Practice questions · Finance & Accounting
ACCA Qualification: Practice Questions
Original concept-check questions across the ACCA syllabus: Business & Technology, Management Accounting, Financial Accounting, Corporate & Business Law, Performance Management, Taxation, Financial Reporting, Audit & Assurance, Financial Management and Strategic Professional concepts. Each answer is explained, including why the other options are wrong. Filter by domain or difficulty. These test understanding of public concepts - not real exam questions.
Answered 0 · Correct 0
-
Under the accruals concept, revenue is recognized when:
Correct answer: B. Accruals accounting recognizes revenue when earned, matching it to the period. Cash timing, invoice filing and year-end do not by themselves trigger recognition. -
The accounting equation is:
Correct answer: C. Assets = Liabilities + Equity is the fundamental identity behind double-entry: what the business owns equals what it owes plus owners' claims. The other forms rearrange the terms incorrectly, for example adding liabilities to equity or subtracting equity from liabilities. -
In double-entry bookkeeping:
Correct answer: D. In double-entry, every debit has an equal and opposite credit, so the books always balance. Recording only debits, treating cash as the only account, or letting entries not balance all break the double-entry system. -
The primary purpose of an external audit is to:
Correct answer: A. An audit gives reasonable assurance and an independent opinion on fair presentation. It cannot detect every fraud, does not prepare the accounts, and never guarantees performance. -
The going concern assumption means:
Correct answer: D. Going concern assumes the entity will continue operating for the foreseeable future, so assets are measured on a normal basis rather than at liquidation value. The business being sold soon and assets at liquidation value are the opposite case, and going concern does not require the cash basis. -
Management accounting differs from financial accounting in that it:
Correct answer: D. Management accounting serves internal decisions and is not bound by external reporting standards or external audit. Financial accounting is the externally reported, standards-based view. -
Contribution is calculated as:
Correct answer: C. Contribution is sales revenue minus variable costs, the amount left to cover fixed costs and profit. Fixed costs minus revenue reverses the logic, sales minus all costs gives net profit, and profit plus tax works back to pre-tax profit - none is contribution. -
A liability is best defined as:
Correct answer: C. A liability is a present obligation from past events expected to cause an outflow. Plans, owner's equity and assets are different elements. -
Depreciation is:
Correct answer: A. Depreciation allocates cost over useful life; it is not a cash flow, a revaluation, or an increase in value. -
The statement of financial position shows:
Correct answer: D. The statement of financial position (balance sheet) is a snapshot at a date. Performance over a period is the income statement; cash movements are the cash flow statement. -
In decision-making, which cost is relevant?
Correct answer: B. Relevant costs are future and differ between options. Sunk costs, historical depreciation and unavoidable allocated overheads are not relevant. -
The concept of prudence means accountants should:
Correct answer: C. Prudence avoids overstating assets/income or understating liabilities under uncertainty. Overstating or always choosing the highest figure breaches it. -
The statement of profit or loss (income statement) reports:
Correct answer: B. The income statement reports income and expenses over a period, showing performance. The list of shareholders belongs in the share register, assets and liabilities at a point in time are the statement of financial position, and cash movements are the cash flow statement. -
In double-entry bookkeeping, a debit entry typically increases:
Correct answer: C. A debit increases assets and expenses; credits increase liabilities, income and equity. So 'equity only', 'liabilities and income' (both increased by credits) and 'nothing' all misstate the debit rule. -
A trial balance is prepared to:
Correct answer: B. A trial balance lists all ledger balances to check that total debits equal total credits before preparing the financial statements. Calculating the tax bill, paying wages and setting selling prices are separate tasks it does not perform. -
The dual aspect (double-entry) concept means that every transaction:
Correct answer: B. Dual aspect means each transaction has equal and opposite debit and credit effects on at least two accounts. A transaction does not always increase profit, is not recorded only once, and is not limited to cash. -
Goodwill arises when:
Correct answer: D. Goodwill arises when a business is acquired for more than the fair value of its identifiable net assets. Charging depreciation, issuing new shares and selling inventory are routine transactions that do not create goodwill. -
Under IFRS, inventory is normally measured at:
Correct answer: A. Under IAS 2, inventory is measured at the lower of cost and net realisable value, reflecting prudence. Replacement cost, always cost, and always selling price are not the IFRS measurement rule. -
The accruals (matching) concept requires that:
Correct answer: D. Matching requires expenses to be recognised in the same period as the related revenue they help earn. Recording revenue twice, ignoring expenses, and recording only cash all contradict the accruals concept. -
Under IAS 7, the statement of cash flows classifies cash flows into operating, investing and:
Correct answer: B. IAS 7 uses three headings: operating, investing and financing activities. Marketing, tax and audit are not separate cash-flow categories - tax cash flows usually sit within operating activities. -
'Reasonable assurance' in an audit means:
Correct answer: D. Reasonable assurance is a high, but not absolute, level of assurance, because of inherent limitations like sampling and judgement. It is not a guarantee of no errors, not zero assurance, and not limited to cash. -
A 'material misstatement' is one that:
Correct answer: A. A material misstatement could reasonably influence the economic decisions users make based on the financial statements. Affecting only cash, sitting below the threshold, or being fraud are not the test - materiality is about influence on users' decisions. -
