Practice Q&A

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SECTION A – Multiple Choice Questions

Answer ALL questions. Each question carries 1 mark.

1. Which of the following is the correct expression of the accounting equation?

a. Assets + liabilities = equity.
b. Assets = liabilities – equity.
c. Assets + equity = liabilities.
d. Assets = liabilities + equity.

2. Which of the following statements concerning the cash flow statement is correct?
a. It provides the connecting link between the income statement and the balance
sheet.
b. It summarises the cash flows between buyers and sellers.
c. An alternative name is the cash budget.
d. It includes cash and non-cash items

3. Which of the following financial statement elements is not closed at the end of an
accounting cycle? 
A. Drawings
B. Accumulated Depreciation
C. Salary Expense
D. Sales Revenues

4. Which of these is not a liability?

a. GST payable
b. Bank overdraft
c. Wages paid
d. Creditor

5. If the loss for the period is $15 000 and total income is $115 000, total expense for
the period is:
a. $100 000.
b. $130 000.
c. $115 000.
d. $145 000

6.The source document for a cash sale could be a:

a. purchase order.
b. credit note.
c. payroll
d. credit card slip.
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7. Which of the following statements is true?
a. The profit of an entity is always represented by an increase in cash.
b. A withdrawal of cash for private use by the owner is shown in the income
statement as an expense.
c. Equity can be thought of as the owner’s claim to the assets of the entity after
deducting all liabilities.
d. Profit can be calculated as net assets at the end of the year less net assets at the
beginning of the year less drawings.

8. A two year insurance policy paid for on l January can initially be recorded in an
asset account called:
a. prepaid insurance.
b. insurance payable.
c. unearned insurance.
d. debtors.

9. The office supplies inventory account is a/an:

a. liability.
b. income.
c. expense.
d. asset.

10. Michael purchased two vehicles for his business on 1 January 2015. These
vehicles cost $70,000 each and have a useful life of 5 years with an expected
residual of $20,000 each. The adjusting entry for depreciation on 31 December
2015, using the straight-line method, is which of the following?
a. DR Accumulated depreciation $10 000; CR Depreciation expense $10 000
b. DR Depreciation expense $10 000; CR Accumulated depreciation $10 000
c. DR Accumulated depreciation $20 000; CR Depreciation expense $20 000
d. DR Depreciation expense $20 000; CR Accumulated depreciation $20 000

11. Right Style Consulting Company received a $1000 advance payment from a
customer for work to be carried out in the next accounting period. Which of the
following is the correct accounting entry to initially record the $1000?
a. Debit bank $1000; credit unearned income $1000
b. Debit unearned income $1000; credit bank $1000
c. Debit bank $1000; credit accounts payable $1000
d. Debit income earned $1000; credit bank $1000
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12. Purple Company carried out consulting work to the value of $7,500. They are
paid $4,500 immediately with the balance to be settled in the next accounting
period. Under the accrual approach to profit measurement the amount of
Consulting Revenue that will be recorded in the current period is:
a. $12,000.
b. $7,500.
c. $4,500.
d. $3,000.

13. Which of these is not a temporary account?

a. Sales revenue
b. Drawings
c. Cash at bank
d. Cleaning expense

14. Closing an account means:

a. transferring the balance to the trial balance.
b. transferring the balance to the balance sheet.
c. reducing the balance to zero: for example the expense accounts.
d. removing the account from the ledger.

15. Adelaide Ltd. sold goods to Perth Ltd. on credit at a price of $4,400 including GST.
What is the entry to record this transaction in Adelaide’s books under the
periodic inventory system?
a. DR accounts receivable $4400; CR sales $4400
b. DR accounts receivable $4000; CR sales $4000
c. DR accounts receivable $4000, DR GST payable $400; CR sales $4400
d. DR accounts receivable $4400; CR sales $4000, CR GST payable $400

16. Which of these is not a principle of internal control?

a. Separation of record keeping and custody of assets
b. Division of responsibility for related transactions
c. Establishing clear lines of responsibility
d. Placing excess cash on fixed deposit to earn interest

17. Aeroplanes owned by an airline company is classified as:

a. Non-current assets.
b. Current assets.
c. Contra assets.
d. Non-current liabilities
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18. Which statement concerning the allowance for doubtful debts account is not true?
a. Allowance for doubtful debts is used to adjust receivables for estimated bad
debts because individual debtor’s balances cannot be removed from the ledger
unless there is indisputable evidence they are bad.
b. Allowance for doubtful debts is a contra-asset account designed to reduce
receivables to estimated realisable value.
c. Allowance for doubtful debts represents cash set aside to cover losses incurred as
a consequence of customers being declared bankrupt.
d. Allowance for doubtful debts normally has a credit balance.

