A Compilation of Multiple Choice Questions with Solution
1. Select the asset that would not be considered to be a tangible asset.
a. A natural resource such as a mineral deposit on land
b. Land upon which a factory has been built
c. A typewriter used in a business office
d. A patent granted to a manufacturer
2. Timing differences are a very important consideration in making business
decisions. When a business owner purchases a machine and takes out a loan to
pay for it, the accounting effect of the timing difference (cost) can be considered
__________ __________ __________.
a. accruing a payment
b. an interest expense
c. poor business planning
d. a long-term asset
3. Which depreciation method listed below is the easiest to apply and use in a
a. Declining balance method
b. Activity (units of production) method
c. Straight-line method
d. Double-declining balance method
4. The term used to describe what an asset will be worth when the business is
finished using it is called
a. book value.
b. depreciable base.
c. carrying value.
d. salvage value.
5. A company remodels the wiring system of a building it owns to increase the
efficiency and life of the system. This activity is an example of a __________
expenditure, which are sometimes known as __________.
a. capital; betterments
b. capital; repairs
c. revenue; maintenance
d. revenue; repairs
6. A copyright is an example of a(an) __________ asset; to write off its cost we
__________ it over the periods in which it benefits a business.
a. tangible; depreciate
b. tangible; deplete
c. intangible; amortize
d. intangible; deplete
7. When a long-term asset is sold one of three situations will exist, which must be
recorded for accounting purposes. The situation in which the cash proceeds from
the sale are greater than the asset's book value is known as
a. a gain on the sale.
b. a loss on the sale.
c. breaking even on the sale.
d. an illegal activity according to GAAP.
8. The accounting information related to depreciation for the financial statements is
not the same information needed for federal income taxes and tax return
preparation. Why is this the case?
a. Information required for the IRS may be different than the
information required by GAAP.
b. The IRS is only concerned with the net income found on the income statement, so it
will only examine this statement.
c. GAAP is concerned only with the proper presentation of the financial statements, not
d. Both the IRS and GAAP require the same information to be reported; therefore, there
are no differences.
9. The formula that measures how well a company is using its assets to generate
revenue is known as
a. straight-line depreciation.
c. estimating gross profit.
d. return on assets (ROA).
10. One of the most significant risks associated with long-term assets is that someone
may steal such an asset. Controls need to be put in place to protect against such an
event from occurring. Which statement below would not be a good example of an
internal or physical control designed to prevent theft of a long-term asset?
a. Increasing the deductible on the theft provision of an insurance policy
b. Monitoring to ensure other controls are in place
c. Placing a lock on a building
d. The distinct separation of duties among employees
11. A trader reports opening inventory at £122,800, Purchases for the year at
£824,700, and closing inventory at £154,200. During the year goods costing
£24,800 were lost, others costing £12,500 had been removed for own use by the
proprietor, and some costing £10,000 were gifted to charity. What is the cost of
12. Which of the following expenses would you regard as part of the cost of goods
a. Packing the goods for delivery to customers
b. Advertising the goods for sale
c. Insurance of goods in the warehouse against fire and theft
d. Insurance and freight on importing goods for sale
13. If carriage inwards amounting to £57,800 is included as part of carriage outwards,
the impact of the error would be:
a. gross profit as well as net profit will be exaggerated.
b. gross profit will be exaggerated but net profit unaffected.
c. gross profit as well as net profit will not be affected.
d. gross profit as well as net profit will be understated.
14. How would you account for the goods removed for own use by the proprietor?
a. Credit the Opening Inventory account and debit the Drawings account with cost price
of the goods.
b. Credit the Trading account and debit the Drawings account with the cost price of the
c. Credit the Sales account and debit the Drawings account with the sale price of the
d. Credit the Purchases account and debit the Drawings account with the cost price of the
15. If closing inventory is accounted for as £240,000 instead of £180,000:
a. gross profit will be exaggerated but net profit correctly reported.
b. gross profit will be exaggerated and net profit understated.
c. gross profit as well as net profit will be exaggerated.
d. gross profit and net profit would both be understated.