Audit sampling is used because:
Correct answer: D. Sampling is used because testing 100% of transactions is usually impractical and uneconomic, yet a well-designed sample gives sufficient evidence. The law does not forbid full testing, sampling is not about the client's image, and it is not inherently more accurate than full testing. -
Fixed costs are costs that:
Correct answer: D. Fixed costs do not change with output in the short run within the relevant range. Costs that are always zero or always equal revenue are nonsensical, and costs that vary directly with output are variable costs, not fixed. -
The break-even point is where:
Correct answer: B. Break-even is where total revenue equals total costs, giving zero profit. Costs being zero and revenue being zero are not break-even, and maximum profit occurs well beyond the break-even point. -
Under marginal (variable) costing, inventory is valued at:
Correct answer: A. Marginal costing includes only variable production cost in inventory; absorption costing also includes fixed overhead. -
A 'favourable' variance means that:
Correct answer: D. A favourable variance means actual results were better than budget, such as lower costs or higher revenue. No budget existing, being exactly on budget, and results worse than budget (an adverse variance) all describe different situations. -
A balanced scorecard measures performance across:
Correct answer: A. The balanced scorecard adds customer, internal-process and learning perspectives to financial measures. -
Accrued expenses are:
Correct answer: B. Accrued expenses are costs already incurred but not yet paid or recorded, recognised in the period they relate to. They are not part of equity, not cash paid in advance (that is a prepayment), and not a form of revenue. -
A finance (capital) lease is recognised on the lessee's statement of financial position because:
Correct answer: A. Under substance over form, the lessee controls the asset and bears a related obligation, so both an asset and a liability are recognised. It is not because leasing is always cheaper, because leases are never recorded, or to avoid tax. -
In an organisation, the role of the board of directors is mainly to:
Correct answer: A. The board sets strategy and oversees management on behalf of shareholders, which is governance. Running payroll and operating the production line are day-to-day operational tasks, and an independent audit of the statements is the external auditor's job, not the board's. -
Which of the following best describes 'corporate governance'?
Correct answer: B. Corporate governance is the system by which companies are directed and controlled, balancing the interests of stakeholders. Preparing tax returns and valuing inventory are technical accounting tasks, and marketing concerns selling products, none of which defines governance. -
A flat organisational structure is characterised by:
Correct answer: C. A flat structure has few management layers and a wide span of control, so each manager supervises many staff. Many layers describes a tall structure, while having no managers or only one employee are not what 'flat' means. -
In Maslow's hierarchy of needs, which need is at the most basic (lowest) level?
Correct answer: D. Physiological needs such as food and shelter sit at the base of Maslow's hierarchy and must be met first. Social belonging, esteem and self-actualisation are higher-level needs addressed only after the lower ones are satisfied. -
The main purpose of an internal control system is to:
Correct answer: A. Internal controls help produce reliable reporting, safeguard assets and support efficient, compliant operations. They do not directly move the share price, cannot replace all staff, and cannot guarantee a profit, which depends on trading performance. -
Which document sets out a company's internal rules and the rights of its members?
Correct answer: B. The articles of association are the company's internal rulebook, governing members' rights and how the company is run. A bank statement records cash movements, a sales invoice documents a sale, and the audit report gives an opinion on the accounts. -
A SWOT analysis examines an organisation's:
Correct answer: C. SWOT stands for Strengths, Weaknesses, Opportunities and Threats, combining internal and external factors. The other expansions are invented and are not what the SWOT acronym represents. -
Segregation of duties as an internal control means that:
Correct answer: D. Segregation of duties splits authorisation, recording and custody so no one person controls an entire transaction, reducing fraud and error risk. Letting one person handle every stage is the weakness it prevents, while not recording transactions or having all staff do the same job are unrelated. -
Which of the following is a key benefit of cloud computing for a business?
Correct answer: A. Cloud computing offers scalable, on-demand resources without heavy upfront hardware spending, usually paid for as you use them. It does not remove the need for data security, does not guarantee profitability, and is not permanently free of charge. -
The 'agency problem' in companies refers to the potential conflict between:
Correct answer: B. The agency problem arises because managers (agents) may pursue their own interests rather than those of the shareholders (principals) who own the company. Conflicts between customers and tax authorities, two rival firms, or employees and families are not the agency problem in this governance sense. -
A 'stakeholder' of a company is best described as:
Correct answer: C. A stakeholder is any party with an interest in or affected by the organisation, such as employees, customers, suppliers, lenders and the community, as well as shareholders. Limiting it to the largest shareholder, the auditor or the finance director is too narrow. -
Which of the following is an example of a 'general' control over an IT system rather than an application control?
Correct answer: D. Physical access restrictions to the server room are a general IT control affecting the whole environment. The invoice total check, the date range check and the customer-code validation are application controls embedded in a specific program's processing of data. -
A product has a selling price of $50, variable cost of $30 per unit, and total fixed costs of $40,000. How many units must be sold to break even?
