Part 2 Multiple choice questions and answers

Transcription

1 Part 2 Multiple choice questions and answers These questions and answers were originally prepared by John Wyett. For this edition they have been revised by John Dyson. Answers to the multiple choice questions are provided separately so that lecturers may copy and distribute the questions to their students. Explanations to the answers are provided where necessary.

2

3 Chapter 1 The accounting world 1. Sole traders differ from other types of trading organizations. Which of the following statements correctly summarizes the key characteristics of a sole trader s business? (a) Liability is limited to the providers of loan finance and only the trader takes an active part in managing the business. (b) The trader has unlimited liability and runs the business in conjunction with the providers of loan finance. (c) The trader has unlimited liability and must have the business accounts audited. (d) The trader has unlimited liability, takes sole responsibility for management of the business and no audit is needed. 2. Which of the following statements best describes the purpose of financial accounting in a limited liability company? (a) To assist in the day-to-day management of the company. (b) To enable the business to pay the correct amount of tax. (c) To ensure that the business pays the correct dividend. (d) To help the directors discharge their obligations to the shareholders. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

4 Chapter 2 Accounting rules 1. A business has prepared its accounts for a financial year and these show a profit of The accounts do not include the following items: a likely loss on a contract of a possible Court ruling in favour of the company which is likely to increase profits by a possible Court ruling against the company which could result in damages of between to Having regard to the fundamental accounting concepts, which of the following revised profit figures is correct when the above factors are taken in to account? (a) (b) (c) (d) A company sells goods on credit valued at to a customer. At what point in the sales cycle should this sale be recognized in the accounts? (a) When the customer s order is received. (b) When the goods are ready for dispatch to the customer. (c) When the goods are sent, accepted and invoiced. (d) When the customer pays. 98 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

5 Chapter 3 Recording data 1. Exe Ltd sells goods on credit to Wy Ltd for Which of the following accounting entries correctly records this transaction? (a) Debit sales, credit Wy Ltd (b) Debit Wy Ltd, credit sales (c) Debit cash, credit sales (d) Debit Wy Ltd, credit stock The following items relate to the bank account of Exe Ltd: balance at 1 January 2001 = 4500 (in hand), total payments in 2001 were , total receipts in 2001 were , bank charges not yet entered into the bank account were What was the correct closing bank balance at 31 December 2001? (a) 5600 overdrawn. (b) overdrawn. (c) 4400 overdrawn. (d) overdrawn. 3. A business has the following transactions recorded in its sales ledger for 2001: 000 Debtors at 1 January Sales in Receipts from debtors 318 Credit notes raised in Which is the correct figure for debtors at 31 December 2001? (a) (b) (c) (d) A business has the following transactions recorded in its purchase ledger: 000 Creditors at 1 January Purchases during Creditors at 31 December Debit notes raised on suppliers 5 Which is the correct figure for the total of payments to suppliers during 2001? (a) (b) (c) (d) Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

6 5. A business receives a cheque from a customer for 256 in full agreed settlement of an account which showed a debit balance of 270. Which of the following entries correctly records this transaction? (a) Credit bank 256, credit discount received 14, debit debtor 270. (b) Debit bank 256, debit discount received 14, credit debtor 270. (c) Debit bank 256, debit discount allowed 14, credit debtor 270. (d) Debit bank 256, debit discount allowed 14, credit creditor Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

7 Chapter 4 Trading entity accounts 1. Which of the following statements is correct? (a) Accounting profit is the difference between cash receipts and cash paid in a period. (b) Accounting profit is the total of cash sales in the year less the expenses for the period. (c) Accounting profit is the difference between revenue income and expenses for the period. (d) Accounting profit is the difference between revenue income and cash payments for the period. 2. Which of the following statements is correct in relation to a trial balance? (a) It shows the financial position of a business. (b) All the balances in the trial balance will be summarized on the business balance sheet. (c) It is a list of balances and forms the starting point for the preparation of the business accounts. (d) It is part of the published accounts of a business. 3. A business has the following items in its trial balance: 000 Trade debtors 25 Prepayments 10 Bank overdraft 5 Trade creditors 8 Fixed assets 15 Closing stock 8 Which of the following is the correct figure for the working capital of the business? (a) (b) (c) (d) A business has the following items extracted from its trial balance: 000 Opening stock 10 Purchases 25 Sales 40 Expenses 10 In addition, its closing stock is valued at What is the correct figure for the business gross profit? (a) (b) (c) (d) nil. Questions 5, 6 and 7 use the following summary balance sheet: Fixed assets 22 Capital 20 Stocks 10 Retained profit of year 5 Debtors 20 Creditors 10 Bank 5 Long-term loan Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

