Accounting QB_Final 2025 ICAEW PDF

The Institute of Chartered Accountants in England and Wales Accounting Question Bank For exams in 2025 icaew.com Accounting The Institute of Chartered Accountants in England and Wales ISBN: 978-1-0355-1968-2 Previous ISBN: 978-1-0355-0931-7 e-ISBN: 978-1-0355-1985-9 First edition 2007 Eighteenth edition 2024 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, graphic, electronic or mechanical including photocopying, recording, scanning or otherwise, without the prior written permission of the publisher. The content of this publication is intended to prepare students for the ICAEW examinations, and should not be used as professional advice. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. 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For more information about the IFRS Foundation and rights to use its material please visit www.IFRS.org Disclaimer: To the extent permitted by applicable law the Board and the IFRS Foundation expressly disclaims all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omission) to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs. Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualiﬁed professional. Copyright © IFRS Foundation All rights reserved. Reproduction and use rights are strictly limited. No part of this publication may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the IFRS Foundation. Contact the IFRS Foundation for further details. The Foundation has trade marks registered around the world (Trade Marks) including ‘IAS®’, ‘IASB®’, ‘IFRIC®’, ‘IFRS®’, the IFRS® logo, ‘IFRS for SMEs®’, IFRS for SMEs® logo, the ‘Hexagon Device’, ‘International Financial Reporting Standards®’, NIIF® and ‘SIC®’. Further details of the Foundation’s Trade Marks are available from the Licensor on request. © ICAEW 2024 Contents The following questions are exam-standard. Unless told otherwise, these questions are the style, content and format that you can expect in your exam. Title Page Question Answer 1 Introduction to accounting 1 165 2 The accounting equation 9 171 3 Recording ﬁnancial transactions 13 173 4 Ledger accounting and double entry 17 175 5 Preparing basic ﬁnancial statements 19 177 6 Errors and corrections to accounting records and ﬁnancial 179 statements 23 7 Cost of sales and inventories 33 187 8 Irrecoverable debts and allowance for receivables 47 195 9 Accruals and prepayments 55 201 10 Non-current assets and depreciation 67 209 11 Company ﬁnancial statements 81 221 12 Company ﬁnancial statements under IFRS Accounting Standards 95 233 13 Statement of cash ﬂows 125 267 14 Company ﬁnancial statements under UK GAAP 143 287 15 Sole trader ﬁnancial statements under UK GAAP 147 289 16 Practice exam 153 293 Appendix: Mock Exam guidance notes 305 ICAEW 2025 Contents iii Exam The assessment consists of 25 questions in total. There will be 24 objective test questions (60% of the marks) which will be of three types: Multiple choice – select 1 from 4 options A, B, C or D Multi-part multiple choice – select 1 from 2 or 3 options, for two or more question parts Multiple response – select 2 or 3 responses from 4 or more options These questions will cover the areas of the syllabus in accordance with the weightings set out in the speciﬁcation grid. The remaining 40% of the marks are allocated from the preparation of single company ﬁnancial statements; either a statement of proﬁt or loss and the statement of ﬁnancial position or a statement of cash ﬂows, using a proforma template. The exam is 1.5 hours long and at least 55 marks are required to pass this exam. Our website has the latest information, guidance and exclusive resources to help you prepare for this exam. Find everything you need, from exam webinars, sample exams, errata sheets and the syllabus to examiner- and tutor-written articles at icaew.com/examresources if you are studying the ACA and icaew.com/cfabstudents if you are studying ICAEW CFAB. iv Accounting ICAEW 2025 Professional skills Professional skills are essential to accountancy and your development of them is embedded throughout the ACA qualiﬁcation. The level of competency in each of the professional skills areas required to pass each module exam increases as ACA trainees progress upwards through each Level of the ACA qualiﬁcation. The professional skills embedded throughout this Question Bank provide the opportunity to develop the knowledge and professional skills required to successfully pass the exam for this module. During your question practice, remain mindful that you should be demonstrating each of the four professional