Financial Statements Test Questions

1. Why are all receipts and payments of a capital nature excluded from an income and expenditure account?

2. A depreciation charge is treated as expenditure in an income and expenditure account, although it represents no movement in cash and is not included in the cash website. What is depreciation? On what sort of assets is it properly chargeable?

3. What is a balance sheet?

4. How would you account for expenses paid in advance (a) in the balance sheet, and (b) in the income and expenditure account?

5. How would you account for expenses incurred but not paid during the period (a) in the income and expenditure account and (b) in the balance sheet?

6. Why does a balance sheet always balance?

7. In the income and expenditure account (or the trading and profit and loss account), how is the cost of materials and goods sold calculated?

8. What do you understand by the term 'goodwill'?

9. How would you deal with a debt due to you from a person you know to be bankrupt and without means?

10. How would you show in the accounts that some of the debts due to you might turn out to be bad, but you don't know which?

11. What do you understand by a 'reserve'?

12. Define gross profit in the case of a manufacturing firm.

13. Define net profit.

14. What is meant by the 'rate of stock turnover'?

15. Distinguish between fixed assets and current assets.

16. What is the term used to describe the total of current assets less the total of current liabilities?

17. What are 'liquid assets'?

18. What is a 'break-even' point?

19. Describe the use made of the ratio that net profit bears to total sales in studying the performance of a business at various levels of activity.

20. What do you understand by the term 'percentage net profit to capital employed'?


Profitability And Break-even Point

the costs of any business can be broadly divided into fixed costs :sometimes called indirect costs because they are not directly -elated to the rate of business activity), and variable costs (or direct costs, because they vary more or less directly with turnover). These :erms were described more fully in section 9. Certain minimum fixed costs will be incurred even when turnover is nil. It follows that :here must be a minimum volume of sales below which the business .s bound to function at a loss. The level of activity at which net loss :urns into net profit is called the 'break-even' point.
Profitability And Break-even Point


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