8 5. Which is the correct figure for the net assets of the business? (a) (b) (c) (d) Which is the correct figure for the capital employed in the business? (a) (b) (c) (d) Which of the following statements regarding the retained profit of 5000 for the year is correct? (a) It is the net profit of the period. (b) It is the net profit kept in the business after owner s drawings. (c) It is the amount of surplus cash in the business. (d) It is the amount of profit the owner can take out of the business. 8. The following trial balance is incorrect: Stock 10 Capital 15 Bank overdraft 15 Trade creditors 30 Fixed assets 25 Trade debtors 10 Cash 2 Trade investments 13 Sales 100 Purchases 50 Operating expenses Which of the following groups of items, if moved to the correct side of the trial balance, will correct it? (a) Capital, investments, cash, sales, purchases and operating expenses. (b) Capital, cash, investments. (c) Capital, bank overdraft. (d) Sales, purchases, operating expenses. 102 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

9 Chapter 5 Accounting for adjustments 1. A business has the following items in its accounts at its year end 31 December Opening stock at 1 January Closing stock at 31 December Purchases for Purchase returns in Which is the correct figure for cost of goods sold in 2001? (a) (b) (c) (d) The following figures relate to the rent and rates payable expense for a business in Rent paid in advance at 1 January Rates in arrears at 1 January Payments in Rates paid in advance at 31 December Rent in arrears at 31 December Which is the correct figure for rent and rates expense in the profit and loss account for the year ended 31 December 2001? (a) (b) (c) (d) A company owns some land and buildings for which the following details are relevant: Cost of land ; cost of buildings ; estimated life of buildings 20 years; estimated residual value of buildings 2000; estimated residual value of land The company uses the straight line depreciation method. Which is the correct annual depreciation charge for this asset? (a) (b) (c) (d) A company has trade debtors at its year end amounting to One of the debtors, value 8000, is now known to be uncollectable.the company takes a 5% provision for bad debts each year and last year s provision amounted to 2000.Which figure will appear in the profit and loss account as the total bad debt charge for the year? (a) (b) (c) (d) Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

10 5. Which of the following accounting concepts are being followed when a company operates a provision for bad debts account? (a) Consistency, prudence, accruals, going concern. (b) Accruals, consistency, going concern. (c) Prudence, consistency, going concern. (d) Prudence, accruals, going concern. 6. The double entry required to write off a specific bad debt is: (a) Debit sales, credit trade debtor. (b) Debit profit and loss, credit trade debtor. (c) Debit trade debtor, credit profit and loss. (d) Debit profit and loss, credit provision for bad debts. 7. A company has calculated that it has made a net loss of for the year before the following additional adjustments: 000 Depreciation of plant 15 Write off bad debts amounting to 3 Reduce the provision for bad debts by 1 Accrue for outstanding wages amounting to 4 Which is the corrected net loss taking account of the above adjustments? (a) (b) (c) (d) Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

11 Chapter 6 Company accounts 1. XYZ Ltd has a net profit before tax of , taxation amounts to , a dividend on ordinary share capital of has been declared and the company will transfer to a capital reserve. What is the retained profit figure for the year? (a) (b) (c) (d) XYZ Ltd issues new ordinary 1 shares at an issue price of 1.50 and makes a bonus issue of new shares amounting to ordinary shares.the company also increases its authorized ordinary share capital by ordinary shares. By how much will the balance sheet ordinary share capital account increase? (a) (b) (c) (d) An ordinary share dividend is: (a) Part of the company profits used to reward the shareholders for their investment. (b) Interest on money lent to the company by its shareholders. (c) An expense of running the company. (d) The directors remuneration. 4. XYZ Ltd has declared an ordinary share dividend of at Which of the following correctly explains the accounting entries for the dividend at the year end? (a) Expense in profit and loss account, creditor on the balance sheet. (b) Appropriation of profit, reserve on the balance sheet. (c) Appropriation of profit, current liability on the balance sheet. (d) Expense in profit and loss account, reserve on the balance sheet. 5. Statements of Standard Accounting Practice and Financial Reporting Standards should be complied with when preparing the final accounts of a limited company because: (a) The Companies Act 1985 demands that they are used. (b) The auditors will insist they are followed. (c) The directors are under a legal obligation to ensure they are followed. (d) They ensure that the accounts present a true and fair view. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

12 6. Below is shown a draft summarized balance sheet of XYZ Ltd at before certain adjustments 000 Net assets 880 Ordinary share capital ( 1 shares) 350 Share premium account 50 Capital reserve 120 Profit and loss account The company decides to increase the value of its net assets by including an upward revaluation of its buildings of , it also decides to transfer an additional sum of from its profit and loss account to capital reserves and, finally, a dividend of is proposed. Which of the following is the correct net asset figure as a result of including these transactions? (a) (b) (c) (d) Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