skills within your answers. You are advised to familiarise yourself with the full ACA professional skills development grids which can be found at icaew.com/examresources. The following advice will help you demonstrate each of the professional skills when completing your answers to questions in this Question Bank. Professional skills focus: Assimilating and using information You need to carefully read the information provided in exam questions to understand the scenario and the requirement, to identify the most relevant information and to prioritise the key issues. In the multiple-choice, multi-part multiple choice or multiple-response questions, the key is in carefully reading the requirement and then using the information provided in the scenario to address that requirement. The 40-mark accounts preparation question contains a large volume of information that you need to work through in a structured and logical manner. Professional skills focus: Structuring problems and solutions You are expected to be able to structure data, often using speciﬁc techniques or using proforma as described in the Workbook and use the data provided to prepare a solution to the speciﬁc requirement set. The type of problem you may be faced with in Accounting including transactions not having been recorded, errors in recording transactions which need to be corrected or determining the impact of adjustments on proﬁt for the year. Professional skills focus: Applying judgement Professional accountants need to apply judgement when determining whether transactions should be recognised in the ﬁnancial statements and at what amount they should be measured. Although you will not be dealing with complex judgements in Accounting, you should be aware that common adjustments such as depreciation, the allowance for receivables and provisions all require the judgement and experience of the accountant. ICAEW 2025 Introduction v vi Accounting ICAEW 2025 Question Bank viii Accounting ICAEW 2025 Chapter 1: Introduction to accounting 1 Which of the following best explains the term 'capital expenditure'? Capital expenditure is expenditure: A on non-current assets, including repairs and maintenance B on expensive items over £10,000 C on the acquisition of non-current assets, or improvement in their earning capacity D on items relating to owners' capital LO 1d 2 Which of the following should be accounted for as capital expenditure? A The annual cost of painting a factory ﬂoor B The repair of a window in a building C The purchase of a vehicle for re-sale by a car retailer D Legal fees incurred on the purchase of a building LO 1d 3 Which of the following transactions should be treated as capital expenditure in the ﬁnancial statements of Sydney, sole trader? A £500 taken by Sydney to buy a music system for personal use B £800 spent on purchasing a new laptop to replace the secretary's old one C £2,000 on purchasing a machine for resale D £150 paid to a painter for redecorating his ofﬁce LO 1d 4 Which of the following is an aspect of relevance, according to the IFRS Foundation’s Conceptual Framework for Financial Reporting (the Conceptual Framework for Financial Reporting)? A Neutrality B Free from error C Completeness D Materiality LO 1a 5 According to the Conceptual Framework for Financial Reporting, which of the following are enhancing qualitative characteristics? A Comparability, understandability, timeliness, veriﬁability B Consistency, prudence, measurability, veriﬁability C Consistency, reliability, measurability, timeliness D Materiality, understandability, measurability, reliability LO 1a ICAEW 2025 1: Introduction to accounting 1 6 In relation to the business of a sole trader, which two of the following does the government and its agencies need to be able to do? A Establish levels of tax revenue B Assess whether the business will continue in existence C Produce national statistics D Assess the owner's stewardship E Take decisions about their investment LO 1a 7 Information about an entity's assets and liabilities at a point in time is primarily provided in: A the statement of proﬁt or loss B the statement of ﬁnancial position C retained earnings D the statement of cash ﬂows LO 1a 8 According to the Conceptual Framework for Financial Reporting, information on which two of the following areas can help users identify the reporting entity's ﬁnancial strengths and weaknesses? A The economic resources it controls B Its ﬁnancial performance in the past C The demographic structure of the local economy D The claims on an entity's resource (the entity's liabilities) E