O Level Principles of Accounts Financial Statements Quiz

Answer Key - O-Level Principles of Accounts Quiz - Financial Statements

Total Marks: 50

Section A: Multiple Choice and Short Answer Questions (15 marks)

1. C. Motor vehicles [1]

• Explanation: Motor vehicles are tangible assets held for use in the business for more than one accounting period. They are non-current assets. Inventory (A) and trade receivables (B) are current assets. A bank overdraft (D) is a current liability.
• Common mistake: Students often confuse non-current assets with current assets. Remember: non-current assets are used in the business for a long time (more than one year).

2. B. Revenue – Cost of Sales [1]

• Explanation: Gross profit is the profit a business makes from buying and selling goods, before deducting operating expenses. It is calculated as Revenue (sales) minus the Cost of Sales (the cost of the goods that were sold).
• Common mistake: Students sometimes subtract all expenses from revenue to get gross profit. That gives net profit, not gross profit.

3. A. $13,000 [1]

• Explanation: The increase in capital is calculated as Net Profit – Drawings. $15,000 –$2,000 = $13,000. Drawings reduce the owner's capital because they represent the owner taking assets out of the business for personal use.
• Common mistake: Students sometimes add drawings to net profit instead of subtracting them. Drawings decrease capital, not increase it.

4. B. Accruals (matching) [1]

• Explanation: The accruals concept (also called the matching concept) states that expenses should be recorded in the same period as the revenue they helped to earn. This ensures that the profit for a period is accurately calculated.
• Common mistake: Students confuse accruals with prudence. Prudence is about being cautious (not overstating assets or profits). Accruals is about matching.

5. B. A current asset [1]

• Explanation: Prepaid rent is an amount paid in advance for a future benefit. It is an asset because the business has a right to use the rented property in the future. It is current because the benefit will be used up within one year.
• Common mistake: Students sometimes think prepayments are expenses. They are assets because the business has not yet received the benefit.

6. Assets = Capital + Liabilities [1]

• Explanation: This is the fundamental accounting equation. It shows that everything the business owns (assets) is financed either by the owner (capital) or by outsiders (liabilities).
• Marking: Accept "Assets = Owner's Equity + Liabilities" or similar.

7. Any one of: Investors / Shareholders / Bank / Suppliers / Government / Managers [1]

• Explanation: Different users need financial information for different decisions. Investors want to know if the business is profitable. Banks want to know if the business can repay loans.
• Marking: Accept any valid user.

8. Net profit would be overstated by $500. [1]

• Explanation: Closing inventory is deducted from cost of sales. If closing inventory is overstated, cost of sales is understated (too low). A lower cost of sales means a higher gross profit and therefore a higher net profit.
• Common mistake: Students sometimes think overstating inventory understates profit. Work through the cost of sales formula: Opening Inventory + Purchases – Closing Inventory = Cost of Sales. A higher closing inventory = lower cost of sales = higher profit.

9. Any one of: Rent / Salaries / Utilities / Depreciation / Advertising / Insurance [1]

• Explanation: Expenses are the costs incurred by the business in earning revenue during the period.
• Marking: Accept any valid expense.

10. A current liability is a debt that is due to be paid within one year of the reporting date. [1]

• Explanation: Examples include trade payables, accrued expenses, and bank overdrafts. They are "current" because they must be settled in the short term.
• Marking: Accept "a liability expected to be settled within the business's normal operating cycle or within 12 months".

11. Gross profit = $38,000 [3]

• Working: Cost of Sales = Opening Inventory + Purchases – Closing Inventory Cost of Sales = $12,000 +$45,000 – $15,000 =$42,000 Gross Profit = Revenue – Cost of Sales = $80,000 –$42,000 = $38,000
• Marking breakdown:
  • Correct calculation of cost of sales: 1 mark
  • Correct calculation of gross profit: 1 mark
  • Correct final answer: 1 mark
• Common mistake: Students forget to subtract closing inventory. The formula is: Opening + Purchases – Closing.

12. A trade receivable is a customer who owes the business money for goods or services sold on credit. A trade payable is a supplier to whom the business owes money for goods or services bought on credit. [2]

• Explanation: Receivables are assets (the business is owed money). Payables are liabilities (the business owes money).
• Marking breakdown:
  • Correct definition of trade receivable: 1 mark
  • Correct definition of trade payable: 1 mark

13. Capital = $120,000 [2]

• Working: Accounting Equation: Assets = Capital + Liabilities Rearranged: Capital = Assets – Liabilities Capital = $200,000 –$80,000 = $120,000
• Marking breakdown:
  • Correct formula or rearrangement: 1 mark
  • Correct final answer: 1 mark

14. The Income Statement shows the profit or loss of a business for a specific period (usually one year). [1]

• Explanation: It calculates gross profit (Revenue – Cost of Sales) and then deducts expenses to arrive at net profit or net loss.
• Marking: Accept "to calculate the net profit or net loss for the period".

15. Non-current liability [1]

• Explanation: A loan repayable in 5 years is due after more than one year, so it is classified as a non-current liability.
• Common mistake: Students sometimes classify all loans as non-current. If a loan is repayable within one year, it is a current liability.

Section B: Structured Questions (20 marks)

16. (a) Cost of Sales = $68,000 [2]

• Working: Cost of Sales = Opening Inventory + Purchases – Closing Inventory Cost of Sales = $18,000 +$72,000 – $22,000 =$68,000
• Marking breakdown:
  • Correct formula: 1 mark
  • Correct final answer: 1 mark

(b) Income Statement for ABC Traders for the year ended 31 December 2024 [5]

• Marking breakdown:
  • Correct heading and layout: 1 mark
  • Correct cost of sales (from part a): 1 mark
  • Correct gross profit: 1 mark
  • Correct listing of all expenses: 1 mark
  • Correct net profit: 1 mark
• Common mistake: Students sometimes forget to include all expenses or mis-calculate the total.

