Deck 7: The Accounting Equation and Its Components

Question 1

If drawings exceed opening capital plus net profit, and no new capital has been introduced, then the:

A) Business is healthy.
B) Drawings account has a credit balance
C) Business is bankrupt
D) Capital account has a credit balance

Answer 1

Business is bankrupt

Question 2

Owner's capital is:

A) Opening capital plus drawings minus net profit
B) Total assets minus external liabilities
C) Opening capital plus net profit plus trade payables
D) Current assets less working capital

Answer 2

Total assets minus external liabilities

Question 3

An entity's net profit may be calculated using the following:

A) Closing capital - drawings + capital introduced - opening capital
B) Closing capital + drawings - capital introduced - opening capital
C) Opening capital + drawings - capital introduced - closing capital
D) Opening capital - drawings + capital introduced - closing capital

Answer 3

Closing capital + drawings - capital introduced - opening capital

Question 4

Which of the following best explains what is meant by capital expenditure? Capital expenditure is expenditure:

A) To maintain non-current assets
B) To repair non-current assets
C) Relating to the cost, renewal and repair of non-current assets
D) To improve non-current assets

Question 5

A business has a property worth £60,000, a motor vehicle worth £7,000, fixtures and fittings worth £15,000, cash in the bank of £6,000. The business owes £20,000 to its suppliers and £5,000 is still outstanding on a loan. How much capital does the business have?

A) £39,000
B) £53,000
C) £81,000
D) £95,000

Question 6

Where does the following item appear in the financial statements? The purchase of a Camcorder for the business for taking video clips for the website.

A) Drawings in the statement of financial position
B) Purchases in the income statement
C) Equipment in the statement of financial position
D) Sundry expenses in the income statement

Question 7

Which of the following costs would be classified as capital expenditure for a restaurant business?

A) Knives and forks for the business
B) Glasses for the tables
C) A replacement broken window
D) A new sign advertising the restaurant

Question 8

Which of the following statements is not reflective of revenue expenditure?

A) Expenditure to carry on the trade of the business
B) Expenditure which is charged to the income statement in the period to which it relates
C) Expenditure which provides benefit to the business for several periods
D) Expenditure which provides benefit to the business in one period only

Question 9

Which of the following statements is correct?

A) Opening capital less profits less drawings equals closing capital
B) Opening capital less losses less drawings equals closing capital
C) Opening capital less drawings less capital introduced equals closing capital
D) Opening capital less closing capital equals drawings plus capital introduced.

Question 10

If opening capital is £10,000 and closing capital is £13,000 then the movement can be explained by which of the following:

A) The entity made a loss of £2,000. The owner introduced £5,000
B) The entity made a profit of £2,000. The owner introduced £5,000
C) The entity made a loss of £1,000. The owner introduced £4,000 and withdrew £1,000.
D) The entity made a profit of £1,000. The owner introduced £5,000 and withdrew £1,000

Question 11

If opening capital is £120,000, closing capital is £140,000, profits for the period are £20,000 and capital introduced is £10,000, then drawings are:

A) £0
B) £10,000
C) £20,000
D) £30,000

Question 12

A business has a property worth £100,000, a motor vehicle worth £5,000 and equipment worth £10,000. The business owes £20,000 to its suppliers and is owed £5,000 from its customers, has a £1,000 overdraft and has £4,000 outstanding on a loan.
How much capital does the business have?

A) £34,000
B) £76,000
C) £81,000
D) £86,000

Question 13

A business has a motor vehicle worth £5,000 and equipment worth £10,000. It has £500 cash. The business owes £10,000 to its suppliers and is owed £25,000 from its customers, has a £500 overdraft and has £1,000 outstanding on a loan. How much capital does the business have?

A) £4,000
B) £29,000
C) £29,500
D) £49,000

Question 14

Which of the following is regarded as capital expenditure in a car dealership?

A) The purchase of motor vehicles for resale
B) Improvements made to trade-in cars for resale
C) Gift bags and car mats
D) Expenditure on advertising on the side of the managing directors car

Question 15

Which of the following is regarded as capital expenditure in a retail store?

A) Hangers
B) Carrier bags
C) Mannequins
D) Clothes for resale

Question 16

Which of the following is regarded as capital expenditure in a builder's yard?

A) Sand
B) Wood
C) Delivery van
D) Tools for sale