19. The debt ratio measures:

a. the proportion of assets financed by borrowing.
b. the time taken to collect debts.
c. liquidity.
d. profits earned in relation to debt.

20. Fricker Ltd.’s financial records reveal this information at the end of its financial
year 31 May 2016.
Net sales = $105 000
Cost of sales = $68 000
Ending inventory = $15 000
Beginning inventory = $19 000
The number of days taken to turn over average inventory for the year is:
a. 61 days.
b. 71 days.
c. 76 days.
d. 91 days.
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SECTION B (80 Marks)

Answer ALL questions.

Question 1
Furong Trading Enterprise is a trading business. Its financial year end is 31 March each year.
Below is an extract of the Furong Trading Enterprise’s trial balance as at 31 March 2016.

Dr. Cr.
No. Account Title $'000 $'000
1 Accounts receivable 367  
2 Cash at bank 74  
3 Consultancy services expense 36  
4 Discount allowed 19  
5 Drawings 23  
6 Employees food expense 29  
7 Interest expense 11  
8 Inventory at 1.4.2015 169  
9 Miscellaneous operating expense 2  
10 Office building 300  
11 Office equipment, at cost 350  
12 Prepaid insurance 20  
13 Purchases 1,234  
14 Salaries and wages expenses 412  
15 Sales return 11  
16 Staff superannuation expense 28  
17 Transport inwards expense 16  
18 Upkeep and maintenance expense 23  
19 Utilities expenses 35  
20 Accounts payable   420
21 Accumulated depreciation, office building, 1.4.2015   49
22 Accumulated depreciation, office equipment, 1.4.2015   23
23 Allowance for doubtful debts   6
24 Bad debts recovered   10
25 Bank loan, due 1.1.2030   200
26 Capital   380
27 Discount received   19
28 Interest revenue   4
29 Sales revenue   2048
  3159 3159
(Ignore Goods & Services Tax.)

You are provided the other data:

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(i) Furong Trading Enterprise did an inventory count and valuation on the last day of the
financial year. It was valued at $170,000 (Ending inventory)
(ii) The prepaid insurance is valid for 20 months, starting from 01 April 2015.
(iii) The depreciation charges for office building $6,000 and for office equipment $38,000
for the financial year had not yet been adjusted.
(iv) The Allowance for Doubtful Debts is required to increase to $10,000. (Bad debt
expenses)
(v) Furong Trading Enterprise has not yet paid and not charged an interest expense of
$3,000 for the month of March 2016.

(vi) Furong issued a “Letter of Appointment” to a new employee who will start work on
01 May 2016. His salary will be $25,000 per month. No payment was made when the
letter was issued.

REQUIRED:

(a) Prepare a detailed Income Statement for the year ended 31 March 2016; and

(b) A Statement of Owner’s Equity for the year and a detailed Balance Sheet as at 31
March 2016.
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Question 2
The following is the balance of accounts at the beginning and at the end of the financial year
2015 for WUYI Enterprise.

Balance as at Balance as at
Accounts
01 January 2015 31 December 2015
Accounts payable $190,000 $70,000
Accounts receivable $400,000 $1,000,000
Inventory $100,000 $400,000
Prepaid insurance $30,000 $30,000
Rent payable $12,000 $13,000
Salaries payable $20,000 $0

The Income Statement of WUYI Enterprise for the financial year ended 31 December 2015 is
shown below.

Income Statement for the year ended 31 December 2015.