17. (a) Net book value = $60,000 [1]

• Working: Net Book Value = Cost – Accumulated Depreciation Net Book Value = $80,000 –$20,000 = $60,000
• Common mistake: Students sometimes confuse net book value with cost. Net book value is the cost less depreciation to date.

(b) Statement of Financial Position for XYZ Ltd as at 31 December 2024 [7]

• Marking breakdown:
  • Correct heading and date: 1 mark
  • Correct classification of non-current assets: 1 mark
  • Correct classification of current assets: 1 mark
  • Correct calculation of closing capital: 1 mark
  • Correct classification of non-current liabilities: 1 mark
  • Correct classification of current liabilities: 1 mark
  • Correct total assets = total capital and liabilities: 1 mark
• Common mistake: Students often forget to include drawings in the capital section. Drawings reduce capital.

18. (a) Rent expense = $8,500 [2]

• Working: Rent expense = Rent paid + Prepaid at start – Accrued at end Wait – careful. The correct formula for rent expense is: Rent expense = Rent paid – Prepaid at start + Accrued at end Let's check: The business paid $8,000. It had$1,000 prepaid at the start of the year (this was an asset last year, but it is now an expense of this year because the benefit was used this year). It owes $1,500 at the end of the year (this is an expense of this year that has not yet been paid). So: Rent expense =$8,000 (paid) + $1,000 (prepaid used up) +$1,500 (accrued) = $10,500. Wait, let me re-check. The prepaid at 1 Jan 2024 was paid last year but relates to this year. So it is added to this year's expense. The accrued at 31 Dec 2024 relates to this year but will be paid next year. So it is also added to this year's expense. Rent expense =$8,000 + $1,000 +$1,500 = $10,500. Let me re-read the question: "Rent paid during the year:$8,000. Rent prepaid at 1 January 2024: $1,000. Rent accrued at 31 December 2024:$1,500." The prepaid at 1 Jan 2024 means the business had already paid $1,000 for rent that relates to 2024. So this$1,000 is an expense of 2024. The accrued at 31 Dec 2024 means the business owes $1,500 for rent that relates to 2024 but has not been paid yet. So this$1,500 is also an expense of 2024. Total rent expense for 2024 = $8,000 (paid in 2024) +$1,000 (prepaid from last year, used this year) + $1,500 (accrued, relating to this year) =$10,500. I made an error above. The correct answer is $10,500.
• Marking breakdown:
  • Correct method: 1 mark
  • Correct final answer: 1 mark
• Common mistake: Students often get the adjustment signs wrong. Draw a timeline or use the formula: Expense = Amount paid + Prepaid at start – Prepaid at end + Accrued at end – Accrued at start. In this case: $8,000 +$1,000 – $0 +$1,500 – $0 =$10,500.

(b) Prepaid rent: Current asset. Accrued rent: Current liability. [2]

• Explanation: Prepaid rent is an asset because the business has paid for a benefit it will receive in the future. Accrued rent is a liability because the business owes rent that has not yet been paid.
• Marking breakdown:
  • Correct classification of prepaid rent: 1 mark
  • Correct classification of accrued rent: 1 mark

19. The prudence concept requires that inventory is valued at the lower of cost and net realizable value. This ensures that inventory is not overstated in the financial statements, and any potential loss is recognized immediately. [1]

• Explanation: Prudence means being cautious. If the selling price of inventory falls below its cost, the business should write down the inventory to the lower net realizable value to avoid overstating assets and profits.
• Marking: Accept any explanation that mentions "lower of cost and net realizable value" and the idea of not overstating assets/profits.

Section C: Application and Analysis Questions (15 marks)

20. (a) Income Statement for PQR Traders for the year ended 31 December 2024 [8]

Working notes:

• Rent expense: $6,000 paid –$1,000 prepaid = $5,000 (the prepaid portion is not an expense of this year)

• Salaries expense: $18,000 paid +$2,000 accrued = $20,000 (the accrued portion is an expense of this year)

• Depreciation: 10% × $50,000 (cost) =$5,000

• Marking breakdown:

  • Correct heading and layout: 1 mark
  • Correct cost of sales calculation: 1 mark
  • Correct gross profit: 1 mark
  • Correct rent expense (after prepaid adjustment): 1 mark
  • Correct salaries expense (after accrued adjustment): 1 mark
  • Correct depreciation calculation: 1 mark
  • Correct total expenses: 1 mark
  • Correct net profit: 1 mark

• Common mistake: Students often forget to adjust for prepaid and accrued items. Always check if the amount paid is the same as the expense for the period.

(b) Statement of Financial Position for PQR Traders as at 31 December 2024 [7]

Working notes:

• Equipment net book value: Cost $50,000 – Accumulated depreciation$10,000 – Depreciation for year $5,000 =$35,000

• Prepaid rent of $1,000 is a current asset

• Accrued salaries of $2,000 is a current liability

• Closing capital: $60,000 +$7,000 (net profit) – $4,000 (drawings) =$63,000

• Marking breakdown:

  • Correct heading and date: 1 mark
  • Correct net book value of equipment: 1 mark
  • Correct classification of current assets (including prepaid rent): 1 mark
  • Correct total assets: 1 mark
  • Correct calculation of closing capital: 1 mark
  • Correct classification of current liabilities (including accrued salaries): 1 mark
  • Correct total capital and liabilities = total assets: 1 mark

• Common mistake: Students often forget to include the prepaid rent as a current asset and the accrued salaries as a current liability. They also sometimes forget to update the accumulated depreciation.

END OF ANSWER KEY