the policy of capitalising
advertising should be ended because the economic benefit of the expenditures is not clearly
determinable. The amount of advertising capitalised this year was $100 000. What effect would such
a policy change have on net profit before tax?
a. There would be a $45 000 reduction.
b. There would be a $30 000 reduction.
c. There would be a $75 000 reduction.
d. There would be no effect.

47

20. Question Mark Ltd has an income tax rate of 30%. The company makes it a practice to
capitalise a portion of its research and development costs as a 'deferred asset' and to amortise them
at 20% p.a. The accountant has suggested to the financial controller that the policy of capitalising
research and development should be discontinued because the economic benefit of the expenditure
is not clearly determinable. The amount of research and development capitalised this year was $180
000. What effect would such policy change have on the assets?
a. $144 000 overstated
b. $124 000 overstated
c. $180 000 overstated
d. No effect