Sales   $3,000,000
Less: Cost of goods sold   1,000,000
Gross Profit   $2,000,000
Profit on sale of office equipment   2,000
    2,002,000
Less: Expenses    
Depreciation expense 90,000  
Insurance expense 40,000  
Interest expense 5,000
Miscellaneous operating expense 3,000  
Rent expense 120,000  
Salary expense 600,000  
Total expenses   858,000
Net profit   1,144,000

Other data were provided below:

During the financial year, WUYI Enterprise took a bank loan of $1,000,000, which was
repayable in the year 2020. The owner also invested a fresh capital of $300,000 cash in the
business on 21 June 2015. The interest and miscellaneous operating expenses were paid as
they arose.

WUYI paid $1,200,000 cash to buy a piece of land and building. The business enterprise also
bought and paid cash for five new motor vehicles at $50,000 each and ten brand new
computers at $10,000 each. An old motor vehicle was sold for $4,000 cash, which it had a
carrying value of $4,000 at the time of sale. A fully depreciated computer was sold for $2,000
cash. WUYI had a cash balance of $100,000 on 01 January 2015.
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REQUIRED:

(a) Prepare a detailed Cash Flow Statement of WUYI Enterprise for the year ended 31
December 2015.

(b) The owner of WUYI Enterprise could not understand the Cash Flow Statement that
you have prepared. Explain the Cash Flow Statement to the owner.

Question 3 (A) SXQ is a marketing consultancy firm. It updates its accounts daily.

Indicate the immediate effect of the following errors on each of the accounting elements
described in the column headings below, using the following code:
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O = overstated
U = understated
NE = no effect

Copy the boxes below before answering:

(Do not copy the questions)

Net Total Total Owner’s

Error Profit Assets Liabilities Equity

For Example: Received $500 cash for

advice given to a customer, but U U NE U
recorded the transaction as $50.

(i) SXQ bought a new building for

$400,000 cash. It was wrongly recorded
as $4,000,000.

(ii) SXQ paid the rent expense for the

month, $12,000 cash. It was wrongly
recorded as Dr. Rent Expense $21,000
and Cr. Cash $21,000.
(iii) The owner of SXQ withdrew $5,000
cash for personal use. It was not
recorded. He said, “he and the business
were one and the same”.
(iv) This morning SXQ received $15,000
for the marketing consultancy work done
in the last financial year. It was recorded
as Dr. $15,000 Cash and Cr. $15,000
Marketing Consultancy Revenue.
(v) SXQ bought an office computer for
$3,489 on a credit term of 60 days. It was
not recorded at all for this purchase.

Question 3 (B)

The following information is provided by MZZ Enterprise for the month of March 2016:
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On 01 March 2016, it was noted that the following cheques were still outstanding.
Cheque number Amount
2232 $4,000
2233 $6,000

The following information is extracted from the books of MZZ Enterprise.

Cash at Bank Account

Date Particulars $ Date Particulars $
1/3 Balance b/d 70,000 4/3 Cheque no 2234 16,000
5/3 Deposit 11,000 9/3 Cheque no 2235 10,000
8/3 Deposit 5,000 14/3 Cheque no 2236 17,000
28/3 Deposit 9,999 23/3 Cheque no 2237 1,000
30/3 Deposit 7,000 24/3 Cheque no 2238 5,555
31/3 Deposit 35,000 31/3 Cheque no 2239 1,050
- 31/3 Cheque no 2239 1,050
- 31/3 Balance c/d 86,344
137,999 137,999

The Bank Statement below was issued by County Bank, MZZ Enterprise’s banker.

MZZ Enterprise A/C: Bank Statement as at 31 March 2016

Date Particulars Debit Credit Balance

$ $ $
1/3 Balance b/d 80,000 CR
4/3 Cheque no 2233 6,000 74,000 CR
5/3 Deposit 11,000 85,000 CR
8/3 Deposit 5,000 90,000 CR
9/3 Cheque no 2234 16,000 74,000 CR
11/3 Cheque no 2235 10,000 64,000 CR
12/3 Bank Commission 40 63,960 CR
18/3 Cheque no 2236 17,000 46,960 CR
24/3 Cheque no 2237 1,000 45,960 CR
29/3 Cheque no 7007 888 45,072 CR
31/3 Bank charge 50 45,022 CR
31/3 Deposit 35,000 80,022 CR
31/3 Interest 28 80,050 CR
31/3 Cheque no 2239 1,050 79,000 CR

Notes:
(i) In March 2016, MZZ Enterprise inadvertently recorded twice a cheque issued for
the amount of $1,050.
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(ii) On 28 March, MZZ Enterprise received a cheque of $9,999 from Delin & Quent
Company (a customer) and banked it in on the same day. The following day,
County Bank called and issued a statement to MZZ Enterprise to inform it that the
cheque has been dishonoured.

