PTA Level 1 — Questions and Answers
Question 1: Which of the following estimates a trader's net profit over a certain period?
- Closing net assets + drawings - capital introduced - opening assets (Correct answer)
- Closing net assets - drawings + capital introduced - opening net assets
- Closing net assets - drawings - capital introduced - opening net assets
- Closing net assets + drawings + capital introduced - opening assets
Correct answer: Closing net assets + drawings - capital introduced - opening assets
Net profit represents the increase in owner's equity from business operations, excluding owner contributions or withdrawals. To calculate it, you start with the closing net assets, add back any drawings (owner withdrawals), subtract any new capital introduced, and then subtract the opening net assets. This formula isolates the profit generated by the business itself over the period.
Question 2: A Statement of Financial Position is intended to show:
- a clear and definite review of what a firm is truly worth.
- the amount the firm may be sold for in liquidation.
- the business's assets and the claims against them. (Correct answer)
- the amount the business may be sold for as a going concern.
Correct answer: the business's assets and the claims against them.
The Statement of Financial Position, also known as the Balance Sheet, provides a snapshot of a company's financial health at a specific point in time. It details the company's assets (what it owns) and its liabilities (what it owes to others) and equity (the owners' claim on the assets). This fundamental accounting statement adheres to the accounting equation: Assets = Liabilities + Equity.
Question 3: A grocery store's net assets were $64,800 as of January 31, 2008, with a net profit of $30,600 for the year. On August 31, 2007, the proprietor invested an extra $7,200. He also withdrew $960 each month and $840 worth of products on December 24, 2007. What were the net assets on February 1, 2007?
- $50,040
- $51,850
- $39,360 (Correct answer)
- $13,420
Correct answer: $39,360
To find the opening net assets, we use the formula: Closing Net Assets = Opening Net Assets + Net Profit + Capital Introduced - Drawings. First, calculate total drawings: ($960/month * 12 months) + $840 = $11,520 + $840 = $12,360. Then, rearrange the formula: Opening Net Assets = Closing Net Assets - Net Profit - Capital Introduced + Drawings. So, $64,800 - $30,600 - $7,200 + $12,360 = $39,360.
Question 4: Which of the following things may show on a company's Statement of Cash Flows? (1) Surplus from revaluation of non-current assets (2) Proceeds from the issuing of shares. (3) Proposed dividend. (4) Dividends received.
- 2 and 4 (Correct answer)
- 1 and 3
- 3 and 4
- 1 and 2
Correct answer: 2 and 4
The Statement of Cash Flows reports actual cash inflows and outflows from operating, investing, and financing activities. Proceeds from the issuing of shares (2) represent a cash inflow from financing activities. Dividends received (4) are a cash inflow, typically from investing activities. Surplus from revaluation (1) is a non-cash item, and proposed dividends (3) are not cash outflows until they are actually paid.
Question 5: Which of the following would not show on a Statement of Cash Flows?
- The acquiring of long-term investments
- The nominal value of debentures redeemed at par throughout the year.
- The Dividends given to preferred stockholders during the year
- The Statement of Profit or Loss for Taxation for the Year (Correct answer)
Correct answer: The Statement of Profit or Loss for Taxation for the Year
The Statement of Cash Flows focuses exclusively on actual cash movements within a business. While the acquisition of investments, redemption of debentures, and dividends paid are all cash transactions, the 'Statement of Profit or Loss for Taxation' is an accrual-based accounting report that calculates taxable income, not a record of cash flows. It includes non-cash items and adjustments for tax purposes.
Question 6: A debit entry to the sales account might indicate
- irrecoverable debts are written off
- credit sales for the repair of an error
- correction of a mistake or returned goods (Correct answer)
- cash sales
Correct answer: correction of a mistake or returned goods
A sales account typically has a credit balance, representing revenue. A debit entry to the sales account reduces this balance. This occurs when sales are reversed, such as when customers return goods (sales returns), or when a mistake in recording a sale needs to be corrected, thereby decreasing the recorded revenue. It signifies a reduction in sales.
Question 7: The debit side of a company's trial balance equals $1,920 greater than the credit sale. Which of the following problems might entirely account for the difference?
- The petty cash amount of $1,920 has been excluded from the trial balance.
- Discount obtained $960 has been deducted from discount authorized account. (Correct answer)
- A receipt of $1,920 for commission receivable was removed from the documents.
- The $960 spent for plant maintenance has been accurately recorded in the cash book and credited to the plant asset account.
Correct answer: Discount obtained $960 has been deducted from discount authorized account.
If 'Discount obtained' ($960), which is a credit item, was incorrectly deducted from a debit account or recorded as a debit, it would cause a discrepancy. The credit side of the trial balance would be understated by $960 (because the discount wasn't credited), and the debit side would be overstated by $960 (because it was incorrectly debited). This results in a total debit excess of $1,920 ($960 + $960).
Question 8: In times of rising prices, what impact does using the historical cost concept have on a company's asset values and profit?
- Asset values understated and profit overstated (Correct answer)
- Asset values and profit both overstated
- Asset values and profit both understated
- Asset values overstated and profit understated
Correct answer: Asset values understated and profit overstated
Under the historical cost concept, assets are recorded at their original purchase price. In times of rising prices (inflation), this means the reported asset values will be lower than their current market value, leading to understatement. Consequently, depreciation charges based on these lower historical costs will be smaller, resulting in higher reported profits than if assets were valued at current replacement costs.
Question 9: What is the function of the International Financial Reporting Interpretations Committee?
- To provide assistance on the use of International Financial Reporting Standards. (Correct answer)
- To develop a set of global accounting standards
Correct answer: To provide assistance on the use of International Financial Reporting Standards.
The International Financial Reporting Interpretations Committee (IFRIC), now known as the IFRS Interpretations Committee, plays a crucial role in supporting the consistent application of International Financial Reporting Standards (IFRS). Its primary function is to provide timely guidance and authoritative interpretations on complex or emerging accounting issues, ensuring uniformity and clarity in financial reporting globally.
Question 10: How should a contingent liability be shown in a company's financial statements if the possibility of a transfer of economic advantages to settle it is remote?
- No disclosure or provision is needed. (Correct answer)
- Disclosed by note and no provision is provided.
Correct answer: No disclosure or provision is needed.
According to accounting standards (e.g., IAS 37), a contingent liability is only disclosed by note if the possibility of an outflow of economic benefits is 'not remote' (i.e., possible or probable). If the possibility of a transfer of economic advantages to settle the liability is remote, meaning very unlikely, then no disclosure in the financial statements or provision (recognition as a liability) is required.
Question 11: What exactly is the purpose of amortization?
- To distribute the cost of the intangible non-current asset across its useful life. (Correct answer)
- To decrease the value of the intangible asset.
- To guarantee that funds are available to replace the asset in the future.
Correct answer: To distribute the cost of the intangible non-current asset across its useful life.
Amortization is the systematic process of expensing the cost of an intangible asset over its estimated useful life. Similar to depreciation for tangible assets, its purpose is to match the cost of the asset with the revenues it helps generate. This reflects the consumption of the asset's economic benefits over time, providing a more accurate representation of profitability.
PTA Level 1
Which of the following estimates a trader's net profit over a certain period?