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ACCA FA: Financial Accounting Practice Questions
45 original practice questions for ACCA Financial Accounting (FA), written for this site with full explanations. They are original questions in the style of the syllabus - not taken from any official exam. Use them to test coverage, then confirm details against ACCA's official materials.
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Which of the following correctly states the accounting equation?
Correct answer: B. Everything a business owns (assets) is financed either by the owners (capital, or equity) or by outsiders (liabilities), so Assets = Capital + Liabilities. The other arrangements break this relationship: subtracting liabilities from capital, or adding assets to capital or liabilities, does not reflect how resources are funded. -
What is the double entry to record the purchase of goods for resale on credit?
Correct answer: D. Buying goods for resale increases the purchases expense (a debit) and, because payment is deferred, increases trade payables (a credit). Debiting payables and crediting purchases reverses the entry, crediting cash would apply to a cash purchase, and receivables and sales relate to selling goods, not buying them. -
Which of the following normally appears as a credit balance in a trial balance?
Correct answer: A. Income accounts such as revenue carry credit balances, as do liabilities and capital. Trade receivables are assets, purchases are expenses, and motor vehicles at cost are assets, and assets and expenses all normally carry debit balances. -
Which of the following errors would NOT be revealed by extracting a trial balance?
Correct answer: C. An error of complete omission leaves both the debit and the credit out, so the trial balance still balances and gives no warning. A one-sided posting, a debit and credit posted at different amounts, and an addition (casting) error in one account all cause total debits and credits to disagree, so the trial balance would expose them. -
A trial balance fails to agree: total debits exceed total credits by $500. What balance will be entered in the suspense account?
Correct answer: D. The suspense account is opened with whatever balance makes the trial balance totals equal: since debits are $500 too high, a credit of $500 is needed. A debit entry would widen the difference, and there is nothing in the facts to justify doubling or halving the amount. -
In which book of prime entry is a credit note issued to a customer recorded?
Correct answer: B. A credit note issued to a customer usually reflects goods returned by that customer (or an allowance granted), and these are listed in the sales returns day book before posting. The sales day book records invoices issued, the purchases day book records suppliers' invoices received, and the cash book records receipts and payments of money. -
Which of the following should be treated as capital expenditure?
Correct answer: C. Costs directly attributable to bringing a non-current asset to its location and working condition, such as delivery and installation of a new machine, are capitalised as part of the asset's cost. Repainting, routine maintenance and fuel keep existing assets running rather than creating or enhancing an asset, so they are revenue expenditure charged to profit or loss. -
Repairs of $800 were wrongly debited to the Machinery at cost account. Which journal corrects this error?
Correct answer: A. This is an error of principle: the expense went into an asset account. The correction removes the amount from Machinery (credit) and puts it into Repairs (debit) at the original $800. Reversing the entries would compound the error, $1,600 would only be needed if one account had to be adjusted through zero from an opposite-side posting, and no suspense account is involved because the original entry had equal debits and credits, so the trial balance still balanced. -
A business owes a supplier $2,000. It settles the debt by paying $1,900 from the bank, the supplier allowing a $100 settlement discount. What is the overall effect on the accounting equation?
Correct answer: A. Cash (an asset) falls by the $1,900 actually paid, the payable of $2,000 is removed in full, and the $100 discount received is credited as income, increasing profit and therefore capital, which keeps the equation in balance: -1,900 = -2,000 + 100. The other options either ignore the discount, misstate the cash paid, or treat the discount received as a loss instead of a gain. -
Which of the following best describes an accrued expense (accrual)?
Correct answer: D. An accrual arises when a benefit, such as electricity, has been consumed by the year end but the bill has not yet been paid or even received, so the estimated amount is charged as an expense and shown as a current liability. An expense paid in advance is a prepayment, income received in advance is deferred income, and an uncollectable customer debt is an irrecoverable debt. -
What is the purpose of charging depreciation on a non-current asset?
Correct answer: B. Depreciation is an application of the accruals concept: the cost of the asset (less residual value) is spread over the periods that benefit from its use. It is a book allocation, not a valuation exercise, so it does not aim at market value; it involves no transfer of cash into any fund; and while depreciation-related allowances may affect tax, eliminating tax is not its purpose. -
A business with a 31 December year end pays its annual insurance premium of $2,400 on 1 October, covering the year to 30 September. What adjustment is needed at 31 December?
Correct answer: C. At 31 December, only 3 months of the 12-month policy (October to December) have been used, so 9 months' worth remains paid in advance: 2,400 x 9/12 = $1,800 is carried forward as a prepayment (a current asset), leaving $600 as the expense for the year. $600 is the expense element, not the prepayment, and no accrual arises because the premium has already been paid. -
A machine cost $45,000, has an expected residual value of $5,000 and a useful life of 8 years. What is the annual straight-line depreciation charge?
