What is the difference between a debit and a credit?

Debits increase assets and expenses; credits decrease them. Credits increase liabilities, equity, and revenue; debits decrease them. A useful mnemonic is DEAD CLIC: Debits increase Expenses, Assets, Dividends; Credits increase Liabilities, Income, Capital.

What is depreciation and how is it calculated?

Depreciation is the systematic allocation of an asset's cost over its useful life. Straight-line depreciation = (Cost − Residual Value) ÷ Useful Life. The journal entry is: Debit Depreciation Expense, Credit Accumulated Depreciation.

What is the difference between the income statement and balance sheet?

The income statement shows revenues and expenses over a period of time, resulting in net profit or loss. The balance sheet shows assets, liabilities, and equity at a single point in time. Net profit flows to retained earnings on the balance sheet, linking the two statements.

What are accrued expenses?

Accrued expenses are expenses that have been incurred but not yet paid or recorded. The adjusting journal entry is: Debit Expense, Credit Accrued Liability. For example, unpaid salaries at year-end must be accrued to match expenses to the correct period.

What is the current ratio and what does it measure?

The current ratio = Current Assets ÷ Current Liabilities. It measures short-term liquidity — whether a company can pay its obligations due within one year. A ratio above 1 means current assets exceed current liabilities. A ratio above 2 is generally considered healthy.

What is the difference between gross profit and net profit?

Gross profit = Revenue − Cost of Goods Sold (COGS). It measures production efficiency. Net profit = Revenue − all expenses (COGS, operating expenses, interest, tax). Net profit is the bottom line — what is available to shareholders after all costs.

What are the three main financial statements?

The three main financial statements are: (1) Income Statement — revenues and expenses for a period. (2) Balance Sheet — assets, liabilities, and equity at a point in time. (3) Cash Flow Statement — cash inflows and outflows from operating, investing, and financing activities.

Financial Accounting 101 Practice Questions 2026

Question 01 of 150

What is the accounting equation?

Explanation: Accounting equation: Assets = Liabilities + Equity. Always in balance. Every transaction affects at least two accounts (double-entry). If assets increase, liabilities/equity must also increase by same amount.

Question 02 of 150

What is a debit in accounting?

Explanation: Debit (Dr): left side. Increases: Assets, Expenses, Dividends. Decreases: Liabilities, Equity, Revenue. Remember: DEAD (Debit increases Expenses, Assets, Dividends).

Question 03 of 150

What is a credit in accounting?

Explanation: Credit (Cr): right side. Increases: Liabilities, Equity, Revenue. Decreases: Assets, Expenses. Remember: CLIC (Credits increase Liabilities, Income, Capital/Equity).

Question 04 of 150

What is a journal entry?

Explanation: Journal entry: date, accounts debited (left), accounts credited (right, indented), narration. Debits = Credits always. Posted to general ledger. Source documents trigger entries.

Question 05 of 150

What is the accounting cycle?

Explanation: Accounting cycle: 8 steps. Adjusting entries: prepayments, accruals, depreciation, bad debts. Closing entries: close temporary accounts (revenue, expenses) to retained earnings.

Question 06 of 150

What is the difference between cash and accrual accounting?

Explanation: Accrual basis: revenue when earned, expense when incurred. Better matches income with expenses. Cash basis: simpler, used by small businesses. IFRS/GAAP: accrual required.

Question 07 of 150

What is revenue recognition?

Explanation: IFRS 15 (Revenue from Contracts with Customers): 5 steps: identify contract, identify performance obligations, determine transaction price, allocate to obligations, recognise when satisfied.

Question 08 of 150

What is the matching principle?

Explanation: Matching principle: if you sell goods in March (revenue), the cost of those goods must be expensed in March, even if paid in February. COGS matched to sales revenue.

Question 09 of 150

What is depreciation?

Explanation: Depreciation: not cash, just allocation. Dr Depreciation Expense, Cr Accumulated Depreciation. Methods: straight-line (cost-residual/life), reducing balance (% × NBV). IFRS: choose based on consumption pattern.

Question 10 of 150

What is straight-line depreciation?

Explanation: Straight-line: annual depreciation = (R100,000 - R10,000) / 5 years = R18,000/year. Carrying value = cost - accumulated depreciation. Residual value: estimated scrap value at end of life.

Question 11 of 150

What is the income statement?

Explanation: Income statement (P&L): Revenue - COGS = Gross Profit. Gross Profit - Operating Expenses = Operating Profit. - Interest = EBT. - Tax = Net Profit. Covers a period (month, year).

Question 12 of 150

What is the balance sheet?

Explanation: Balance sheet: Assets (current + non-current) = Liabilities (current + non-current) + Equity. Point in time (e.g., 31 December 2025). Must balance: A = L + E.

Question 13 of 150

What is the cash flow statement?

