22 questions. Try each one, then open the answer to check yourself and read the explanation.
Which of the following items appear only in the balance sheet and NOT in the income statement?
I. Accumulated depreciation
II. Accrued expenses
III. Bad debt expense
IV. Share capital
Answer: B (I, II and IV only)
Accumulated depreciation, accrued expenses and share capital are balance sheet items; bad debts are an expense in the income statement.
A trader's capital account will DECREASE when:
I. Net profit is recorded
II. Drawings are made
III. Additional capital is introduced
IV. Net loss is recorded
Answer: C (II and IV only)
Drawings and losses reduce capital; profit and new capital increase it.
The following are effects of errors that do NOT affect the agreement of a trial balance:
I. Error of omission
II. Error of commission
III. Error of principle
IV. Casting error
Answer: A (I, II and III only)
Omission, commission and principle errors affect debit and credit equally, so the trial balance still agrees; a casting (addition) error makes it disagree.
A company's receipts and payments account would include:
I. Sale of fixed assets
II. Subscription income
III. Depreciation charges
IV. Cash donations received
Answer: A (I, II and IV only)
A receipts and payments account records cash in and out: sale proceeds, subscriptions and donations received. Depreciation involves no cash.
When preparing a bank reconciliation statement, which of the following would be ADDED to the bank statement balance?
I. Outstanding cheques
II. Deposits in transit
III. Bank charges are not yet in the cash book
IV. Unpresented cheques
Answer: B (II only)
Deposits not yet credited by the bank are added to the bank statement balance; unpresented (outstanding) cheques are deducted, and bank charges are adjusted in the cash book.
The concept of going concern implies that:
I. Assets are valued at cost, not market value
II. The business will continue operating indefinitely
III. Depreciation must be charged on fixed assets
IV. All liabilities must be paid immediately
Answer: B (I, II and III only)
Because the business is expected to carry on, assets are kept at cost and depreciated over their lives; liabilities need not be settled at once.
Which of the following are examples of capital expenditure?
I. Purchase of a delivery van
II. Repainting office walls
III. Extension of the factory building
IV. Annual insurance premium
Answer: B (I and III only)
Buying a van and extending a building add lasting assets; repainting and insurance are running (revenue) costs.
The net realisable value of inventory is the:
I. Cost of purchase less trade discount
II. Estimated selling price less costs to complete and sell
III. Original invoice price of goods
IV. Lower of cost and market value only when prices fall
Answer: C (II only)
NRV = estimated selling price minus the costs of completing and selling the goods.
Study the following information: Opening stock: ₦40,000 Purchases: ₦200,000 Carriage inwards: ₦8,000 Returns outward: ₦12,000 Closing stock: ₦35,000. Which of these figures are included in computing cost of goods sold?
Answer: B (All of the above)
Cost of goods sold = opening stock + purchases + carriage inwards − returns outward − closing stock = ₦201,000, so all five figures are used.
A company had the following transactions for the month: Credit sales: ₦350,000 Cash received from debtors: ₦280,000 Discount allowed: ₦14,000 Bad debts written off: ₦6,000 Returns inward: ₦10,000 Opening debtors: ₦60,000. Which of the following are entries in the DEBIT side of the debtors control account?
I. Opening balance ₦60,000
II. Credit sales ₦350,000
III. Returns inward ₦10,000
IV. Cash received ₦280,000
Answer: A (I and II only)
The debit side holds what customers owe: the opening balance and credit sales. Returns, cash, discounts and bad debts reduce debtors and go on the credit side.
Consider the following data for Olatunji Traders for 2024: Net sales: ₦900,000 Cost of goods sold: ₦540,000 Operating expenses: ₦120,000 Tax rate: 30%. Which statements about this business are TRUE?
I. Gross profit margin is 40%
II. Net profit before tax is ₦240,000
III. Net profit after tax is ₦168,000
IV. Operating profit is ₦300,000
Answer: B (I, II and III only)
Gross profit = ₦360,000, 40% of sales. Profit before tax = 360,000 − 120,000 = ₦240,000 (also the operating profit), and after 30% tax = ₦168,000.
In preparing the income and expenditure account of a non-profit organisation, which of the following items should be EXCLUDED?
I. Surplus from tuck shop sales
II. Life membership fees received
III. Annual subscriptions due but not yet received
IV. Purchase of sports equipment
Answer: A (II and IV only)
Life membership fees are capital receipts and sports equipment is a capital asset; both go to the balance sheet, not the income and expenditure account.
Which of the following will INCREASE the profit figure reported in the final accounts?
I. Understating closing stock
II. Overstating closing stock
III. Understating accrued expenses
IV. Overstating prepaid expenses
Answer: B (II, III and IV only)
Overstating closing stock lowers cost of sales; understating accruals and overstating prepayments lower expenses. All three raise profit.
A branch was invoiced goods by the head office at cost plus 25%. At year-end, branch stock was ₦50,000 at invoice price. Which of the following are correct when eliminating unrealised profit?