Correct answer: C. Straight-line depreciation = (cost - residual value) / useful life = (45,000 - 5,000) / 8 = $5,000 per year. $5,625 ignores the residual value (45,000 / 8), $4,500 wrongly uses a 10-year life on the depreciable amount, and $6,250 divides cost plus residual value by 8 instead of deducting the residual value. -
Equipment cost $80,000 and is depreciated at 25% per annum on the reducing balance basis. What is the depreciation charge for the second year?
Correct answer: B. Year 1 depreciation = 80,000 x 25% = $20,000, leaving a carrying amount of $60,000. Year 2 depreciation = 60,000 x 25% = $15,000. $20,000 is the first year's charge, $11,250 is the third year's charge (45,000 x 25%), and $35,000 is the accumulated depreciation after two years rather than the year 2 charge alone. -
A customer owing $1,200 has gone into liquidation and there is no prospect of any payment. No allowance was previously made for this balance. What is the correct double entry?
Correct answer: D. A debt known to be uncollectable is written off by removing it from receivables (credit) and charging the loss as an expense (debit). Reversing the entry would increase receivables, debiting revenue would wrongly cancel the original sale, and crediting the allowance account is only appropriate when adjusting a general allowance rather than writing off a specific known irrecoverable balance. -
During the year, a company wrote off debts of $5,000. Closing trade receivables after the write-off are $85,000, and the company requires an allowance for receivables of 4% of closing receivables. The allowance brought forward was $2,600. What total charge appears in profit or loss for irrecoverable debts and the allowance movement?
Correct answer: A. The allowance required = 85,000 x 4% = $3,400, so the allowance must increase by 3,400 - 2,600 = $800. The total charge = write-offs of $5,000 plus the $800 increase = $5,800. $8,400 wrongly adds the full closing allowance to the write-offs, $5,000 ignores the allowance movement, and $3,400 is the closing allowance balance, not the charge. -
A company failed to record an accrual for $2,000 of electricity consumed in December. What is the effect of correcting this omission on the financial statements?
Correct answer: B. Recording the accrual adds $2,000 to the electricity expense, cutting profit by $2,000, and creates a $2,000 accrued liability. No cash moves, because the bill has not yet been paid, and no asset is affected; the adjustment touches only the expense and the liability. -
A machine that cost $30,000, with accumulated depreciation of $22,000, is sold for $9,500. What is the profit or loss on disposal?
Correct answer: A. The carrying amount at disposal = 30,000 - 22,000 = $8,000, and proceeds of $9,500 exceed this by $1,500, giving a profit on disposal. A loss of $1,500 reverses the comparison, $9,500 treats the whole proceeds as profit while ignoring the carrying amount, and $20,500 wrongly compares proceeds with original cost. -
Which financial statement shows an entity's assets, liabilities and equity at a single point in time?
Correct answer: C. The statement of financial position is a snapshot of assets, liabilities and equity at the reporting date. The statement of profit or loss reports income and expenses over a period, the statement of cash flows reports cash movements over a period, and the statement of changes in equity reconciles opening and closing equity balances over a period. -
Which of the following items should be presented under current liabilities?
Correct answer: D. Current liabilities are amounts expected to be settled within twelve months of the reporting date (or within the normal operating cycle), and trade payables due in 30 days clearly qualify. A loan repayable in five years is a non-current liability, share capital is part of equity, and plant and machinery is a non-current asset. -
Revenue for the year is $200,000, opening inventory was $15,000, purchases were $120,000 and closing inventory is $18,000. What is the gross profit?
Correct answer: D. Cost of sales = opening inventory + purchases - closing inventory = 15,000 + 120,000 - 18,000 = $117,000, so gross profit = 200,000 - 117,000 = $83,000. $80,000 deducts purchases alone and ignores the inventory movement, $77,000 swaps the opening and closing inventory figures, and $117,000 is the cost of sales rather than the gross profit. -
An item of inventory cost $50 to buy. It is expected to sell for $60, but only after incurring selling costs of $15. At what amount should this item be valued in the financial statements?
Correct answer: C. Inventory is measured at the lower of cost and net realisable value (NRV), where NRV = expected selling price minus costs to sell = 60 - 15 = $45. Since $45 is below the $50 cost, the item is written down to $45. $50 ignores the NRV test, $60 uses selling price without deducting selling costs, and $35 wrongly deducts the selling costs from cost instead of from selling price. -
In a statement of cash flows, cash paid to acquire new plant and equipment is classified under:
Correct answer: A. Purchases and disposals of long-term assets belong to investing activities, which show how the entity deploys cash to maintain and expand its productive capacity. Operating activities cover the main revenue-producing transactions, financing activities cover changes in borrowings and equity, and paying cash for plant is very much a cash transaction. -
A company issues 100,000 ordinary shares with a nominal value of $1 each at an issue price of $1.60 per share, fully paid in cash. What is the effect on equity?