Its management structure LO 1a 9 According to IAS 1, Presentation of Financial Statements which two of the following are objectives of primary ﬁnancial statements? A To show the results of management's stewardship of the resources entrusted to it B To provide a basis for valuing the entity C To provide information about the ﬁnancial position, ﬁnancial performance and cash ﬂows of an entity that is useful to a wide range of users in making economic decisions D To facilitate comparison of ﬁnancial performance between entities operating in different industries E To assist management and those charged with governance in making timely economic decisions about deployment of the entity's resources LO 1a 2 Accounting ICAEW 2025 10 Information is relevant if it is capable of making a difference in the decisions made by users. According to the Conceptual Framework for Financial Reporting, ﬁnancial information is capable of making a difference in decisions if it has which of the following? (1) Predictive value (2) Comparative value (3) Historic value (4) Conﬁrmatory value A 1 and 3 only B 2 and 4 only C 1 and 4 only D 2 and 3 only LO 1d 11 The accounting principle which, in times of rising prices, tends to understate asset values and overstate proﬁts, is: A going concern B accruals C consistency D historical cost LO 1d 12 Which of the following statements about accounting concepts and the characteristics of ﬁnancial information is correct? A Financial statements are required to give a true and fair view. These terms have clear deﬁnitions which are included in IAS 1, Presentation of Financial Statements. B The historical cost concept means that only items capable of being measured in monetary terms can be recognised in ﬁnancial statements. C It may sometimes be necessary to exclude information that is relevant and reliable from ﬁnancial statements because it is too difﬁcult for some users to understand. D A speciﬁc disclosure requirement of an IFRS Accounting Standard need not be satisﬁed if the information is immaterial. LO 1d 13 Listed below are two comments on accounting conventions. (1) According to the Conceptual Framework for Financial Reporting, ﬁnancial information must be either relevant or faithfully represented if it is to be useful. (2) Materiality means that only items having a physical existence may be recognised as assets. Requirement Which, if either, of these comments is correct? A 1 only B 2 only C Both of them D Neither of them LO 1d ICAEW 2025 1: Introduction to accounting 3 14 Which of the following is the best description of fair presentation in accordance with IAS 1, Presentation of Financial Statements? A The ﬁnancial statements are accurate. B The ﬁnancial statements are as accurate as possible given the accounting systems of the organisation. C The directors of the company have stated that the ﬁnancial statements are accurate and correctly prepared. D The ﬁnancial statements are reliable in that they faithfully reﬂect the effects of transactions, other events and conditions. LO 1d 15 Which of the following deﬁnitions of the going concern concept in accounting is consistent with the deﬁnition given in IAS 1, Presentation of Financial Statements? A The directors do not intend to liquidate the entity or to cease trading in the foreseeable future. B The entity is able to pay its debts as and when they fall due. C The directors expect the entity's assets to yield future economic beneﬁts. D Financial statements have been prepared on the assumption that the entity is solvent and would be able to pay all creditors in full in the event of being wound up. LO 3b 16 According to IAS 1, Presentation of Financial Statements, compliance with IFRS Accounting Standards will normally ensure that: A the entity's inventory is valued at net realisable value B the entity's assets are valued at their break-up value C the entity's ﬁnancial statements are prepared on the assumption that it is a going concern D the entity's ﬁnancial position, ﬁnancial performance and cash ﬂows are presented fairly LO 1d, 3b 17 The directors of Lagon plc wish to omit an item from the company's ﬁnancial statements on the grounds that it is commercially sensitive. Information on the item would inﬂuence the users of the information when making economic decisions. Requirement According to IAS 1, Presentation of Financial Statements, the item is said to be: A neutral B prudent C material D understandable LO 1a 4 Accounting ICAEW 2025 18 The International Sustainability Standards Board (ISSB) was established in 2021 and issues IFRS Sustainability