MCQs Course for SEBI Grade A 2020 - Paper 2

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1. Which one of the following is true?

1. The term fixed asset cannot be applied to items which can be moved
2. Fixed assets tend to change constantly in amount and composition
3. Fixed assets are normally used in the business on a long-term basis
4. Fixed assets are bought with the intention of resale

Ans: 3

Fixed assets are items that provide a benefit to the entity for more than one
accounting period. They are items bought for continued use in the business
and held for the long-term Examples include land and buildings, plant and
machinery and fixtures and fittings.

Fixed assets are usually kept for the duration of their useful life and then
either scrapped or sold. However, unlike stock, they are not bought with the
intention of reselling them.

New fixed assets may be acquired and existing ones modified, repaired or
improved but generally such transactions are infrequent. This contrasts
with current assets which are changing all the time, for example, when an
item of stock is bought or sold in the case of a retailer.

2. A piece of machinery held for continued use in the business would

usually be stated in the balance sheet at:

1. its current value to the business

2. its net book value (historical cost less depreciation)
3. a realistic second-hand or scrap value
4. its current replacement cost
Ans: 2

A piece of machinery held for continued use in the business is a fixed asset
and so it is shown in the balance sheet at its net book value (i.e. its historic
cost or its original cost less accumulated depreciation). Accumulated
depreciation is the total amount of depreciation charged in respect of the
asset since it was acquired.

Current replacement cost, market value, and second hand/scrap values are
not acceptable bases for determining fixed assets amounts in accounts
produced under the historic cost accounting convention. These asset
valuation bases may be acceptable under some form accounting that
adjusts for the impact of inflation (e.g. CPP, CCA). However, inflation-
adjusted accounts are not a statutory requirement and they are now
extremely rare.

3. Drawings by a sole trader are known as?

1. An appropriation of profit
2. Items of office decoration
3. An expense
4. A liability

Ans: 1

In accounting the term drawings relate to the cash (or goods) the owner has
withdrawn from the business for their own use. Drawings are an
appropriation (a use or application) of profit.

Expenses, on the other hand, are amounts deducted from sales revenue in
arriving at the profit available to be appropriated. Expenses incurred in
decorating an office would normally be treated as a revenue expense unless
they are connected with the development or extension of new property.

4. A business has net assets at the beginning of 2010 of £101,700. The

profit earned by the business during 2010 was £72,500. The owner
withdrew goods for his own private use which had cost £2,500. What
were the net assets at the end of 2010?
 1. £174,200
2. £171,700
3. £176,700
4. £99,200

Ans: 2

At the start of the period:

Net assets = capital = £101,700

At the end of the period:

Closing net assets = opening capital + profit - drawings

= £101,700 + 72,500 - 2,500

= £171,700

5. For accounting purposes an asset is essentially a resource held by the

business which has certain characteristics. Which of the following is
not a required characteristic of an asset?

1. A probable future benefit exists

2. The benefit must arise from some past transaction or event
3. The business has an exclusive right to control the benefit
4. It must have physical substance and be capable of being touched

Ans: 4

An asset has been defined as the right or other access to future economic
benefits controlled by an entity as the result of past transactions or events
(Accounting Standards Board). Assets need not be of a physical nature, i.e.
tangible. Many assets are intangible, such as goodwill, patents and
development costs.

6. On 1 January 2011 the books of Travelite show accrued rent payable

of £250. During the year it pays rent bills amounting to £1,275 including
a bill for £375 in respect of the quarter ending 31 January 2012. What is
the charge in the profit and loss for rent payable for the year ending 31
December 2011?

1. £900
2. £1,150
3. £1,400
4. £1,650

Ans: 1

Paid to 31/12/11 1,275

Less: amount owing at 1.1.11 (250)

prepaid (1/1/09 to 31/10/11

i.e. 375 /3) (125)

Charge for year 900

7. A business changes from depreciating its vehicles at 25% on a

straight-line basis to 10%. What will be the effect of this change on
profit?

1. No effect
2. Not able to quantify
3. Increase profits
4. Decrease profits

Ans: 3

The effect of switching from 25% to 10% will be that the asset will be
depreciated over 10 years as opposed to 4 years. This will cause the
depreciation charge to fall significantly, thereby lowering expenses and in
turn increasing profits.
8. A business buys £1,000 of stock on credit. What is the dual effect of
this transaction?

