Tag: Topic 18

Which ONE of the following statements correctly describes the principal purpose of an external audit of a limited company?

Select ONE answer:

1. To help in the preparation of the company’s financial statements
2. To prevent fraud within the company
3. To examine and express an opinion on the company’s financial statements
4. To help the directors improve the company’s financial reporting process

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 => It is management’s responsibility to prevent fraud within a company (option 2). There are auditor independence issues regarding external auditors’ involvement in the preparation of financial statements and in assisting management to improve reporting processes (options 1 and 2). It should therefore be apparent that option (3) is the correct one
4. Not correct

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Alex plc’s current ratio this year is 1.5:1 compared to 1.25:1 last year.

Which ONE of the following might help to explain this increase in the ratio?

Select ONE answer:

1. Alex plc paid its payables earlier than usual out of a bank overdraft
2. Alex plc made an unusually large sale immediately after the year-end
3. Alex plc made an unusually large purchase of goods for cash immediately before the year-end, and these goods remain in inventory
4. Alex plc paid its payables earlier than usual out of a positive cash balance

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 4

1. Not correct
2. Not correct
3. Not correct
4. Correct => If payables are paid out of a positive cash balance, then this will reduce both cash (assets) and payables by the same absolute amount. However, since the current ratio is positive (assets are greater than liabilities), the ratio will increase.

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

Alex plc’s current ratio this year is 1.5:1 compared to 1.25:1 last year.

Which ONE of the following might help to explain this increase in the ratio?

Select ONE answer:

1. Alex plc paid its payables earlier than usual out of a bank overdraft
2. Alex plc made an unusually large sale immediately before the year-end
3. Alex plc made an unusually large purchase of goods for cash immediately before the year-end, and these goods remain in inventory
4. Alex plc paid its payables later than usual, out of a negative cash balance

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 => An unusually large sale would increase receivables and the current ratio.
3. Not correct
4. Not correct

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

A furniture store and a local high-street bakery have the same markup on cost.

However, the gross profit margin of the furniture store is significantly higher than that of the bakery.

Which ONE of the following is a possible reason for this?

Select ONE answer:

1. The Bakery’s revenue is increasing, while that of the Furniture shop is decreasing
2. The Bakery has a higher level of wastage of inventory than the Furniture store
3. The Furniture shop takes advantage of trade discounts for bulk buying
4. The Bakery has a higher turnover of inventory than the Furniture store

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 => If the Bakery has a higher level of wastage of inventory than the Furniture shop, then the cost of wasted inventory will be treated as an expense in cost of sales. This will reduce the Bakery’s cost of sales independently of the mark-up applied. Cost of sales will therefore be high in relation to revenue, so the Bakery’s gross margin will be lower than the Furniture store’s.
3. Not correct
4. Not correct

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Alex Ltd’s Liquid Capital ratio (sometimes known as the Acid Test or Quick ratio) has fallen from 2:1 to 1.5:1.

Which one of the following might help to explain this decline?

Select ONE answer:

1. The provision for doubtful debts (or allowance for receivables) has been reduced
2. Credit control of receivables has been poor
3. The entity has purchased a property for cash
4. Inventory or stock levels have fallen

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 => If the entity has purchased a property for cash, this would reduce current assets without any corresponding reduction in current liabilities (i.e. Dr Non-Current Assets Cr Cash)
4. Not correct

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