16. Which of the following will result from a failure to account for goods removed by
the proprietor for own use?
a. It would not make any difference to the net profit for the year or the Capital account
b. Both net profit and the Capital account balance at year-end will be understated.
c. Net profit will remain the same but the closing balance in the Capital account will be
d. Net profit will be understated but the closing balance in the Capital account will not
17. If goods lost are not accounted for:
a. gross profit and net profit will be understated.
b. gross profit will be overstated but net profit will be correctly stated.
c. gross profit will be understated but net profit will be correctly reported.
d. gross profit as well as net profit will be overstated.
18. Which of the following is incorrect? The cost of sales is:
a. sales – return inwards – gross profit.
b. opening inventory + purchases + carriage outwards – closing inventory.
c. opening inventory + purchases – closing inventory.
d. opening inventory + purchases + carriage inwards – closing inventory.
19. Having reported its financial performance in the year a business finds that goods
costing £74,500 removed by the owner have not been accounted for. The effect of
correcting this error would be:
a. gross profit increases by £74,500 and net profit increases by the same amount.
b. no change in gross profit and net profit.
c. gross profit increases by £74,500; but no change in net profit.
d. gross profit as well as net profit decrease by £74,500.
20. On the basis of the information provided below a business reported the gross
profit for the period as £34,000 and net profit as £14,000. Since then it has been
discovered that closing inventory is in fact £280,000. The effect of correcting this
a. gross profit as well as net profit remain unchanged.
b. gross profit decreases by £80,000 and net profit remains unchanged.
c. gross profit increases by £80,000 and net profit remains unchanged.
d. gross profit as well as net profit increase by £80,000.
21. Which among the following expenses may be included as part of the cost of
closing inventory: i) Factory staff salary; ii) Machinery depreciation; iii) Sales
commission; iv) Raw materials used; v) Accounting expenses; vi) Office rent; vii)
Stationery; viii) Interest paid; ix) Sales commission; x) Direct labour; xi) Factory
rent; xii) Advertising; xiii) Postage; xiv) Bad debts; xv) Import duty; xvi)
a. i), iv), vi), x), xi), xv)
b. i), ii), iii), ix), xiii)
c. ii), vii), xi), x), xi)
d. i), ii), iv), x), xi), xv)
22. Sophie deals in DVD players of the same make and model. At the commencement
of the year on 1st January she held 40 units purchased for £30 each. She sells each
unit for £60. Her sales in the year amounted to £12,000. Her purchases during the
year are stated below. Ascertain the cost of closing inventory on each cost flow
a. FIFO = £1,950 ; Weighted Average = £1,610
b. FIFO = £1,950 ; Weighted Average = £2,650
c. FIFO = £1,950 ; Weighted Average = £1,650
d. FIFO = £1,250 ; Weighted Average = £1,650
23. Stated below is information in respect of a wholesale merchant. The cost of
closing inventory has been ascertained as £198,600.
a) The Profit Margin (as a percentage)?
24. b) The Gross Profit Percentage?
25. A trader reports his sales in 2005 as £548,700. What would be his gross profit in
each of the following independent circumstances?
a) His gross profit percentage is 25%
26. b) Selling prices are cost plus 25%
27. c) Selling prices are cost plus 20%
28. d) Selling prices are cost plus 40%
A retail trader fixes his sale price by adding 25% to the cost of every item purchased. He
provides you with the information relating to 2005 as stated below:
29. a) His closing inventory should be:
30. b) If his closing inventory was only £250,000 the cost of goods lost is:
31. A business account is only for transactions. Which of the following is not a
a. The business enquires about buying some land
b. The owner introduces £100,000 as capital.
c. £600 was paid for advertising.
d. £75,000 was paid to buy land and buildings.