13 Chapter 7 Other accounts 1. The following balances are taken from the trial balance of the XYZ Manufacturing company: 000 Raw material purchases 48 Direct labour 25 Direct expenses 8 Indirect labour 25 Indirect expenses 6 Transportation costs 4 The prime cost of production is: (a) (b) (c) (d) Which of the following statements regarding manufacturing accounts is correct? (a) All manufacturing companies must prepare a manufacturing account. (b) A manufacturing account is useful as an aid to financial reporting for manufacturing companies. (c) A management accounting system is needed to produce a manufacturing account. (d) Manufacturing accounts are always produced annually by manufacturing companies. 3. Direct expenses are those which can be identified with particular products. Which of the following items is a direct cost? (a) The rent of the factory in which products are made. (b) The wages of the production supervisor. (c) A royalty paid to the holder of a patent after each item is produced. (d) The cost of the glue used to attach labels to the products. 4. At the end of an accounting period a business has valued its work in progress closing stock by including the following items: 000 Raw material cost in WIP 150 Carriage costs of the above goods 10 Production wages associated with this stock 20 Production overheads associated with this stock 30 Administration costs 5 Which is the correct figure for the valuation of closing stock? (a) (b) (c) (d) Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

14 5. The XYZ manufacturing company has the following balances in its trial balance at the year end: 000 Prime cost of manufacture 3450 Factory overheads 236 Work in progress at start of year 126 Selling overheads 56 Bank interest 89 In addition, work in progress at the end of the year is valued at Which is the correct figure for the cost of manufactured goods? (a) (b) (c) (d) Manufacturing profit is sometimes added to the cost of goods manufactured before it is transferred to the trading account in order to compare more fairly the total cost with prices which would be charged by another manufacturer. Which of the following statements regarding this approach is correct? (a) The profit taken is deducted from the total profit earned by the business. (b) The profit taken is realized because the goods have been finished. (c) The value of stocks of unsold finished goods will need to be adjusted to remove the profit element. (d) Manufacturing profit is added for reasons of control. 7. Which of the following statements is true? The main accounts of a debating society will consist of the following: (a) An income and expenditure account and a balance sheet. (b) A trading account, a profit and loss account and a balance sheet. (c) A profit and loss account and a balance sheet. (d) A trading account, an income and expenditure account and a balance sheet. 8. A profit-making service sector entity records what is originally contributed by its shareholders in which account? (a) Income and expenditure. (b) Accumulated fund. (c) Capital. (d) Members. 108 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

15 Chapter 8 Cash flow statements 1. Cash flow statements are required by: (a) Company law. (b) The shareholders of a company. (c) The auditors of a company. (d) Financial Reporting Standard No XYZ Ltd made an operating profit in 2001 but has increased its overdraft during the year. Which of the following factors could explain this: (a) Taking extended periods of credit from its suppliers. (b) Additional investment in purchased fixed assets. (c) Reducing its depreciation charge for the year. (d) Reducing the period of credit allowed to its customers. 3. The following balances have been extracted from the financial statements of XYZ Ltd at its year end 31 December 2001: 000 Operating profit before depreciation and tax 235 Depreciation 47 Taxation 56 Debtors 67 Creditors 56 Stocks 70 Balances at 1 January 2001 were Debtors 50 Creditors 60 Stocks 55 Which of the following represents the net cash flow from operations for 2001? (a) (b) (c) (d) In a cash flow statement a bonus issue will: (a) be included in cash flow from investing activities. (b) be included in cash flow from financing activities. (c) not appear as no cash flow occurs as a result of a bonus issue. (d) be included as part of cash flow from operations. 5. In a cash flow statement the payment of a preference dividend will: (a) Be included under financing activities. (b) Be included under investing activities. (c) Be included under returns on investments and servicing of finance. (d) Be included under net cash flow from operations. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

16 6. The main reason for a company preparing a cash flow statement is: (a) To comply with legal requirements. (b) To show the financial position of the company at the end of a period. (c) To show the profit or loss of the company for the period. (d) To show, in a standard format, the sources and uses of cash during the period. 110 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

17 Chapter 9 Interpretation of accounts 1. Which of the following is not an essential prerequisite to permit the successful use of financial statements for ratio analysis? (a) The accounts should use comparable accounting policies. (b) The accounts should be drawn from similar types of organizations. (c) The accounts should be available for several accounting periods. (d) The accounts used should not include forecast financial information. 2. The current ratio is an indicator of which following characteristic of an organization? (a) The current level of profitability. (b) The future level of profitability. (c) The investment potential. (d) The liquidity in the short term. The following data was extracted from the records of XYZ Ltd at 31 December 2001 and is to be used for Questions 3 and Sales 2500 Cost of sales 1200 Stock at 31 December Stock at 1 January Debtors 340 Creditors The debtors collection period in days was? (a) 43. (b) 45. (c) 50. (d) The rate of stock turnover was? (a) 3.5 times. (b) 3.7 times. (c) 6.3 times. (d) 7.7 times. 5. For a limited company, return on capital employed is most likely to be calculated by using which of the following methods? (a) Net profit as a percentage of the average of the opening and closing borrowings. (b) Net profit as a percentage of the average of the opening and closing capital. (c) Net profit as a percentage of the average of the opening and closing total assets. (d) Net profit as a percentage of the average of the opening and closing fixed assets. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

