Question 1

A business that is not a legal entity, where there is one owner who is fully liable for all debts, is:
A) a sole trader.
B) a proprietary company.
C) a partnership.
D) none of the above.

Accepted Answer

A sole trader is an individual who owns and runs their own business, with no legal distinction between the owner and the business. As a result, the owner is fully liable for all debts and obligations of the business. A proprietary company is a type of business entity that is a separate legal entity from its owners, while a partnership involves two or more people sharing ownership and liability for a business. None of the above is not the correct answer, as a sole trader is a specific type of business structure.

Question 2

GAAP, in an accounting context, stands for:
A) Good Auditing and Accounting Practices.
B) General Accepted Accounting Practice.
C) General Assumptions and Attitudes of Professionals.
D) none of the above.

Accepted Answer

GAAP stands for Generally Accepted Accounting Principles, which are a set of guidelines and standards for financial accounting and reporting. It provides a common language for companies, investors, and regulators to understand financial information.

Question 3

Financial accounts prepared by companies under the Financial Reporting Act must meet which general standard of reporting?
A) satisfactory
B) accurate
C) true and fair
D) beyond a reasonable doubt

Accepted Answer

Financial accounts prepared by companies under the Financial Reporting Act must meet the general standard of true and fair reporting. This means that the financial statements should present a true and fair view of the company's financial position, financial performance, and cash flows. Satisfactory or accurate reporting is not sufficient, as these standards may allow for some level of misrepresentation or error. Beyond a reasonable doubt is a legal standard used in criminal cases and does not apply to financial reporting.

Question 4

The assumption that for reporting purposes the life of a business is divided up into a series of time periods of equal length is known as the:
A) accounting period assumption.
B) entity assumption.
C) realisation assumption.
D) matching assumption.

Accepted Answer

The accounting period assumption assumes that the life of a business can be divided into a series of time periods of equal length, such as monthly, quarterly, or annually, for the purpose of financial reporting. This allows for the preparation of regular financial statements that provide useful information for decision-making.

Question 5

If a company has a share capital of $100,000, revenue reserves of $15,000 and retained earnings of $30,000, what is the maximum amount it can legally distribute as cash dividends?
A) $45,000
B) $30,000
C) $145,000
D) $130,000

Accepted Answer

The maximum amount a company can legally distribute as cash dividends is the sum of its revenue reserves and retained earnings, which in this case is $15,000 + $30,000 = $45,000. Share capital is not distributed as dividends.

Question 6

A company issued 300,000 ordinary shares to the public, priced at $1. The shares were payable as 50 cents on 1 July 2015 with 50 cents uncalled. How much cash was due to the company on 1 July 2015 from the issue?
A) $300,000
B) $150,000
C) $250,000
D) $100,000

Accepted Answer

The company issued 300,000 ordinary shares priced at $1, therefore the total value of the shares issued was 300,000 x $1 = $300,000. Each share was payable as 50 cents on 1 July 2015 with 50 cents uncalled. Therefore, the company was due to receive 50 cents x 300,000 shares = $150,000 on 1 July 2015.

Question 7

Which of these accounting concepts conflict with each other?
A) monetary basis and historical cost
B) prudence and full disclosure
C) entity and the accounting period
D) accounting period and matching

Accepted Answer

Prudence and full disclosure can conflict because prudence involves being conservative in financial reporting to avoid overstating assets or income, while full disclosure requires revealing all relevant financial information, which could potentially include optimistic estimates or projections.

Question 8

The statement that is true about the order of repayment for a company in liquidation is:
A) creditors rank before ordinary shareholders.
B) wages owing to employees rank last.
C) ordinary shareholders rank before preference shareholders.
D) All of the statements are true.