Correct answer: A. Contribution per unit is $50 - $30 = $20; break-even units = fixed costs / contribution = $40,000 / $20 = 2,000 units. 800 wrongly divides by $50, 1,333 wrongly divides by $30, and 1,000 wrongly divides fixed costs by $40, so all use the wrong figure. -
The contribution-to-sales (C/S) ratio is calculated as:
Correct answer: B. The C/S (or contribution margin) ratio is contribution per unit divided by selling price, showing how much of each sales dollar covers fixed costs and profit. Fixed costs over sales is not it, profit over sales is the net margin, and variable cost over price is the variable-cost ratio (its complement). -
Under absorption costing, fixed production overheads are:
Correct answer: C. Absorption costing includes fixed production overheads in unit cost via an overhead absorption rate. Treating them entirely as a period cost is marginal costing, ignoring them is wrong, and charging them only to administration misclassifies production overheads. -
If budgeted overheads are $100,000 and budgeted labour hours are 25,000, the overhead absorption rate per labour hour is:
Correct answer: D. The absorption rate is budgeted overheads / budgeted activity = $100,000 / 25,000 hours = $4.00 per hour. $2.50 and $0.25 invert or misplace the decimal, and $25.00 divides in the wrong direction. -
Which of the following is a 'prime cost' in a manufacturing business?
Correct answer: A. Prime cost is the total of direct costs, principally direct materials and direct labour (plus direct expenses). Factory rent is a production overhead, while administrative salaries and head-office depreciation are non-production costs, so none is a prime cost. -
Using the high-low method, costs were $14,000 at 1,000 units and $20,000 at 2,000 units. The variable cost per unit is:
Correct answer: B. Variable cost per unit = change in cost / change in units = ($20,000 - $14,000) / (2,000 - 1,000) = $6,000 / 1,000 = $6. $10 is the average cost at 2,000 units, $14 is the average cost at 1,000 units, and $20 mistakes the high total cost ($000) for the rate, none of which is the variable rate. -
In the Economic Order Quantity (EOQ) model, the EOQ minimises the total of:
Correct answer: C. The EOQ is the order size that minimises the sum of ordering (set-up) costs and inventory holding (carrying) costs. Selling and marketing, direct labour and materials, and production costs are not what the EOQ trade-off balances. -
A 'cost centre' is a part of an organisation for which:
Correct answer: D. A cost centre is a location, function or item for which costs are accumulated and held to account. Where revenues are collected is a revenue centre, where profit is measured is a profit centre, and where investment is appraised is an investment centre. -
When production exceeds sales in a period, profit under absorption costing compared with marginal costing will be:
Correct answer: A. When production exceeds sales, inventory rises and absorption costing carries some fixed overhead forward in that inventory, so reported profit is higher than under marginal costing. It is not always the same or zero, and it is not lower in this scenario. -
Which inventory valuation method assumes the most recently purchased items are sold first?
Correct answer: B. LIFO assumes the most recently purchased (last in) items are sold first. FIFO assumes the oldest are sold first, weighted average blends all costs, and standard cost uses a predetermined rate, so none of those matches the 'most recent first' assumption. -
Idle time in labour costing refers to:
Correct answer: C. Idle time is paid time during which no production takes place, for example due to machine breakdown or waiting for materials. Direct production time, overtime hours and machine running time all involve activity, so they are not idle time. -
A semi-variable (mixed) cost is one that:
Correct answer: D. A semi-variable cost has a fixed component plus a variable component that changes with activity, such as a phone bill with a standing charge plus usage. A purely proportional cost is variable, a constant cost is fixed, and a nil cost is neither. -
A flexible budget is one that:
Correct answer: A. A flexible budget is recalculated for the actual activity level so that like is compared with like in variance analysis. A budget that never changes is a fixed budget, and budgets that contain no costs or only cash flows are not flexible budgets. -
If a company expects to sell 5,000 units, hold 600 units of closing inventory and start with 400 units of opening inventory, the production budget (in units) is:
Correct answer: B. Production = sales + closing inventory - opening inventory = 5,000 + 600 - 400 = 5,200 units. 5,000 ignores inventory changes, 4,800 reverses the adjustment, and 6,000 is unrelated. -
A business buys goods on credit. The correct double entry is:
Correct answer: C. Buying goods on credit increases purchases (an expense, debit) and increases trade payables (a liability, credit). Debiting cash is wrong because no cash moves yet, while the sales entries describe selling, not buying. -
When a customer pays an amount they previously owed on credit, the entry is:
Correct answer: D. Receiving cash from a credit customer increases cash (debit) and reduces the amount owed in trade receivables (credit). Crediting sales would double-count revenue already recorded, and the payables entry relates to suppliers, not customers. -
A prepayment (prepaid expense) is shown in the financial statements as:
Correct answer: A. A prepayment is a current asset because the business has paid for a benefit it will receive in a future period. It is not a liability, not income, and not part of share capital. -
An allowance for doubtful (receivables) accounts is created by:
Correct answer: B. Setting up or increasing the allowance debits the irrecoverable/doubtful debts expense and credits the allowance, reducing net receivables. Debiting cash or share capital and crediting sales have nothing to do with recognising expected credit losses. -
A bank reconciliation is performed to:
Correct answer: C. A bank reconciliation agrees the business's cash book with the bank statement, explaining differences such as unpresented cheques and outstanding lodgements. It does not calculate tax, set prices or value inventory. -
A debit balance brought down on the cash (bank) ledger account usually represents:
Correct answer: D. In the ledger, a debit balance on the bank account represents cash at bank, an asset. An overdraft would be a credit balance, while a sale is income and a liability is something owed, none of which a debit cash balance shows. -
The purpose of a suspense account is to:
Correct answer: A. A suspense account temporarily holds a difference (for example when the trial balance does not balance) until the error is located and corrected. It does not record salaries, replace cash, or pay dividends. -