Explanation: CFS: Operating (cash from core business), Investing (PPE purchases/sales, investments), Financing (loans, dividends, share issues). Reconciles cash position. Profit ≠ cash.

Question 14 of 150

What is goodwill?

Explanation: Goodwill = Purchase price - Fair value of net assets acquired. Only recognised on acquisition. Not amortised under IFRS — tested annually for impairment. Represents brand, customer base, synergies.

Question 15 of 150

What is FIFO?

Explanation: FIFO: during inflation: lower COGS (old cheaper costs), higher profit, higher inventory value. Ending inventory = most recent costs. IFRS allows FIFO and weighted average. Not LIFO.

Question 16 of 150

What is weighted average cost method?

Explanation: Weighted average: average cost = total cost of goods available / total units. Simple, smooths price fluctuations. Allowed under IFRS and GAAP.

Question 17 of 150

What is accounts receivable?

Explanation: Accounts receivable (debtors): current asset. Revenue recorded (Dr AR, Cr Revenue). Cash collected (Dr Cash, Cr AR). Bad debt: Dr Bad Debt Expense, Cr Allowance for Doubtful Debts.

Question 18 of 150

What is accounts payable?

Explanation: Accounts payable (creditors): current liability. Purchase on credit: Dr Inventory/Expense, Cr AP. Payment: Dr AP, Cr Cash. Working capital management: extend AP, reduce AR.

Question 19 of 150

What is working capital?

Explanation: Working capital = CA - CL. Positive: can pay short-term obligations. Negative: liquidity risk. WC ratio (current ratio) = CA/CL. Goal: positive but not excessive.

Question 20 of 150

What is the current ratio?

Explanation: Current ratio: 2:1 often cited as healthy. < 1: potential liquidity problem. > 3: may indicate excess idle assets. Compare to industry average and prior periods.

Question 21 of 150

What is the quick ratio (acid test)?

Explanation: Quick ratio: (Cash + AR + Short-term investments) / CL. Excludes inventory (may take time to sell). Ratio of 1:1 generally adequate. More stringent test than current ratio.

Question 22 of 150

What is gross profit margin?

Explanation: Gross profit margin: R1m revenue, R600k COGS → GPM = 40%. Measures pricing power and production efficiency. Compare to competitors and industry. Should be stable or improving.

Question 23 of 150

What is net profit margin?

Explanation: Net profit margin: measures overall profitability. R1m revenue, R100k net profit → NPM = 10%. Affected by: GPM, operating expenses, interest, tax rate.

Question 24 of 150

What is return on equity (ROE)?

Explanation: ROE: key metric for shareholders. Net profit / equity. DuPont decomposition: ROE = Net profit margin × Asset turnover × Equity multiplier (leverage). High ROE: efficient use of equity.

Question 25 of 150

What is return on assets (ROA)?

Explanation: ROA: measures asset utilisation efficiency. Capital-intensive industries: lower ROA. Service businesses: higher ROA (fewer assets). ROE = ROA × Equity multiplier (leverage).

Question 26 of 150

What is the debt-to-equity ratio?

Explanation: D/E ratio: 1:1 = equal debt and equity. Higher: more financial risk, higher interest burden. Lower: more conservative. Context matters: utilities can sustain high D/E, tech firms less so.

Question 27 of 150

What is EBITDA?

Explanation: EBITDA: adds back non-cash charges (D&A) and financing costs to net profit. EV/EBITDA: valuation multiple. EBITDA margin = EBITDA/Revenue. Not a GAAP measure.

Question 28 of 150

What is the difference between gross profit and operating profit?

Explanation: Gross profit: production efficiency. Operating profit (EBIT): operational efficiency including overhead. EBIT - Interest = EBT. EBT - Tax = Net profit.

Question 29 of 150

What is the trial balance?

Explanation: Trial balance: lists all accounts with Dr or Cr balances. Total Dr = Total Cr (confirms double-entry). Doesn't catch: wrong account used, omissions, compensating errors. Adjusted trial balance: after adjusting entries.

Question 30 of 150

What is an accrual?

Explanation: Accrual: at year end, wages earned but unpaid: Dr Wages Expense, Cr Accrued Wages (liability). Interest earned not received: Dr Accrued Interest (asset), Cr Interest Income. Matching principle.

Question 31 of 150

What is a prepayment?

Explanation: Prepayment: pay insurance R12,000 for year: Dr Prepaid Insurance (asset), Cr Cash. Each month: Dr Insurance Expense R1,000, Cr Prepaid Insurance R1,000. Deferred revenue: Dr Cash, Cr Deferred Revenue.

Question 32 of 150

What is the going concern assumption?

Explanation: Going concern: IAS 1. If material doubt about going concern: disclose prominently. Affects: asset valuations (liquidation vs cost), classification (current vs non-current). Auditor assesses annually.

