AAT L3 Final Accounts Preparation 5

Question 1

The prudence concept in accounting requires that:

Accepted Answer

Losses and liabilities are recognised as soon as they are probable; profits only when realised

Answer

Prudence means not overstating assets or income, and not understating liabilities or expenses. Anticipated losses are recognised immediately; profits are only recognised when realised.

Question 2

The income statement of a limited company presents:

Accepted Answer

Revenue, gross profit, operating profit, profit before tax, and profit after tax

Answer

A limited company's income statement typically presents: revenue, cost of sales, gross profit, distribution and administrative expenses, operating profit, finance costs, profit before tax, tax, and profit after tax.

Question 3

In partnership accounts, a 'salary' allowance for a partner is:

Accepted Answer

An appropriation from the net profit, NOT a business expense

Answer

Partners' salary allowances are appropriations of net profit (not business expenses); they are dealt with in the appropriation account. The partnership's net profit is calculated before partners' salaries.

Question 4

An entity's current ratio is 1.5:1. This means:

Accepted Answer

The entity has £1.50 of current assets for every £1.00 of current liabilities

Answer

Current ratio = current assets / current liabilities. A ratio of 1.5:1 means there are £1.50 of current assets for every £1 of current liabilities, indicating the entity can meet short-term obligations.

Question 5

If a business has a net profit margin of 15%, it means:

Accepted Answer

15 pence of every £1 of revenue is retained as net profit

Answer

Net profit margin = net profit / revenue × 100%. A 15% margin means 15 pence of each pound of sales becomes net profit after all costs and expenses.

AAT Level 3 Practice Test

AAT Level 3 Practice Test

AAT L3 Final Accounts Preparation 5