Carriage inwards (delivery cost of buying goods) is normally treated as:
Correct answer: B. Carriage inwards is the cost of bringing in purchased goods and is added to the cost of purchases. It is not a reduction of sales, not equity, and not a long-term liability. -
When a non-current asset is sold for more than its carrying amount, the difference is:
Correct answer: C. Selling an asset above its carrying amount produces a profit on disposal, recognised in profit or loss. It is not share capital, it is not ignored, and it is not necessarily a revaluation reserve, which arises from upward revaluation rather than disposal. -
A credit note issued to a customer who returned goods will:
Correct answer: D. A credit note records a return or allowance and reduces the amount the customer owes (and reduces sales/revenue). It does not increase sales or the customer's debt, and it does affect receivables. -
Drawings by the owner of a sole trader are:
Correct answer: A. Drawings are amounts the owner takes out for personal use and reduce the owner's capital. They are not a business expense, not revenue, and not a liability owed by the business. -
Closing inventory of $8,000 understated by $1,000 will cause this period's profit to be:
Correct answer: B. Closing inventory reduces cost of sales, so understating it by $1,000 overstates cost of sales and understates profit by $1,000. It is therefore not overstated, not unaffected, and the $8,000 figure is the inventory total, not the error. -
An error of principle in bookkeeping is when:
Correct answer: C. An error of principle posts a transaction to the wrong class of account, such as treating a repair (expense) as an asset, yet the trial balance still balances. Omitting both entries is an error of omission, transposing figures is a transposition error, and an imbalance is not the defining feature here. -
For a simple contract to be legally binding, which of the following is normally required?
Correct answer: D. A valid simple contract generally needs offer, acceptance, consideration and an intention to create legal relations (plus capacity). Most contracts need not be in writing, court approval, or government registration to be binding. -
In contract law, 'consideration' refers to:
Correct answer: A. Consideration is something of value that each party gives or promises, the 'price' of the bargain. It does not mean careful thought, the negotiating time, or merely a signature. -
A key consequence of a company having separate legal personality is that:
Correct answer: B. Separate legal personality means the company is a legal person distinct from its members, so it can own property and sue or be sued in its own name. Shareholders are not personally liable for company debts beyond their shares, directors do not own the assets, and the company can own property. -
'Limited liability' for shareholders of a limited company means their liability is limited to:
Correct answer: C. Shareholders' liability is limited to any amount unpaid on their shares; once shares are fully paid they owe nothing more. They are not liable for all personal assets or the company's total debts, and it is not nil in every case where shares are partly paid. -
An 'invitation to treat', such as goods displayed in a shop window, is:
Correct answer: D. An invitation to treat invites customers to make an offer, which the seller can then accept or reject; the display itself is not an offer. It is therefore not a binding offer, not an acceptance, and not a breach. -
Directors owe their fiduciary duties primarily to:
Correct answer: A. Directors owe fiduciary duties to the company as a whole, to act in good faith for its benefit. They must not put their personal interests first, and their duty is not owed to a particular customer or to the auditors. -
An ordinary resolution of a company is normally passed by:
Correct answer: B. An ordinary resolution requires a simple majority of over 50% of the votes cast. A 75% majority is a special resolution, unanimity is not required, and auditors do not pass resolutions. -
The main distinction between a contract term that is a 'condition' and one that is a 'warranty' is that breach of a condition:
Correct answer: C. A condition is a major term going to the root of the contract, so its breach may allow the injured party to terminate and claim damages, whereas breach of a warranty gives damages only. So breach of a condition is not without remedy, not limited to a price rise, and certainly can be claimed for. -
Which of the following is a feature of a partnership (without limited liability)?
Correct answer: D. In an ordinary partnership the partners share profits and are personally, often jointly, liable for the firm's debts. A traditional partnership lacks separate legal personality, partners can be liable, and it has partners rather than shareholders. -
Employment law generally distinguishes an 'employee' from an 'independent contractor' mainly by the degree of:
Correct answer: A. A central test is control: an employee works under the employer's direction on how, when and where to work, whereas a contractor is more independent. Uniform colour, invoice size and email volume are not the legal tests for employment status. -
The materials price variance is calculated as:
Correct answer: B. The materials price variance is (standard price - actual price) multiplied by the actual quantity, isolating the effect of paying a different price. The formula using (standard quantity - actual quantity) is the usage variance, while comparing standard cost to sales or actual to budgeted profit are not price-variance formulas. -
In target costing, the target cost is found by:
Correct answer: C. Target costing starts from a competitive market selling price and subtracts the required profit margin to give the maximum allowable (target) cost. It does not add profit to current cost (that is cost-plus), and it cannot ignore the selling price or rely solely on historical cost. -
Activity-based costing (ABC) assigns overheads to products using:
Correct answer: D. ABC traces overheads to products through cost drivers that cause each support activity, giving more accurate costs for diverse products. A single volume-based rate is traditional absorption costing, and using selling price or random allocation are not ABC. -
A 'limiting factor' (key constraint) in short-term decision-making is something that:
Correct answer: A. A limiting factor is a scarce resource (such as labour hours or materials) that restricts output and must be used to maximise contribution per unit of that factor. It does not by itself increase profit, it clearly affects production, and it is not the same thing as fixed cost. -
A negative (adverse) sales volume variance most likely means:
Correct answer: B. An adverse sales volume variance means fewer units were sold than budgeted, reducing contribution or profit. Selling more units would be favourable, and changes in selling price or fixed costs are captured by different variances. -
Return on investment (ROI) for a division is calculated as:
Correct answer: C. ROI is divisional profit divided by capital employed (investment), measuring how efficiently assets generate profit. Sales over assets is asset turnover, profit over sales is the margin, and cash over liabilities is a liquidity idea, none of which is ROI. -
Residual income (RI) is calculated as divisional profit minus:
Correct answer: D. Residual income deducts an imputed interest (cost of capital) charge on the division's investment from its profit, rewarding profit above the required return. It does not subtract all sales, only tax, or direct materials. -
If a company makes a component for $18 and can buy it externally for $15 with no other change in costs, in the short term it should usually:
Correct answer: A. If the relevant cost to buy ($15) is below the relevant cost to make ($18) and nothing else changes, buying externally saves $3 per unit. Continuing to make it is more expensive, stopping the component or raising the selling price do not address the make-or-buy comparison. -
A key risk of using ROI to evaluate divisional managers is that it may:
Correct answer: B. ROI can cause dysfunctional behaviour: a manager may reject a project that earns above the cost of capital simply because it is below the division's current ROI, harming the group. It does not always maximise group profit, it does use profit, and it does not remove the need for budgeting. -
Throughput accounting focuses primarily on maximising:
Correct answer: C. Throughput accounting maximises throughput contribution (sales minus direct material cost) relative to the bottleneck resource, treating other costs as largely fixed. It seeks to reduce, not maximise, inventory, and it is not about headcount or overhead absorption. -
The difference between tax avoidance and tax evasion is that tax evasion:
Correct answer: D. Tax evasion is illegal, involving concealing income or misstating facts, whereas tax avoidance uses lawful means to reduce tax. Evasion does not increase tax paid, and it applies to individuals and companies alike, so the other options are wrong. -
A 'direct tax' is one that is:
Correct answer: A. A direct tax is charged directly on a person's income, profits or gains, such as income tax or corporation tax. Taxes on imports are customs duties, taxes collected by sellers on sales are indirect taxes, and airport-only charges are not the definition. -
Value Added Tax (VAT) / GST is best described as:
Correct answer: B. VAT/GST is an indirect tax on consumption, charged on the value added at each stage and ultimately borne by the final consumer. It is not a profits tax, a payroll tax, or a tax restricted to land. -
If a VAT-registered business has output VAT of $12,000 and recoverable input VAT of $8,000, the amount payable to the tax authority is:
Correct answer: C. VAT payable is output VAT minus recoverable input VAT = $12,000 - $8,000 = $4,000. $20,000 adds the two, while $8,000 and $12,000 are just the input and output figures, not the net amount due. -
An 'allowable expense' for tax on trading profits is generally one that is:
Correct answer: D. Trading expenses are usually allowable if incurred wholly and exclusively for the business. Capital purchases of buildings are dealt with through capital allowances, personal living costs are disallowed, and dividends are an appropriation of profit, not an allowable expense. -
Capital allowances (tax depreciation) are given because:
Correct answer: A. Accounting depreciation is generally added back (disallowed) and capital allowances are given instead as the statutory tax deduction for qualifying assets. They do not always equal accounting depreciation, they reduce rather than increase taxable profit, and the asset point is unrelated. -
A capital gain for tax purposes generally arises on the:
Correct answer: B. A capital gain arises when a capital asset is disposed of for more than its allowable cost. Trading income, paying wages and buying inventory are revenue or operating items, not capital disposals. -
A 'tax-deductible' expense reduces a company's:
Correct answer: C. A tax-deductible expense reduces taxable profit, which lowers the tax charge. It does not reduce share capital or headcount, and it does not automatically change the dividend per share. -
The 'tax point' for VAT is important because it determines:
Correct answer: D. The tax point fixes the date a supply is treated as made, deciding which VAT period and rate apply. It does not set the selling price, the accountant's salary, or anything about the invoice's appearance. -
Income tax for an individual is usually charged on:
Correct answer: A. Income tax is charged on taxable income above any personal allowance, frequently using progressive bands. It is not limited to savings balances or foreign income, and taxing the total value of all assets describes a wealth tax, not income tax. -
Under the IASB Conceptual Framework, the two fundamental qualitative characteristics of useful financial information are:
Correct answer: B. The fundamental qualitative characteristics are relevance and faithful representation; comparability, verifiability, timeliness and understandability are enhancing characteristics. Speed and length, profit and cash, and cost and price are not the Framework's fundamental characteristics. -
Under IFRS 15, revenue from a contract with a customer is recognised when (or as):
Correct answer: C. IFRS 15 recognises revenue when a performance obligation is satisfied, that is when control transfers to the customer. Banking the cash, signing the contract and printing an invoice do not by themselves determine when control passes. -
Under IAS 16, an item of property, plant and equipment is initially measured at:
Correct answer: D. IAS 16 requires initial measurement at cost, including purchase price and directly attributable costs such as delivery and installation. Expected selling price, zero, or a guess of fair value are not the initial measurement basis. -
Under IAS 37, a provision should be recognised when there is a present obligation, a probable outflow of resources, and:
Correct answer: A. IAS 37 requires a present obligation from a past event, a probable outflow, and a reliable estimate of the amount before a provision is recognised. Optimism, prior cash payment, or an auditor's request are not the recognition criteria. -
A contingent liability that is only possible (not probable) is normally:
Correct answer: B. Under IAS 37 a possible obligation is a contingent liability that is disclosed in the notes rather than recognised, unless the outflow is remote. It is not recognised as a liability, and it is certainly not income or revenue. -