Disclosure Standards. Requirement Which of the following statements regarding the ISSB and IFRS Sustainability Disclosure Standards is true? A The ISSB has authority to mandate the application of IFRS Sustainability Disclosure Standards B The ISSB initially focused on climate-related disclosures. C The IFRS Sustainability Disclosure Standards will replace IFRS Accounting Standards. D Prior to the formation of the ISSB, there was no guidance available to entities relating to the disclosure of sustainability information. LO 1a 19 Which three of the following are fundamental principles of the IESBA Code of Ethics for Professional Accountants? A Integrity B Objectivity C Independence D Conﬁdentiality E Courtesy LO 1b 20 Which of the following statements is correct? A The ICAEW Code of Ethics applies to its members only. B The ICAEW Code of Ethics applies to its members and employees of member ﬁrms only. C The ICAEW Code of Ethics applies to its members, employees of member ﬁrms and ICAEW students. D The ICAEW Code of Ethics applies to its members, employees of member ﬁrms, ICAEW students and all other members of UK accountancy bodies. LO 1b 21 Which of the following statements best describes ethical guidance in the UK? A Ethical guidance provides a set of rules which must be followed in all circumstances. B Ethical guidance is a framework containing a combination of rules and principles, the application of which is dependent on the professional judgement of the accountant based on the speciﬁc circumstances. C Ethical guidance provides a set of principles which can be applied at the discretion of the accountant. D Ethical guidance is a series of legal requirements. LO 1b 22 There are two main approaches to a code of professional ethics: a rules-based ethical code and a code based upon a set of principles. Indicate whether the following statements are true or false. ICAEW 2025 1: Introduction to accounting 5 Requirements A code based upon a set of principles requires a professional accountant to comply with a set of speciﬁc rules. A True B False A rules-based code requires a professional accountant to identify, evaluate and address threats to compliance with fundamental ethical principles. C True D False The ICAEW uses a rules-based approach. E True F False LO 1b 23 Which of the following is not a beneﬁt to users, other than directors, of annual reports of an entity providing sustainability-related disclosures relating to its impacts and dependencies? A A better understanding of the entity’s sustainability-related risks and its responses to those risks B A better understanding of how the entity can create and maintain value C Be certain that the company will meet its future sustainability-related disclosure targets because they have been disclosed D The ability to make investment decisions based on an entity’s social impacts as well as its ﬁnancial performance 24 Which two of the following are examples of dependencies which may affect an entity? A The level of greenhouse gas emissions generated by the entity B The availability of natural resources used by the entity C The health of the workforce of the entity D The levels of waste generated by the entity 25 In terms of sustainability-related disclosures, factors that affect an entity’s ability to create or maintain value are referred to as ‘dependencies’. A True B False Information on dependencies is generally more useful to an entity’s investors than information on impacts. C True D False 26 The term ‘sustainability’ is understood to mean: A Environmental and climate-change related issues only B The ongoing ability of an entity to create a return for its investors C The practice of meeting the needs of the present without compromising the ability of future generations to meet their own needs D How a business positively or negatively affects environmental, societal, and governance issues 6 Accounting ICAEW 2025 27 Which two of the following were consequences of historically having no mandatory standards relating to the disclosure of sustainability-related information: A A lack of guidance being available for entities on the disclosure of sustainability-related information B Inconsistency in the nature and type of information disclosed C A lack of understanding of how sustainability-related information linked to ﬁnancial reporting D Entities did not take any action relating to sustainability-related matters in their operations 28 Which of the following statements regarding IFRS Sustainability Disclosure Standards is true? A The IFRS Sustainability Disclosure Standards are a comprehensive set of standards covering all sustainability-related matters B The IFRS Sustainability Disclosure Standards were developed without reference to existing sources of guidance C The IFRS Sustainability Disclosure Standards are designed to complement existing IFRS Accounting Standards D The IFRS Sustainability Disclosure Standards are intended to provide information to a wide range of stakeholders ICAEW 2025 1: Introduction to accounting 7 8 Accounting ICAEW 2025 Chapter 2: The accounting equation 1 The accounting equation is correctly expressed as: A Assets + proﬁts – drawings – liabilities = closing capital B Assets – liabilities – drawings = opening capital + proﬁt C Assets – liabilities – opening capital + drawings = proﬁt D Opening capital + proﬁt – drawings – liabilities = assets LO 1d 2 The capital of a sole trader would change as a result of: A a credit customer paying by bank transfer B raw materials being purchased on credit C non-current assets being purchased on credit D personal petrol being paid for out of the business's petty cash LO 1d, 3a 3 A business can make a proﬁt and yet have a decreased bank balance. Which of the following might cause this to happen? A The sale of non-current assets at a loss B The charging of depreciation in the statement of proﬁt or loss C The lengthening of the period of credit given to customers D The lengthening of the period of credit taken from suppliers LO 1d, 3a, 3b 4 The purpose of the ﬁnancial statement that lists an entity's total assets and total capital and liabilities is to show: A the ﬁnancial performance of the entity over a period of time B the amount the entity could be sold for in liquidation C the amount the entity could be sold for as a going concern D the ﬁnancial position of the entity at a particular point in time LO 3b, 3a 5 A sole trader is £5,000 overdrawn at their bank and receives £1,000 from a credit customer in respect of its account. Requirement Which element(s) of the accounting equation will change due to this transaction? A Assets and liabilities only B Liabilities only C Assets only D Assets, liabilities and capital LO 1d ICAEW 2025 2: The accounting equation 9 6 A sole trader purchases goods on credit. Requirement Which element(s) of the accounting equation will change due to this transaction? A Assets and liabilities B Assets and capital C Capital and liabilities D Assets only LO 1d 7 A sole trader borrows £10,000 from a bank. Requirement Which element(s) of the accounting equation will change due to this transaction? A Assets and liabilities B Assets and capital C Capital and liabilities D Assets only LO 1d 8 A sole trader sells goods for cash for £500 which had cost £300. Requirement Which element(s) of the accounting equation will change due to this transaction? A Assets and liabilities B Assets and capital C Capital and liabilities D Assets only LO 1d 9 A sole trader increases the business's number of motor vehicles by adding their own car to the business's ﬂeet. Requirement Which element(s) of the accounting equation will change due to this transaction? A Assets only B Capital only C Assets and capital D Assets and liabilities LO 1d 10 Accounting ICAEW 2025 10 Which three of the following are elements of ﬁnancial statements as identiﬁed by the Conceptual Framework for Financial Reporting? A Income B Expenses C Proﬁts D Losses E Obligations F Resources G Equity LO 1d ICAEW 2025 2: The accounting equation 11 12 Accounting ICAEW 2025 Chapter 3: Recording ﬁnancial transactions 1 A business paid out £12,450 in net wages to its employees. In respect of these wages, the following amounts were presented in the statement of ﬁnancial position. £ Pay as you earn (PAYE) payable 2,480 National Insurance (NI) payable – employees' 1,350 – employer's 1,500 No other deductions were made. Requirement Employees' gross wages, before deductions, were: A £12,450 B £27,450 C £16,280 D £17,780 LO 1d 2 Which of the following is a source document that would be recorded in an entity’s cloud-based accounting software? A Debit note B Credit note C Sales order D Purchase order LO 1c 3 The following data has been extracted from the payroll records of Kleen Ltd for the month of February 20X1. £ Pay as you earn (PAYE) 17,000 Employer's national insurance (NI) 7,500 Employees' national insurance 6,000 Cash paid to employees 50,000 Requirement The wages and salaries expense for the month is: A £50,000 B £56,000 C £74,500 D £80,500 LO 1c, 1d ICAEW 2025 3: Recording ﬁnancial transactions 13 4 When a purchase invoice is received from a supplier which two of the following documents would the invoice be checked to before it is recorded in the cloud-based accounting software? A Sales order B Purchase order C Remittance advice D Goods received note E Credit note LO 1c 5 George purchased goods on credit but returned them as they were defective. Requirement What document would George receive from the supplier in respect of the returned goods? A Invoice B Remittance advice C Credit note D Delivery note LO 1c 6 A bank transaction report shows a cash payment of £412 which the computerised accounting system has not been able to match to a transaction. Requirement The unmatched payment is most likely the result of: A the purchase of a new laptop for £412 B payment to a regular credit supplier for an invoice totalling £412 C a receipt from a credit customer in respect of an invoice for £450 on which a prompt payment discount of £38 was taken D the payment of net wages of £412 which is consistent with the payroll ledger LO 1c 7 A business has the following payroll costs for a month: £ Gross pay 112,450 Income tax deducted 15,800 Employees' national insurance 9,810 Employer's national insurance 11,200 Requirement What is the net amount paid to employees for the month? A £75,640 B £91,440 C £102,640 D £86,840 LO 1c, 1d 14 Accounting ICAEW 2025 8 A business has the following payroll costs for a month: £ Gross pay 38,600 PAYE 5,400 Employees' national insurance 3,100 Employer's national insurance 3,500 Requirement What is the wages cost to the business for the month? A £38,600 B £42,100 C £47,100 D £50,600 LO 1c, 1d 9 Which two of the following are source documents that contain information that will be entered into a business's accounting system? A Goods received note B Invoice to a customer C Purchase order to a supplier D Cheque payment to a supplier E Delivery note to a customer LO 1c 10 Which two of the following are examples of a cloud-computing service? A Accounting software installed on the computers of individual users B An internet-based storage service available to all users C Anti-virus software installed on the computers of individual users D An email service accessed on the computer of individual users LO 1d 11 Which of the following is a drawback of cloud accounting? A Users cannot access the accounting software from remote locations B Multiple users cannot access the accounting software at the same time C There is an increased risk of accounting data being hacked D There is a need to maintain back up copies of all accounting data LO 1d ICAEW 2025 3: Recording ﬁnancial transactions 15 12 Which two of the following are disadvantages of using artiﬁcial intelligence (AI) to assist with bookkeeping? A AI can only record transactions and cannot produce ﬁnancial statements B AI cannot perform reconciliations and is therefore limited in its ability to check the accuracy of information C AI may misinterpret and incorrectly account for non-standard transactions D The use of AI increases the risk that conﬁdential data may be breached LO 1d 16 Accounting ICAEW 2025 Chapter 4: Ledger accounting and double entry 1 Blake is a VAT registered trader whose sales and purchases carry VAT at the standard rate of 20%. Blake sells a customer goods on credit for £4,800 exclusive of VAT. Requirement What is the double entry to record this? A Debit Sales £4,800, Debit VAT £960, Credit Receivables £5,760 B Debit Sales £4,000, Debit VAT £800, Credit Receivables £4,800 C Debit Receivables £5,760, Credit Sales £4,800, Credit VAT £960 D Debit Receivables £4,800, Credit Sales £4,000, Credit VAT £800 LO 1d, 2c 2 What transaction is represented by the entries: Debit Rent, Credit Payables? A The receipt of rental income by the business B The issue of an invoice for rent to a tenant C The receipt of an invoice for rent payable by the business D The payment of rent by the business LO 1d, 2d 3 In double-entry bookkeeping, which of the following statements is true? A Credit entries decrease liabilities and increase income. B Debit entries decrease income and increase assets. C Credit entries decrease expenses and increase assets. D Debit entries decrease expenses and increase assets. LO 1d 4 Crimson plc paid an invoice from a credit supplier and took advantage of the early settlement discount offered. When the invoice was received and recorded, Crimson plc did not expect to take the discount. Requirement The journal entry to record the payment of the invoice is: A Debit Payables, Credit Purchases, Credit Cash at bank account B Debit Payables, Credit Cash at bank account C Debit Cash at bank account, Debit Purchases, Credit Payables D Debit Cash at bank account, Credit Purchases, Credit Payables LO 1d ICAEW 2025 4: Ledger accounting and double entry 17 5 Winn Ltd has opening trade payables of £24,183 and closing trade payables of £34,655. Purchases for the period totalled £254,192 of which £31,590 related to cash purchases. Requirement Total payments recorded in the payables ledger for the period were: A £212,130 B £233,074 C £243,720 D £264,664 LO 1d, 2c 6 What is the correct double entry to record an invoice raised to a credit customer who is not expected to take advantage of an early settlement discount? A Debit Revenue, Credit Receivables B Debit Payables, Credit Revenue C Debit Receivables, Credit Revenue D Debit Revenue, Credit Payables LO 1d, 2c 7 Which of the following would require a debit entry in the payables account? A Output VAT B Cash purchases total C Payments made to suppliers D Early settlement discounts given to customers LO 1d, 2c 8 A payment has been received from a credit customer in settlement of an invoice. The customer was expected to take advantage of an early settlement discount offered, however, payment was not made within the required timeframe and the discount was not taken. Requirement The correct double entry to record the receipt of funds from the customer in full settlement of the invoice is: A Debit Cash at bank, Credit Receivables, Credit Revenue B Debit Cash at bank, Debit Revenue, Credit Payables C Debit Receivables, Debit Revenue, Credit Cash at bank D Debit Receivables, Credit Revenue, Credit Cash at bank LO 1d, 2c 18 Accounting ICAEW 2025 Chapter 5: Preparing basic ﬁnancial statements 1 Which of the following should be classiﬁed as a non-current asset? A Cash B Prepayments C Land D Receivables LO 3c 2 Gerrard Ltd is registered for VAT. In the month of April, it sells goods to customers for a total of £89,436 excluding VAT and purchases goods from suppliers for a total of £86,790 including VAT. Requirement What is the net amount shown in Gerrard Ltd's VAT account at the end of April? A £3,422 debit B £2,452 debit C £3,422 credit D £2,452 credit LO 3c 3 A sole trader had trade receivables of £2,700 at 1 May. During May they made cash sales of £7,200, credit sales of £16,500 and received £15,300 from their credit customers. Requirement The balance on the trade receivables account at the end of May was: A £1,500 B £3,900 C £8,700 D £11,100 LO 3c 4 Which of the following would be a credit balance in the trial balance? A Bank overdraft B Drawings C Purchases D Delivery outwards LO 1f 5 Plym plc is a VAT registered retailer. All transactions attract VAT at the rate of 20%. For the year to 30 June 20X7, Plym plc made purchases of £69,600 including VAT and made sales of £89,400 excluding VAT. There was no change in the ﬁgures for opening and closing inventory in the statements of ﬁnancial position as at 30 June 20X6 and 20X7. Requirement What was Plym plc's gross proﬁt for the year ended 30 June 20X7? ICAEW 2025 5: Preparing basic ﬁnancial statements 19 A £19,800 B £4,900 C £31,400 D £16,500 LO 3c 6 Val had an opening trade payables balance of £3,450 on 1 December. During the month of December, they sold goods totalling £6,780 to customers on credit, purchased goods totalling £5,100 from suppliers on credit and made cash purchases of £400. They also received £3,900 from credit customers and made payments to credit suppliers of £4,200. Requirement What was the balance on Val’s trade payables account at the end of December? A £4,350 B £6,330 C £4,750 D £2,550 LO 3c 7 The following are balances on the accounts of London, a sole trader, as at the end of the current ﬁnancial year and after all entries have been processed and the proﬁt for the year has been calculated. £ Non-current assets 85,000 Trade receivables 7,000 Trade payables 3,000 Bank loan 15,000 Accumulated depreciation, non-current assets 15,000 Inventory 4,000 Accruals 1,000 Prepayments 2,000 Bank overdraft 2,000 Requirement What is the balance on London’s capital account? A £59,000 B £66,000 C £62,000 D £64,000 LO 3c 8 An initial trial balance has been produced by an entity’s accounting software. You have been asked to review the reasonableness of each ledger account balance listed in the initial trial balance to ensure that no errors have arisen. 