Question 33 of 150

What is an audit?

Explanation: External audit: independent auditor (Big Four: PwC, Deloitte, KPMG, EY). Opinion: unqualified (clean), qualified (material misstatement), adverse, disclaimer. Required for listed companies.

Question 34 of 150

What is equity?

Explanation: Equity components: share capital, share premium, retained earnings, other reserves. Retained earnings: cumulative profits not distributed as dividends. Equity increases: profits, share issues. Decreases: losses, dividends.

Question 35 of 150

What is inventory?

Explanation: Inventory: raw materials, WIP, finished goods. IAS 2: measured at lower of cost and net realisable value (NRV). COGS: beginning inventory + purchases - ending inventory. FIFO or weighted average.

Question 36 of 150

What is the concept of materiality in accounting?

Explanation: Materiality: qualitative and quantitative. No fixed threshold. IAS 1: material information must be disclosed. Immaterial items: can be aggregated. Used in determining: disclosure level, audit focus areas.

Question 37 of 150

What is the historical cost principle?

Explanation: Historical cost: reliable, verifiable. Criticism: balance sheet may not reflect current values. IFRS: some assets at fair value (investment property, financial instruments). SA: often revaluation model for PPE.

Question 38 of 150

What is a provision?

Explanation: Provision (IAS 37): warranty provisions, legal claims, restructuring. Must be: present obligation, probable outflow, reliable estimate. Contingent liability: possible but not probable → disclose only.

Question 39 of 150

What is amortisation?

Explanation: Amortisation: patents, licences, customer relationships. Goodwill: not amortised under IFRS (annual impairment test). GAAP (US): goodwill was amortised, now impairment-only model.

Question 40 of 150

What is impairment?

Explanation: Impairment (IAS 36): recoverable amount = higher of fair value less costs to sell and value in use. If RA < carrying value: impairment loss. Dr Impairment Loss, Cr Accumulated Impairment.

Question 41 of 150

What is the statement of changes in equity?

Explanation: SOCE: opening equity + net profit + OCI + share issues - dividends = closing equity. Shows how equity changed. Links income statement to balance sheet. IFRS requirement.

Question 42 of 150

What are retained earnings?

Explanation: Retained earnings: opening RE + net profit - dividends = closing RE. Represents internally generated capital. Negative (accumulated deficit): if cumulative losses exceed profits.

Question 43 of 150

What is GAAP?

Explanation: GAAP: principles (conservatism, materiality, consistency, going concern). SA: JSE-listed companies use IFRS. Smaller entities: SA GAAP or IFRS for SMEs. US: US GAAP (FASB). IFRS: IASB.

Question 44 of 150

What is a ledger?

Explanation: General ledger: collection of all T-accounts. Each account shows Dr and Cr entries. Closing balance = Dr side - Cr side (for Dr-balance accounts). Trial balance: lists all ledger balances.

Question 45 of 150

What is the difference between capital and revenue expenditure?

Explanation: Capital expenditure: buy machine → capitalise → depreciate over life. Revenue: repair machine → expense immediately. Incorrect classification: misstates profit and asset values.

Question 46 of 150

What is the inventory turnover ratio?

Explanation: Inventory turnover: COGS / Avg Inventory. Days inventory = 365 / Inventory turnover. High turnover: fast-moving goods, efficient management. Low: slow-moving, obsolescence risk.

Question 47 of 150

What is the receivables collection period?

Explanation: Receivables days = AR / Revenue × 365. If 45 days: average 45 days to collect. Compare to credit terms (net 30): if > terms, collection problem. Lower: better cash flow.

Question 48 of 150

What is the payables payment period?

Explanation: Payables days = AP / COGS × 365. Longer payables: retain cash longer. Too long: damages supplier relationships, risks loss of credit terms. Balance between cash flow and supplier management.

Question 49 of 150

What is the difference between an asset and an expense?

Explanation: Asset: long-term benefit. Expense: period cost. Misclassifying expense as asset: overstates profit short-term, understates long-term. Capital expenditure decision crucial.

Question 50 of 150

What is a T-account?

Explanation: T-account: left (Dr) side, right (Cr) side. Balance = larger side minus smaller side. Opening balance + entries = closing balance. Used for teaching and manual bookkeeping.

Question 51 of 150

What is the statement of comprehensive income?

Explanation: Comprehensive income = Net profit + OCI. OCI: gains/losses not through P&L (PPE revaluation, forex translation, cash flow hedge gains). Both together = total comprehensive income.

Question 52 of 150

What is a bank reconciliation?

Explanation: Bank rec: balance per bank + outstanding deposits - outstanding cheques = adjusted bank balance = adjusted book balance. Identifies: errors, unrecorded transactions, bank charges.