Under IAS 38, internally generated brands and most research costs are:
Correct answer: C. IAS 38 requires research costs and internally generated brands to be expensed, because future benefits cannot be reliably demonstrated; only qualifying development costs may be capitalised. They are not capitalised as intangibles, not inventory, and not cash. -
The current ratio is calculated as:
Correct answer: D. The current ratio measures short-term liquidity as current assets divided by current liabilities. Total assets over equity is a gearing-style measure, sales over total assets is asset turnover, and profit over sales is a margin, none of which is the current ratio. -
Gearing (leverage) most commonly measures the relationship between:
Correct answer: A. Gearing compares debt with equity (or debt with total capital), indicating financial risk from borrowing. Sales versus cost of sales relates to margin, cash versus inventory to working capital, and dividends versus tax to distributions, none of which is gearing. -
On consolidation, a parent company prepares group accounts to show:
Correct answer: B. Consolidated accounts present the parent and its subsidiaries as one economic entity, eliminating intra-group items. They are not just the parent's results, not just the subsidiary's, and not limited to cash balances. -
Earnings per share (EPS) is broadly calculated as:
Correct answer: C. Basic EPS is profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue. Dividends over assets, sales over shares, and equity over liabilities are not the EPS calculation. -
A 'rights issue' of shares is one in which:
Correct answer: D. In a rights issue, existing shareholders can buy new shares pro rata to their holdings, typically at a discount. Free shares to employees, buying back and cancelling shares, and a first public sale (IPO) describe different transactions. -
Under IAS 10, an event after the reporting period that provides evidence of a condition existing at the reporting date is:
Correct answer: A. Under IAS 10 an adjusting event gives evidence of conditions existing at the reporting date, so the financial statements are adjusted. It is not ignored, it is not a non-adjusting event, and it is not recorded as revenue. -
Auditor independence is important because it:
Correct answer: B. Independence supports the objectivity and credibility of the auditor's opinion, so users can rely on it. It does not guarantee profitability, the auditor should not prepare the client's accounts, and evidence is still required regardless of independence. -
An 'unmodified' (clean) audit opinion means the auditor concludes that the financial statements:
Correct answer: C. An unmodified opinion states the statements are presented fairly in all material respects. It does not mean pervasive errors or an inability to audit, and it never guarantees the statements are completely free of any error. -
Which of the following would most likely lead to a 'qualified' audit opinion?
Correct answer: D. A qualified ('except for') opinion arises when there is a material but not pervasive misstatement or scope limitation. Correct statements give an unmodified opinion, an immaterial difference does not affect the opinion, and trading success is irrelevant to the opinion type. -
Substantive procedures in an audit are designed to:
Correct answer: A. Substantive procedures (tests of detail and analytical procedures) aim to detect material misstatements in the statements. Testing the effectiveness of controls describes tests of controls, while setting fees and preparing budgets are not audit procedures. -
Professional scepticism requires an auditor to:
Correct answer: B. Professional scepticism means keeping a questioning mind and critically assessing evidence, alert to possible misstatement. It does not mean assuming dishonesty, accepting everything uncritically, or avoiding evidence. -
'Audit evidence' is considered sufficient and appropriate when it is:
Correct answer: C. Sufficient relates to quantity and appropriate relates to relevance and reliability, so both are needed. Evidence is not limited to oral statements, should not rely solely on untested management representations, and is not confined to the cash account. -
A self-review threat to auditor independence arises when the auditor:
Correct answer: D. A self-review threat occurs when the auditor evaluates work the firm itself produced, making objective review difficult. A normal fee, attending a committee meeting, and using a checklist are not self-review threats. -
The audit risk model expresses audit risk as a function of inherent risk, control risk and:
Correct answer: A. Audit risk is modelled as inherent risk times control risk times detection risk, the last being the risk the auditor's procedures fail to find a misstatement. Share price, marketing and weather risks are not components of the audit risk model. -
A 'disclaimer of opinion' is issued when the auditor:
Correct answer: B. A disclaimer is given when the auditor cannot obtain sufficient appropriate evidence and the possible effects are both material and pervasive, so no opinion can be expressed. Fair statements give an unmodified opinion, and small or single minor issues would at most give an unmodified or qualified opinion. -
Tests of controls are performed to obtain evidence about:
Correct answer: C. Tests of controls assess whether controls operated effectively over the period, supporting reliance on them. They are not about product pricing, directors' personal wealth, or predicting future share prices. -
The time value of money principle states that:
Correct answer: D. The time value of money says a dollar today is worth more than the same dollar later, because it can be invested to earn a return. Saying money has no time value, that future money is worth more, or that inflation never matters all contradict the principle. -
If $1,000 is invested at 10% per year (compound interest, compounded annually), its value after two years is:
Correct answer: A. Compounding gives $1,000 × 1.10 × 1.10 = $1,210. $1,100 is only one year's growth, $1,200 ignores compounding (simple interest two years), and $2,000 is unrelated. -
The Net Present Value (NPV) of a project is:
Correct answer: B. NPV discounts future cash flows to present value and subtracts the initial outlay; a positive NPV adds value. Summing undiscounted flows ignores the time value of money, and accounting profit and payback period are different measures. -
A project should generally be accepted using the NPV rule when its NPV is:
Correct answer: C. A positive NPV means the project is expected to add value at the chosen discount rate, so it should be accepted. A negative NPV destroys value, a zero NPV only just meets the required return, and matching the initial investment is not the decision rule. -