18 6. The following balances were extracted from the records of XYZ Ltd: Sales Gross profit Gross profit percentage 20% 18% Which of the following is the most likely reason for the fall in the gross profit percentage despite the increase in sales in 2002? (a) An increase in selling prices. (b) A decrease in the costs of purchasing raw materials for the business. (c) Offering higher discounts to customers to secure extra sales. (d) An increase in wages and salaries. 112 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

19 Chapter 10 Disclosure of information 1. A limited company is under a legal duty to disclose information to parties external to the company. To which of the following groups does this requirement mainly apply? (a) Banks. (b) Customers. (c) Shareholders. (d) Suppliers. 2. Which of the following best describes the measures which have been taken to stop the practice known as creative accounting? (a) Creative accounting has been made a criminal offence. (b) The Companies Act forbids directors from engaging in creative accounting. (c) The Stock Exchange conditions of listing prohibit the practice. (d) The regulatory system has been altered and accounting standards have been changed to discourage the practice. 3. Directors of a limited company are under an obligation to? (a) Send financial statements to employees. (b) Send summary financial statements to all shareholders. (c) File copies of the financial statements with the registrar of companies. (d) Produce financial statements which are correct in all respects. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

20 Chapter 11 The annual report 1. Which of the following statements regarding the Chairman s report in an annual report is correct? (a) The report is required by the Companies Act. (b) The report is subject to an audit by the external auditors of the company. (c) Accounting standards define the format of the Chairman s report. (d) There are no controls over the format or content of the Chairman s report and it is not subject to statutory audit. 2. Which of the following items is unlikely to be found in the directors report for a limited company? (a) A description of the accounting policies of the company. (b) Details of corporate donations to charities. (c) Details of corporate donations to political parties. (d) Details of the company s health and safety policy. 3. An audit of most limited company financial statements is required because: (a) The Cadbury Report into corporate governance recommended that one should be undertaken. (b) The shareholders of a company usually request one. (c) It is required by the Companies Act. (d) Banks or other lenders usually request one to be carried out. 4. B Ltd is a subsidiary of A plc if? (a) A owns all of the shares in B. (b) A is in a position to exercise dominant influence over the financial and operating policies of B. (c) A owns the assets of B. (d) A has given a substantial loan to B secured on B s assets by a debenture. 5. A group of companies must prepare consolidated accounts when which of the following situations exists? (a) A parent company has one or more subsidiary companies. (b) When a parent company has overseas subsidiaries. (c) When a parent company trades from the same address as its subsidiaries. (d) When a company has a participating interest in another associated company. 6. When a company s financial statements have been audited, an audit report will be prepared. If this is unqualified the auditors will report that the financial statements: (a) Are certified correct. (b) Contain no material errors. (c) Comply with the Companies Act. (d) Present a true and fair view and comply with the Companies Act. 114 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

21 Chapter 12 Contemporary issues in financial reporting 1. Which of the following factors is not a defect of the traditional historical cost method of accounting under inflationary conditions? (a) Assets which have not been revalued are recorded at historic cost. (b) Debtors and other monetary assets lose value with inflation. (c) Asset values are objectively recorded at historic cost. (d) Depreciation charges tend to be understated if based on the historic cost of fixed assets. 2. FRS 10 deals with accounting for goodwill. Which of the following is an acceptable treatment of purchased goodwill? (a) Include under fixed assets, permanently, on the balance sheet. (b) Include under intangible assets, permanently, on the balance sheet. (c) Amortize on a systematic basis over the life of an asset. (d) Write off immediately following acquisition by deducting from share capital. 3. Which of the following factors is likely to be an area of difficulty in a large multinational group of companies? (a) Compliance with international accounting standards. (b) Foreign currency translation. (c) The preparation of the group financial statements. (d) All of the above. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