Question 53 of 150

What is the accounts receivable turnover?

Explanation: AR turnover = Revenue / Avg AR. Higher = collect faster. Days = 365 / AR turnover. Low: collection problem, bad debt risk. Compare to credit terms.

Question 54 of 150

What is the difference between solvency and liquidity?

Explanation: Liquidity: current ratio, quick ratio. Short-term. Solvency: D/E ratio, interest coverage. Long-term. Can be liquid but insolvent (if long-term debt overwhelming). Both important.

Question 55 of 150

What is interest coverage ratio?

Explanation: Interest coverage: EBIT / Interest. >3: comfortable. <1.5: danger zone. If can't cover interest: default risk. Also called times interest earned (TIE).

Question 56 of 150

What is the price-to-earnings (P/E) ratio?

Explanation: P/E: high P/E: market expects growth, or overvalued. Low P/E: undervalued, or no growth. SA market average P/E ~15x. Compare to sector. Forward P/E uses forecast EPS.

Question 57 of 150

What is earnings per share (EPS)?

Explanation: Basic EPS = (Net profit - Preference dividends) / Weighted avg shares. Diluted EPS: includes potential shares from options, convertibles. Required disclosure under IAS 33.

Question 58 of 150

What is a contingent liability?

Explanation: Contingent liability (IAS 37): if probable and reliable estimate → provision. If possible → disclose in notes. If remote → ignore. Legal claims, warranties, guarantees.

Question 59 of 150

What is equity method of accounting?

Explanation: Equity method: Investment + share of profits - dividends received = carrying value. IAS 28: apply to associates and joint ventures. Consolidation for subsidiaries (>50%).

Question 60 of 150

What is the concept of substance over form?

Explanation: Substance over form: finance lease vs operating lease. Finance lease: risks/rewards transferred → recognise as asset regardless of legal ownership. Lease liabilities on balance sheet (IFRS 16).

Question 61 of 150

What is IFRS 16 leases?

Explanation: IFRS 16 (2019): lessees recognise: right-of-use asset (Dr ROU, Cr Lease Liability). Depreciate ROU, pay down liability. Income statement: depreciation + interest (instead of lease expense). Increases gearing ratios.

Question 62 of 150

What is impairment of accounts receivable?

Explanation: IFRS 9 ECL: estimate expected credit losses on AR. Dr Bad Debt Expense, Cr Allowance for Expected Credit Losses. Net AR = Gross AR - Allowance. More forward-looking than old incurred loss model.

Question 63 of 150

What is the difference between direct and indirect method for cash flows?

Explanation: Indirect method (more common): Net profit + Depreciation ± Working capital changes ± Non-cash items = Operating cash flow. Direct: actual cash collections and payments. Both valid under IFRS.

Question 64 of 150

What is the concept of conservatism (prudence) in accounting?

Explanation: Prudence/conservatism: lower of cost or NRV for inventory. Only recognise revenue when earned. Recognise provisions when probable. Don't anticipate profits. Basis of many accounting rules.

Question 65 of 150

What is the concept of consistency in accounting?

Explanation: Consistency: change method only if required or if provides more reliable information. Disclose change and effect. Comparability: users can compare periods. Not absolute — better method allowed.

Question 66 of 150

What is financial leverage?

Explanation: Financial leverage: if ROA = 10% and cost of debt = 6%: leverage amplifies ROE. But if ROA < cost of debt: leverage destroys value. Financial risk increases with leverage.

Question 67 of 150

What is the difference between gross and net assets?

Explanation: Net assets = Equity = Assets - Liabilities. Gross assets: before accumulated depreciation. Net book value (NBV) of asset = cost - accumulated depreciation.

Question 68 of 150

What is the role of accounting in decision-making?

Explanation: Financial accounting: external users (investors, lenders, regulators). Management accounting: internal (budget, cost, decisions). Both grounded in accounting data.

Question 69 of 150

What is a consolidated balance sheet?

Explanation: Consolidation: eliminate intercompany transactions. Goodwill on acquisition. Non-controlling interests. IFRS 10: control = power + exposure to variable returns + ability to use power.

Question 70 of 150

What is the earnings before interest and tax (EBIT)?

Explanation: EBIT (Operating profit): measures operating performance regardless of financing. EBIT margin = EBIT/Revenue. Interest coverage = EBIT/Interest expense.

Question 71 of 150

What is a finance lease vs operating lease under IFRS 16?

Explanation: IFRS 16 (lessee): all leases → ROU asset + lease liability. Exceptions: short-term (<12 months) and low-value assets. Lessors: still classify as finance or operating.

Question 72 of 150

What is the dividend payout ratio?

Explanation: Dividend payout: 40% payout = 60% retained earnings. Growth companies: low payout (reinvest). Mature companies: high payout. Dividend yield = Dividend per share / Market price.