The Internal Rate of Return (IRR) is the discount rate at which a project's NPV equals:
Correct answer: D. The IRR is the discount rate that makes a project's NPV zero, so it is compared with the cost of capital. It is not the rate that equals the initial investment, the accounting profit, or total sales. -
The payback period of a project measures:
Correct answer: A. Payback is the time for cumulative cash inflows to recover the initial outlay, a simple measure of liquidity risk. It does not measure total profit, the discount rate, or the NPV. -
The Weighted Average Cost of Capital (WACC) is used as a discount rate because it reflects:
Correct answer: B. WACC blends the costs of equity and debt by their proportions, giving the overall required return demanded by all finance providers. It is not the cost of equity alone, the cost of debt alone, or simply the tax rate. -
The cost of debt to a company is usually lower than the cost of equity partly because:
Correct answer: C. Debt is typically cheaper because interest is often tax-deductible and lenders rank ahead of shareholders, bearing less risk. Debt holders do not own the company, equity does carry a return, and debt is normally repaid, so the other options are false. -
Working capital is defined as:
Correct answer: D. Working capital is current assets minus current liabilities, the short-term funds available for day-to-day operations. Total assets minus total liabilities is net assets/equity, sales minus cost of sales is gross profit, and equity plus debt is long-term capital. -
An aggressive working capital financing policy tends to:
Correct answer: A. An aggressive policy finances more assets with cheaper short-term funds, lowering cost but raising liquidity and refinancing risk. It does not avoid short-term finance, hold excess cash (that is conservative), or eliminate inventory. -
Offering an early-settlement (cash) discount to customers is mainly intended to:
Correct answer: B. An early-settlement discount encourages customers to pay sooner, improving cash flow and reducing receivables. It lowers (not raises) the amount received per sale, is not aimed at reducing customers, and does not exist to raise tax. -
The dividend valuation model values a share based on:
Correct answer: C. The dividend valuation model values a share as the present value of its expected future dividends, discounted at the required return. Historical cost, headcount and total sales are not the basis of the model. -
In Porter's five forces model, which is one of the five competitive forces?
Correct answer: D. Porter's five forces are the threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitutes and competitive rivalry. The weather, packaging colour and the CEO's salary are not among them. -
A risk management response of 'transferring' risk is best illustrated by:
Correct answer: A. Transferring risk shifts its financial impact to another party, for example through insurance or outsourcing. Ignoring it is not a deliberate response, stopping the activity is avoidance, and doing nothing is acceptance, so those are different strategies. -
The role of an audit committee within corporate governance is mainly to:
Correct answer: B. An audit committee, made up largely of independent non-executive directors, oversees financial reporting integrity, internal controls and the auditors. Running daily accounting, setting the marketing budget and selling products are management or operational tasks. -
Under the IASB Conceptual Framework, the 'going concern' assumption underpins the financial statements unless:
Correct answer: C. Statements are prepared on a going concern basis unless management intends or has no realistic alternative but to liquidate or stop trading. Making a profit, changing auditor and rising sales do not remove the going concern basis. -
A whistleblowing policy in an organisation is designed to:
Correct answer: D. A whistleblowing policy gives staff a confidential, protected route to raise concerns about wrongdoing, supporting good governance. It is not meant to punish employees, increase dividends, or replace the external audit. -
The fundamental ethical principle of 'integrity' for a professional accountant means being:
Correct answer: A. Integrity requires an accountant to be straightforward and honest in all professional and business relationships. Putting client loyalty above honesty, overlooking fraud, or chasing fees all conflict with integrity and other ethical principles. -
An 'enterprise risk management' (ERM) approach differs from traditional risk management by:
Correct answer: B. ERM takes an integrated, organisation-wide and strategic view of risk rather than managing risks in isolated silos. Confining risk to finance, ignoring strategic risks, or focusing only on insurance describe narrower, traditional approaches. -
The 'business model' of an organisation describes:
Correct answer: C. A business model explains how an organisation creates, delivers and captures value for its stakeholders. It is broader than its legal structure, tax position, or headcount alone. -
Integrated reporting (the <IR> Framework) aims to communicate how an organisation creates value over time using multiple 'capitals', such as:
Correct answer: D. Integrated reporting considers a range of capitals: financial, manufactured, intellectual, human, social and relationship, and natural. Focusing on financial capital, share capital or cash alone is narrower than the integrated reporting concept. -
A non-executive director (NED) primarily contributes to governance by:
Correct answer: A. NEDs provide independent judgement, scrutiny and constructive challenge, strengthening board oversight. They do not run daily operations full-time, prepare the financial statements, or set product prices, which are executive or operational tasks. -
An asset is best described as:
Correct answer: B. An asset is a resource the entity controls as a result of past events and from which future economic benefits are expected. An amount owed is a liability, drawings are money taken out by the owner, and dividends are an appropriation of profit, none of which is an asset. -
Gross profit is calculated as:
Correct answer: C. Gross profit is sales revenue minus the cost of sales, before other operating expenses. Sales minus all expenses gives net profit, total assets minus liabilities is net assets, and net profit plus tax works back to pre-tax profit. -
Variable costs are costs that:
Correct answer: D. Variable costs change in total as activity changes, for example direct materials rising with units produced. Costs that stay the same are fixed, being paid in cash is about timing not behaviour, and administration costs can be fixed or variable. -
Which of the following is an example of an indirect (overhead) cost in a factory?