22 Chapter 13 The framework of management accounting 1. The main purpose of a management accounting system is to: (a) Provide information for the financial accounting function. (b) Protect the senior staff from criticism. (c) Comply with the Companies Act (d) To supply data and information to management. 2. Which of the following is not a major function of management accounting? (a) Human resource management. (b) Budgeting. (c) Cost accounting. (d) Internal auditing. 3. Which of the following statements is true? (a) A management accountant should instruct other staff what to do. (b) A management accountant provides a service for other managers. (c) A management accountant must remain aloof from other staff. (d) A management accountant s job is largely to crunch numbers. 4. Which of the following items is not an essential ingredient of a planning and control system? (a) A clear statement of the entity s objectives. (b) A detailed budget for each department. (c) Disciplinary action when actual costs exceed budgeted costs. (d) A formalized organizational managerial structure. 116 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

23 Chapter 14 Cost accounting 1. Which of the following is likely to be classified as a direct material cost of a motor car wheel? (a) The metal used to manufacture it. (b) The metal used to manufacture one of the tools used in the car wheel factory. (c) The cost of operating the raw material stores in the factory. (d) The cost of the quality operation on the finished car wheels. 2. The first in, first out method of pricing raw material issues, exhibits which one of the following features? (a) The issue price is recalculated each time new deliveries are made into stock. (b) The issue price is always at the latest price. (c) The goods are always issued strictly in the physical order in which they are received. (d) The issue price is always at the earliest price. 3. Which of the following is not a method of pricing raw material issues from stock? (a) Standard costing. (b) Unit cost. (c) Marginal cost. (d) Continuous weighted average. 4. Which of the following is a direct labour cost? (a) Supervisors salaries in the factory. (b) Costs of the payroll accounting section. (c) A bonus paid to the storeman. (d) The wages of an operative paid on the basis of output achieved. 5. Production overheads are absorbed into production units by the use of an overhead absorption rate. Which one of the following best describes how the absorption rate is calculated? (a) Total number of units produced divided by the total cost centre overheads. (b) Total number of units produced multiplied by the unit overhead cost. (c) Total cost centre overheads divided by the cost centre activity level. (d) Total indirect costs for the business divided by the total number of units produced. 6. XYZ Ltd has a labour intensive assembly department. Which of the following methods of absorbing overheads is likely to used for that department? (a) Direct labour hours method. (b) Direct labour cost method. (c) Direct material cost method. (d) A percentage of prime cost. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

24 7. XYZ Ltd has the following data relating to its assembly plant in the year ended 31 December 2001: 000 Direct material costs 500 Direct labour cost 250 Assembly plant indirect costs 100 In addition, the stores department has total costs of and spends 50% of its time servicing the assembly plant. There were labour hours worked and machine hours run in the assembly plant in The overhead cost per direct labour hour was: (a) 2. (b) 4. (c) 2.3. (d) If a company uses predetermined overhead recovery rates and at the end of a period finds that there has been an under-recovery of overhead, which of the following best explains how the underrecovery has occurred? (a) Actual overhead cost has exceeded the amount used as a basis for the establishment of the predetermined rate. (b) Actual overhead cost has been less than the amount used as a basis for the establishment of the predetermined rate. (c) Actual activity levels were higher than planned due to an increase in demand. (d) An expected price increase in the overhead costs which was built into the overhead recovery rate did not take place. 9. If there has been an over recovery of overheads, at the end of the accounting period the amount concerned should be? (a) Debited to the company profit and loss account. (b) Credited to the company profit and loss account. (c) Carried forward to the next accounting period as a cost saving. (d) Used to reduce next period s overhead recovery rate. 118 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

25 Chapter 15 Planning and control: budgeting 1. Which of the following is not an essential feature of a budget? (a) There is a clearly defined budget period. (b) It is a combination of financial and non-financial data set by reference to key budget assumptions. (c) It permits managers flexibility in terms of the policies that should be pursued to meet corporate objectives. (d) It has been formally approved and accepted as realistic by managers. 2. A master budget comprises: (a) A budgeted balance sheet. (b) A budgeted balance sheet and profit and loss account. (c) A budgeted balance sheet, profit and loss account and cash flow statement. (d) A budgeted balance sheet, profit and loss account, cash flow statement based upon coordinated departmental operating budgets. 3. A flexible budget is: (a) One where departmental functional managers are given discretion over the application of spending limits. (b) One where the budget is permitted to alter to reflect changes in activity levels. (c) One where managers are given discretion as to the investigations which are carried out into variances revealed by budgetary control reports. (d) One which allows departmental managers to design their own budgetary control reports. 4. In a manufacturing company, which of the budgets will normally be prepared first in the budget preparation cycle? (a) The stock budget. (b) The production budget. (c) The cash flow forecast. (d) The sales budget. 5. The administration of the budget process in a large organization is normally the responsibility of: (a) The board of directors. (b) The audit committee. (c) The chief executive. (d) A budget committee working in conjunction with the finance function. 6. Which of the following statements is valid: (a) The Budget Committee should set the budgets for cost centre managers. (b) Cost centre managers should prepare their own budgets. (c) Management accountants should prepare budgets for cost centre managers. (d) Senior management should prepare cost centre budgets. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

