Chapter 3 Self-test questions

. The cost of sales calculation is:

Opening inventory + purchases + closing inventory - purchase returns - discounts received

Opening inventory + purchases - closing inventory + purchase returns - discounts received

Opening inventory + purchases - closing inventory - purchase returns + discounts received

Opening inventory + purchases - closing inventory - purchase returns - discounts received

. Which of the following statements are correct? Please select all that apply.

The International Accounting Standards Board defines income as 'increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims'.

A prepayment is an expense paid in advance of the accounting period to which it relates.

Financial statements are drawn up on the cash received and cash paid basis.

The allowance for receivables allows for a potential loss from trade receivables that may not be collected.

. Depreciation is an application of the ________ basis of accounting.

. The residual value of a non-current asset is ignored when calculating the depreciation charge for the accounting period on the reducing balance basis.

True

False

. Jordan has trade receivables at 31 October 2021 of £500,000. Of these trade receivables, there is a known irrecoverable debt of £20,000. Jordan wants to create an allowance for receivables of 5% of the remaining trade receivables. At 31 October 2020, the allowance for receivables was £18,000. What is Jordan's total charge for irrecoverable debts and allowance for receivables in the statement of profit or loss for the year ended 31 October 2021?

£20,000

£24,000

£26,000

£44,000

. On 30 June 2021, Klaus sold a piece of machinery for £45,000. The machinery had cost £100,000 on 1 July 2018. On that date, Klaus had estimated that the machinery would have a residual value of £25,000. Klaus's policy is to depreciate plant and machinery on the straight-line basis at a rate of 20% per annum. What was Klaus's profit or loss on the sale of this piece of machinery?

£5,000 profit

£5,000 loss

£10,000 profit

£10,000 loss

. Which of the following statements are correct? Please select all that apply.

Operating profit - finance income + finance expense = profit before tax.

The International Accounting Standards Board defines expenses as 'decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims'..

An accrual is an expense owing at the end of the financial year for goods and services received but not yet paid for.

Depreciation represents a loss in value of a non-current asset.

. The _____________ principle of accounting states that profits should not be anticipated until they have been earned through a sale.

. Cash paid to a trade payable has no effect on the statement of profit or loss.

True

False

. Bhavika buys a new machine for £100,000 on 1 June 2021. She estimates that the new machine will be used for four years in the business and that it will have a £20,000 residual value in four years' time. It is Bhavika's policy to depreciate machinery on the reducing balance basis at the rate of 33% per annum. What will the carrying amount of this machinery be at the end of the second year of its useful life?

£44,088

£44,890

£55,110

£55,912

. Discounts allowed (early settlement discounts) are an expense in the statement of profit or loss.

True

False

. Which of the following statements describe cost of sales? Please select all that apply.

The costs of producing or buying in products for sale.

The costs of running the business.

The direct costs incurred in making sales of products and services.

The costs of financing a business.

. Both sales made for cash and sales made on credit increase revenue in the statement of profit or loss during an accounting period.

True

False

. At 31 October 2020, Alyssa's statement of financial position showed an accrual for accounting costs of £1,500. During the twelve months ended 31 October 2021, Alyssa made cash payments for accounting costs totalling up to £10,900. At 31 October 2021, accounting costs of £2,200 were awaiting payment. What figure will Alyssa show for accounting costs in her statement of profit or loss for the financial year ended 31 October 2021?

£10,200

£10,900

£11,600

£14,600

. Which of the following statements are true? Please select all that apply.

Reducing balance depreciation in the first year of a non-current asset's useful life is calculated by multiplying the non-current asset's cost by the reducing balance depreciation %.

Cost - accumulated depreciation = carrying amount.

Straight line depreciation is calculated by deducting a non-current asset's estimated residual value from its cost and dividing the resulting number by the number of years of the non-current asset's estimated useful life.

Reducing balance depreciation is most suitable for non-current assets whose economic benefits are consumed evenly over the non-current assets' useful lives.

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