Question 1

Which one of the following statements is correct? Recognition of income and expenses occurs at the point when:
A)The annual accounts are prepared.
B)The quarterly VAT return is due.
C)Goods or services are supplied.
D)Goods or services are paid for.

Accepted Answer

Recognition of income and expenses occurs at the point when goods or services are supplied, according to the accrual basis of accounting. This means that income is recognized when the goods or services are delivered, regardless of whether payment has been received yet, and expenses are recognized when the goods or services have been received, regardless of whether payment has been made yet. The preparation of annual accounts and VAT returns are related to reporting and compliance, but do not necessarily determine the recognition of income and expenses. Payment for goods or services is important for cash flow purposes, but does not determine the timing of recognition under the accrual basis.

Question 2

Kylie runs a heating system supply business.Her closing inventory at her 31 December year end is £32 447, valued at cost.This figure includes a total cost of £2400 in respect of 20 immersion heating units which cost Kylie £120 each some months earlier.This type of unit is now becoming obsolete and Kylie has decided to sell them off at £50 per unit in the New Year. Her opening inventory was £29 955.Revenue for the year was £162 250 and purchases were £122 483.Kylie incurred import duties of £3350 in respect of a consignment of Japanese boilers.
What was Kylie's gross profit for the year ended 31 December, applying the rules of inventory valuation?
A)£39 909
B)£43 259
C)£40 309
D)£37 509

Accepted Answer

The answer of Kylie runs a heating system supply business.Her...

Question 3

Navinder's business supplies computer parts on credit to many customers.On average, Navinder has found that 0.7% by value of his trade receivables amounts will not be settled.Therefore, he makes a general allowance in his accounts each year of 0.7% of trade receivables at the year end. Navinder's trade receivables at his 31 December 20X5 and 20X6 year ends were:
 Assuming that there are no other transactions relating to Navinder's bad and doubtful trade receivables in 20X6 what is the doubtful trade receivables expense in his statement of profit or loss for the year ended 31 December 20X8?
A)£2429.70
B)£5134.50
C)£275.10
D)£2704.80

Accepted Answer

The answer of Navinder's business supplies computer parts on credit...

Question 4

Arkady makes an accrual for accounting and tax advisory fees in his financial statements for the year ended 31 May 20X8..Which one of the following statements correctly describes the effects of the accrual on his statement of financial position?
A)Capital is increased and both assets and liabilities are decreased.
B)Capital is decreased and liabilities are decreased.
C)Capital is increased and assets are increased.
D)Capital is decreased and liabilities are increased.

Accepted Answer

When Arkady makes an accrual for accounting and tax advisory fees, it means that he recognizes an expense (liability) for services already received but not yet paid for. This will increase his liabilities and decrease his capital, as he has incurred an obligation to pay in the future. Therefore, the correct answer is D.

Question 5

Dolly's year end trade receivables at 31 August 20X9 totaled £38 470.She is currently in the process of taking legal action against a customer who owes her £1070 (included in the total of £38 470).She feels that there is only a limited chance of her succeeding in this action and so she decides to make a specific allowance against the whole amount.Apart from this item, Dolly expects, on the basis of past experience, that 98.5% of her trade receivables by value will be settled.The general allowance for bad trade receivables made at 31 August 20X8 was £330.There was no specific allowance at that date. Assuming that there are no other transactions during the year ended 31 August 20X9 relating to Dolly's bad and doubtful trade receivables, what was the total of her doubtful trade receivables expense in her statement of profit or loss for the year ended 31 August 20X9 (i.e.including both specific and general allowances)?
A)£1301
B)£1631
C)£1961
D)£839

Accepted Answer

The answer of Dolly's year end trade receivables at 31...

Question 6

The following details are relevant to Lucrezia's current assets at 31 December 20X3: Inventory: her inventory at cost totals £29 030.Of this amount £2600 relates to items that are rapidly becoming obsolete.Lucrezia has been looking round for possible purchasers and thinks she has agreed a deal with a trader who will pay her £1000 for these items.
Trade receivables: Lucrezia's trade receivables total £22 450.Usually, her trade receivables are settled reliably and quickly.However, there has been a general downturn in the economy and she has decided to make an allowance of 2% for the first time.
Cash: cash at bank is £8850.
There are no other current assets.
What is the total value of Lucrezia's current assets at 31 December 20X3 for inclusion in her statement of financial position?
A)£57 281
B)£59 179
C)£58 179
D)£58 281

