Category: Business Studies

With respect to an operating lease, which of the following statements is true?

Select ONE answer:

1. It is only possible to cancel the agreement during the term at significant cost
2. With this type of agreement, a company sells assets to a finance house and the finance house receives regular payments while the company uses the asset
3. It is a short-term lease that can easily be cancelled
4. It is a contract for a specified term, normally equal to the expected asset life

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct == > An operating lease is a short-term contract which may not last for the full life of the asset. The lessor owns the asset. The other options are all common features of finance leases.
4. Not correct

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Which of the following in practice is the source of finance that a company can draw upon most easily?

Select ONE answer:

1. Cash generated from retained earnings
2. New share issues
3. Rights issues
4. Bank borrowings

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > Cash generated from retained earnings is the source of finance that most companies prefer traditionally. – it is simple, no involvement of the shareholders is required, and the control structure of the company is unaffected. New share issues are expensive and risky – they are normally only undertaken when large amounts of new capital are required. Rights issues are cheaper and easier to arrange than new share issues – however they must be priced attractively to ensure that enough shareholders will exercise their rights to make the issue a success. Bank borrowings are a major source of finance since debt finance is generally cheaper and easier to arrange than equity, but it lacks the simplicity of using cash from retained earnings.
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Keith is a financial consultant and has made the following statements about finance leases to his clients in newsletter:

• Statement 1 The lessor is responsible for maintenance of the asset
• Statement 2 The agreement may split the lease term into a primary period and a secondary period
• Statement 3 The capital value of the asset must be shown on the lessee’s statement of financial position
• Statement 4 The leasing company is normally a bank or finance house

Which of these statements are true?

Select ONE answer:

1. Statements 1, 2 and 3 only
2. Statements 2, 3 and 4 only
3. Statements 1, 2 and 4 only
4. Statements 1, 3 and 4 only

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct == > Under a finance lease, the risks and rewards of ownership are transferred to the lessee, who will therefore normally be responsible for maintenance.
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Which of the following is an advantage to shareholders of a company that is obtaining a quotation on the London Stock Exchange?

Select ONE answer:

1. Disclosure requirements are reduced
2. Larger dividends can be paid
3. Shares become more readily marketable
4. The company becomes entitled to put ‘plc’ (that is, public limited company) after its name

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct == > Shares become more readily marketable when they are quoted. Not all public limited companies are quoted companies, and all quoted companies face increased disclosure requirements, not reduced ones, compared to an unquoted plc let alone a Ltd company. The size of dividend does not depend on whether a company is quoted.
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.