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The MCQs below are drawn from the Accountancy & Auditing subject category.
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111
How should office equipment be classified for a computer manufacturer versus a company that trades in such equipment?
For a manufacturer, office equipment is a long-term asset used in operations, thus it is a fixed asset. For a company that buys and sells this equipment as its primary business, the equipment is held for resale, making it inventory or a current asset.
112
When a business acquires capital equipment on a 30-day credit term, how does this transaction impact the Balance Sheet?
The acquisition of capital equipment increases non-current assets (Property, Plant, and Equipment). Since the purchase is made on credit, it creates an obligation to pay, which is recorded as an increase in current liabilities (Accounts Payable). This maintains the accounting equation balance.
113
What is the accounting term for the financial obligations or debts owed by a business to external parties?
Liabilities represent the financial debts or obligations that a business incurs during its operations. These are amounts owed to creditors, lenders, or other entities that must be settled in the future, typically through the transfer of assets or the provision of services.
114
To be recognized as an asset in the balance sheet, what condition must the business satisfy regarding that resource?
According to modern accounting frameworks, an asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Control is the essential criterion, even if legal ownership is absent.
115
What financial value is derived by subtracting total liabilities from total assets?
Based on the fundamental accounting equation (Assets = Liabilities + Equity), rearranging the formula to Assets - Liabilities = Equity reveals the owner's residual interest in the business. This value represents the net worth of the company after all obligations to outside creditors have been satisfied.
116
Which of the following is classified as a biological asset?
A biological asset is defined as a living animal or plant. In accounting, these assets are distinct from inanimate fixed assets like land or buildings. They are typically measured at fair value less costs to sell, reflecting their ability to grow, degenerate, or produce agricultural produce over time.
117
Which of the following items is classified as a liability on a company's balance sheet?
A liability represents an obligation of the business to pay an amount to an external party. Creditors (or accounts payable) represent amounts owed to suppliers for goods or services purchased on credit, making them a classic example of a current liability. Cash, equipment, and debtors are all classified as assets.
118
Which term describes the portion of a business's capital that is invested in long-term fixed assets?
Fixed capital refers to the funds invested in long-term assets such as land, buildings, machinery, and equipment. These assets are intended for long-term use in the business operations rather than for immediate resale, distinguishing them from working capital, which covers short-term operational needs.
119
What term is used to identify assets that are expected to be converted into cash within one year or less?
Current assets are those assets that a company expects to convert into cash, sell, or consume within the normal operating cycle of the business, typically defined as one year. Examples include cash on hand, bank balances, accounts receivable, and inventory. These assets are vital for maintaining the liquidity of a business and meeting short-term financial obligations.
120
What is the term for a person or entity to whom money is owed?
A creditor is an entity or person to whom a business owes money, typically arising from credit purchases of goods or services. Managing accounts payable to creditors is a critical function of accounting to ensure timely payments and maintain good business relationships. This is distinct from a debtor, who is someone that owes money to the business.
