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Free Questions › ACCA › Financial Accounting
Free ACCA Financial Accounting Practice Questions & Answers
400 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 271
In a manufacturing account, what is the difference between 'prime cost' and 'cost of production'?
Select an option first.
Correct answer: B — Prime cost = direct materials + direct labour + direct expenses; cost of production = prime cost + manufacturing overheads
Explanation: B is correct. Prime cost = all direct costs. Cost of production = prime cost + manufacturing overheads (factory rent, factory machinery depreciation). Period costs (admin, selling) are separate. A reverses the relationship. C is wrong. D is wrong.
Question 272
What is a 'suspense account balance' and how is it cleared?
Select an option first.
Correct answer: B — A temporary difference — once the error is identified, correct entries are posted to the relevant accounts and a corresponding entry clears the suspense account to zero
Explanation: B is correct. Suspense account: opened when trial balance doesn't balance. Once the error is found: correct the error and post opposite entry to suspense to clear it. A makes it permanent (wrong). C is incorrect. D is wrong.
Question 273
What is 'gross profit' and how is it calculated?
Select an option first.
Correct answer: B — Revenue minus cost of goods sold (cost of sales)
Explanation: B is correct. Gross profit = Revenue − Cost of sales. Measures core trading profitability before deducting operating expenses. A confuses gross and net profit. C is operating profit. D is profit after tax.
Question 274
What is 'operating profit' and how does it differ from gross profit?
Select an option first.
Correct answer: B — Operating profit = gross profit minus all operating expenses — profit from operations before interest and tax
Explanation: B is correct. Profit cascade: Revenue → Gross profit (−cost of sales) → Operating profit (−operating expenses) → PBT (±finance items) → PAT (−tax). A is wrong. C is wrong for most entities. D is wrong.
Question 275
What is the 'gross profit margin' ratio?
Select an option first.
Correct answer: B — Gross profit divided by revenue × 100% — indicating how much of each £1 of revenue is retained after paying for goods sold
Explanation: B is correct. Gross profit margin = (Gross profit ÷ Revenue) × 100%. Higher margin = better pricing power or more efficient procurement. A uses wrong items. C is asset turnover. D is closer to ROCE.
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Question 276
What is the 'current ratio'?
Select an option first.
Correct answer: B — Current assets divided by current liabilities — measuring the ability to pay short-term obligations from short-term assets
Explanation: B is correct. Current ratio = Current assets ÷ Current liabilities. Ratio > 1 indicates short-term obligations can be met. A is an asset composition ratio. C reverses the ratio. D uses wrong items.
Question 277
What is the 'quick ratio' (acid test) and why does it exclude inventory?
Select an option first.
Correct answer: B — (Current assets − Inventory) ÷ Current liabilities — inventory excluded because it is the least liquid current asset
Explanation: B is correct. Quick ratio = (Current assets − Inventory) ÷ Current liabilities. Inventory excluded: requires sale to become cash (potentially slow). Tests liquidity more rigorously. A is the current ratio. C and D use wrong items.
Question 278
Current assets £80,000 (including inventory £20,000), current liabilities £40,000. Quick ratio?
Select an option first.
Correct answer: B — 1.5
Explanation: B is correct. Quick ratio = (£80,000 − £20,000) ÷ £40,000 = £60,000 ÷ £40,000 = 1.5. A is the current ratio (£80,000 ÷ £40,000 = 2.0). C divides the wrong way. D is not obtainable.
Question 279
What is 'return on capital employed' (ROCE)?
Select an option first.
Correct answer: B — Profit before interest and tax (PBIT) ÷ Capital employed (total assets minus current liabilities) × 100%
Explanation: B is correct. ROCE = PBIT ÷ (Total assets − Current liabilities) × 100%. Capital employed = non-current assets + working capital = total equity + non-current liabilities. A uses wrong items. C uses gross profit. D uses wrong items.
Question 280
What is 'inventory days'?
Select an option first.
Correct answer: B — (Inventory ÷ Cost of sales) × 365 — average number of days inventory is held before being sold
Explanation: B is correct. Inventory days = (Inventory ÷ Cost of sales) × 365. Higher = inventory held longer (slow-moving or overstocked). A is supplier lead time. C is inventory turnover in times. D uses revenue.
Question 281
What is 'receivable days' and what does a high figure suggest?
Select an option first.
Correct answer: B — (Trade receivables ÷ Revenue) × 365 — a high figure suggests customers take longer to pay; possible credit control problems
Explanation: B is correct. Receivable days = (Trade receivables ÷ Revenue) × 365. High = slow-paying customers → cash flow risk. A is receivables turnover. C uses cost of sales. D is payable days with wrong numerator.
Question 282
What is 'payable days' and what does a high figure suggest?
Select an option first.
Correct answer: B — (Trade payables ÷ Cost of sales) × 365 — a high figure suggests the business takes longer to pay suppliers: strong negotiation or cash flow difficulty
Explanation: B is correct. Payable days = (Trade payables ÷ Cost of sales) × 365. High = stretching credit terms. Context determines interpretation. A and D use wrong denominators. C gives payables turnover.
Question 283
What is 'gearing' and what does a high ratio indicate?
Select an option first.
Correct answer: B — The proportion of a company's funding from debt relative to equity — high gearing indicates greater financial risk and reliance on borrowed funds
Explanation: B is correct. Gearing = Non-current liabilities ÷ (Equity + Non-current liabilities) × 100%. High = more debt → higher financial risk. A is asset intensity. C is interest cover. D is liability structure.
Question 284
What is 'interest cover'?
Select an option first.
Correct answer: B — Profit before interest and tax (PBIT) ÷ Interest expense — showing how many times operating profit covers the interest charge
Explanation: B is correct. Interest cover = PBIT ÷ Interest expense. Higher = easier to service debt. Low (< 2) indicates financial stress. A uses PBT (already has interest deducted). C and D use wrong items.
Question 285
What is the five-step revenue recognition model under IFRS 15?
Select an option first.
Correct answer: B — Identify the contract, identify performance obligations, determine the transaction price, allocate the price to obligations, recognise revenue when each obligation is satisfied
Explanation: B is correct. IFRS 15 five steps: (1) Identify the contract; (2) Identify performance obligations; (3) Determine transaction price; (4) Allocate price to obligations; (5) Recognise revenue when each obligation is satisfied. A, C and D are not the five-step model.
Question 286
Under IFRS 15, when is revenue from the sale of goods recognised?
Select an option first.
Correct answer: B — When control of the goods transfers to the customer — at a point in time (e.g., delivery) or over time (e.g., long-term contract)
Explanation: B is correct. IFRS 15: revenue recognised when control transfers. For goods: typically on delivery. For services: may be over time. A is too early. C is cash basis. D is before delivery.
Question 287
What is a statement of cash flows and what three categories does it contain?
Select an option first.
Correct answer: B — A statement showing cash inflows and outflows classified under: operating activities, investing activities, and financing activities
Explanation: B is correct. Statement of cash flows (IAS 7): (1) Operating — cash from main business; (2) Investing — purchases/sales of non-current assets; (3) Financing — share issues, borrowings, dividends. A is a bank statement. C is a cash budget. D is a partial description.
Question 288
Which is an 'investing activity' in a statement of cash flows?
Select an option first.
Correct answer: B — Purchase of production equipment paid in cash
Explanation: B is correct. Investing activities: acquisition and disposal of non-current assets. Buying equipment = outflow under investing. A is operating. C can be financing under IAS 7. D is financing.
Question 289
What is the 'indirect method' of preparing operating cash flows?
Select an option first.
Correct answer: B — Starting with profit before tax, adjusting for non-cash items (depreciation, amortisation), working capital changes, and removing finance items to arrive at cash from operations
Explanation: B is correct. Indirect method: starts with PBT → add back non-cash charges → adjust for working capital → remove non-operating items. Most commonly used. A and C describe the direct method. D is a bank reconciliation.
Question 290
Why is depreciation ADDED BACK in the indirect method cash flow?
Select an option first.
Correct answer: B — Because depreciation is a non-cash charge deducted from profit — adding it back reverses its effect to convert accounting profit to a cash-based figure
Explanation: B is correct. Depreciation is non-cash — no cash moves when recorded. Adding it back reverses its deduction from profit. A is wrong. C misunderstands depreciation. D mislabels it.
Question 291
Cash flow effect of an INCREASE in trade receivables (indirect method)?
Select an option first.
Correct answer: B — Deducted from profit — cash tied up in receivables not yet received
Explanation: B is correct. ↑ Receivables: more revenue recognised than collected → deduct from profit. Working capital: ↑ receivables = cash outflow (deduct); ↓ receivables = cash inflow (add).
Question 292
Cash flow effect of an INCREASE in trade payables (indirect method)?
Select an option first.
Correct answer: B — Added to profit — goods/services used but not paid, so less cash paid than expenses recognised
Explanation: B is correct. ↑ Payables = incurred expenses but haven't paid yet → more cash retained → add to profit. Working capital: ↑ payables = cash inflow (add); ↓ payables = cash outflow (deduct). A reverses the logic. C and D are wrong.
Question 293
What is 'other comprehensive income' (OCI)?
Select an option first.
Correct answer: B — Items of income and expense not recognised in profit or loss but reported as part of total comprehensive income — examples: gains on revaluation of PPE, fair value changes on certain financial instruments
Explanation: B is correct. OCI: excluded from P&L by specific standards. Examples: IAS 16 revaluation surpluses, IFRS 9 certain fair value changes, actuarial gains on pension schemes, FX translation differences. A is finance income. C may be P&L or OCI. D mischaracterises OCI.
Question 294
What is a 'parent company' and what is a 'subsidiary'?
Select an option first.
Correct answer: B — A parent company controls another entity (subsidiary) — typically owning more than 50% of voting rights — and must prepare consolidated financial statements
Explanation: B is correct. IFRS 10: control = power + exposure to variable returns + ability to use power to affect returns. >50% voting rights typically gives control. C and D oversimplify. A is a lender-borrower relationship.
Question 295
What are 'consolidated financial statements'?
Select an option first.
Correct answer: B — Financial statements aggregating the assets, liabilities, income, and expenses of a parent and all its subsidiaries as if they were a single economic entity — required by IFRS 10
Explanation: B is correct. Consolidated statements present the group as a single entity — eliminating intra-group transactions. IFRS 10 requires consolidation when a parent controls subsidiaries. A, C and D are wrong.
Question 296
What is 'goodwill on consolidation'?
Select an option first.
Correct answer: B — The excess of the consideration paid to acquire a subsidiary over the fair value of identifiable net assets acquired at the acquisition date
Explanation: B is correct. Goodwill (IFRS 3) = Consideration − FV of identifiable net assets. Represents premium paid for brand, customer relationships, etc. A, C and D do not describe the accounting calculation.
Question 297
Parent pays £800,000 for 100% of Subsidiary. FV of Subsidiary's identifiable net assets = £650,000. What is goodwill?
Select an option first.
Correct answer: D — £150,000
Explanation: D is correct. Goodwill = Consideration − FV of net assets = £800,000 − £650,000 = £150,000. A adds consideration and net assets. B is just consideration. C is just net assets.
Question 298
What is a 'non-controlling interest' (NCI)?
Select an option first.
Correct answer: B — The portion of equity in a subsidiary NOT owned by the parent — shown within equity in the consolidated statement of financial position
Explanation: B is correct. NCI: when parent acquires less than 100% of a subsidiary, remaining equity belongs to NCI — presented within equity (not as a liability) in consolidated SFP. A is the parent's interest. C confuses direction. D is only the parent's share.
Question 299
What is an 'intra-group transaction' and how is it treated on consolidation?
Select an option first.
Correct answer: B — A transaction between entities within the same group — eliminated on consolidation to avoid double-counting, as it is internal to the single economic entity
Explanation: B is correct. Intra-group transactions must be eliminated — they represent internal activity. Including them overstates revenue, cost of sales, and intra-group balances. A, C and D are wrong.
Question 300
What is 'unrealised profit on intra-group sales'?
Select an option first.
Correct answer: B — Profit recorded on goods sold between group entities that remain in the buyer's inventory at year end — eliminated because profit is not realised from the group's perspective until sold externally
Explanation: B is correct. If S sells goods at a markup to P, and P still holds them, the group P&L includes unrealised profit. Consolidation: reduce group profit and reduce inventory to cost from the group's perspective. A, C and D are different adjustments.
More free ACCA topics
Management Accounting401
Corporate and Business Law400
Performance Management400
Financial Reporting400
Financial Management400
Strategic Business Reporting400
Advanced Financial Management400
Advanced Performance Management400
Advanced Taxation400
Business and Technology300
Taxation300
Audit and Assurance300
Strategic Business Leader300
Advanced Audit and Assurance296
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