Question 1

Which of the following best describes the primary purpose of financial accounting in a business context?

Accepted Answer

To provide a language for business that supports decision-making for managers, investors, and stakeholders.

Question 2

A company has $$100 in $$share capital and $$0 in $$retained earnings. It earns a profit of $$20. If it $$reinvests the profit to buy a new machine instead of paying a dividend, what is the impact on retained earnings and future profits?

Accepted Answer

Retained earnings increase and future profits may increase due to higher production capacity.

Question 3

Which formula correctly calculates Net Working Capital?

Accepted Answer

$$Net\ Working\ Capital = Current\ assets - Current\ liabilities$$

Question 4

Why must the balance sheet always balance?

Accepted Answer

Because the total amount invested (equity and liabilities) must equal the total amount of resources owned (assets).

Question 5

Which of the following is NOT a source of capital for a business?

Accepted Answer

Customers (Revenue)

Question 6

A business spends capital on advertising and salaries. How are these expenditures classified?

Accepted Answer

As consumption (expenses) that reduce profit and retained earnings.

Question 7

Which of the following best describes the risk and return profile of equity holders?

Accepted Answer

Highest risk, unlimited potential return.

Question 8

If a company pays its suppliers 30 days after receiving goods, and collects cash from customers 30 days after selling goods, what is the total length of its cash conversion cycle?

Accepted Answer

$$20\ days$$

Question 9

Which of the following is an example of a productive asset?

Accepted Answer

Purchase of a machine

Question 10

What is the main objective of maximizing profit for shareholders?

Accepted Answer

To maximize revenue at the lowest possible consumption (expenses), within environmental and social boundaries.

Question 11

Which equation correctly represents the structure of a balance sheet?

Accepted Answer

$$Assets = Liabilities + Equity$$

Question 12

A company receives goods from a supplier and pays for them after 30 days. How does this affect the company's working capital?

Accepted Answer

It increases current liabilities and does not immediately affect current assets.

Question 13

Which of the following is NOT included in the calculation of net profit on the income statement?

Accepted Answer

Share capital

Question 14

If a company wants to improve its cash flow, which management lesson should it follow?

Accepted Answer

Buy low, sell high, pay late, collect early.

Question 15

Which of the following is a non-productive asset?

Accepted Answer

Inventory

Question 16

Which statement about debt financing is correct?

Accepted Answer

Debt must be repaid by a fixed date and usually carries a fixed interest obligation.

Question 17

On a balance sheet, which item is typically considered a current asset?

Accepted Answer

Inventory

Question 18

A company pays a salary of $$5$$ from its cash account. How does this transaction affect the balance sheet?

Accepted Answer

Cash decreases by $$5$$ and retained earnings decrease by $$5$$

Question 19

Which of the following is true about retained earnings?

Accepted Answer

Retained earnings are profits reinvested in the company for growth.

Question 20

Which of the following best describes the relationship between revenue and net profit on the income statement?

Accepted Answer

Net profit is calculated by subtracting operating expenses, interest expenses, and income tax expense from revenue.

Introduction to Financial Statements and the Balance Sheet

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