(iii) The cheque no 7007 was issued by Ah Mong Cha Cha Ltd, but wrongly charged
to MZZ Enterprise’s Account by the bank.

REQUIRED:
(a) Update the Cash at Bank Account of MZZ Enterprise.

(b) Prepare a Bank Reconciliation of MZZ Enterprise as of 31/3.

(c) Justify why do you need to operate a “Petty Cash System” in a company when you can
pay by cheque, which is more secure. Discuss

QUESTION 4
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Mawang Enterprise is a retailer of a standard canister use in the oil palm industry in a country
called Purple Land. It uses the Periodic Inventory System. The following data were provided
by the management for the month of May 2016. (Ignore Goods & Services Tax)

Date Detail Number of Cost

Units per unit
01 May 2016 Balance at the beginning 40,000 $15
04 May 2016 Purchase 60,000 $18
16 May 2016 Purchase 200,000 $20
27 May 2016 Purchase 200,000 $22
31 May 2016 Balance at month end 100,000

During the month of May 2016, Mawang Enterprise sold 400,000 units at $50 each. All
purchases were made on 30 days credit period basis given by the supplier.

REQUIRED:

(a) Use the First-in First-out valuation method (FIFO) for the month of May 2016, to
determine the cost of goods sold and the ending inventory.

(b) Prepare the journal entry for the transaction on 04 May 2016.

(c) Calculate the Net Profit of the business for the month of May 2016, if the Administrative
Expense and Selling Expense were $465,000 and &370,000 respectively.

*** END OF EXAMINATION PAPER ***

The answers are below

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Answers
SECTION A (20 Marks)

1. D

2. A

3. B

4. C

5. B

6. D

7. C

8. A

9. D

10. D

11. A

12. B

13. C

14. C

15. D

16. D

17. A

18. C

19. A

20. D
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SECTION B (80 Marks)

Question 1

1(a) Furong Trading Enterprise: Income Statement for the year ended 31.3.2016
$’000 $’000
Sales 2,048
Less: Sales return 11
Net sales 2,037
Less: Cost of goods sold :
Beginning Inventory 169
Add: Purchases 1,234
Transport inwards 16
1,419
Less: Ending Inventory (170)
1,249
Gross Profit 788
Add: Other Income
Discount received 19
Bad debts recovered 10
Interest revenue 4
33
821
Less: Expenses
Bad debts expense 4
Consultancy services expense 36
Depreciation expenses (6 + 38) 44
Discount allowed 19
Employees food expense 29
Insurance expense (20 x 12/20) 12
Interest expense (11 + 3) 14
Miscellaneous operating expenses 2
Salaries and wages expenses 412
Staff superannuation expenses 28
Utilities expense 35
Upkeep and maintenance expense 23
(658)
NET Profit 163
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2(b)
Furong Trading Enterprise: Statement of Owner’s Equity for the year ended 31.3.2016
$’000
Beginning capital 380
Add: Net Profit 163
543
Less: Drawings (23)
Ending capital 520

Furong Trading Enterprise: Balance Sheet as at 31 March 2016

$’000 $’000
Current assets:
Cash at bank 74
Accounts receivable 367
Less: Allowance for Doubtful Debts (10) 357
Inventory 170
Prepaid Insurance 8
609
Non-current assets:
Office building (300 – 55) 245
Office equipment (350 – 61) 289 534
1,143
Current liabilities
Accounts payable 420
Interest payable 3
423
Non-curent liabilities
Bank Loan, due in 2024 200 623
Net Assets 520

