Chapter 1+ 2+3

Which one of the following should be accounted for as capital expenditure?

• The cost of redecorating the business’s head office

• The cost of replacing some roof tiles on a building

• The cost of a computer purchased for resale by a computer sales business

• The cost of delivery paid when purchasing a new manufacturing machine

Which of the following items should be treated as a capital item in the financial statements of a large shop?

(1) Purchase of fixed shelving units

(2) Payment of wages

(3) Repairs to fixed shelving units

• (1) only

• (1) and (2) only

• (2) and (3) only

• (1), (2) and (3)

Which of the following items should be treated as revenue items in an entity’s financial statements?

(1) Payment of local property tax

(2) Purchase of premises

(3) Alteration of premises to configure them to be ready for use in the business

(4) External audit fee

• (1) and (2) only

• (2) and (3) only

• (3) and (4) only

• (1) and (4) only

Which of the following should be classified as capital expenditure?

• Repairs to motor vans

• Depreciation of machinery

• Extension to premises

• Purchase of motor vans for resale

Which of the following is a consideration in the application of ICAEW’s Code of Ethics?

• Whether or not the activity is remunerated

• That the client or employer is an ICAEW member, student, affiliate or member firm

• If an action brings discredit to the profession

• Whether or not the activity is an accounting or assurance engagement

Ned is considering two issues in the course of preparing his financial statements. Issue 1: Non-current assets are valued at cost less depreciation.

Issue 2: Expenses incurred but for which invoices have not yet been received are included in the financial statements.

Which accounting characteristic or principle is relevant to each of these issues?

• Issue 1: Verifiability; Issue 2 Accruals

• Issue 1: Accruals; Issue 2 Verifiability

• Both issues: Verifiability

• Both issues: Accruals

The auditor of James plc is insistent that great care is taken in estimating the amounts of accruals and prepayments each year. This is justified primarily by which accounting concept?

• Going concern

• Maturity

• Consistency

• Matching

Mr Bliss owns a business. Although most of the business expenses are paid by cash, Mr Bliss on certain occasions uses his own personal bank account to pay some business expenses. His accountant has asked to see his personal bank statements so that some of these amounts may be included as expenses in the statement of profit or loss. Mr Bliss is confused about this and asks ’If you are going to use my personal bank statement to prepare the financial statements, why don’t you include all payments as expenses instead of only some of them?’

The main reason why the accountant does not include all of the expenses is because:

• Mr Bliss has not recorded the full details of some of the expenditure and, because of this uncertainty, it is more prudent not to include them in the financial statements.

• there are a large number of immaterial payments which would take a long time to examine.

• the personal expenses of the owner are separate from those of the business and are not relevant to the statement of profit or loss.

• to be consistent with last year’s financial statements only payments above £500 are included in the statement of profit or loss.

2.1: The capital of a sole trader would change as a result of:

• A a trade payable being paid by a transfer from the business bank account

• B raw materials being paid for from petty cash

• C non-current assets being purchased for cash

• D the owner taking goods from the inventory of the business

2.2: The purpose of a statement of financial position is to show:

• A an estimate of what a business is really worth

• B the amount the business could be sold for as a going concern

• C the amount the business could be sold for in a liquidation

• D the assets of the business and the related liabilities