1. Increase creditors and increase stocks

2. Increase debtors and increase stocks
3. Decrease cash and increase stocks
4. Decrease creditors and increase stocks

Ans: 1

The dual effect of purchasing stock on credit terms is to increase the

amount owed to suppliers (they become creditors, i.e. a liability) and
increase the amount of stock available to be sold which becomes an asset.
So the increase in total liabilities is exactly matched by the increase in total
assets and the accounting equation (assets less liabilities equals capital) still
holds good.

If the stock had been purchased for cash then the dual effect would have
been to decrease cash (an asset) and to increase stock (an asset). The
simultaneous increase and decrease in assets by exactly the same amounts
would effectively cancel each other out so leaving total assets and the
accounting equation unchanged.

9. An electrical retail company is due to report lower pre-tax profits

than the previous year. Management fear shareholder dissatisfaction.
Which of the following measures before the year-end could improve
the draft profit figure?

1. A reduction in the proposed dividend for the year

2. Postponement of an investment in new equipment
3. Delaying payment to creditors
4. A reduction in the provision for doubtful debts

Ans: 4

Pre-tax profits are arrived at by deducting expenses from gross profit but
before the deduction of tax and dividends. A reduction in the proposed
dividends would have no effect on the pre-tax profit whereas a reduction in
the provision for bad debts will have an impact.

Creating or increasing a provision is treated as an expense thereby

lowering profits, whereas reducing a provision has the opposite effect of
lowering expenses (it is effectively other income) and so improving profits.
Delaying payment to creditors and postponing new investment will simply
improve immediate cash flow and the cash balance; it will have no effect on
existing profits.

10. A firm bought a new vehicle for £10,000. It is expected to be used for
5 years and then sold for £2,000. What is the annual amount of
deprecation if the straight-line method is used?

1. £2,000
2. £1,600
3. £2,400
4. £2,334

Ans: 2

The annual depreciation charge is given by:

= original cost - estimated residual value estimated life of the asset
= (10000 - 2,000)/5
= 8,000/5
= £1,600

11. Which one of the following would be a fixed asset for a car
dealership?

1. Cash
2. Motor vehicles for sale on the forecourt
3. Debtors
4. Office equipment

Ans: 4
Fixed assets are items that provide a benefit to the entity for more than one
accounting period. They are items bought for continued use in the business
and held for the long-term Examples include land and buildings, plant and
machinery and fixtures and fittings. A typical motor dealer will have office
furniture and equipment held for continued use in the business.

These items are necessary for the business to function properly. Cash and
debtors will appear as current assets on the balance sheet. Motor dealers
trade-in motor cars, i.e. they buy and sell cars at a profit. So cars on the
forecourt are their stock in trade (just like tins of baked beans are for a food
retailer) and they are included on the balance sheet as a current asset.

12. An electricity accrual of £400 was ignored completely when

preparing a trader's profit and loss account. What will be result?

1. Profit was understated by £400

2. Profit was overstated by £400 and current liabilities overstated by
£400
3. Profit was overstated by £400 and current assets overstated by £400
4. Profit was overstated by £400 and current liabilities understated by
£400

Ans: 4

An accrual is an amount outstanding for a service provided during a

particular accounting period which is still to be paid at the end of it, e.g. the
use of the telephone just before the year-end for which a bill has yet to be
received.

By definition, therefore, an accrual is normally treated as a current liability.

For the purpose of calculating profit it should be added to the total of
electricity bills actually paid (i.e. add to the trial balance figure) to give the
total expense for the period in question. Unless this adjustment is made the
electric charge in the profit and loss account would be understated by £400
and the profit overstated by the same amount. As far as the balance sheet is
concerned, the accrual will not have been included in current liabilities and
so the current liabilities will also have been understated by £400.
13. Which one of the following types of business faces a particularly
difficult problem when determining the point of revenue recognition
and will often recognize revenue before all of the work necessary to
generate the revenue is complete?