32. In a retail shop, selling confectionery, which of the following transactions may be
expected to occur most frequently on a daily basis?
a. Sale of confectionery
b. Receiving money as capital from the owner
c. Payment of rent
d. Payment of salary to staff
33. Business entities systematically record their receipts and payments in a Cash
account and balance it on a daily basis in order to: Which of the following
statements is incorrect?
a. continuously assess whether they have enough cash to meet their commitment.
b. find how rich they have become.
c. maintain an accurate chronological record of transactions.
d. protect cash from being stolen.
34. To keep proper control of the cash held by a business: Which of the following
statements is incorrect?
a. the Cash Book entries should be in pencil so that any mistakes can be corrected.
b. the difference between amounts received and paid should agree with the amount in hand.
c. every receipt and payment of cash should be recorded as soon as it happens.
d. every entry in the Cash account should be substantiated by an appropriate voucher
35. If a business commenced the day with £3,400 in hand, receives and pays out
£42,800 and £44,200 respectively during the day, the cash in hand at the end of
the day would be:
36. f a business commenced the day with £14,200, paid out £58,900 during the day
and has £22,900 by the end of the day, it should have received ______ during the
37. The Cash account has recorded the sales as £216,480 and the purchases as
£196,475 in the first year of business. Sales are always made at cost plus 20% and
no inventory remains unsold at the year-end. The owner suspects that part of the
amount received from sales has been misappropriated by the manager who has
now resigned. What is the extent of the suspected misappropriation?
38. You, as the Cashier, check the accuracy of your Cash account by ascertaining
whether the cash in hand matches the amount stated as the balance in the Cash
Select the appropriate option to identify the amount by which the cash physically in your
hand will differ from the Cash account balance if the only mistake is each of the
a) £4,620 paid for purchasing goods for sale is recorded on the payment side of the Cash
account as £462.
a. £4,454 less
b. £4,158 less
39. b) £460 received from sales is not recorded at all in the Cash account.
a. £460 less
b. £460 more
40.c) £620 paid for stationery was recorded on the payment side of the Cash account as
a. £360 less
b. £360 more
c. £660 less
Answer No. Description
d 1. This would be considered a tangible asset.
b 2. It is true that a long-term (fixed) asset has been purchased, but the
accounting cost of the timing difference is considered to be
c 3. Straight-line depreciation is the simplest way to allocate the cost of
an asset to the periods in which the asset is used.
d 4. Carrying value is defined as cost minus accumulated depreciation.
The correct term is salvage value.
a 5. This is a capital expenditure sometimes known as betterment.
c 6. A copyright is an intangible asset which we will amortize over the
periods in which it benefits a business.
a 7. There is a gain on the sale of the asset. This is not an illegal a
ctivity per GAAP.
a 8. Note that the information required for the IRS may be different
than the information required by GAAP.
d 9. The correct answer is return on assets (ROA).
a 10. This would be considered to be an internal or physical control
designed to deter theft of a long-term asset.
d 12. Insurance and freight on importing goods would beincluded in the
cost of goods sold.
b 13. Carriage outwards is a distribution cost that should be deducted from
the gross profit. If it is included with the Carriage inwards the
expense charged in arriving at the gross profit will be
overstated. However, there is no effect on the net profit.
b 14. Goods taken by the proprietor for own use should be credited to
the Trading account in order to arrive at the correct gross
profit figure. It is then deducted from the gross profit to
arrive at the net profit.
c 15. If the closing inventory is overstated, the cost of goods sold will be
understated and so the gross profit and net profit will be
overstated by the amount of the overvaluation. In this case
the gross profit and net profit would be overstated by £60,000.
d 16. If goods taken by the proprietor are not reported in the Income
Statement, then the cost of goods sold will be inflated by
the amount taken and the net profit will be understated.
