Advanced Financial Accounting Exam Quiz!

1. Why does a Balance Sheet balance (assets = liabilities + equity)?

It is required by law.

Companies force it to balance.

Accounting is a double-entry system of equal debits and credits.

Auditors make adjustments to make it balance.

The reason why a balance sheet balances is because accounting follows a double-entry system of equal debits and credits. This means that for every transaction recorded, there must be an equal amount debited and credited, ensuring that the equation assets = liabilities + equity is always balanced. This system allows for accurate and reliable financial reporting, as it ensures that all transactions are properly recorded and accounted for.

Explanation

The reason why a balance sheet balances is because accounting follows a double-entry system of equal debits and credits. This means that for every transaction recorded, there must be an equal amount debited and credited, ensuring that the equation assets = liabilities + equity is always balanced. This system allows for accurate and reliable financial reporting, as it ensures that all transactions are properly recorded and accounted for.

2. The primary financial statements that are forecast:

Income statement only.

Retained earnings and cash flow.

Balance sheet and trial balance.

Income statement, balance sheet, and cash flow.

The correct answer is income statement, balance sheet, and cash flow because these three statements are the most important financial statements that provide a comprehensive overview of a company's financial performance and position. The income statement shows the company's revenues, expenses, and net income over a specific period. The balance sheet presents the company's assets, liabilities, and shareholders' equity at a specific point in time. The cash flow statement shows the inflows and outflows of cash during a specific period, providing insights into the company's liquidity and ability to generate cash. Together, these three statements give a complete picture of the company's financial health and help stakeholders make informed decisions.

Explanation

The correct answer is income statement, balance sheet, and cash flow because these three statements are the most important financial statements that provide a comprehensive overview of a company's financial performance and position. The income statement shows the company's revenues, expenses, and net income over a specific period. The balance sheet presents the company's assets, liabilities, and shareholders' equity at a specific point in time. The cash flow statement shows the inflows and outflows of cash during a specific period, providing insights into the company's liquidity and ability to generate cash. Together, these three statements give a complete picture of the company's financial health and help stakeholders make informed decisions.

3. All of the Financial statements preparing over an accrual basis.

True

False

The statement of cash flow presented over cash basis

Explanation

The statement of cash flow presented over cash basis

4. Dividends paid for the year would appear in which of the following sections of the cash flow statement?

Operating section.

Investing section.

Financing section.

It would not appear on the statement.

Dividends paid for the year would appear in the financing section of the cash flow statement because dividends are considered a cash outflow and are typically classified as a financing activity. This section of the cash flow statement shows the cash flows related to the company's financing activities, such as issuing or repurchasing stocks, issuing or repaying debt, and paying dividends to shareholders.

Explanation

Dividends paid for the year would appear in the financing section of the cash flow statement because dividends are considered a cash outflow and are typically classified as a financing activity. This section of the cash flow statement shows the cash flows related to the company's financing activities, such as issuing or repurchasing stocks, issuing or repaying debt, and paying dividends to shareholders.

5. Which of the following financial statements provides information about economic resources and claims on those resources?

Income Statements

Balance Sheet

Cash Flow

All of the Above

The balance sheet provides information about economic resources and claims on those resources. It presents a snapshot of a company's financial position at a specific point in time, showing its assets, liabilities, and shareholders' equity. This statement helps stakeholders understand the company's financial health and its ability to meet its obligations. Income statements, on the other hand, provide information about a company's revenues, expenses, and net income over a period of time. Cash flow statements show the inflows and outflows of cash during a specific period. Therefore, the correct answer is the Balance Sheet.

Explanation

The balance sheet provides information about economic resources and claims on those resources. It presents a snapshot of a company's financial position at a specific point in time, showing its assets, liabilities, and shareholders' equity. This statement helps stakeholders understand the company's financial health and its ability to meet its obligations. Income statements, on the other hand, provide information about a company's revenues, expenses, and net income over a period of time. Cash flow statements show the inflows and outflows of cash during a specific period. Therefore, the correct answer is the Balance Sheet.

6. What is the basic principle for measuring inventories?

Inventories shall be measured at the lower of cost and value in use.

Inventories shall be measured at the lower of fair value and value in use.

Inventories shall be measured at the lower of fair value and net realizable value.

Inventories shall be measured at the lower of cost and net realizable value.