26 Chapter 16 Planning and control: standard costing 1. A standard cost which will be most useful for control purposes is one which: (a) Contains no allowances for normal losses or other forms of wastage. (b) Is set in advance of the control period and which then remains unchanged. (c) Contains a reasonable degree of allowances for operating inefficiencies. (d) Managers are expected to achieve at all times. 2. Direct material total variances can be analysed into: (a) Efficiency and price variances. (b) Price and productivity variances. (c) Price and usage variances. (d) Efficiency and usage variances. 3. XYZ Ltd uses standard costing.variance analysis has revealed an adverse total direct material variance at the end of an operating period.which of the following combinations of factors is the most likely reason for the adverse variance? (a) Price reductions and lower wastage. (b) Price increases and greater wastage. (c) Employing less skilled workers to lower labour costs. (d) Over estimation of the material cost built into the standard cost. 4. Which of the following statements would be a valid explanation of a favourable direct labour rate variance? (a) The standard cost overestimated a national wage agreement settlement for the production operatives in the factory. (b) The standard labour time per unit was overstated as it failed to incorporate production efficiencies made possible by new machinery. (c) There was a cost saving as a result of a strike in the factory during the year. (d) The standard cost did not take into account changes in the product specification which meant that in practice, less time per unit was needed for assembly. 120 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

27 Chapter 17 Decision making: contribution analysis 1. A variable cost is? (a) One which varies in proportion to the level of fixed cost incurred. (b) One which tends to vary with the level of activity. (c) One which changes over time. (d) One which cannot be estimated with any great degree of accuracy. 2. The term contribution refers to? (a) The actual amount of profit made per unit. (b) The budgeted profit per unit. (c) The amount of profit which goes towards meeting the overheads of the business. (d) The difference between sales revenue and variable costs per unit. 3. The break-even point is that at which: (a) The level of activity at which the business operates most economically. (b) The level of activity at which the business makes neither a profit nor a loss. (c) The fixed costs are lowest. (d) The variable cost per unit is minimized. 4. When a business is faced with a limiting factor (one which limits the activity of an entity) and there is a choice to be made between options to follow, which of the following statements describes the optimal course of action? (a) Choose the option which gives the highest unit profit. (b) Choose the option which gives the highest unit contribution. (c) Aim to achieve a balance of activities covering all of the options. (d) Choose the option which gives highest contribution per unit of limiting factor. 5. XYZ Ltd has the following alternative planned activity levels: Level A Level B Level C Total costs Number of units produced (Fixed overhead remains constant over the activity range shown.) The fixed overhead cost per unit is: (a) 20. (b) 15. (c) (d) Which of the following statements regarding marginal costing is incorrect? (a) It is a useful long-term planning technique. (b) It assumes that fixed costs remain fixed over relevant activity ranges. (c) It assumes that other costs vary in proportion to activity. (d) It assumes that costs can be classified as variable or fixed. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

28 Chapter 18 Decision making: specific decisions 1. Which of the following items is an important characteristic of decision-making? (a) Concentration on historical data. (b) Exclusion of forecasted data. (c) An accruals and prepayments approach. (d) Exclusion of non-relevant costs. 2. Which of the following cost classification methods is not relevant in decision-making? (a) Direct and indirect. (b) Fixed and variable. (c) Controllable and non-controllable. (d) Avoidable and non-avoidable. 3. An opportunity cost may best be described as: (a) The cost of an alternative course of action. (b) The cost of losing an order to a competitor. (c) The cost involved in seeking new opportunities. (d) The cost incurred in training new staff. 4. Which of the following cost classification would be classified as non-relevant when considering the temporary closure of a factory? (a) Direct materials. (b) Fixed overheads. (c) Variable overheads. (d) Direct labour. 5. Which of the following costs is likely to be the minimum price charged for a special order? (a) Total direct and indirect cost. (b) Variable cost. (c) Total production cost. (d) Total cost plus a profit margin. 6. What is the ideal transfer price that would satisfy both the supplying and receiving segment? (a) Market price. (b) Adjusted market price. (c) Standard variable cost plus the opportunity cost. (d) Total standard cost plus a profit margin. 122 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

