FA: Financial Accounting

• Topic 01

  The Context and Purpose of Financial Reporting

  267 questions
• Topic 02

  Accounting Principles, Concepts and Qualitative Characteristics

  256 questions
• Topic 03

  The Use of Double-Entry Bookkeeping and Accounting Systems

  238 questions
• Topic 04

  Recording Transactions and Events

  265 questions
• Topic 05

  Reconciliations

  241 questions
• Topic 06

  Preparing a Trial Balance

  245 questions
• Topic 07

  Preparing Financial Statements

  221 questions
• Topic 08

  Preparing Basic Consolidated Financial Statements

  218 questions
• Topic 09

  Interpretation of Financial Statements

  218 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A business receives GBP 3,000 cash from a credit customer. Which accounts are affected and on which side?

   • A
     Debit bank account GBP 3,000 (asset increases) and credit trade receivables GBP 3,000 (asset decreases)
     Correct answer
   • B
     Debit trade receivables GBP 3,000 and credit bank account GBP 3,000
   • C
     Debit bank account GBP 3,000 and credit sales revenue GBP 3,000
   • D
     Credit bank account GBP 3,000 (asset increases as money comes in) and debit trade receivables GBP 3,000
   Explanation

   Receiving cash increases the bank balance — debit bank GBP 3,000 (assets increase with debits). The customer's debt is reduced — credit trade receivables GBP 3,000 (assets decrease with credits). A common mistake is to apply the bank statement perspective, where receipts appear as credits. In the entity's own books, cash received is always a debit.

2. A company's year-end is 31 December. During the year, it received GBP 200,000 in cash from customers and paid GBP 150,000 in cash to suppliers. However, at the year-end, GBP 30,000 was owed by customers (trade receivables) and GBP 20,000 was owed to suppliers (trade payables). Additionally, GBP 15,000 of revenue received in cash related to services to be delivered in January. What is the profit under the accruals basis?

   • A
     GBP 50,000, calculated simply as cash received (GBP 200,000) less cash paid (GBP 150,000)
   • B
     GBP 60,000, calculated as total cash received plus receivables less total cash paid
   • C
     GBP 80,000, calculated as cash received (GBP 200,000) less cash paid (GBP 150,000) plus receivables (GBP 30,000)
   • D
     GBP 45,000, calculated as accruals-based revenue (GBP 200,000 + GBP 30,000 - GBP 15,000 = GBP 215,000) less accruals-based expenses (GBP 150,000 + GBP 20,000 = GBP 170,000)
     Correct answer
   Explanation

   Under the accruals basis:

   Revenue: Cash received GBP 200,000 + receivables GBP 30,000 - deferred revenue GBP 15,000 = GBP 215,000 (The GBP 15,000 is excluded because services have not yet been delivered)

   Expenses: Cash paid GBP 150,000 + payables GBP 20,000 = GBP 170,000

   Profit: GBP 215,000 - GBP 170,000 = GBP 45,000 \nThe cash basis would give GBP 50,000 (GBP 200,000 - GBP 150,000), but this is different from the accruals result because it fails to account for receivables, payables, and deferred revenue.

3. A supplier offers a 20% trade discount and a 2% settlement discount for payment within 14 days on goods with a list price of GBP 10,000. The customer pays within 14 days. What amount should the customer record as the purchase cost?

   • A
     GBP 7,840 (list price GBP 10,000 less 20% trade discount = GBP 8,000, then less 2% settlement discount = GBP 7,840)
     Correct answer
   • B
     GBP 10,000, because both discounts are recorded separately from the purchase cost
   • C
     GBP 8,000, because only the trade discount is deducted from the purchase cost and the settlement discount is an expense
   • D
     GBP 7,800, because the two discounts of 20% and 2% are combined to give 22% off the list price
   Explanation

   The trade discount of 20% is applied first: GBP 10,000 x 80% = GBP 8,000. This is the amount recorded as the purchase. The settlement discount of 2% is then applied to GBP 8,000: GBP 8,000 x 2% = GBP 160. The net amount paid is GBP 7,840. The discounts are applied sequentially, not combined (20% + 2% = 22% would give GBP 7,800, which is incorrect). Under IFRS 15, the settlement discount reduces the transaction price if the customer is expected to pay early.