The basic principle for measuring inventories is to measure them at the lower of cost and net realizable value. This means that inventories should be valued at the lower of their historical cost or the amount they are expected to be sold for, less any costs associated with selling them. This principle ensures that inventories are not overstated on the balance sheet and reflects their true economic value.

Explanation

The basic principle for measuring inventories is to measure them at the lower of cost and net realizable value. This means that inventories should be valued at the lower of their historical cost or the amount they are expected to be sold for, less any costs associated with selling them. This principle ensures that inventories are not overstated on the balance sheet and reflects their true economic value.

7. Dividends paid to ordinary shareholders shall be presented:

In the statement of other comprehensive income as an increase in equity.

In the statement of profit or loss as a financial expense.

In the statement of other comprehensive income as a decrease in equity.

In the statement of profit or loss as other operating expense.

Dividends paid represent distribution of profit after tax to shareholders and therefore, they are shown as a movement in equity. Decrease, of course.

Explanation

Dividends paid represent distribution of profit after tax to shareholders and therefore, they are shown as a movement in equity. Decrease, of course.

8. A company acquired a vehicle for total cost of USD 20,000 and plans to depreciate it over 4 years. The company assumes that after 4 years, vehicle will be sold for USD 1,000. Calculate the depreciation expense for the third year on a sum of years digit (SYD) basis.

1900

1000

5700

2375

To calculate the depreciation expense for the third year using the sum of years digits (SYD) method, we need to follow these steps:

Calculate the sum of the digits for the useful life of the asset.

The sum of the digits formula is: n(n + 1) / 2, where n is the number of years of useful life.

For a 4-year useful life: Sum = 4(4 + 1) / 2 = 10.

Calculate the depreciation expense for each year using the following formula: (Remaining useful life / Sum of digits) * (Cost - Salvage value).

For the third year: Remaining useful life = 4 - 3 = 1.

Depreciation expense = (1 / 10) * (20,000 - 1,000).

Let's plug in the values and calculate:

Depreciation expense = (1 / 10) * (20,000 - 1,000) = (1 / 10) * 19,000 = 1,900.

So, the depreciation expense for the third year using the sum of years digits (SYD) basis is USD 1,900.

Explanation

To calculate the depreciation expense for the third year using the sum of years digits (SYD) method, we need to follow these steps:

Calculate the sum of the digits for the useful life of the asset.

The sum of the digits formula is: n(n + 1) / 2, where n is the number of years of useful life.

For a 4-year useful life: Sum = 4(4 + 1) / 2 = 10.

Calculate the depreciation expense for each year using the following formula: (Remaining useful life / Sum of digits) * (Cost - Salvage value).

For the third year: Remaining useful life = 4 - 3 = 1.

Depreciation expense = (1 / 10) * (20,000 - 1,000).

Let's plug in the values and calculate:

Depreciation expense = (1 / 10) * (20,000 - 1,000) = (1 / 10) * 19,000 = 1,900.

So, the depreciation expense for the third year using the sum of years digits (SYD) basis is USD 1,900.

9. Increase in trade receivables during 20X1 represents USD 14,280. It includes the unrealized foreign exchange gain amounting to USD 1,460 as at 31 December 20X1. What amount shall be presented as an adjustment for non-cash item in the operating part?

(1,460)

1,460

0

12,820

Unrealized foreign exchange gain “artificially” increased the balance of receivables and therefore, it must be deducted as a non-cash adjustment.

Explanation

Unrealized foreign exchange gain “artificially” increased the balance of receivables and therefore, it must be deducted as a non-cash adjustment.

10. A provision is:

A liability of uncertain timing or amount.

A possible obligation arising from past events.

A present obligation arising from past events.

A liability of uncertain timing, amount and settlement.

A provision is a liability of uncertain timing or amount. This means that it is an obligation that a company is likely to have to fulfill in the future, but the exact timing or amount of the obligation is uncertain. This could be due to factors such as legal uncertainties or ongoing negotiations. The company must recognize this liability on its balance sheet and make an estimate of the amount based on the information available.

Explanation

A provision is a liability of uncertain timing or amount. This means that it is an obligation that a company is likely to have to fulfill in the future, but the exact timing or amount of the obligation is uncertain. This could be due to factors such as legal uncertainties or ongoing negotiations. The company must recognize this liability on its balance sheet and make an estimate of the amount based on the information available.