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Free ACCA Financial Accounting Practice Questions & Answers
388 exam-style Financial Accounting questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 1
What is the primary purpose of financial accounting?
Select an option first.
Correct answer: B — To provide useful financial information to external users such as investors, lenders and creditors
Explanation: B is correct. Financial accounting produces statements for external users — investors, lenders, creditors — enabling economic decisions. A is management accounting. C is a by-product, not the primary purpose. D is bookkeeping, a process not a purpose.
Question 2
Which statement best describes a statement of financial position?
Select an option first.
Correct answer: C — A snapshot of an entity's assets, liabilities, and equity at a specific date
Explanation: C is correct. The statement of financial position shows assets owned, liabilities owed, and owners' residual interest (equity) at one point in time. A is the cash flow statement. B is the income statement. D is the statement of changes in equity.
Question 3
What does a statement of profit or loss primarily measure?
Select an option first.
Correct answer: C — The financial performance — income earned less expenses incurred — over a period
Explanation: C is correct. The income statement measures financial performance over a period by matching income with the expenses incurred to generate it. A is the cash flow statement. B and D are balance sheet concepts.
Question 4
What is the fundamental accounting equation?
Select an option first.
Correct answer: C — Assets = Liabilities + Equity
Explanation: C is correct. Assets = Liabilities + Equity. Everything owned (assets) is funded by borrowings (liabilities) or owners' funds (equity). A and B rearrange it incorrectly. D adds when it should subtract.
Question 5
Which of the following is an ASSET?
Select an option first.
Correct answer: C — A delivery van owned by the business
Explanation: C is correct. An asset is a resource controlled by the entity expected to generate future economic benefits — a delivery van provides benefit through use in operations. A, B, and D are all liabilities.
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Question 6
Which of the following is a LIABILITY?
Select an option first.
Correct answer: C — An amount owed to a supplier for goods purchased on credit
Explanation: C is correct. A liability is a present obligation to transfer an economic resource — an amount owed to a supplier is a classic trade payable. A and B are current assets. D is an intangible asset.
Question 7
How is EQUITY defined in accounting?
Select an option first.
Correct answer: B — The residual interest in the assets of the entity after deducting all its liabilities
Explanation: B is correct. Equity = Assets − Liabilities. It includes share capital, retained earnings, and other reserves. A, C and D are components of equity, not its complete definition.
Question 8
What is the 'accruals basis' of accounting?
Select an option first.
Correct answer: B — Income and expenses are recognised when earned or incurred, regardless of when cash flows
Explanation: B is correct. The accruals concept: income recognised when earned, expenses when incurred — not when cash moves. A and D describe the cash basis. C is not a recognised accounting basis.
Question 9
What does the 'going concern' assumption mean?
Select an option first.
Correct answer: B — The business is expected to continue operating for the foreseeable future with no intention or need to liquidate
Explanation: B is correct. Going concern: entity continues operating (at least 12 months), justifying assets at cost rather than forced-sale values. A is not implied. C and D are not what going concern means.
Question 10
What is the 'historical cost' basis of measurement?
Select an option first.
Correct answer: B — Assets are recorded at the original amount paid to acquire them
Explanation: B is correct. Historical cost = original transaction price paid. Objective and verifiable. A is net realisable value. C is replacement cost. D is the fair value model.
Question 11
The 'prudence' concept requires that:
Select an option first.
Correct answer: C — Caution is applied — income and gains are not overstated, losses are not understated
Explanation: C is correct. Prudence: caution when uncertain — not overstating income/assets, not understating liabilities/losses. A reverses the concept. B is wrong — expenses recognised when incurred. D goes too far.
Question 12
What does 'materiality' mean in financial accounting?
Select an option first.
Correct answer: B — Information is material if omitting or misstating it could reasonably influence users' economic decisions
Explanation: B is correct. Materiality: information is material if it affects decisions. Immaterial items can be grouped. A sets an arbitrary threshold (none exists). C and D are incorrect.
Question 13
What is the 'consistency' concept?
Select an option first.
Correct answer: B — An entity should apply the same accounting policies from one period to the next, enabling meaningful comparison
Explanation: B is correct. Consistency: same policies each period for comparability. Changes permitted with valid reason and must be disclosed. A is too absolute. C and D are too narrow.
Question 14
What does 'substance over form' mean?
Select an option first.
Correct answer: B — Transactions should be accounted for based on economic reality rather than their legal form
Explanation: B is correct. Economic reality governs accounting treatment, not legal structure. For example, IFRS 16 leases reflect substance (lessee has economic control) over form (legal title stays with lessor). A is the opposite. C and D misuse the word 'substance'.
Question 15
Which is a FUNDAMENTAL qualitative characteristic under the IASB Conceptual Framework?
Select an option first.
Correct answer: B — Faithful representation
Explanation: B is correct. The IASB Conceptual Framework identifies two fundamental qualitative characteristics: relevance and faithful representation. Enhancing characteristics include comparability, verifiability, timeliness, and understandability. A is a measurement basis. C is a threshold. D is an underlying assumption.
Question 16
What does 'relevance' mean as a qualitative characteristic?
Select an option first.
Correct answer: B — Information is capable of making a difference to users' decisions — it has predictive or confirmatory value
Explanation: B is correct. Relevance: information that can influence decisions — predictive value (helps forecast) or confirmatory value (confirms past predictions). A is a presentation matter. C is understandability. D is faithful representation.
Question 17
What does 'faithful representation' require?
Select an option first.
Correct answer: B — Information should be complete, neutral, and free from material error
Explanation: B is correct. Faithful representation: completeness (nothing important omitted), neutrality (no bias), freedom from error (no errors in description or process). A confuses it with a measurement basis. C is consistency. D is an audit concept.
Question 18
What is the role of the IASB?
Select an option first.
Correct answer: B — To develop and issue International Financial Reporting Standards (IFRS) used globally
Explanation: B is correct. The IASB develops and issues IFRS Standards, adopted by over 140 countries. A is the role of auditors. C is professional accounting bodies. D is tax authorities.
Question 19
What is IFRS 18 and why is it significant?
Select an option first.
Correct answer: B — A standard issued in April 2024 replacing IAS 1 — prescribing presentation and disclosure of financial statements, examinable from September 2025
Explanation: B is correct. IFRS 18 'Presentation and Disclosure in Financial Statements' replaces IAS 1 and is examinable from September 2025. It introduces three mandatory income statement categories (operating, investing, financing) and new MPM requirements. A, C and D identify other standards.
Question 20
Under IFRS 18, how many mandatory categories are in the statement of profit or loss?
Select an option first.
Correct answer: B — Three — operating, investing, and financing
Explanation: B is correct. IFRS 18 introduces three mandatory categories: operating, investing, and financing. More structured than the flexible IAS 1 format. A is incomplete. C and D do not reflect IFRS 18.
Question 21
What are the five components of a complete set of financial statements?
Select an option first.
Correct answer: B — Statement of profit or loss, statement of financial position, statement of cash flows, statement of changes in equity, and notes
Explanation: B is correct. Complete financial statements: (1) statement of financial position, (2) statement of profit or loss and OCI, (3) statement of changes in equity, (4) statement of cash flows, (5) notes. A, C and D mix bookkeeping records with financial statements.
Question 22
What is 'capital expenditure' vs 'revenue expenditure'?
Select an option first.
Correct answer: B — Capital expenditure acquires or improves long-term assets (capitalised on SFP); revenue expenditure maintains day-to-day operations (expensed in P&L)
Explanation: B is correct. Capital expenditure: long-term benefit → capitalised. Revenue expenditure: current period benefit only → expensed immediately. A, C and D are all wrong — no monetary threshold determines classification; the nature of the benefit does.
Question 23
Which is CAPITAL expenditure?
Select an option first.
Correct answer: C — Installing a new production machine that expands capacity
Explanation: C is correct. Installing a new machine creates a long-term asset providing future benefits — capital expenditure. A is maintenance (revenue). B is servicing (revenue). D is wages, a period cost.
Question 24
What is the purpose of a trial balance?
Select an option first.
Correct answer: B — To check that total debits equal total credits, confirming arithmetic accuracy of double-entry
Explanation: B is correct. A trial balance lists all ledger account balances and checks debits = credits. A is the income statement. C is the SFP. D is the role of ledgers/journals.
Question 25
Which error will a trial balance FAIL to detect?
Select an option first.
Correct answer: B — A transaction posted to the wrong account with both sides recorded correctly (same amount) — error of commission
Explanation: B is correct. A trial balance only checks debits = credits. An error of commission (correct amount, both sides, but wrong accounts) leaves totals equal — not detected. A, C and D would all cause debits ≠ credits — detected.
Question 26
What is a suspense account?
Select an option first.
Correct answer: B — A temporary account opened when the trial balance does not balance — closed once the error or query is resolved
Explanation: B is correct. A suspense account is opened temporarily when a trial balance difference can't be immediately identified. Once errors are found, the account is cleared. A, C and D describe other concepts.
Question 27
What is the difference between financial accounting and management accounting?
Select an option first.
Correct answer: B — Financial accounting produces reports for external users following mandatory standards; management accounting produces internal reports for managers with no prescribed format
Explanation: B is correct. Financial accounting: external users, mandated standards, typically annual. Management accounting: internal users, no prescribed format, supports planning and control. A, C and D are too absolute or incorrect.
Question 28
What are 'retained earnings'?
Select an option first.
Correct answer: B — Cumulative net profits since incorporation less dividends paid to shareholders
Explanation: B is correct. Retained earnings = Cumulative profits − Dividends. Forms part of equity. A is not a defined reserve. C is current year profit only. D describes a specific reserve.
Question 29
What is 'comparability'?
Select an option first.
Correct answer: B — Information is presented so users can compare results over time and against other entities
Explanation: B is correct. Comparability: identify similarities and differences within an entity over time and between entities. Requires consistency and disclosure of policies. A is too absolute. C is too rigid. D ignores exchange rate effects.
Question 30
What is the 'money measurement concept'?
Select an option first.
Correct answer: B — Only transactions expressible in monetary terms are recorded in financial statements
Explanation: B is correct. Only events measurable in monetary terms are recorded. Non-monetary factors (e.g., staff morale) are excluded. A is an authorisation control. C and D are too narrow.
More free ACCA topics
Management Accounting401
Strategic Business Reporting400
Advanced Taxation400
Corporate and Business Law398
Advanced Financial Management396
Financial Reporting395
Financial Management394
Performance Management391
Advanced Performance Management388
Business and Technology300
Taxation299
Strategic Business Leader297
Advanced Audit and Assurance296
Audit and Assurance294
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