29 Chapter 19 Decision making: capital investment 1. Which one of the following is not normally a characteristic of major capital expenditure projects? (a) The benefits from the expenditure will rise over a number of years. (b) The costs can be estimated with a fair degree of certainty. (c) The project is likely to involve considerable expenditure. (d) The project is an important part of a company s strategic planning. 2. Which one of the following is not a technique used for capital investment appraisal? (a) The payback method. (b) The accounting rate of return method. (c) Discounted cash flow techniques. (d) Capital budgeting. 3. Which of the following factors is irrelevant when using the payback method? (a) Depreciation of the initial asset acquired. (b) The annual financial benefit arising from the project. (c) The total initial cost of the investment. (d) The incidence of cash flows arising from the project. 4. If an investment appraisal exercise is undertaken using the techniques of discounted cash flow, which of the following statements correctly shows the reasoning behind the preferred option? (a) The option shows the highest cash inflow. (b) The option recoups the initial investment in the shortest possible time. (c) The option has the highest positive net present value. (d) The option generates profits more quickly than the other options. 5. XYZ Ltd has used DCF as a technique to evaluate a project which has an initial capital outlay of , the project has a 3 year life and achieves a positive net present value as a result of the following cash inflows (all year end cash flows). Year Cash inflow The project has no residual value at the end of the 3 year period and the company evaluates projects using a discount rate of 15%. Discount factors are as follows: Year Factor (15%) Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

30 By how much could the initial capital investment increase for the project to cease to be worthwhile? (a) (b) (c) (d) Which of the following is not considered to be an appropriate form of finance for capital investment projects? (a) An issue of share capital. (b) A bank overdraft. (c) The issue of a debenture. (d) Leasing. 124 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

31 Chapter 20 Contemporary issues in management accounting 1. Activity-based costing uses the term cost driver. What is this? (a) An instruction from management to reduce operating costs. (b) An activity which generates a cost. (c) A fixed overhead absorption technique. (d) A convenient point in a costing system for the collection of costs. 2. Which of the following is not a benefit likely to arise from the implementation of a just in time costing system? (a) A reduction in ordering costs. (b) A reduction in raw material stock holding costs. (c) A reduction in the investment in working capital. (d) A reduction in production delays as a result of stockouts. 3. Which of the following categories of costs is likely to increase following the introduction of a system of total quality management (TQM) by a business? (a) Wastage. (b) Warranty claims. (c) Rectification of damage caused by faulty products. (d) Training of employees. 4. Which of the following potential trigger points is not normally adopted in backflush costing? (a) When the finished units are produced. (b) When the raw materials are purchased and the finished units are produced. (c) When the raw materials are purchased and the finished units are sold. (d) When the finished units are sold. 5. What does the following definition best describe: A system that tracks and accumulates the actual costs attributable to products from the time that they are originally conceived until the time that they are finally abandoned? (a) Life cycle budgeting. (b) Life cycle costing. (c) Total product costing. (d) Total absorption costing. 6. Which essential characteristic distinguishes strategic management accounting from conventional management accounting? (a) It is the sole responsibility of the strategic management team. (b) It forms part of the strategic planning process. (c) It incorporates non-financial information. (d) It incorporates data external to the entity. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

32 7. To which management accounting technique does the following definition relate: A costing system that enables the estimated cost of a product to be established? (a) Absorption costing. (b) Standard costing. (c) Target costing. (d) Throughput accounting. 126 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

33 Answers to multiple choice questions Chapter 1 The accounting world Question 1 d is correct Question 2 d is correct The day-to-day management of the business would best be helped by the provision of management accounts the business tax liability uses the financial accounts as a basis for the computation, the amount payable is determined by other factors, however, the decision to pay a dividend is ratified by the shareholders and is based upon the company s trading position and ability to pay (liquidity). The Companies Act 1985 sets out the directors responsibilities to produce accounts showing a true and fair view for the shareholders. Chapter 2 Accounting rules Question 1 b is correct 000 Draft profit 500 Provide for loss (prudent) (25) Ignore unrealized gain - Provide for maximum loss (prudence) (15) Revised profit 460 Question 2 c is correct It best illustrates the application of the realization concept. Chapter 3 Recording data Questions 1 b is correct Question 2 a is correct Bank a/c Balance brought down Total payments Total receipts Bank charges Balance carried down Question 3 a is correct Question 4 b is correct Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

34 Question 5 c is correct Chapter 4 Trading entity accounts Question 1 c is correct Question 2 c is correct Question 3 d is correct Working capital = stock + debtors + prepayments creditors bank overdraft; fixed assets are not part of working capital. Question 4 a is correct Expenses are ignored in calculating gross profit. Question 5 b is correct Net assets = capital + retained profit. Question 6 c is correct Capital employed is owners capital plus long-term loan capital. Question 7 b is correct Question 8 a is correct Moving these items to the other column of the trial balance shows the balances correctly. Chapter 5 Accounting for adjustments Question 1 b is correct Question 2 d is correct The calculation is: rent in advance at 1 January, plus payments, less rates in arrears at 1 January, plus rent in arrears at 31 December less rates in advance at 31 December. Question 3 b is correct Land is not depreciated, so the depreciation charge is /20 = 4900 p.a. Question 4 c is correct Actual bad debts written off 8000 plus the required increase in the provision of 5% ( ) 2000 = 8500, totalling Question 5 a is correct It is prudent to under- rather than overstate profits. Bad debt provisions seek to charge profits with an expense relating to possible uncollectable sales receipts. The accruals concept matches profits with a bad debt expense if the business creates a provision it should use a consistent approach; and finally, 128 Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