Correct answer: B. The nominal value of the shares issued (100,000 x $1 = $100,000) is credited to share capital, and the excess of the issue price over nominal value (100,000 x $0.60 = $60,000) is credited to share premium. Putting the whole $160,000 into share capital ignores the premium, the third option swaps the two amounts, and issue proceeds never go to retained earnings, which accumulate profits. -
How are carriage inwards and carriage outwards presented in the financial statements of a trading business?
Correct answer: A. Carriage inwards is a cost of bringing purchased goods to the business, so it forms part of the cost of the goods and increases cost of sales. Carriage outwards is the cost of delivering goods to customers, which is a selling and distribution expense after gross profit. Treating both the same way, or reversing them, misstates gross profit even though net profit may be unchanged. -
Profit before tax is $40,000. Depreciation for the year was $6,000, receivables increased by $3,500, payables increased by $2,000 and inventory decreased by $1,500. Using the indirect method, what is the cash generated from operations?
Correct answer: B. Starting from profit of $40,000: add back non-cash depreciation of $6,000, deduct the $3,500 increase in receivables (sales not yet collected), add the $2,000 increase in payables (expenses not yet paid) and add the $1,500 decrease in inventory (stock turned into cash): 40,000 + 6,000 - 3,500 + 2,000 + 1,500 = $46,000. $53,000 wrongly adds the receivables increase, $39,000 wrongly deducts the payables and inventory movements, and $40,000 ignores all the adjustments. -
Two weeks after its year end, a company learns that a major customer has gone into liquidation. The customer's balance was outstanding at the year end and little is expected to be recovered. According to IAS 10, how should this be treated in the financial statements being finalised?
Correct answer: D. The liquidation shortly after the year end normally provides evidence of the customer's financial condition at the reporting date, so it is an adjusting event and the year-end receivable is written down. Non-adjusting treatment applies to conditions that arose only after the year end, ignoring the event would overstate assets, and the adjusting/non-adjusting distinction depends on when the condition existed, not on an arbitrary profit threshold (although materiality governs whether any item matters at all). -
For consolidation purposes, a subsidiary is best defined as:
Correct answer: C. The parent-subsidiary relationship rests on control: the power to direct the entity's relevant activities so as to affect the investor's returns, most commonly through holding a majority of voting rights. A 20% holding typically suggests only significant influence (an associate), and trading relationships or sharing an auditor have nothing to do with control. -
An associate is best described as an entity over which the investor has:
Correct answer: C. Significant influence is the power to participate in financial and operating policy decisions without controlling them, and a holding of 20% to 50% of voting rights is presumed to give it. Control indicates a subsidiary, holdings below 20% are normally simple investments, and a branch is legally part of the same entity rather than a separate investee. -
What is the purpose of preparing consolidated financial statements?
Correct answer: D. Consolidated statements combine the parent and its subsidiaries line by line so that shareholders of the parent see the resources and results of the whole group as one economic unit, reflecting substance over legal form. Tax is generally assessed on individual legal entities, each subsidiary still prepares its own statements, and the parent-only view is given by the parent's separate financial statements. -
At the year end, a parent's receivables include $12,000 due from its subsidiary, and the subsidiary shows the same $12,000 as a payable. How is this balance treated in the consolidated statement of financial position?
Correct answer: B. From the single-entity perspective, an amount owed between group members is neither an asset nor a liability of the group, so intra-group balances are cancelled in full on consolidation. Leaving the balances in would inflate both assets and liabilities, partial elimination applies to no intra-group balance (even with a non-controlling interest, the balance is eliminated in full), and equity is not involved. -
P acquired 100% of the shares of S for $500,000 when the fair value of S's identifiable net assets was $420,000. What goodwill arises on the acquisition?
Correct answer: A. Goodwill = consideration transferred - fair value of identifiable net assets acquired = 500,000 - 420,000 = $80,000, representing what was paid for factors such as reputation and workforce that are not separately identifiable. $500,000 is the consideration, $420,000 is the net assets acquired, and $920,000 wrongly adds the two together. -
P's revenue for the year is $800,000 and its subsidiary S's revenue is $300,000. During the year, S sold goods to P for $40,000. What revenue appears in the consolidated statement of profit or loss?
Correct answer: B. Consolidated revenue = 800,000 + 300,000 - 40,000 = $1,060,000, because the intra-group sale is not revenue from the group's perspective; only sales to outside customers count. $1,100,000 omits the elimination, $800,000 shows the parent alone, and $1,020,000 wrongly deducts the intra-group sale twice. -
P acquired 80% of S for $600,000 when the fair value of S's identifiable net assets was $650,000. The non-controlling interest is measured at its proportionate share of net assets. What goodwill arises?