Owner’s Equity 520

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Question 2a.
WUYI Enterprise : Cash Flows Statement for the year ended 31.12.2015
Cash Flows from Operating activities $’000 $’000
Receipts from customers (3000 - 600) 2,400
Payments to suppliers (1000 + 300 + 120) (1,420)
Interest paid (5)
Payments of employees (600 + 20) (620)
Payment for Insurance (40)
Payments for miscellaneous operating expenses (3)
Payments for rent (120 – 1) (119)
Net cash provided by Operating activities 193
Cash flows from Investing activities
Receipts from disposal of motor vehicle 4
Payments for purchase of motor vehicle (250)
Payments for purchase of land and building (1,200)
Receipts from disposal of office equipment 2
Payments for purchase of office equipment (100)
Net cash used for Investing activities (1,544)
Cash flows from Financing activities
Receipts from bank loan 1,000
Receipts from investment by owner 300
Net cash used for Financing activities 1,300
Net decrease in cash (51)
Beginning cash 100
Ending cash 49

Question 2(b) Interpretation of the cash flow statement:

The cash collection from its customers was $2,400,000 and it was used to pay its regular
expenses and had generated a net cash inflow of $193,000 from its operating activities. This
was poor, considering that it enjoyed a high net profit $1,144,000. Part of the reason was due
to inefficient collection from customers. Another reason was due to rapid expansion through
higher purchase of inventory and quick payment to suppliers.

The business was undertaking an expansion in the financial year 2015. WUYI Enterprise sold
one old motor vehicle for $4,000 cash but bought five motor vehicles for total of $250,000
cash. It also sold an old office equipment for $2,000 cash but bought ten new computers for
$100,000 cash. The business also bought land and building for $1,200,000 cash.This has
resulted in a net cash out flow of $1,544,000. It did not have enough cash to pay for these
acquisitions from the cash it received from the Operating Activities. As a result it has to raise
finances from other sources.

WUYI Enterprise took a bank loan for $1,000,000. It also raised more cash through the
owner injecting $300,000 into the business. On the whole, the business had a reduction of
$51,000 cash. This resulted in the cash balance dropped to $49,000.
(other reasonable interpretation is acceptable)
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Question 3 (A)

Net Total Total Owner’s

Error
Profit Assets Liabilities Equity
(i) NE NE NE NE
(ii) U U NE U
(iii) NE O NE O
(iv) O O NE O
(v) NE U U NE

Question 3 (B)
Cash at Bank Account
31/3 Balance b/d 86,344 31/3 Commission Exp. 40
Interest income 28 Bank Charge Exp. 50
Cheque 2239, mistake 1,050 A/C Receivable 9,999
(Dishonoured cheq)
Balance c/d 77,333

87,422 87,422
Balance b/d $77,333

3(b) Bank Reconciliation Statement as at 31/3

Balance as per bank statement $79,000

Add: Error on cheque no 7007 $888
Unrecorded deposit 31/3 7,000
7,888
86,888
Less: Unpresented cheques:
Cheque no 2232 4,000
Cheque no 2238 5,555
( 9,555)
Balance as per Cash Book $77,333

3(c) Reasons for payment by petty cash:

 Small amount, risk is very low
 Easier to pay, less formality to follow (no need to sign high volume of cheques)
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Question 4
(a)
Beginning inventory 40,000 x $15 = $600,000
Add: Purchases
04 May Purchases 60,000 x $18 = $1,080,000
16 May Purchases 200,000 x $20 =$4,000,000
27 May Purchases 200,000 x $22 =$4,400,000
Total Purchases 460,000 units $9,480,000
Total inventory available for sale 500,000 units $10,080,000
Ending inventory 100,000 x $22 2,200,000
Cost of goods sold $7,880,000

b) Journal entry for purchase of inventory

Dat Particulars DR CR
e $ $
4/5 Purcahse A/C 1,080,000
A/C Accounts Payable 1,080,000
Bought 60,000 units on 30 days credit basis at $18 each

c) To calculate Net Profit:

Sales (400,000 x $50) $20,000,000
Less: Cost of Goods Sold 7,880,000
Gross Profit 12,120,000
Less: Expenses:
Administrtive expense 465,000
Selling expense 370,000
Total expenses 835,000
Net Profit $11,285,000