Accepted Answer

Creditors rank before ordinary shareholders in the repayment order for a company in liquidation. This is because creditors have a higher level of priority in terms of repayment as they have provided the company with credit or goods and services that have not been paid for, whereas ordinary shareholders have invested in the company and are considered owners rather than creditors. Additionally, wages owed to employees generally rank above ordinary shareholders but below secured creditors. Preference shareholders rank above ordinary shareholders but below secured creditors and certain other classes of preferred debts.

Question 9

A sole trader cannot legally operate which of these businesses?
A) engineering consultancy
B) chemist
C) bank
D) service station

Accepted Answer

A sole trader cannot legally operate a bank as banks require a specific license and are heavily regulated by the government. The other businesses listed can be operated by a sole trader.

Question 10

A share issue where the company gives existing shareholders the first right of refusal of the issue is:
A) an ordinary issue.
B) a preference issue.
C) a rights issue.
D) a bonus issue.

Accepted Answer

A rights issue gives existing shareholders the right (but not the obligation) to purchase additional shares in proportion to their current holdings before they are made available to the general public. This allows existing shareholders to maintain their proportional ownership in the company and avoid dilution of their shares.

Question 11

Which of these is an advantage of a private company compared with a partnership? 
i) perpetual life
Ii) easier transfer of ownership
Iii) mutual agency
Iv) limited liability
A) i, ii, iii
B) i, ii, iv
C) ii, iii, iv
D) i, ii

Accepted Answer

A private company has perpetual life and limited liability, similar to a partnership. However, the advantage of a private company over a partnership is that it allows for easier transfer of ownership, which is reflected in option (ii). Mutual agency is a characteristic of a partnership and not relevant to this comparison.

Question 12

If a company issues 20,000 ordinary shares which are sold at $4 per share, the effect on the accounting equation is:
A) increase in cash $80,000; increase in liabilities $80,000.
B) increase in cash $80,000; decrease in shareholder's equity $80,000.
C) increase in cash $80,000; increase in shareholder's equity $80,000.
D) none of the above.

Accepted Answer

Issuing ordinary shares will increase the company's cash by the total amount received from the sale ($4 x 20,000 = $80,000), and also increase the shareholder's equity by the same amount. There is no increase in liabilities as the company does not owe any debt for issuing ordinary shares.

Question 13

In comparison with a company, a disadvantage of operating as a partnership is:
A) limited life.
B) unlimited liability.
C) mutual agency.
D) all of the above.

Accepted Answer

All of the options listed are disadvantages of operating as a partnership compared to a company. Partnerships often have a limited life, meaning they may dissolve upon the death or withdrawal of a partner unless there are provisions in place for continuation. Partners in a general partnership face unlimited liability, meaning they are personally responsible for the debts of the business. Mutual agency is another characteristic of partnerships where each partner can make decisions and enter into contracts on behalf of the partnership, potentially creating liabilities for all partners.

Question 14

Which item can be a component of shareholders' equity?
A) share capital
B) retained earnings
C) reserves
D) all of the above

Accepted Answer

All three options (share capital, retained earnings, and reserves) can be components of shareholders' equity. Share capital represents the initial investments made in a company by shareholders, retained earnings are the profits that the company has earned but not distributed as dividends, and reserves are funds set aside by the company for specific purposes, such as future expansions or contingencies. Therefore, all three options can contribute to shareholders' overall equity in the company.

Question 15

Which business is not likely to be organised as a sole trader or partnership?
A) architect
B) carpenter
C) oil exploration
D) hot bread shop

Accepted Answer

Oil exploration requires significant investments and high risks, making it more suitable for a corporate structure such as a limited liability company or a public corporation. Sole trader or partnership structures may not provide sufficient legal protection for the risks associated with this industry.

Question 16

If the retained earnings figure in a company balance sheet increases from the beginning of the year to the end of the year, it is most probable that:
A) profit for the year is more than dividends declared.
B) bonus shares have been issued.
C) additional capital has been raised during the year.
D) profit for the year is less than dividends declared.