Accepted Answer

- Inventory: £29,030 - £2,600 (obsolescence) + £1,000 (sale) = £27,430 
- Trade receivables: £22,450 - 2% allowance = £22,001 
- Cash: £8,850 
Total value of current assets = £27,430 + £22,001 + £8,850 = £58,281

Question 7

Dilbert sells goods on credit to almost 400 customers.He knows from experience that a few of his customers will not pay up, but it is generally difficult to determine in advance which ones will prove to be bad payers. At Dilbert's year end, 30 September 20X4, his trade receivables total was £85 520.He discovered just after the year end that one of his oldest customers, Farebrother, had gone bankrupt.At 30 September 20X4, Farebrother owed Dilbert £1820 and it seemed highly unlikely that Dilbert would ever recover it.Reviewing his list of trade receivables, Dilbert identified two other amounts, of £180 and £263, that had been owed for over a year, and he decided that a specific allowance was required in respect of these amounts.Dilbert had never previously had to make an allowance for specific trade receivables.
He decided to continue to make his usual 1% allowance against the remainder of the trade receivables outstanding at 30 September 20X4.The general allowance at 30 September 20X3 was £750.
What was the net value of trade receivables in Dilbert's statement of financial position at 30 September 20X4 (to the nearest £)?
A)£82 424
B)£84 665
C)£82 863
D)£83 174

Accepted Answer

The net value of trade receivables is £82,424. This is calculated by taking the total trade receivables of £85,520 and deducting the specific allowance of £1,820, the general allowance of £855 (1% of £85,520), and the two specific allowances of £180 and £263.

Question 8

In order to calculate profit with a reasonable degree of precision, it is important to match income and expenses in the statement of profit or loss.This is an accounting convention known as which of the following?
A)The accruals convention.
B)The profit convention.
C)The realization convention.
D)The recognition convention.

Accepted Answer

The accruals convention requires income and expenditures to be matched and recorded in the period in which they are incurred, regardless of when the money is received or paid out. This approach offers a more accurate picture of a company's financial position than the cash accounting method, which only records transactions when cash changes hands.

Question 9

Which one of the following statements is correct?
A)Prepayments are included as part of liabilities in the statement of financial position.
B)Accruals are included as part of liabilities in the statement of financial position.
C)Accruals reduce the amount of expenses for inclusion in the statement of profit or loss.
D)Prepayments reduce the amount of expenses for inclusion in the statement of profit or loss.

Accepted Answer

Prepayments are recorded as assets on the statement of financial position, while accruals are recorded as liabilities. Accruals represent expenses that have been incurred but not yet paid or recorded, and are included in the liabilities section of the statement of financial position. Accruals do not reduce the amount of expenses for inclusion in the statement of profit or loss; instead, they increase the amount of expenses to properly match them with the revenue they helped to generate. Prepayments, on the other hand, reduce the amount of expenses for inclusion in the statement of profit or loss by recording the expense in the current period, even if the payment was made in advance.

Question 10

Silvia is a market trader who deals in shoes.At 31 October 20X4 her closing inventory is valued at a cost of £13 750.Closing inventory includes a batch of shoes which cost Silvia £800 earlier in the year.This particular range of shoes has not sold well, and Silvia estimates that she will need to discount it heavily in order to shift it.She estimates that she can probably sell the batch of inventory for £300. What is the value of Silvia's closing inventory at 31 October 20X4, applying the rules of inventory valuation?
A)£14 550
B)£13 250
C)£13 750
D)£14 250

Accepted Answer

The correct value of Silvia's closing inventory, applying the rules of inventory valuation, is £13,250. This is because inventory should be valued at the lower of cost and net realizable value. The batch of shoes that cost £800 but can only be sold for £300 should be written down to £300, reducing the inventory value by £500 (£800 - £300) from the original £13,750 to £13,250.

Quiz 4: Applying Accounting Conventions

Which one of the following statements is correct? Recognition of income and expenses occurs at the point when:

Arkady makes an accrual for accounting and tax advisory fees in his financial statements for the year ended 31 May 20X8..Which one of the following statements correctly describes the effects of the accrual on his statement of financial position?

In order to calculate profit with a reasonable degree of precision, it is important to match income and expenses in the statement of profit or loss.This is an accounting convention known as which of the following?

Which one of the following statements is correct?