CXC Principles of Accounts: Financial Statements 2 — Questions and Answers
Question 1: The Balance Sheet shows:
- Revenue and expenses earned during an accounting period
- Cash inflows and outflows over a period
- Assets, liabilities, and owner's equity at a specific date (Correct answer)
- Sales and purchase transactions only
Correct answer: Assets, liabilities, and owner's equity at a specific date
The Balance Sheet is a snapshot of a business's financial position — showing its assets, liabilities, and owner's equity at a specific point in time.
Question 2: The fundamental accounting equation is:
- Assets = Liabilities + Owner's Equity (Correct answer)
- Assets = Revenue − Expenses
- Liabilities = Assets + Equity
- Owner's Equity = Assets + Liabilities
Correct answer: Assets = Liabilities + Owner's Equity
The accounting equation Assets = Liabilities + Owner's Equity must always balance, forming the basis of double-entry bookkeeping.
Question 3: Which of the following is a current asset?
- Machinery
- Long-term investments
- Accounts receivable (Correct answer)
- Motor vehicles
Correct answer: Accounts receivable
Accounts receivable is a current asset because it is expected to be converted into cash within one year.
Question 4: Which of the following is a non-current (fixed) asset?
- Cash at bank
- Closing inventory
- Prepaid expenses
- Motor vehicles (Correct answer)
Correct answer: Motor vehicles
Motor vehicles are non-current (fixed) assets because they are long-term assets used in business operations for more than one accounting period.
Question 5: Owner's equity on the Balance Sheet increases when:
- The owner withdraws cash from the business
- The business incurs a net loss
- The business earns a net profit (Correct answer)
- Total liabilities increase
Correct answer: The business earns a net profit
Net profit increases retained earnings, which is a component of owner's equity, thereby increasing total equity on the Balance Sheet.
Question 6: Accumulated depreciation on the Balance Sheet is shown as:
- An addition to the value of non-current assets
- A deduction from the cost of non-current assets (Correct answer)
- A current liability of the business
- Part of owner's equity
Correct answer: A deduction from the cost of non-current assets
Accumulated depreciation is subtracted from the cost of a non-current asset to give its net book value (carrying amount) on the Balance Sheet.
Question 7: Which of the following is a long-term (non-current) liability?
- Bank overdraft
- Accounts payable
- Accrued expenses
- Mortgage payable (Correct answer)
Correct answer: Mortgage payable
A mortgage payable is a long-term liability because it is repaid over many years, extending beyond the current accounting period.
