JAN FA MCQs

super basics

What is a statement of financial position?

A snapshot of the financial position of a company at a specific point in time.

What does a statement of financial position show?

The assets, liabilities, and equity of a company at a specific date.

What are the two fundamental qualitative characteristics of useful financial information?

Relevance and faithful representation.

What is relevance in financial reporting?

Financial information that is capable of making a difference in the decisions made by users.

What is faithful representation?

Financial information that represents faithfully the substance of an economic phenomenon, not just its legal form.

What three characteristics maximize faithful representation?

Completeness, neutrality, and freedom from error.

What is materiality?

An entity-specific aspect of relevance based on the nature or magnitude of items in the context of an individual entity's financial report.

What is prudence?

The exercise of caution when making judgements under conditions of uncertainty.

How does prudence affect financial reporting?

Assets and income are not overstated, and liabilities and expenses are not understated.

What are the four enhancing qualitative characteristics of useful financial information?

Comparability, verifiability, timeliness, and understandability.

What is comparability?

The ability for users to make comparisons between the financial statements of different companies or different periods for the same company.

What is verifiability?

Different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation.

What is timeliness?

Information is available to decision-makers in time to be capable of influencing their decisions.

What is understandability?

Information is classified, characterized, and presented clearly and concisely for users with reasonable knowledge of business and economic activities.

Should complicated information be left out of financial statements to improve understandability?

No, some phenomena are inherently complex and excluding such information would make financial reports incomplete and potentially misleading.

What are the criteria for an asset to be classified as current?

Expected to be realized within 12 months, held for trading, or is cash (property, plant and equipment is NOT a criterion for current assets).

When is a liability classified as current?

When it is expected to be settled within 12 months of the reporting date.

What is the difference between current and non-current liabilities?

Current liabilities are due within 12 months; non-current liabilities are due after 12 months.

If a bank loan has instalments due within 12 months and after 12 months, how should it be presented?

The portion due within 12 months is shown as a current liability; the portion due after 12 months is shown as a non-current liability.

When should a dividend be recognized in the financial statements?

When it is declared and approved by shareholders before the year-end date.

If a dividend is approved after the year-end, should it be recognized in that year's financial statements?

No, it should be recognized in the following year's financial statements.

How do you calculate the total dividend amount?

Number of shares × dividend per share.

How do you calculate the number of ordinary shares?

Total share capital ÷ nominal value per share.

When ordinary shares are issued for cash above their nominal value, what is recorded in the share capital account?

Only the nominal value (number of shares × nominal value per share).

What happens to the excess amount when shares are issued above nominal value?

It is recorded in the share premium account.

How do you calculate interest expense when a loan is partially repaid during the year?

Calculate interest on the opening balance for the period before repayment, then calculate interest on the reduced balance for the remaining period.

What is the formula for calculating interest for part of a year?

Principal × interest rate × (number of months / 12).

What documents are required in a complete set of financial statements under IAS 1?

Statement of financial position, statement of profit or loss and other comprehensive income, statement of cash flows, statement of changes in equity, and notes comprising accounting policies and explanatory information.

What is the purpose of financial accounting?

To provide financial information about the entity that is useful to external users for decision-making purposes.

Who are the primary users of financial accounting information?

External users such as investors, creditors, and other stakeholders.

What is the accrual basis of accounting?

Revenues and expenses are recognized when they are earned or incurred, regardless of when cash is received or paid.

What is the cash basis of accounting?

Revenues and expenses are recognized only when cash is received or paid.

Which basis provides a more accurate reflection of financial performance?

The accrual basis.

In double entry bookkeeping, what does a debit entry represent for an asset account?

An increase in an asset.

In double entry bookkeeping, what does a credit entry represent for an asset account?

A decrease in an asset.

In double entry bookkeeping, what does a debit entry represent for a liability account?

A decrease in a liability.

In double entry bookkeeping, what does a credit entry represent for a liability account?

An increase in a liability.

What does a debit entry represent for expenses?

An item of expense (an increase in expenses).

What does a credit entry represent for income?

An item of income (an increase in income).

What is the formula for calculating cost of sales?

Opening inventory + purchases - closing inventory.

What are trade receivables?

Amounts owed to the business by customers for goods or services sold on credit.

How do you calculate cash receipts from trade receivables?

Opening receivables + credit sales - closing receivables.

Are trade receivables classified as current or non-current assets?

Current assets.

Is cash classified as a current or non-current asset?

Current asset.

Is finished goods inventory classified as a current or non-current asset?

Current asset.

Is equipment classified as a current or non-current asset?

Non-current asset (property, plant and equipment).

If development expenditure is expected to benefit future years, how should it be treated?

It should be recorded as an intangible asset in the statement of financial position, not as an expense in cost of sales.

What is the effect on profit when development expenditure is capitalized as an asset?

Profit will increase by the amount of the development expenditure.

Which type of business entity has ownership divided into individual shares and distributes profits through dividends?

A limited company.

What is a sole trader?

A business owned and operated by one individual who receives all profits and bears all losses.

What is a partnership?

A business owned by two or more individuals who share profits and losses.

How do you calculate cash inflow from sales when goods are sold on credit?

Credit sales + opening receivables - closing receivables.

What is the going concern basis?

The assumption that the entity will continue in business for the foreseeable future.

What happens if the going concern basis does not apply?

Financial statements are prepared on a break-up basis, where assets are measured at their expected selling price and accounting standards may not apply.

What is the entity concept?

The business is treated as separate from its owners for accounting purposes.

What is the matching principle (accruals concept)?

Expenses should be matched with the revenues they help generate in the same accounting period.

What is consistency in accounting?

Using the same accounting methods and policies from one period to another to ensure comparability.

What is the historical cost principle?

Assets are initially recorded at their original purchase cost.

What are the main components of an income statement?

Revenue
Cost of sales
Gross profit
Operating expenses
Profit for the period.

What is gross profit?

Revenue minus cost of sales.

What is operating profit?

Gross profit minus operating expenses (before interest and tax).

What types of expenses are included in operating expenses?

Administrative expenses, selling and distribution expenses, and other operating costs.

What are non-current assets?

Assets expected to provide economic benefits for more than one year (e.g., property, plant, equipment, intangible assets).

What are current liabilities?

Obligations expected to be settled within 12 months (e.g., trade payables, short-term borrowings, accrued expenses).

What are non-current liabilities?

Obligations not due for settlement within 12 months (e.g., long-term loans, bonds payable).

What is equity?

The residual interest in the assets of the entity after deducting all liabilities (assets - liabilities = equity).

What are the main components of equity?

Share capital
Share premium
Retained earnings
Reserves

What are retained earnings?

Cumulative profits retained in the business after dividends have been paid.

What is the Statement of Financial Position (Balance Sheet) and its primary function?

It reports the entity's assets, liabilities, and equity at a specific point in time
Its function is to show the financial position of the business, what it owns versus what it owes, providing a snapshot of its net worth.

What is the Statement of Profit or Loss (Income Statement) and its primary function?

It reports the entity's revenues, expenses, and resulting profit or loss over a period of time
Its function is to show the financial performance of the business, indicating how profitable it was during the reporting period.

What is the Statement of Cash Flows and its primary function?

It reports the entity's cash inflows and outflows, categorized into operating, investing, and financing activities, over a period of time
Its function is to show how cash was generated and used, providing insight into the business's liquidity and solvency.