1. A food retailer selling goods for cash

2. A hotel operator that requires payment on departure
3. A computer hardware store offering interest-free credit
4. A construction company engaged in contracts lasting more than one
year

Ans: 4

Revenue is normally recognised in the accounts when the legal title to the
goods (or services) is transferred to the customer (normally when they take
possession) and they are then obliged to pay for them. The point of
recognition for a food retailer is when the customer pays for the goods at
the checkout. Legal title and settlement of the amounts due are
simultaneous so there is no problem. The point of revenue recognition for a
hotel operator is likely to be on the departure of the resident. Normally they
will simultaneously be billed for the services provided (room occupation
etc.) and payment made (for personal customers) or payment
request/invoice issued (business customers whose companies are paying).
This presents few problems.

The point of revenue recognition for a construction company may present

problems since the contracting activity is likely to fall into more than one
accounting period. It would be potentially misleading if revenue was only
recognized on contract completion. Indeed this would contravene the
matching rule.

So companies are permitted to recognize revenue as building activity

progresses. The point of recognition for a computer store selling on credit is
when the customer takes possession of the goods and is issued with an
invoice and credit agreement, i.e. at the checkout. The amounts owed will
be recorded as a debtor in the accounts of the computer store. This presents
no real problems.
14. What are the fixed assets?

1. Items that a business owns that are tangible and often held on a long-
term basis.
2. Assets that have a fixed price and do not change.
3. Assets that are cemented into the ground and do not move.
4. Assets that are owned by consumer type businesses.

Ans: 1

Fixed assets are also known as tangible assets or property, plant, and
equipment (PP&E)—is an accounting term for assets and property that
cannot be easily converted into cash. The word fixed indicates that these
assets will not be used up, consumed, or sold in the current accounting
year.

15. How do fixed assets vary between businesses?

1. All businesses own the same fixed assets.

2. Only corporations own fixed assets.
3. Based on the type of business a company is engaged in, they may own
more or fewer fixed assets.
4. Businesses must own a minimum number of fixed assets for accounting
reasons.

Ans: 3

Fixed assets, also known as property, plant, and equipment (PP&E) and as
capital assets, are tangible things that a company expects to use for more
than one accounting period.

Generally, a company's assets are the things that it owns or controls and
intends to use for the benefit of the business. These might be things that
support the company's primary operations, such as its buildings, or that
generate revenue, such as machines or inventory. Its variation based on the
type of business a company is engaged in, they may own more or fewer
fixed assets.
16. What will be the result when the cost of a fixed asset deducted from
accumulated depreciation expenses of the fixed asset?

1. Book value of a fixed asset

2. The market value of a fixed asset
3. The historical cost of a fixed asset
4. Recoverable amount if a fixed asset

Ans: 1

Cost of a fixed asset - Accumulated depreciation expenses of the fixed asset

= Book value of a fixed asset. Except for the cost of land, the cost of a fixed
asset is spread over its estimated useful life to the business; the amount
allocated to each period is called depreciation expense.

17. Which of the following is/are fixed asset(s)?

1. Closing inventory
2. Fixed deposit in a bank
3. Patents
4. Prepaid expenses

Ans: 3

Patents are fixed assets. The accounting process for patents is similar to
other fixed assets. Companies allocate or amortize the costs over the life of
the patent.

18. Which one of the following is true?

1. Fixed assets are bought with the intention of resale.

2. The term fixed asset cannot be applied to items that can be moved.
3. Fixed assets are normally used in the business on a long-term basis.
4. Fixed assets tend to change constantly in amount and composition.

Ans: 3
Assets that are purchased for long-term use and are not likely to be
converted quickly into cash, such as land, buildings, and equipment.

19. The liabilities that are payable in more than a year and are not be
liquidated from current assets?

(A) Current liabilities

(B) Fixed liabilities

(C) Contingent liabilities

(D) All of the above

Ans: B

Fixed liabilities are debts. bonds, mortgages, or loans that are payable over
a term exceeding one year. These debts are better known as non-current
liabilities or long-term liabilities. The liabilities that are payable in more
than a year and are not be liquidated from current assets known as fixed
liabilities.

20. Depreciation on fixed assets is known as?

1. Capital expenditure and credited to the Fixed Assets Account

2. Revenue expenditure and credited to the Fixed Asset Account
3. Capital expenditure and debited to the Capital Account
4. Revenue expenditure and debited to the Fixed Assets Account

Ans: 2

Depreciation is the systematic reduction of the recorded cost of a fixed

asset. Examples of fixed assets that can be depreciated are buildings,
furniture, and office equipment. Depreciation on fixed assets is known as
revenue expenditure and credited to the Fixed Asset Account.