I. Unrealised profit = ₦10,000
II. Stock reserve is debited in the head office books
III. Branch stock is reduced to ₦40,000 in consolidated accounts
IV. A stock reserve account is a liability
Answer: A (I and III only)
Profit = 25/125 = ⅕ of invoice price, so ₦10,000 and stock at cost ₦40,000. The stock reserve is credited, and it reduces the asset rather than being a liability.
The following errors were found after preparing the trial balance:
I. Rent paid ₦15,000 was posted to the rates account
II. Machinery purchased for ₦80,000 was debited to the repairs account
III. A sale of ₦12,000 was entered on both sides as ₦21,000
IV. The discount received of ₦3,000 was completely omitted
Which errors are errors of principle?
Answer: B (II only)
Debiting machinery (capital) to repairs (revenue) puts it in the wrong class of account: an error of principle. I is commission, III original entry, IV omission.
From the following, identify items that appear in the trading account:
I. Carriage outwards
II. Carriage inwards
III. Returns inward
IV. Wages of production workers
Answer: B (II, III and IV only)
Carriage inwards, returns inwards and production wages go in the trading account; carriage outwards is a selling expense in the profit and loss account.
A company issued 500,000 ordinary shares of ₦1 each at a premium of 50 kobo per share. Applications were received for 600,000 shares. Allotment was made pro rata. Which of the following are TRUE?
I. Total cash received on full subscription would be ₦750,000
II. Shares were oversubscribed by 100,000
III. Share premium account is credited with ₦250,000
IV. Excess application money must be refunded or transferred
Answer: D (All of the above)
500,000 × ₦1.50 = ₦750,000; 600,000 − 500,000 = 100,000 oversubscribed; premium = 500,000 × ₦0.50 = ₦250,000; the extra application money must be returned or applied to allotment.
The following balances appeared in the books of Fadekemi Plc as at 31 December 2024: Share capital (₦1 ordinary shares): ₦400,000 Share premium: ₦80,000 Retained earnings: ₦120,000 Revaluation reserve: ₦60,000. Which of the following statements are TRUE?
I. Total shareholders' equity = ₦660,000
II. Revaluation reserve is a distributable reserve
III. Share premium can be used to write off preliminary expenses
IV. Retained earnings represent cumulative undistributed profits
Answer: A (I, III and IV only)
Equity = 400,000 + 80,000 + 120,000 + 60,000 = ₦660,000. A revaluation reserve is a capital reserve and cannot be paid out as dividends.
The following data relates to a manufacturing company: Opening raw materials: ₦30,000 Purchases of raw materials: ₦150,000 Closing raw materials: ₦20,000 Direct labour: ₦80,000 Factory overhead: ₦40,000 Opening WIP: ₦15,000 Closing WIP: ₦10,000. Which of the following are CORRECT?
I. Raw materials consumed = ₦160,000
II. Prime cost = ₦240,000
III. Cost of production = ₦285,000
IV. Factory overhead is part of the prime cost
Answer: A (I, II and III only)
Materials consumed = 30,000 + 150,000 − 20,000 = ₦160,000; prime cost = 160,000 + 80,000 = ₦240,000; cost of production = 240,000 + 40,000 + 15,000 − 10,000 = ₦285,000. Overheads are not part of prime cost.
A receipts and payments account showed the following: Subscriptions received: ₦96,000 Subscriptions in arrears (opening): ₦8,000 Subscriptions in advance (opening): ₦5,000 Subscriptions in arrears (closing): ₦6,000 Subscriptions in advance (closing): ₦9,000. Which of the following are CORRECT?
I. Subscription income for the I&E account = ₦90,000
II. Subscriptions in advance are treated as current liabilities
III. Subscriptions in arrears are treated as current assets
IV. Subscription income = ₦86,000
Answer: A (I, II and III only)
Income = 96,000 − 8,000 + 6,000 + 5,000 − 9,000 = ₦90,000. Advance subscriptions are owed to members (liabilities) and arrears are owed by members (assets).
In consignment accounts, which of the following are CORRECTLY described?
I. Del credere commission — agent guarantees payment by customers
II. Proforma invoice — sent by the consignor before goods are dispatched
III. Account sales — statement sent by consignee showing sales and expenses
IV. Consignor — the party who receives and sells the goods on behalf of another
Answer: A (I, II and III only)
I–III are right. The consignor sends the goods; the consignee receives and sells them.
Which of the following statements about ratio analysis are CORRECT?
I. A high gearing ratio indicates a company relies heavily on debt financing
II. Return on capital employed measures how efficiently capital generates profit
III. A current ratio of 2:1 is the ideal benchmark for every type of business
IV. A short debtor collection period is generally favourable to a business
Answer: A (I, II and IV only)
High gearing means heavy borrowing, ROCE measures profit per naira of capital and quick collection helps cash flow. 2:1 is only a rough guide, not ideal for every business.