Question 73 of 150

What is a chart of accounts?

Explanation: Chart of accounts: each account has unique number. Structure: 1000-1999 assets, 2000-2999 liabilities, 3000-3999 equity, 4000-4999 revenue, 5000-5999 expenses.

Question 74 of 150

What is the concept of the entity assumption?

Explanation: Entity assumption: Dr. Smith's personal car is not a company asset even if he owns both. Financial statements reflect only the business entity's transactions.

Question 75 of 150

What is the role of the auditor's report?

Explanation: Auditor's report: unqualified (clean — fairly presented). Qualified (except for: specific material misstatement). Adverse (not fairly presented). Disclaimer (unable to form opinion).

Question 76 of 150

What is comparative information in financial statements?

Explanation: Comparative: IFRS requires at least one prior period for each financial statement. Three balance sheets required when retrospective restatement. Key for trend analysis.

Question 77 of 150

What is the relationship between profit and cash flow?

Explanation: Profit ≠ Cash. Add back depreciation, subtract working capital increases. A fast-growing profitable company may have negative operating cash flow (overtrading). CFS reconciles the difference.

Question 78 of 150

What is the concept of deferred tax?

Explanation: Deferred tax: accelerated depreciation for tax → lower tax now, more later (deferred tax liability). Loss carry-forward → deferred tax asset. IAS 12: balance sheet liability method.

Question 79 of 150

What is an intangible asset?

Explanation: Intangible assets (IAS 38): identifiable (separable or from contractual rights), non-monetary, without physical substance. Must meet recognition criteria: future economic benefits + reliable cost measurement.

Question 80 of 150

What does 'fair value' mean in accounting?

Explanation: Fair value (IFRS 13): exit price, not entry price. Hierarchy: Level 1 (quoted prices), Level 2 (observable inputs), Level 3 (unobservable inputs). Used for investment property, financial instruments, business combinations.

Question 81 of 150

What is other comprehensive income (OCI)?

Explanation: OCI: bypasses P&L but included in total comprehensive income. SOCE shows OCI separately. Reclassifiable (forex, cash flow hedges) vs non-reclassifiable (revaluation, actuarial). Goes to equity reserves.

Question 82 of 150

What is a share premium?

Explanation: Share premium: company issues R1 par shares for R10 each. Share capital: R1 per share. Share premium: R9 per share. Under IFRS: no longer distinction between par and share premium in some jurisdictions.

Question 83 of 150

What is property, plant and equipment (PPE)?

Explanation: PPE (IAS 16): recognised at cost. Subsequently: cost model (cost - accumulated depreciation) or revaluation model (fair value - subsequent depreciation). Derecognise: on disposal (gain/loss to P&L).

Question 84 of 150

What is the asset turnover ratio?

Explanation: Asset turnover: high = efficient use of assets. Service businesses: very high (few assets). Capital-intensive: lower. DuPont: ROE = Net profit margin × Asset turnover × Financial leverage.

Question 85 of 150

What is a bonus issue (stock dividend)?

Explanation: Bonus issue (capitalisation issue): Dr Retained Earnings (or share premium), Cr Share Capital. Number of shares increases, price adjusts proportionally. No change in equity total. EPS falls.

Question 86 of 150

What is a rights issue?

Explanation: Rights issue: raises cash (new equity financing). Existing shareholders: maintain proportional ownership if they exercise rights. Discount to market: incentive to participate. Dilutive if not exercised.

Question 87 of 150

What is the concept of double-entry bookkeeping?

Explanation: Double-entry: invented by Pacioli (1494). Every transaction: Dr one account, Cr another. Total Dr = Total Cr always. Accounting equation always balances. Reduces errors.

Question 88 of 150

What is a suspense account?

Explanation: Suspense account: use when: uncertain which account to debit/credit, trial balance doesn't balance. Must be cleared before financial statements prepared. Any remaining balance: investigate.

Question 89 of 150

What is the cost of goods sold (COGS)?

Explanation: COGS: includes raw materials, direct labour, manufacturing overhead. Service companies: cost of services. Gross profit = Revenue - COGS. COGS increases: margins squeezed.

Question 90 of 150

What is a lease liability?

Explanation: Lease liability: Dr Lease Liability, Cr Cash (lease payment). Interest portion: Dr Interest Expense. Principal portion: Dr Lease Liability. Amortise ROU asset separately.

Question 91 of 150

What is the effect of paying dividends on the accounting equation?

Explanation: Dividend: Dr Retained Earnings (equity), Cr Cash (asset). Reduces both equity and assets by equal amount. Accounting equation remains balanced.

Question 92 of 150

What is the purpose of adjusting entries?

Explanation: Adjusting entries: made before financial statements. Types: accruals (earn/incur not recorded), deferrals (cash before earning/incurring), depreciation, bad debts. Not corrections of errors.

Question 93 of 150

What is the difference between a current asset and a non-current asset?

Explanation: Current assets: cash, AR, inventory, prepayments. Non-current assets: PPE, intangibles, investments. Classification affects: working capital, current ratio, capital structure analysis.

Question 94 of 150

What is an invoice?

Explanation: Invoice: triggers journal entry. Seller: Dr AR, Cr Revenue. Buyer: Dr Inventory/Expense, Cr AP. VAT: Dr VAT Input (buyer), Cr VAT Output (seller). Source document for accounting records.

Question 95 of 150

What is the cash conversion cycle?

Explanation: CCC = DIO + DSO - DPO. Lower CCC: better working capital management. Negative CCC (Amazon, Dell): collect from customers before paying suppliers. Retail model advantage.

Question 96 of 150

What is a revaluation reserve?

Explanation: Revaluation reserve: IAS 16 revaluation model. PPE FV > NBV: Dr Asset, Cr Revaluation Reserve (equity). When asset sold/fully depreciated: reserve transferred to retained earnings.

Question 97 of 150

What is goodwill impairment?

Explanation: Goodwill impairment: allocate goodwill to CGUs. Annual test: compare CGU carrying value to recoverable amount. If RA < CV: impairment loss. Dr Impairment Loss, Cr Goodwill. Cannot be reversed.

Question 98 of 150

What is the concept of negative goodwill (bargain purchase)?

Explanation: Bargain purchase (negative goodwill): purchase price < FV of identifiable net assets. IFRS 3: reassess, then recognise gain in P&L. Not common — check assumptions carefully.

Question 99 of 150

What is the going concern and its effect on classification?

Explanation: Going concern failure: reclassify non-current to current (assets to be liquidated). Remove ROU assets and lease liabilities if leases terminable. Prepare on liquidation basis if appropriate.

Question 100 of 150

What is the concept of fair presentation and true and fair view?

Explanation: Fair presentation / true and fair: IAS 1. Financial statements should faithfully represent transactions. True and fair override: if compliance with a rule is so misleading that it conflicts with the objective, depart and disclose.

Question 101 of 150

What is a related party transaction?

Explanation: Related party: IAS 24. Must disclose: nature of relationship, transaction amounts, outstanding balances. Risk: transfer pricing, non-arm's length terms, conflicts of interest.

Question 102 of 150

What is the ratio analysis limitation?

Explanation: Ratio limitations: historical (lag). Window dressing: change year-end to improve ratios. Off-balance-sheet items excluded. Accounting policy differences: make comparisons difficult. Need industry benchmarks.

Question 103 of 150

What is the concept of double taxation?

Explanation: Double taxation: company pays corporate tax on profit. Shareholder pays dividend tax on dividends. Imputation systems (SA: dividends tax at 20%) partially address this. Integration approach in some countries.

Question 104 of 150

What is the link between the three financial statements?

Explanation: Linkage: IS → Net profit → RE on BS. BS: opening + IS profit + OCI - dividends = closing equity. CFS: operating activities start with net profit. Closing cash = BS cash balance. All three must be consistent.

Question 105 of 150

What is a write-off vs write-down?

Explanation: Write-off: Dr Allowance for Bad Debts, Cr AR (removing from books). Write-down: Dr Impairment Loss, Cr Accumulated Impairment (partial reduction). Write-off = 100%, write-down = partial.

Question 106 of 150

What is the acid test ratio?

Explanation: Acid test (quick ratio): excludes inventory and prepayments (less liquid). ~1:1 generally adequate. < 0.5: potential liquidity crisis. Useful for businesses where inventory is slow-moving.

Question 107 of 150

What is the concept of window dressing in accounting?

Explanation: Window dressing: not necessarily fraudulent but misleading. e.g., repay overdraft before year-end (improve current ratio), delay purchases. Auditors look for unusual year-end transactions.

Question 108 of 150

What is accounting fraud vs error?

Explanation: Fraud: intentional. Examples: Enron (hiding debt in SPVs), WorldCom (capitalising expenses). Error: unintentional. Auditors: design procedures to detect both. NOCLAR (non-compliance with laws and regulations).

Question 109 of 150

What is the statement of retained earnings?

Explanation: Retained earnings reconciliation: always reconcile. RE used for: expansion, debt repayment, future dividends. Company must have positive RE to legally pay dividends in most jurisdictions.

Question 110 of 150

What is the concept of prudence in recognising losses?

Explanation: Prudence: don't overstate assets or understate liabilities. Inventory: lower of cost or NRV. Bad debts: allowance based on expected losses. Provisions: when probable.

Question 111 of 150

What is the interest expense for a loan?

Explanation: Interest expense: Dr Interest Expense (income statement), Cr Interest Payable (liability if not yet paid) or Cr Cash (if paid). Accrued at period end if unpaid.

Question 112 of 150

What is a purchase ledger vs sales ledger?

Explanation: Purchase ledger: suppliers/creditors — individual supplier accounts within total AP. Sales ledger: customers/debtors — individual customer accounts within total AR. Control accounts reconcile to general ledger.

Question 113 of 150

What is a cash book?

Explanation: Cash book: records all cash movements. Two-column: receipts (Dr) and payments (Cr). Three-column: also includes bank and discount columns. Source for bank reconciliation.

Question 114 of 150

What is a credit note?

Explanation: Credit note: seller: Dr Sales Returns/Revenue, Cr AR. Buyer: Dr AP, Cr Purchases/Inventory. Reduces the original invoice amount.

Question 115 of 150

What is the concept of capital maintenance?

Explanation: Capital maintenance: financial (maintain nominal monetary value of equity), or physical (maintain productive capacity). Relevant to measuring profit: income only if capital maintained.

Question 116 of 150

What is a contra account?

Explanation: Contra account: netted against related account. Accumulated depreciation: reduces PPE to net book value. Allowance for doubtful debts: reduces gross AR to net AR.

Question 117 of 150

What is the concept of substance over form in lease accounting?

Explanation: Substance over form: IFRS 16 extension. All leases recognised on balance sheet regardless of legal form. Pre-IFRS 16: operating leases were off-balance-sheet (form over substance).

Question 118 of 150

What is a reconciliation in accounting?

Explanation: Reconciliation: identify and explain differences between two records. Bank rec: book vs bank. Control account: subsidiary ledger vs general ledger control. Intercompany: group eliminations.

Question 119 of 150

What is the accounts payable aging schedule?

Explanation: AP aging: current, 30 days, 60 days, 90+ days overdue. Identify: early payment discounts available, overdue accounts losing credit terms, prioritise payments. Mirror image of AR aging.

Question 120 of 150

What is the difference between equity and debt financing?

Explanation: Equity financing: dilutes ownership, higher expected return (risk premium). Debt: tax shield (interest deductible), must repay, gearing increases financial risk. WACC balances the two.

Question 121 of 150

What is gross vs net revenue presentation?

Explanation: IFRS 15: agent vs principal. Principal: gross presentation (show full revenue, deduct costs). Agent: net presentation (show only commission/margin earned). Affects revenue line significantly.

Question 122 of 150

What is the concept of a going concern qualification in an audit?

Explanation: Going concern qualification: if material uncertainty: auditor includes 'material uncertainty related to going concern' section. If GC basis inappropriate: adverse opinion.

Question 123 of 150

What is absorption costing vs variable costing?

Explanation: Absorption costing: IAS 2 requires for inventory valuation. Fixed factory overhead allocated to units. Variable costing: fixed costs expensed immediately. Different profit in periods with inventory changes.

Question 124 of 150

What is target costing?

Explanation: Target costing: market price - desired profit = target cost. Engineer product cost to meet target. Japanese automotive companies pioneered. Customer-oriented vs cost-plus approach.

Question 125 of 150

What is break-even analysis?

Explanation: Break-even: BEP (units) = Fixed Costs / (SP - VC per unit). BEP (Rand) = Fixed Costs / Contribution margin ratio. Margin of safety = Actual sales - BEP sales. Used for: pricing, planning.

Question 126 of 150

What is the contribution margin?

Explanation: Contribution margin = Revenue - Variable Costs. CM per unit = SP - VC per unit. CM ratio = CM / Revenue. BEP: FC / CM per unit. Higher CM: more profit potential per unit sold.

Question 127 of 150

What is marginal costing in management accounting?

Explanation: Marginal costing: relevant for short-run decisions. Shut-down: if contribution > 0 (P > AVC). Marginal cost of next unit = VC per unit. Not GAAP-compliant for external reporting.

Question 128 of 150

What is the concept of overhead absorption rate?

Explanation: OAR: if budgeted overhead = R100,000 and 10,000 labour hours: OAR = R10/hour. Product using 5 hours: absorbs R50. Over/under-absorption: actual vs budgeted volume differs.

Question 129 of 150

What is activity-based costing (ABC)?

Explanation: ABC: identify activities → assign costs to activities → use cost drivers to allocate to products. More accurate for diverse product mix. Higher implementation cost. Used for: product mix decisions, pricing.

Question 130 of 150

What is a master budget?

Explanation: Master budget: sales budget → production budget → materials/labour/overhead budgets → operating budgets → cash budget → budgeted financial statements. Coordination of all plans.

Question 131 of 150

What is variance analysis in management accounting?

Explanation: Variance analysis: Actual vs Budget. Direct material price variance, usage variance, labour rate variance, efficiency variance, fixed overhead volume/expenditure variance. Management by exception.

Question 132 of 150

What is the payback period?

Explanation: Payback: initial investment / annual cash flow. Simple, easy, focuses on liquidity. Ignores: cash flows beyond payback, time value of money. Better as secondary measure alongside NPV.

Question 133 of 150

What is net present value (NPV)?

Explanation: NPV = Σ CF_t/(1+r)^t - Initial investment. Positive NPV: adds value, accept. Negative: destroys value, reject. Best capital budgeting method: accounts for all cash flows and TVM.

Question 134 of 150

What is internal rate of return (IRR)?

Explanation: IRR: trial and error / financial calculator / interpolation. NPV positive at lower rates, negative at higher. IRR = crossover point. Limitation: multiple IRRs possible, assumes reinvestment at IRR.

Question 135 of 150

What is cash budget?

Explanation: Cash budget: opening balance + receipts - payments = closing balance. Identifies: when to arrange overdraft, when to invest surplus. Month-by-month. Key tool for financial planning.

Question 136 of 150

What is standard costing?

Explanation: Standard cost: predetermined material quantity + price, labour hours + rate, overhead rate. Actual vs standard: variances. Favourable (F): actual better than standard. Adverse (A): actual worse.

Question 137 of 150

What is job costing?

Explanation: Job costing: direct materials + direct labour + overhead absorbed = job cost. Used: construction, printing, professional services. Each job: separate cost card/account.

Question 138 of 150

What is process costing?

Explanation: Process costing: chemicals, food processing, oil refining. Equivalent units (EU): 100 units 50% complete = 50 EUs. Cost per EU = Total costs / Total EUs. FIFO or weighted average.

Question 139 of 150

What is the difference between fixed and variable costs?

Explanation: Fixed costs: total fixed regardless of output. Fixed per unit: decreases as output rises. Variable: total increases with output. Variable per unit: constant. Mixed costs: semi-variable (phone: line rental + usage).

Question 140 of 150

What is the concept of opportunity cost in decision-making?

Explanation: Opportunity cost in decisions: ignore sunk costs (past, irrecoverable), include opportunity costs (benefit foregone). Relevant costs: future, incremental, avoidable. Not in formal accounts but critical for decisions.

Question 141 of 150

What is a make-or-buy decision?

Explanation: Make vs buy: compare: variable cost to make vs purchase price. Qualitative factors: quality, reliability, capacity, strategy. If spare capacity: ignore fixed costs (already incurred). Opportunity cost if capacity constrained.

Question 142 of 150

What is the dividend discount model (DDM) valuation?

Explanation: DDM (Gordon Growth Model): V = D1/(r-g). D1: next year dividend. r: required return. g: sustainable growth rate. Simple but sensitive to g assumption. Suits stable dividend-paying companies.

Question 143 of 150

What is working capital management?

Explanation: WC management: cash, AR, inventory, AP. CCC minimisation. Aggressive: low WC (higher risk, higher return). Conservative: high WC (lower risk, lower return). JIT reduces inventory WC need.

Question 144 of 150

What is a rolling budget?

Explanation: Rolling budget: 12-month rolling: as January passes, add next January. More up-to-date than fixed annual budget. Higher preparation cost. Better for volatile environments.

Question 145 of 150

What is zero-based budgeting?

Explanation: ZBB: start from zero, justify all costs. Identifies waste, inefficiencies. Time-consuming. Used in public sector, cost reduction exercises. Alternative to traditional incremental budgeting.

Question 146 of 150

What is the concept of tax shield?

Explanation: Interest tax shield: borrow R1m at 10% = R100,000 interest. If tax 28%: tax saving = R28,000. After-tax cost of debt = 10% × (1-0.28) = 7.2%. Increases firm value (WACC effect).

Question 147 of 150

What is the weighted average cost of capital (WACC)?

Explanation: WACC = (E/V)×Re + (D/V)×Rd×(1-T). E: equity, D: debt, V: total. Re: cost of equity (CAPM). Rd: cost of debt. T: tax rate. NPV: positive if project return > WACC.

Question 148 of 150

What is the capital asset pricing model (CAPM)?

Explanation: CAPM: Rf: risk-free rate. β: systematic risk (how much stock moves with market). (Rm-Rf): market risk premium. Higher β: higher required return. Used in WACC calculation.

Question 149 of 150

What is economic value added (EVA)?

Explanation: EVA = NOPAT - (WACC × Invested Capital). Positive: creating shareholder value above cost of capital. Negative: destroying value despite accounting profit. Stern Stewart & Co concept.

Question 150 of 150

What is a cost centre vs profit centre?

Explanation: Cost centre: production departments, support functions. Profit centre: divisions, business units. Investment centre: also responsible for capital employed (ROI, EVA metrics). Responsibility accounting.

Financial Accounting 101

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