Question 1

If a worksheet does not balance and the imbalance is not caused by a transposition, single-entry or double-entry error, then it must be an addition or subtraction error.

Accepted Answer

This is true because every error that affects the balance of a worksheet must involve either an addition or subtraction error. Other types of errors, such as transpositions, single-entry or double-entry errors, would have been caught and corrected during the reconciliation process.

Question 2

The balance sheet equation can be represented as: Assets - Liabilities = Equity

Accepted Answer

This is the correct representation of the balance sheet equation. The assets of a company are equal to its liabilities plus its equity.

Question 3

Current assets are always classified according to their nature and not their function.

Accepted Answer

Current assets are often classified according to their liquidity, which means how quickly they can be converted into cash, rather than strictly by their nature or function.

Question 4

The business entity assumption requires that an asset that is used for personal use and not for business use should not be recorded in the business balance sheet.

Accepted Answer

The business entity assumption states that the business is a separate entity from its owners, and therefore only assets, liabilities, and equity related to the business should be recorded in the balance sheet. Personal assets or liabilities of the owners should not be included in the business balance sheet.

Question 5

The future benefits of a non-current asset are difficult to determine, due to the uncertainty of measuring the unexpired benefit.

Accepted Answer

Non-current assets, such as property, plant, and equipment, have a long useful life and therefore, the estimation of future benefits is challenging due to the uncertainty of measuring the unexpired benefit.

Question 6

If assets increase, then, applying the principle of duality, we must increase liabilities, decrease another asset or increase owners' equity.

Accepted Answer

According to the principle of duality in accounting, every transaction has two aspects – debit and credit. If one account increases (debit), another account must decrease (credit) or the same amount should be credited to another account. Therefore, if assets increase (debit), we must credit either an increase in liabilities or an increase in owners' equity to maintain the accounting equation (Assets = Liabilities + Owners' equity).

Question 7

The 'net assets' of a business is equal to current assets plus current liabilities.

Accepted Answer

The 'net assets' of a business is equal to total assets minus total liabilities.

Question 8

In the situation where an entity is insolvent, equity holders will be paid only whatever remains after all liabilities are paid.

Accepted Answer

Insolvency means that the liabilities of a company exceed its assets, leaving no funds for equity holders until all liabilities are paid off.

Question 9

A double-entry error will cause an imbalance in the worksheet which is twice the amount recorded.

Accepted Answer

A double-entry error occurs when an entry is recorded in one account but not in its corresponding account. This will cause an imbalance in the worksheet and the imbalance will be equal to the amount of the entry. Therefore, if a double-entry error is made for $100, the worksheet will be imbalanced by $200 (twice the amount recorded).

Question 10

The historical cost assumption requires that an asset that is used for personal use and not for business use should be recorded at cost in the business balance sheet.

Accepted Answer

The historical cost assumption requires that assets used for business purposes are recorded at their original cost on the business balance sheet. Assets used for personal purposes are not recorded on the business balance sheet.

Question 11

Liquidity refers to the ease with which assets can be converted to cash in the normal course of business.

Accepted Answer

Liquidity is defined as the degree to which an asset or security can be quickly and easily bought or sold in the market, without affecting its price. Thus higher liquidity indicates a more active, fluid, and efficient market, where buyers and sellers can trade more easily and at lower transaction costs.

Question 12

To be classified as a current liability, a debt must be expected to be paid within the current accounting period or within the entity's operating cycle, whichever is the longer.

Accepted Answer

A current liability is a debt that is expected to be paid within the current accounting period or within the entity's operating cycle, whichever is the longer. If a debt is not expected to be paid within this time frame, it would be considered a long-term liability instead.

Question 13

Whether an asset should be reported as current or non-current, depends on whether the asset is in the form of cash or will be realised or consumed within the ensuing operating cycle of the entity.

Accepted Answer

This statement correctly explains the basis for classifying assets as current or non-current. Assets that are expected to be realised or consumed within the operating cycle of the business are typically classified as current assets, while those that will be held longer than one cycle are classified as non-current assets. Cash can be classified as either current or non-current depending on the intended use and availability for operating activities.

Question 14

A major difference between current and non-current assets is that the future benefits of current assets will expire in a short period of time, whereas the future benefits of all non-current assets will decline over a longer period.

Accepted Answer

Current assets are expected to be used or consumed within a year or the normal operating cycle of the business, while non-current assets have a useful life of more than one year and their future benefits will decline over that period.

Question 15

A mortgage payable that had only 12 months left before due for repayment would be reclassified from a non-current liability to a current liability.

Accepted Answer

A liability is classified as non-current if it is not expected to be settled within 12 months from the balance sheet date. If a mortgage payable has only 12 months left before due for repayment, it becomes due within one year and therefore, would be reclassified as a current liability.

Question 16

In relation to the format of a balance sheet, large and complex organisations will summarise assets under broad headings.

Accepted Answer

Large and complex organisations often have numerous assets, so they summarise them under broad headings such as current assets, non-current assets, and intangible assets.

Question 17

The worksheet illustrates the basics underlying double-entry bookkeeping.

Accepted Answer

The worksheet indeed illustrates the basics underlying double-entry bookkeeping.

Question 18

An operating cycle may exceed 12 months and be longer than an accounting cycle.

Accepted Answer

An operating cycle is the time it takes for a company to purchase inventory, sell it, and receive payment from customers. This cycle can exceed 12 months if the company's business model involves a long-term process before the sale of inventory, such as the manufacturing of goods. The accounting cycle, on the other hand, is the process of recording and reporting a company's financial transactions within a specific period (usually one year).

Question 19

A balance sheet provides information on the liquidity of the entity.

Accepted Answer

A balance sheet shows the assets, liabilities, and equity of an entity, which helps determine its liquidity. It shows how much cash, accounts receivable, and inventory the entity has compared to its debts and obligations. This information helps assess the entity's ability to pay off its short-term debts and meet its financial obligations.

Question 20

A piece of equipment purchased for resale within the entity's operating cycle would be classified as a current asset.

Accepted Answer

This is because current assets include items that are expected to be sold, consumed, or converted into cash within the entity's normal operating cycle, or within a year if the cycle is shorter.

Quiz 5: Presentation of Financial Position and the Worksheet