Accepted Answer

Retained earnings are the profits of a company that have not been distributed to shareholders as dividends. Therefore, if retained earnings increase from the beginning of the year to the end of the year, it means that the profits generated during the year were greater than the dividends declared.

Question 17

The three most common types of structure used by businesses in New Zealand are:
A) sole trader, company, co-operative.
B) sole trader, partnership, company.
C) partnership, private company, trust.
D) partnership, company, association.

Accepted Answer

The most common types of structure used by businesses in New Zealand are sole trader, partnership, and company. Co-operatives and trusts are less common, and associations are not a common business structure in New Zealand. Therefore, option B – sole trader, partnership, and company – is the best choice.

Question 18

If you were asked to loan money to a company that you feared might be getting into financial difficulties, which of these courses of action would provide you with the most protection from default on the loan?
A) rely on the principle of limited liability
B) require the accounts of the company to be audited
C) specify a particular accounting method to be used
D) require a mortgage over a specific asset of the company

Accepted Answer

Requiring a mortgage over a specific asset of the company would provide the most protection from default on the loan, as the lender would have a legal claim on the asset in the event of default. The other options may provide some level of protection, but they do not offer the same level of security as a mortgage. Limited liability would protect the lender from being liable for the company's debts, but it would not ensure repayment of the loan. Auditing the company's accounts and specifying an accounting method may provide some assurance of the company's financial stability, but they do not offer any form of collateral or legal claim in the event of default.

Question 19

Drawings by a partner or a sole trader from their business may be:
A) cash taken out on a regular basis.
B) the owner's personal bills paid by the business, e.g. children's school fees.
C) goods taken for personal consumption.
D) all of the above.

Accepted Answer

Drawings by a partner or a sole trader from their business can include cash taken out on a regular basis, the owner's personal bills paid by the business, and goods taken for personal consumption.

Question 20

A bonus issue of shares by a company will:
A) increase total shareholders' equity.
B) reduce total shareholders' equity.
C) sometimes increase shareholders' equity and sometimes leave it unchanged.
D) leave total shareholders' equity unchanged.

Accepted Answer

A bonus issue of shares involves converting a company's retained earnings into share capital. It redistributes the company's equity without changing the total shareholders' equity, as it does not involve any cash flow.

Quiz 2: Different Accounting Entities

A business that is not a legal entity, where there is one owner who is fully liable for all debts, is:

GAAP, in an accounting context, stands for:

Financial accounts prepared by companies under the Financial Reporting Act must meet which general standard of reporting?

The assumption that for reporting purposes the life of a business is divided up into a series of time periods of equal length is known as the:

If a company has a share capital of $100,000, revenue reserves of $15,000 and retained earnings of $30,000, what is the maximum amount it can legally distribute as cash dividends?

A company issued 300,000 ordinary shares to the public, priced at $1. The shares were payable as 50 cents on 1 July 2015 with 50 cents uncalled. How much cash was due to the company on 1 July 2015 from the issue?

Which of these accounting concepts conflict with each other?

The statement that is true about the order of repayment for a company in liquidation is:

A sole trader cannot legally operate which of these businesses?

A share issue where the company gives existing shareholders the first right of refusal of the issue is:

Which of these is an advantage of a private company compared with a partnership? i) perpetual life Ii) easier transfer of ownership Iii) mutual agency Iv) limited liability

If a company issues 20,000 ordinary shares which are sold at $4 per share, the effect on the accounting equation is:

In comparison with a company, a disadvantage of operating as a partnership is:

Which item can be a component of shareholders' equity?

Which business is not likely to be organised as a sole trader or partnership?

If the retained earnings figure in a company balance sheet increases from the beginning of the year to the end of the year, it is most probable that:

The three most common types of structure used by businesses in New Zealand are:

If you were asked to loan money to a company that you feared might be getting into financial difficulties, which of these courses of action would provide you with the most protection from default on the loan?

Drawings by a partner or a sole trader from their business may be:

A bonus issue of shares by a company will: