ICAB Code of Ethics: Principles-based System

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Questions and Answers

What distinguishes current assets from non-current assets?

Non-current assets are liquidated within a short time frame.
Current assets include only receivables.
Current assets are held for less than a year while non-current assets are held for more than a year. (correct)
Non-current assets are accounted for based on market value.

Which of the following is an example of a liability?

Inventory held for sale
Tax owed to the government (correct)
Goods in transit from a supplier
An office building occupied by employees

How does the Business Entity Concept affect accounting?

It mandates all businesses to be registered as separate legal entities.
It merges the owner’s personal and business accounts for clarity.
It allows for personal debts to be disregarded in business reports.
It insists that the business is treated distinctly from its owners in financial records. (correct)

What is the primary characteristic of a non-current asset?

It generates benefits over more than one fiscal year. (D) Signup and view all the answers

What makes a liability 'current'?

It requires payment within the next 12 months. (C) Signup and view all the answers

In a sole trader scenario, how are business debts treated?

Debts must be paid out of personal resources if business assets are insufficient. (A) Signup and view all the answers

Which statement accurately describes receivables?

They include all amounts owed by customers and others to the entity. (C) Signup and view all the answers

Which is an essential characteristic of non-current liabilities?

Their settlement extends beyond 12 months. (A) Signup and view all the answers

What is the role of inventory in a business's financial statements?

It represents goods held for sale and is classified as a current asset. (C) Signup and view all the answers

Which of the following best defines an asset in an accounting context?

A present economic resource controlled by the entity due to past events. (A) Signup and view all the answers

What is the significance of the business entity concept in accounting?

It necessitates separation between a business entity's financial activities and those of its owners. (D) Signup and view all the answers

Which of the following is NOT considered an asset?

A promise to pay in the future. (A) Signup and view all the answers

Which statement regarding liabilities is correct?

Liabilities are present obligations as a result of past events. (D) Signup and view all the answers

Which type of asset is characterized by having no physical form?

Intangible assets. (B) Signup and view all the answers

What is the primary function of financial statements?

To present the financial position and performance of a business entity. (C) Signup and view all the answers

Which of the following is an example of a physical asset?

Office furniture. (B) Signup and view all the answers

Which of the following elements is primarily responsible for a business's economic resources?

Assets. (C) Signup and view all the answers

In constructing a statement of financial position, what must be accounted for?

The interrelationship between assets, liabilities, and capital. (D) Signup and view all the answers

Which component of the financial statement outlines a business’s income and expenses?

Statement of Profit or Loss. (D) Signup and view all the answers

What is the primary effect of profit on the owner's capital?

Profits are added to owner's capital. (A) Signup and view all the answers

How are drawings categorized in accounting terms?

As appropriations of profit. (B) Signup and view all the answers

If a business incurs expenses, what is the expected outcome on profit?

Decrease in profit as expenses exceed income. (A) Signup and view all the answers

In the given example, how much profit did Charlie earn from the day's trading?

CU250 (B) Signup and view all the answers

What happens to profits if they are retained in the business?

They remain as part of the owner's capital. (A) Signup and view all the answers

When Charlie pays Cu40 in wages to their cousin, how is this transaction classified?

As an expense reducing profit. (B) Signup and view all the answers

If Charlie decides to take CU180 from the business, how should this amount be viewed for accounting purposes?

As an appropriation of profit. (C) Signup and view all the answers

Which statement correctly describes the relationship between income and equity?

Income contributes to increases in equity. (A) Signup and view all the answers

What is the role of expenses in regards to financial statements?

Expenses reduce the reported profit. (D) Signup and view all the answers

Which statement is true regarding income in the context of business finance?

Income signifies increases in assets. (C) Signup and view all the answers

What does capital represent in an entity's financial structure?

The owner's investment in the business after liabilities (B) Signup and view all the answers

Which option best describes the basic accounting equation?

Assets = Capital + Liabilities (C) Signup and view all the answers

Why is the business considered a separate entity in accounting?

It can own assets independently of the owner. (C) Signup and view all the answers

When capital is invested in a business, how is it treated by accountants?

As money owed to the owner by the business (C) Signup and view all the answers

How do profits impact the accounting equation?

Profits directly increase capital. (C) Signup and view all the answers

What characteristic defines an asset in relation to the business as a separate entity?

It has a monetary value attributable to the business. (A) Signup and view all the answers

What is the historical cost principle in accounting?

Assets are valued at the price paid for them. (C) Signup and view all the answers

Which of the following statements best explains the concept of equity?

Equity measures the residual interest in assets after removing liabilities. (B) Signup and view all the answers

What occurs to an entity's liabilities if its assets increase?

Liabilities remain unchanged if capital also increases. (D) Signup and view all the answers

If Charlie purchases flowers for CU650, how does it impact the accounting equation?

It increases assets by CU650. (D) Signup and view all the answers

Flashcards

What is an asset?

A resource controlled by a business that has a potential to provide future economic benefits.

What is the definition of an asset?

An economic resource controlled by an entity due to past events.

What is a liability?

A present obligation of the entity as a result of past events.

What is the accounting definition of a liability?

An obligation of the entity, arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.