However, as far as the Capital account is concerned its balance
will not be affected. This is because if the goods taken had
been accounted for then the net profit transferred to the Capital
account would be higher but an identical amount would be
deducted as drawings.
c 17. The cost of goods lost should be deducted from purchases when
calculating the cost of sales. If the cost of goods lost is not
deducted then the cost of goods sold is higher by the
amount of the loss. If the cost of sales is higher than it should be then the
gross profit will be understated. The net profit will not be
affected by failing to disclose the loss.
b 18. Carriage outwards should appear after the calculation of the cost
of sales. It is a selling and distribution cost and should be
deducted from the gross profit when arriving at the net profit.
a 19. The £74,500 should have been deducted from the Purchases
thereby reducing the cost of sales figure and causing the
gross profit to be £74,500 higher. The net profit will also
then be £74,500 higher. The debit for the £74,500
will be in the Drawings account.
d 20. The gross profit is currently (900,000 – (354,000+712,000-
200,000)) = £34,000 and the net profit is (34,000-20,000) =
£14,000. If the closing inventory is £280,000 the
recalculated profit figures are gross profit (900,000 –
(354,000+712,000- 280,000)) = £114,000 and the net profit
(114,000- 20,000)=£94,000. Both profit figures
have increased by £80,000.
D 21 The cost of selling, distribution, administration and finance are not
allowed to be included in the cost of closing inventory.
b 23. Profit is (675,000-(142,400+596,200-198,600)) = 675,000-540,000
Profit margin is (135,000/540,000) x 100 = 25%.
b 24. The profit is 135,000 and Sales are 675,000.The gross profit
percentage is (135,000/675,000)x100 = 20%.
a 25. 25% of £548,700 is £137,175.
c 26. 548,700/125x25 = £109,740
a 27. 548,700/120x20 = £91,450
b 28. 548,700/140x40 = £156,771
b 29. If sales are 985,500 then the cost of these sales would be
985,500/125x100 = £788,400. Closing inventory is:
a 30. Closing inventory should be £338,800. If it is only £250,000 then
(338,000-250,000) = £88,800 has been lost.
a 31. In accounting a transaction has to be able to be expressed in money
terms. A business enquiry is not a transaction in that it is not
measurable in money terms
a 32. The payment for rent and salary are likely to be weekly or monthly
(perhaps quarterly for rent) and receipt of capital is likely to
be at the commencement of business. These are all less
likely to be as f frequent as the sale of confectionery in the
b 33. A Cash Account records the cash receipts and payments but it is
not possible to see if the business has made a profit because
it may contain receipts and payments relating to non-trading
activities such as receiving a loan or buying a car. A
Statement of income is required to determine how rich they
have become i.e. how much their business has grown.
a 34. It is not good practice to erase accounting entries. An appropriate
record needs to be kept of the correction that has been
made in order to be able to see exactly why a change is
being made. This will be dealt with in greater detail in the
chapter explaining the use of the Journal.
b 35. The £3,400 would be increased by £42,800 and reduced by the
payment of £44,200 = £2,000.
c 36. If £14,200 is part of the payment of the £58,900 then a further
£44,700 would be needed from receipts. If in addition there
is a balance of £22,900 then total receipts would be
£67,600. [£58,900 – 14,200 = 44,700] [44,700 + 22,900
a 37. The sales price expected from purchases of £196,475 is (196,475 x
1.2) £235,770. The recorded sales are £216,480. The suspected
misappropriation is, therefore, £235,700 - £216,480 =
£19,290. This assumes that there has been no wastage or out
of date confectionery that could not be sold. The
difference, however, would seem too great for this to be
the only reason
b 38. The cash book payment is understated by £4,158 [4,620 – 462].
This means that the amount of cash in hand will be £4,158
less than the cash book balance
b 39. If the receipt has not been recorded then the cash in hand will be
£460 more than the book balance.
a 40. As the payment has been understated in the books by £360 then the
cash in hand will be £360 less than the Cash Book balance.