Revision Practice 2 – Accounting for Decision Making

📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS Q1. Accounting primarily involves: A. Recording and interpreting economic information for decision-making B. Preparing government tax reports only C. Maintaining customer records D. Monitoring market prices Q2. Which branch of accounting provides information to internal management for planning and control? A. Financial Accounting B. Management Accounting C. Public Accounting D. Auditing Q3. Which of the following is not an external user of financial information? A. Creditors B. Investors C. Department Supervisors D. Tax Authorities Q4. The qualitative characteristic ensuring users can compare results across companies is: A. Relevance B. Comparability C. Neutrality D. Faithful representation Q5. Which statement reports a company’s assets and liabilities on a specific date? A. Statement of Cash Flows B. Balance Sheet C. Income Statement D. Statement of Changes in Equity Q6. The accrual basis of accounting records: A. Only cash transactions B. Revenues when earned and expenses when incurred C. Cash inflows and outflows only D. Only when payments are made Q7. Which statement best reflects the profitability of a business for a period? A. Balance Sheet B. Income Statement C. Statement of Cash Flows D. Trial Balance 1 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS Q8. A provision for doubtful debts results in: A. Increase in profit and receivables B. Decrease in receivables and profit C. Increase in cash D. No change in assets Q9. Gross profit is calculated as: A. Sales – Cost of Goods Sold B. Net Profit – Operating Expenses C. Sales – All Expenses D. Sales – Administrative Costs Q10. Depreciation represents: A. Reduction in asset’s market value B. Allocation of asset cost over useful life C. Cash outflow for new equipment D. A method to increase profit Q11. The main purpose of the cash flow statement is to show: A. Changes in owner’s equity B. Profitability C. Inflows and outflows of cash D. Total assets Q12. Which statement best explains the difference between cash and profit? A. Profit always equals cash B. Profit may include non-cash items C. Cash and profit are the same concept D. Cash basis ignores accruals Q13. Overstating closing inventory will: A. Increase reported profit B. Decrease reported profit C. Have no effect D. Reduce assets Q14. When prices are rising, which inventory method reports the highest profit? A. LIFO B. FIFO C. Weighted Average D. Standard Cost Q15. The matching concept ensures: A. Expenses are recorded in the same period as related revenues 2 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS B. Cash is matched to receipts C. Assets equal liabilities D. Revenues are recorded only when paid Q16. Recognizing revenue before cash is received applies which concept? A. Accruals B. Prudence C. Materiality D. Consistency Q17. A prepaid insurance of $6,000 at year-end should be reported as: A. Expense B. Current Asset C. Current Liability D. Non-current Asset Q18. The prudence concept means accountants should: A. Overstate profits to attract investors B. Record expected gains C. Record losses when probable, but gains only when realized D. Ignore uncertain items Q19. Two companies with identical transactions may show different profits because of: A. Different accounting policies B. Different tax payments C. Different management teams D. Different customer groups Q20. Liquidity analysis is best supported by which statement? A. Income Statement B. Balance Sheet C. Statement of Cash Flows D. Statement of Equity Q21. Collecting accounts receivable earlier affects: A. Cash ↑ B. Cash ↓ C. Profit ↑ D. Liabilities ↑ Q22. Opening inventory = $50,000; Purchases = $200,000; Closing inventory = $70,000. Cost of Sales = ? A. $130,000 B. $180,000 3 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS C. $150,000 D. $220,000 Q23. 8,000 units sold at $30 each. Purchases: 6,000 units @$20, 4,000 @$25. Using FIFO, gross profit = ? A. $70,000 B. $60,000 C. $50,000 D. $40,000 Q24. Using the same data, LIFO gross profit = ? A. $50,000 B. $40,000 C. $60,000 D. $70,000 Q25. Rent expense $24,000; $3,000 unpaid at year-end. Cash paid = ? A. $27,000 B. $24,000 C. $21,000 D. $20,000 Q26. Electricity bill for the year = $2,400; paid $2,100. Outstanding balance = ? A. $300 B. $2,400 C. $2,100 D. $0 Q27. The main difference between operating and net profit is: A. Operating profit excludes interest and tax B. Net profit excludes operating expenses C. They are identical D. Operating profit includes all expenses Q28. Sales $500,000; COGS $320,000; Operating expenses $100,000. Net profit before tax = ? A. $80,000 B. $100,000 C. $180,000 D. $200,000 Q29. Making credit sales increases: A. Profit, not cash B. Cash, not profit 4 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS C. Neither profit nor cash D. Both profit and cash Q30. Which transaction reduces profit but does not reduce cash? A. Depreciation B. Paying suppliers C. Loan repayment D. Paying rent Q31. Payments to suppliers appear under which cash flow category? A. Operating B. Investing C. Financing D. Non-cash Q32. Purchase of machinery is reported under: A. Operating cash flow B. Investing cash flow C. Financing cash flow D. None of above Q33. Dividend payments are classified as: A. Operating cash flows B. Investing cash flows C. Financing cash flows D. Adjusting items Q34. Operating CF = $450, Investing CF = ($200), Financing CF = ($300). Net cash change = ? A. $-50 B. $-250 C. $-100 D. $-500 Q35. Which statement is correct? A. Investing cash flows relate to asset purchases/sales B. Financing cash flows show tax expenses C. Operating cash flows exclude customer receipts D. Cash is unaffected by investments 5 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS PART 2: Scenario-Based Adjustments (Q36–Q50) ABC Ltd. prepared draft accounts for the year ended 31 December 2025. The following items were not recorded: I. Goods costing $300 sold for $500 not yet invoiced. II. Wages for December $250 unpaid. III. Insurance of $480 paid on 1 September for 12 months fully expensed. IV. Equipment cost $3,600, 4-year life, no depreciation recorded. V. Loan $5,000 at 8% interest; rate increased to 12% on 1 October. Q36. Recording unbilled sales will: A. Increase revenue and profit, no cash effect B. Decrease revenue C. No change in profit D. Increase cash immediately Q37. Cash impact of unbilled sales at year-end: A. Increase cash B. Decrease cash C. No effect D. Depends on customer payment Q38. Adjusting unpaid wages requires: A. Increase expense and liability B. Decrease expense C. Increase asset D. No change Q39. Recording unpaid wages will: A. Decrease profit B. Increase profit C. No effect D. Increase cash Q40. Correct insurance adjustment at year-end: A. Create prepayment $320 and reduce expense B. Create liability $160 and increase expense C. No change D. Write off full $480 Q41. Insurance adjustment affects profit by: A. Increasing it $320 B. Decreasing it $320 6 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS C. No effect D. Reducing cash Q42. Depreciation adjustment = ? A. $900 B. $3,600 C. $1,200 D. $600 Q43. Depreciation will: A. Reduce profit, no cash change B. Reduce profit and cash C. Increase profit D. No effect Q44. Total interest expense for the year = ? A. $400 B. $450 C. $440 D. $480 Q45. Adjusting for additional interest will: A. Reduce profit B. Increase profit C. Reduce cash only D. No effect Q46. Recording prepayments generally: A. Increases profit B. Decreases profit C. Decreases cash D. Both A and C Q47. After all five adjustments, the company’s operating profit will likely: A. Decrease overall B. Increase C. Stay the same D. Cannot determine Q48. If equipment life was 6 years instead of 4, profit this year would: A. Increase B. Decrease C. No change D. Reduce cash 7 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS Q49. Which asset category increases due to adjustments? A. Prepayments B. Inventory C. Equipment D. Cash Q50. What is the overall cash effect of all adjustments? A. No effect B. Increase C. Decrease D. Depends on invoice timing 8 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS ANSWERS WITH NOTES Q# Answer Explanation (brief) 1 A. Accounting = recording, classifying & communicating info for decisions. 2 B. Management accounting aids internal planning/control. 3 C. Department supervisors are internal users. 4 B. Comparability allows cross-company analysis. 5 B. Balance Sheet shows assets, liabilities, equity at a date. 6 B. Accrual basis records revenues/expenses when earned/incurred. 7 B. Income Statement measures profit over a period. 8 B. Doubtful debts reduce receivables and profit. 9 A. Gross profit = Sales – Cost of Goods Sold. 10 B. Depreciation allocates cost, not cash spent. 11 C. Cash flow statement shows inflows/outflows. 12 B. Profit includes non-cash items; cash does not. 13 A. Overstated closing inventory → lower COGS → higher profit. 14 B. FIFO uses oldest, cheaper costs → higher profit in rising prices. 15 A. Expenses matched to revenues in same period. 16 A. Accrual concept = record when earned. 17 B. Prepaid insurance = current asset. 18 C. Prudence = anticipate losses, not gains. 19 A. Accounting policy choice (e.g., depreciation, inventory) affects profit. 20 C. Cash flow statement helps analyze liquidity. 21 A. Faster collection → cash ↑. 22 C. 50k + 200k – 70k = 180k → Cost of sales = $180,000. FIFO → 6k@$20 + 2k@$25 = 120+50=170k cost → GP = (240k– 23 A. 170k)=70k. LIFO uses recent costs → 4k@$25+4K@20 = 100k+80K=180K costs → 24 C. GP = 240k–180k=60k. 25 C. Expense 24k, 3k owed → cash paid = 24–3 = 21k. 26 A. 2,400 – 2,100 = 300 payable. 27 A. Operating profit excludes interest/tax. 28 A. 500–320–100 = 80k. 29 A. Credit sales raise revenue now, cash later. 30 A. Depreciation reduces profit only. 31 A. Payments to suppliers = operating activity. 32 B. Machinery = investing cash flow. 9 📘 507 Revision Practice 2 – Accounting for Decision Making - MULTIPLE CHOICE QUESTIONS Q# Answer Explanation (brief) 33 C. Dividends = financing cash flow. 34 A. 450 – 200 – 300 = -50 net cash. 35 A. Investing = purchase/sale of long-term assets. 36 A. Recognize revenue & cost, no cash yet. 37 C. Unbilled sale = no immediate cash. 38 A. Record expense + liability for unpaid wages. 39 A. Expense ↑ → profit ↓. 40 A. 4 months used (Sept–Dec) = $160 expense → prepay $320. 41 A. Reducing expense by $320 ↑ profit. 42 A. 3,600 ÷ 4 = 900 depreciation. 43 A. Non-cash expense → lowers profit only. 44 B. 450 [5,000*0.08*0.75 (9months)=300 plus 5,000*0.12*.025 (3 months)=150 45 A. Extra interest = expense → profit ↓. 46 A. Prepayment reduces expense now → profit ↑. 47 A. More expenses (wages, depreciation, interest) than savings → profit ↓. 48 A. Longer life → less depreciation → higher profit. 49 A. Prepayments ↑ after adjusting insurance. 50 A. All adjustments are non-cash → no change. 10