ACCA AK Financial Accounting 4 — Questions and Answers
Question 1: Under IAS 2, inventories should be measured at:
- Net realisable value
- The lower of cost and net realisable value (Correct answer)
- Cost only
- Replacement cost
Correct answer: The lower of cost and net realisable value
IAS 2 requires inventories to be measured at the lower of cost and net realisable value (NRV). If NRV falls below cost, a write-down is recognised.
Question 2: Which of the following is the correct accounting entry for bad debt written off?
- Debit receivables, Credit bad debt expense
- Debit bad debt expense, Credit receivables (Correct answer)
- Debit bank, Credit receivables
- Debit receivables, Credit bank
Correct answer: Debit bad debt expense, Credit receivables
When a specific debt is written off: Debit bad debt expense (or allowance for doubtful debts) and Credit trade receivables, removing the irrecoverable amount from the books.
Question 3: The accounting equation is:
- Assets = Liabilities − Equity
- Assets = Liabilities + Equity (Correct answer)
- Equity = Assets + Liabilities
- Liabilities = Assets + Equity
Correct answer: Assets = Liabilities + Equity
The fundamental accounting equation is: Assets = Liabilities + Equity. This must always balance, reflecting double-entry bookkeeping.
Question 4: Gross profit is calculated as:
- Revenue − Operating expenses
- Revenue − Cost of sales (Correct answer)
- Revenue − Total expenses including tax
- Net profit + Finance costs
Correct answer: Revenue − Cost of sales
Gross profit = Revenue − Cost of sales. It represents profit before deducting operating expenses such as administration, distribution and finance costs.
Question 5: Which of the following is NOT a component of equity on the statement of financial position?
- Share capital
- Share premium
- Retained earnings
- Long-term bank loan (Correct answer)
Correct answer: Long-term bank loan
Long-term bank loans are non-current liabilities, not equity. Equity comprises share capital, share premium, retained earnings and other reserves.
Question 6: A prepayment arises when:
- An expense has been incurred but not yet paid
- A payment has been made for a benefit not yet received (Correct answer)
- Revenue has been earned but not yet received
- A customer has paid in advance for goods not yet delivered
Correct answer: A payment has been made for a benefit not yet received
A prepayment is an amount paid in the current period for a benefit relating to a future period (e.g., paying next year's insurance in advance). It is a current asset.
ACCA AK Financial Accounting 4
Under IAS 2, inventories should be measured at: