1. Which of the following calculates a sole trader's net profit for a period?
A. Closing net assets + drawings - capital introduced - opening net assets
B. Closing net assets - drawings + capital introduced - opening net assets
C. Closing net assets - drawings - capital introduced - opening net assets
D. Closing net assets + drawings + capital introduced - opening net assets
2. Which of the following statements is/are correct?
(1) A statement of cash flows prepared using the direct method produces a different figure to net cash from operating activities from that produced if the indirect method is used
(2) Rights issues of shares do not feature in a statement of cash flows
(3) A surplus on revaluation of a non-current asset will not appear as an item in a statement of cash flows
(4) A profit on the sale of a non-current asset will appear as an item under cash flows from investing activities in the statement or cash flows
A. 1 and 3 only
B. 3 and 4 only
C. 2 and 4 only
D. 3 only
3. Xena has the following working capital ratios:
| | 20X9 | 20X8 |
|----------|-------|-------|
| Current ratio | 1.2:1 | 1.5:1 |
| Receivables days | 75 days | 50 days |
| Payables days | 30 days | 45 days |
| Inventory turnover | 42 days | 35 days |
Which of the following statements is correct?
A. Xena's liquidity and working capital has improved in 20X9
B. Xena is receiving cash from customers more quickly in 20X9 than in 20X8
C. Xena is suffering from a worsening liquidity position in 20X9
D. Xena is taking longer to pay suppliers in 20X9 than in 20X8
5. If the owner of a business takes goods from inventory for his own personal use, the accounting concept that should be applied to record the transaction is the:
A. relevance concept
B. capitalisation concept
C. money measurement concept
D. separate entity concept
6. Retained earnings are:
A. accumulated and undistributed profits of a company
B. amounts which cannot be distributed as dividends
C. amounts set aside out of profits to replace revenue items
D. amounts set aside out of profits for a specific purpose
Answer (2)
The correct answers for the questions are: 1-B, 2-D, 3-C, 4-D, and 5-A. These answers reflect principles of accounting and financial management that are fundamental in business studies. Each choice is derived from understanding the definitions and calculations relevant to a sole trader's financials, cash flow methodologies, liquidity ratios, and equity management.
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To calculate a sole trader's net profit for a period, we need to consider how all the financial changes in assets and liabilities impact the net profit. The formula to calculate the net profit is:
Option C : Closing net assets - drawings - capital introduced - opening net assets
This option correctly calculates the net profit as it accounts for the changes in net assets after adjusting for drawings and additional capital introduced.
Let’s evaluate which statements are correct relative to statements of cash flows:
Statement (1): A statement of cash flows prepared using the direct method should produce the same net cash from operating activities as when using the indirect method. However, the methodologies to arrive at the figure differ but not the amount.
Statement (2): Rights issues of shares are financing activities and indeed may not feature directly in the main cash flow sections but rather in the equity section.
Statement (3): A surplus on revaluation of a non-current asset is a non-cash item and does not appear as an item in the statement of cash flows.
Statement (4): A profit on the sale of a non-current asset would appear in cash flows from investing activities.
Option B : 3 and 4 only
Therefore, statements 3 and 4 are correct.
To determine the correct statement regarding Xena's working capital ratios:
Current ratio: A decrease from 1.5:1 in 20X8 to 1.2:1 in 20X9 indicates worsening liquidity.
Receivables days have increased from 50 days in 20X8 to 75 days in 20X9, meaning Xena is taking longer to receive cash from customers.
Payables days decreased, meaning Xena is paying suppliers more quickly.
Inventory turnover increased, indicating it takes Xena longer to sell inventory.
Option C : Xena is suffering from a worsening liquidity position in 20X9
When the owner of a business takes goods from inventory for personal use, this transaction should be recorded using the separate entity concept. This concept treats the business as separate from its owner, and thus personal use of business resources is recorded as withdrawals.
Option D : separate entity concept
Retained earnings are best described as:
Option A : accumulated and undistributed profits of a company
These are the profits that have been held back from shareholders to reinvest in the business rather than being paid out as dividends.