Correct answer: A. A factory supervisor's salary cannot be traced to a single unit, so it is an indirect (overhead) cost. Direct materials, direct labour and a per-unit royalty can each be traced directly to units, making them direct costs. -
Which of these is a current liability?
Correct answer: B. Trade payables due within one year are a current liability. Inventory and a delivery vehicle are assets, and a 10-year bank loan is a non-current liability because it is not due within twelve months. -
Ethics in business is primarily concerned with:
Correct answer: C. Business ethics is about distinguishing right from wrong and acting honestly and responsibly toward stakeholders. Maximising profit at any cost, avoiding all taxes, or hiding all information can each conflict with ethical behaviour. -
The main purpose of a budget is to:
Correct answer: D. A budget is a forward-looking plan used to allocate resources and then control performance against that plan. It does not replace the financial statements, set the audit fee, or merely record past transactions. -
Capital expenditure differs from revenue expenditure because capital expenditure:
Correct answer: A. Capital expenditure buys or improves a non-current asset and is capitalised, then depreciated over time. It is not necessarily smaller, it is not charged fully to one year's profit, and day-to-day running costs are revenue expenditure. -
Liquidity refers to a business's ability to:
Correct answer: B. Liquidity is the ability to meet short-term obligations as they fall due, often assessed with the current and quick ratios. Long-term profit, share price and market share are about profitability or growth, not short-term solvency. -
The matching of accounting periods means that the financial statements are usually prepared:
Correct answer: C. Under the periodicity (time period) assumption, results are reported for defined periods such as a year, allowing comparison. They are not prepared only at closure, only once in the business's life, or literally every day. -
Revenue (turnover) in the income statement represents:
Correct answer: D. Revenue is the income earned from a business's main activities of selling goods or services. Cash at the bank is an asset, amounts owed to suppliers are payables, and owner's capital is part of equity, none of which is revenue. -
Equity (owner's capital) in a company broadly represents:
Correct answer: A. Equity is the residual interest in the entity's assets after deducting all liabilities, belonging to the owners. Money owed to the bank is a liability, total sales is revenue, and the cost of inventory is an asset measure, not equity. -
An overhead is best described as a cost that is:
Correct answer: B. An overhead is an indirect cost that cannot be traced to a single cost unit and so must be shared or absorbed. A cost traceable to one unit is a direct cost, overheads can be fixed or variable, and they are certainly recorded in the accounts. -
Internal control is the responsibility of:
Correct answer: C. Designing and maintaining internal control is the responsibility of management and those charged with governance. The external auditor only evaluates controls, the tax authority is unrelated, and it is not solely the job of junior staff. -
Profitability measures how well a business:
Correct answer: D. Profitability assesses how effectively a business generates profit relative to sales or capital employed, for example via margins or return on capital. Paying debts on time is liquidity, while storing inventory and filing paperwork are operational matters. -
A 'cash flow forecast' is mainly used to:
Correct answer: A. A cash flow forecast predicts future receipts and payments so a business can manage liquidity and plan financing. It is not a tax computation, a brand valuation, or an audit of past accounts. -
The data protection principle of 'data minimisation' means an organisation should:
Correct answer: B. Data minimisation means collecting only the personal data necessary for the stated purpose, reducing risk. Collecting everything, keeping no records at all, or sharing data publicly all conflict with this principle. -
Net profit (profit for the year) is best described as:
Correct answer: C. Net profit is what remains after all expenses, including tax, are deducted from income. Total cash received is a cash measure, sales before costs is revenue, and the value of all assets is not a profit figure. -
Direct costs are costs that:
Correct answer: D. Direct costs, such as direct materials and direct labour, can be traced directly to a specific product or cost unit. They are not always fixed, are not limited to head-office costs, and can certainly be measured. -
Comparability as a qualitative characteristic of financial information helps users to:
Correct answer: A. Comparability lets users compare results across periods and between entities, aided by consistent accounting policies. It does not let them predict share prices exactly, avoid tax, or remove business risk.
Practice questions FAQ
- Are these real ACCA exam questions?
- No. These are original study questions written to test understanding. They are not real exam questions, exam dumps, or copied from any provider.
- How should I use these practice questions?
- Answer each one, read the explanation (including why the wrong options are wrong), and use the per-domain score below to focus your revision on weak areas. Revisit before exam day.
- How many questions should I do before the exam?
- Enough to score consistently across every domain, alongside full-length practice from official or reputable providers. Understanding why each answer is right matters more than raw volume.
- What score means I am ready?
- A good signal is consistently scoring around 80% or higher across all domains on questions you have not seen before, and being able to explain why the wrong options are wrong.
- Should I use exam dumps?
- No. Dumps (real or leaked questions) breach provider policy, can void your certification, and do not build the understanding the exam actually tests.