Correct answer: C. Non-controlling interest = 20% x 650,000 = $130,000. Goodwill = consideration + NCI - net assets = 600,000 + 130,000 - 650,000 = $80,000. Comparing only the $600,000 paid with $650,000 of net assets, and concluding there is a $50,000 bargain gain, ignores the NCI's share of those net assets; $130,000 is the NCI itself, and $470,000 subtracts NCI from consideration, which has no meaning. -
During the year, P sold goods to its subsidiary S for $60,000, earning a margin of 25% on the selling price. Half of these goods remain in S's inventory at the year end. By how much must consolidated inventory and profit be reduced for unrealised profit?
Correct answer: A. The profit loaded into the transfer = 60,000 x 25% = $15,000. Only the goods still held are unrealised: 15,000 x 50% = $7,500, which is removed from both group inventory and group profit. $15,000 would apply only if all the goods remained unsold, $6,000 results from wrongly treating 25% as a markup on cost, and $30,000 is simply half the sales value rather than the profit element. -
In consolidated financial statements, how is an investment in an associate accounted for?
Correct answer: D. Associates are equity accounted: the consolidated statement of financial position shows a single investment line that grows with the group's share of post-acquisition retained profits, and the statement of profit or loss shows one line for the share of the associate's profit. Full consolidation is reserved for subsidiaries, holding the investment frozen at cost ignores the influence the investor exercises, and proportionate line-by-line consolidation is not used for associates. -
The going concern assumption means that financial statements are normally prepared on the basis that:
Correct answer: D. Going concern underpins normal accounting measurements: assets are carried on the basis that they will be used in continuing operations, not sold off immediately. Liquidation values become relevant only when the going concern basis is inappropriate; the assumption says nothing about an imminent sale of the business or about profit growth. -
Which option correctly lists the four enhancing qualitative characteristics of useful financial information?
Correct answer: A. The Conceptual Framework identifies comparability, verifiability, timeliness and understandability as characteristics that enhance information which is already relevant and faithfully represented. Relevance is a fundamental rather than enhancing characteristic, completeness and neutrality are components of faithful representation, and going concern and accruals are underlying concepts of preparation, not qualitative characteristics. -
According to the Conceptual Framework, information is material if:
Correct answer: C. Materiality is defined by user impact: information is material if leaving it out, misstating it or obscuring it could influence primary users' decisions. It is entity-specific, so no universal monetary threshold exists, and an item can be material because of its nature (for example, a small transaction with a director) as well as its size; management preference is irrelevant. -
Under the Conceptual Framework, a liability is defined as:
Correct answer: B. The definition has three parts: a present obligation, the obligation involves transferring an economic resource, and it arises from past events. A mere intention creates no obligation, expected outflows without a present obligation do not qualify, and obligations can be constructive (arising from established practice or public commitments) as well as legally enforceable. -
Which statement best describes the accrual basis of accounting?
Correct answer: A. Accrual accounting depicts transactions in the periods to which they relate: a December sale on credit is December revenue even if cash arrives in January. Recording only on cash movement describes the cash basis, and delaying revenue until the customer pays, or expenses until settlement, are both cash-basis behaviours that accrual accounting exists to correct. -
In the Conceptual Framework, prudence is described as:
Correct answer: C. Prudence supports neutrality: caution under uncertainty means assets and income are not overstated and liabilities and expenses are not understated, but it equally prohibits deliberate understatement of assets or income, which would create hidden reserves and bias the accounts. Always minimising profit or padding liabilities is excessive conservatism, and recognising gains as early as possible is the opposite of caution. -
Which measurement basis records an asset at the consideration paid to acquire it, subsequently adjusted where applicable for depreciation or impairment?
Correct answer: B. Historical cost measures use information derived from the original transaction price, updated over time for consumption (depreciation or amortisation) and impairment. Fair value reflects the price in a current market transaction between participants, value in use reflects the present value of the cash flows the entity expects from using the asset, and current cost reflects what it would cost to acquire an equivalent asset today. -
Under the current Conceptual Framework, when should an item that meets the definition of an asset or liability be recognised in the financial statements?
Correct answer: D. The 2018 Framework ties recognition to the fundamental qualitative characteristics: an element is recognised when doing so gives relevant, faithfully representative information, taking into account factors such as existence uncertainty and low probability of flows. Certainty of cash flow has never been required, the 'probable and reliably measurable' test is the wording of the older framework which the current Framework replaced as the general criterion, and management convenience is not a basis for recognition. -
According to the Conceptual Framework, income is defined as:
Correct answer: C. Income covers increases in economic resources that raise equity, excluding amounts contributed by the owners themselves, so a share issue is never income. Cash receipts can include loans and owner contributions that are not income, and income is broader than customer revenue because it also includes gains, such as a profit on disposal of equipment.
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