1.

The purpose of the financial statement that lists an entity's total assets and total capital/liabilities
is to show:
A. the financial performance of the entity over a period of time
B. the amount the entity could be sold for in liquidation
C. the amount the entity could be sold for as a going concern
D. the financial position of the entity at a particular moment in time

KEY : The business's statement of financial position shows its financial position at a
given moment in time. It contains three key elements of financial statements: liabilities,
capital and assets at that moment.
2. A business can make a profit and yet have a decreased bank balance. Which of the
following might cause this to happen?
A. The sale of non-current assets at a loss
B. The charging of depreciation in the statement of profit or loss
C. The lengthening of the period of credit given to customers
D. The lengthening of the period of credit taken from suppliers
KEY: A business can make a profit and yet have a decreased cash in hand and cash at
bank due to various factors. Let's analyze each option to determine which one might
cause this situation:
A. The sale of non-current assets at a loss: When a business sells non-current assets at a
loss, it will result in a decrease in cash. This is because the cash received from the sale is
lower than the book value of the asset. However, this alone does not explain a decrease in
cash in hand and cash at bank while making a profit.
B. The charging of depreciation in the Statement of profit or Loss and other
comprehensive income: Depreciation is a non-cash expense that reduces the value of an
asset over its useful life. While it reduces the reported profit, it does not directly impact
cash in hand and cash at bank. Therefore, this option does not explain a decrease in cash
while making a profit.
C. The lengthening of the period of credit given to customers: If a business extends the
period of credit given to customers, it means that customers are taking longer to pay their
invoices. This can result in a delay in receiving cash, leading to a decrease in cash in
hand and cash at bank. However, this does not directly affect the profit generated by the
business.
D. The shortening of the period of credit taken from suppliers: If a business shortens the
period of credit taken from suppliers, it means that the business is paying its suppliers
earlier. This can result in a decrease in cash in hand and cash at bank, as cash is being
used to settle the payments earlier. However, this does not directly impact the profit
generated by the business.
Based on the analysis, the option that might cause a business to have a decreased cash in
hand and cash at bank while making a profit is C. The lengthening of the period of credit
 given to customers. By extending the credit period, the business may experience a delay
in receiving cash, leading to a decrease in cash balances despite generating a profit.
3. Which of the following expenses is included in cost of sales?
A. Sales people's salaries
B. Cost of raw material
C. Management salaries
D. Overdraft interest
KEY: The others are examples of selling expenses (A), administration expenses (B) and
finance cost (C).
4. Which following statements are true ?
A. A corporation's quarterly dividends will cause a reduction in the corporation's retained
earnings, which in turn reduces the corporation's stockholders' equity. So, this will
reduce the corporation's net income.
B. A corporation's quarterly dividends will not cause a reduction in the corporation's
retained earnings. However, this will reduce the corporation's net income.
C. A corporation's quarterly dividends will cause a reduction in the corporation's retained
earnings, which in turn reduces the corporation's stockholders' equity. However, this will
not reduce the corporation's net income.
D. A corporation's quarterly dividends will cause a increase in the corporation's retained
earnings, which in turn increase the corporation's stockholders' equity. So, this will
increase the corporation's net income.
KEY : Since the dividends are not an expense, the dividends do not reduce the corporation's
net income (earnings, profits). Dividends will reduce the corporation's retained earnings
which is reported in the stockholders' equity section of the balance sheet. (A cash dividend
also reduces the corporation's current asset Cash.)

5. The statements of financial position of John's business at 31 December 20X2 and 20X1
showed the following.
31 December 31 December
20X2 20X1
£ £
Non-current assets 48,500 60,000
Current assets 18,500 33,000
Current liabilities 20,500 15,500

John introduced new capital of £11,000 during the year, and withdrew goods for his private use
which had cost £15,000.
What was the profit or loss of John's business for the year?
A. Profit of £27,000
B. Profit of £27,500
C. Loss of £27,500
D. Loss of £27,000
KEY: Opening net assets = 60,000 + 33,000 – 15,500 = 77,500
Closing net assets = 48,500 + 18,500 - 20,500 = 46,500
Capital introduced = 11,000
Drawing = 15,000.
Change in net assets = Closing net assets - Opening net assets
11,000 – 15,000 + profit/loss = 46,500 - 77,500
 Loss = 27,000