Unit 2 Financial Statement Preparation 1 (End-of-unit assessment)

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1 Unit 2 Financial Statement Preparation 1 (End-of-unit assessment) 1. Accounts receivable is classified as. a) Correct. Accounts receivable is a resource under an enterprise s control and its economic benefits can be received when the customers repay the due amounts. b) Incorrect. Accounts receivable does not create any obligation to an enterprise. c) Incorrect. It is the sale (revenue) causes an increase in economic benefits, but not the account receivable. d) Incorrect. Accounts receivable causes no decrease in economic benefits. 2. Bank overdraft is classified as. a) Incorrect. Bank overdraft is not a resource under an enterprise s control and it is not expected to result in any inflow of resources embodying economic benefits. b) Correct. Bank overdraft is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. c) Incorrect. Bank overdraft causes no increase in economic benefits. d) Incorrect. Bank overdraft causes no decrease in economic benefits. 3. A balance sheet includes, and. (i) assets 1

2 (ii) (iii) (iv) (v) liabilities equity revenue expenses a) (i), (ii) and (iii) b) (ii), (iii) and (iv) c) (iii), (iv) and (v) d) (i), (iv) and (v) a) Correct. The elements directly related to the measurement of financial position are presented in the balance sheet, i.e., asset, liability and equity. b) Incorrect. Revenue is related to the measurement of financial performance and presented in the income statement. c) Incorrect. Revenue and expenses are related to the measurement of financial performance and presented in the income statement. d) Incorrect. Revenue and expenses are related to the measurement of financial performance and presented in the income statement. 4. An expenditure on purchasing a motor van for the use of an enterprise is classified as. a) Correct. The expenditure is a resource under an enterprise s control and its economic benefits can be generated when the enterprise uses the motor vehicle in daily operation. b) Incorrect. The expenditure does not create any obligation to an enterprise. c) Incorrect. The expenditure does not create any inflows or enhancements of assets or decreases of liabilities. d) Incorrect. The expenditure does not create any net outflows or depletions of assets or incurrences of liabilities. 2

3 5. An expenditure on repairing a motor van is classified as. a) Incorrect. The expenditure is not a resource under an enterprise s control. b) Incorrect. The expenditure does not create any obligation to an enterprise. c) Incorrect. The expenditure does not cause any inflows or enhancements (just maintenance) of assets or decreases of liabilities. d) Correct. The expenditure cause a decrease in economic benefits in the form of outflows of assets (if paid by cash) or incurrences of liabilities (if on credit) that result in decreases in equity, other than those relating to distributions to equity participants. 6. Overall considerations in preparing financial statements include and. (i) going concern (ii) consistency of presentation (iii) cash basis of accounting (iv) immateriality a) (i) and (ii) b) (ii) and (iii) c) (iii) and (iv) d) (i) and (iv) a) Correct. The overall considerations include: going concern, accrual basis of accounting, consistency of presentation, materiality and aggregation, offsetting and true and fair view. b) Incorrect. The overall considerations do not include cash basis of accounting. c) Incorrect. The overall considerations do not include cash basis of accounting and immateriality. d) Incorrect. The overall considerations do not include immateriality. 3

4 7. Partners capital accounts are used in recording. (i) capital invested by the partners. (ii) capital withdrawn by the partners. (iii) share of profit or loss in accordance with agreed profit-sharing ratio. (iv) interests to the partners for their contributed capital. a) (i) and (ii) b) (ii) and (iii) c) (iii) and (iv) d) (i) and (iv) a) Correct. Partners capital accounts are used in recording capital invested and withdrawn by the partners. b) Incorrect. Share of profit or loss in accordance with agreed profit-sharing ratio is recorded in partners current accounts. c) Incorrect. Share of profit or loss in accordance with agreed profit-sharing ratio and interest to the partners for their contributed capital are recorded in partners current accounts. d) Incorrect. Interest to the partners for their contributed capital is recorded in partners current accounts. 8. Partners current accounts are not used in recording. a) salaries to the partners b) share of profit or loss in accordance with agreed profit-sharing ratio c) capital d) the charge of interest on drawings from partners a) Partners current accounts are used in recording salaries to the partners. b) Partners current accounts are used in recording share of profit or loss in accordance with agreed profit-sharing ratio. c) Capital is recorded in partners capital accounts. d) Partners current accounts are used in recording the charge of interest on drawings from partners. 4

5 9. Which of the following statements relating to the financial statements of a partnership is correct? a) An appropriation account is equivalent to an income statement. b) Partners current accounts are classified as liabilities. c) The profit is divided among partners in accordance with the proportion of capital contributed by partners. d) Salaries to partners are not included in the income statement. a) Incorrect. An appropriation account shows how profit for an accounting year is divided among partners in accordance with partnership agreement. An income statement shows how the partnership performed for an accounting year. b) Incorrect. Partners current accounts are classified as equity. c) Incorrect. The profit or loss is shared among partners in accordance with agreed profit-sharing ratio. d) Correct. Salaries to partners are treated as a profit division, rather than as an expense, and, accordingly, they are included in the partners current accounts. 10. The profit for the year ended 31 December 2007 of A&B Company, a partnership, is $500,000. In forming the partnership, Mr.A and Mr.B, the partners, contributed capital $1,000,000 and $1,500,000 respectively. According to the partnership agreement: Profit is shared between Mr.A and Mr.B equally; Mr.A is entitled a salary of $100,000 per annum; and Each partner is entitled to an interest of 10% per annum for their contributed capital. What are the balances of profit entitled by Mr.A and Mr.B respectively? a) Mr.A: $60,000 and Mr.B: $90,000 b) Mr.A: $75,000 and Mr.B: $75,000 c) Mr.A: $125,000 and Mr.B: $125,000 d) Mr.A: $200,000 and Mr.B: $200,000 5

6 a) Incorrect. The balance of profit is required to be shared between Mr.A and Mr.B equally. b) Correct. The balance of profit is $150,000 [$500,000 (profit) - $100,000 (Partners salary) - $250,000 (Interest for capital contributed by partners)]. Balance of profit for Mr.A: $75,000 [$150,000 *50%] and balance of profit for Mr.B: $75,000 [$150,000*50%]. c) Incorrect. The salary entitled by Mr.A is missed out in computing the balance of profit. d) Incorrect. The interest for the capital contributed by partners is missed out in computing the balance of profit. 6

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