35 the going concern concept is normally assumed for a business. If this is not the case then the bad debt charge will be much higher since not all debtors will be collectable in the short time period needed to liquidate a business. Question 6 b is correct (a) will reduce gross profit and is technically incorrect. (c) will have the opposite effect to that required by increasing debtors and profit. (d) will only provide for the debt and it will not be written off as a specific bad debt. Question 7 c is correct 000 Unadjusted net loss 107 Add depreciation 15 Add bad debt 3 Add accrued wages 4 Less reduced bad debt provision (1) Adjusted net loss 128 Chapter 6 Company accounts Question 1 c is correct Question 2 b is correct The share premium of will be credited to a share premium account and therefore the ordinary share capital will increase by the nominal value of the newly issued and bonus shares (not the additional authorized capital). Question 3 a is correct Question 4 c is correct Question 5 d is correct This is quite a difficult question. Directors must prepare accounts which give a true and fair view; it is accepted that compliance with accounting standards is necessary to assist in this objective. However, the Companies Act does not demand their use and the auditors cannot insist they are used (although they will probably qualify the audit report if they are not). The directors legal obligations are to ensure that the accounts give a true and fair view and not to ensure that accounting standards are used which rules out (c). Question 6 a is correct 000 Original net assets 880 Reduction by including dividend creditor (60) Increase by revaluation 50 Revised net assets 870 The transfer between reserves has no effect on the business net assets. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited

36 Chapter 7 Other accounts Question 1 c is correct Prime cost is the total of direct costs only. Question 2 b is correct There is no requirement to produce manufacturing accounts; a management accounting system is not needed to produce manufacturing accounts although it will make production easier if used; manufacturing accounts are often produced more frequently than annually. Question 3 c is correct (a), (b) and (d) are indirect factory costs. Question 4 c is correct Stock is valued at cost which may include related production overheads but not administration overheads. Question 5 a is correct Cost of manufactured goods is: 000 Prime cost 3450 Factory overheads 236 Add opening WIP 126 Less closing WIP Question 6 c is correct Profit is unrealized until a sale occurs, therefore stock values need to be adjusted to remove unrealized profits. Question 7 a is correct A debating society would not normally have any trading activities. It would not also be aiming to make a profit; hence it would be misleading to show its revenue income and revenue expenditure in a profit and loss account. Question 8 c is correct A profit-making service sector entity is no different in principle from a profit-making manufacturing entity. Hence if it is a company and it is owned by shareholders, the amount contributed by them in the form of share capital will be recorded in a capital account. Chapter 8 Cash flow statements Question 1 d is correct All but very small companies must comply with FRS1. Question 2 b is correct Question 3 d is correct 000 Operating profit before tax 235 Less increase in debtors 17 Less reduction in creditors 4 Less increase in stocks 15 Net cash flow from operations Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited 2001

37 Question 4 c is correct A bonus issue of shares is a capitalization of reserves, there is no inflow of cash. Question 5 c is correct Question 6 d is correct Chapter 9 Interpretation of accounts Question 1 d is correct Both budgeted/forecast data may be used the essential feature is that comparisons are valid. Question 2 d is correct Question 3 c is correct Question 4 b is correct Question 5 b is correct But be careful to define capital employed. (c) is incorrect because the statement refers to total assets not total net assets which would, of course, be equal to capital employed. Question 6 c is correct (a) would be likely to increase sales revenue but would not reduce gross profit; (b) would reduce cost of sales and thus increase gross profit; (d) would affect the net profit, assuming that the wages are charged to profit and loss not cost of sales. Chapter 10 Disclosure of information Question 1 c is correct However, banks, customers and suppliers may be able to ask for information or be under a right to receive it under certain circumstances. For example, a bank which has lent money under a debenture should be supplied with information relating to the company financial position under the terms of the debenture deed. Question 2 d is correct The ASB has a more sharply defined work programme, accounting standards are being progressively overhauled and replaced by financial reporting standards, the role of auditors is being expanded, the FRRP is now operating. However, the practice of creative accounting still exists (and probably always will to a degree). Question 3 c is correct (a) Employees often receive summary financial statements or employee reports in large companies, but have no right to receive financial statements unless they own shares in the company. (b) Shareholders can opt to receive full or summary financial statements. (c) There are severe penalties for failing to file accounts on time, as specified in the Companies Act. Accounting for Non-Accounting Students, 5th edition, Lecturer s Guide. Pearson Education Limited