20 Accounting ICAEW 2025 Requirement Which two of the following are errors that can arise in computerised accounting software? A Errors are made in entering data into the system B The software has been coded with incorrect rates and formulae C Only one side of a journal entry is posted D The posting of the debit side of a transaction is not equal to the credit side LO 1f ICAEW 2025 5: Preparing basic ﬁnancial statements 21 22 Accounting ICAEW 2025 Chapter 6: Errors and corrections to accounting records and ﬁnancial statements 1 Which three of the following situations are likely to result in a suspense account being used to record a transaction? A A receipt of £135 from a customer who unexpectedly, but correctly, has taken a 3% prompt payment discount. B A payment of £84 made to a supplier in respect of an invoice of £70 plus VAT at 20%. C A receipt of £3,500 from the disposal of a van with a carrying amount of £2,700. D A journal entry posted by the bookkeeper to write off an irrecoverable debt of £55 in which the bookkeeper was unsure where to record the credit entry. E A payment made to a supplier for £90.25 in respect of an invoice for £95 on which a prompt payment discount of 5% was expected to be taken. LO 2b 2 Indicate whether the following statements are true or false. Requirements The owner's drawings are shown on the initial trial balance. A True B False The closing inventory balance is included in the ﬁnal trial balance. C True D False LO 1e 3 When performing a reconciliation between the bank transaction report and the cash at bank account, which two of the following would require an entry in the cash at bank account? A Deposits credited after date B Direct debit shown on bank transaction report only C Bank charges D Bank error LO 2b 4 The accounting records show the cash at bank account is £565 overdrawn, which does not agree to the bank balance per the electronic banking system. The accountant discovers the following: (1) A payment of £57 made by the business on 31 December 20X3 has not yet cleared its bank. (2) An electronic funds transfer of £92 from a customer, which was paid into the bank on 30 December 20X3, has been dishonoured by the customer’s bank on 31 December 20X3. Requirement The correct balance in the business’ cash at bank account as at 31 December 20X3 is: A £473 debit B £714 credit C £657 credit D £473 credit ICAEW 2025 6: Errors and corrections to accounting records and ﬁnancial statements 23 LO 2b 5 Smock Ltd’s draft proﬁt for the year is £324,700. After the draft proﬁt was calculated, the following issues were discovered. Debts of £6,800 should have been written off as irrecoverable at the year end, but the journal entry was not posted. The accounting software had automatically calculated and recorded depreciation, but the standing data was found to be incorrect. The depreciation rate for cars should have been updated to 20% straight-line at the start of the year but, was left as 25% straight-line in error. The balance on the car cost account at the year-end was £24,000. There were no additions or disposals of cars in the year. Requirement What is Smock Ltd’s corrected proﬁt for the year after accounting for the above issues? A £323,500 B £319,100 C £313,100 D £316,700 LO 2a, 2b 6 A company’s initial trial balance includes a suspense account. The bookkeeper identiﬁed the amount as a purchase of machinery for £25,000. The amount had been correctly recorded in cash at bank, but the other side of the transaction had not been matched by the accounting system. Requirement Which of the following journal entries would remove the suspense account and correctly record the purchase of machinery? A DEBIT, Plant and machinery, £25,000; CREDIT, Cash at bank account, £25,000 B DEBIT, Suspense account, £25,000; CREDIT, Plant and machinery £25,000 C DEBIT, Plant and machinery, £25,000; CREDIT, Suspense account £25,000 D DEBIT, Cash at bank account, £25,000; CREDIT, Suspense account £25,000 LO 2c 7 The following information relates to a bank reconciliation. The balance in the cash at bank account before taking the items below into account was £8,970 overdrawn. (1) Bank charges of £550 on the bank statement have not been entered in the cash at bank account. (2) The bank has credited the account in error with £425 which belongs to another customer. (3) Electronic payments totalling £3,275 made shortly before the year end have been entered in the cash at bank account but have not yet cleared the bank statement. (4) Cash receipts totalling £5,380 have been correctly entered on the debit side of the cash at bank account but have not been paid into the bank. Requirement What was the overdrawn balance as shown by the bank statement? A £6,990 B £10,650 C £11,200 D £11,625 LO 2b 24 Accounting ICAEW 2025 8 Which two of the following statements about bank reconciliations are correct? A In preparing a bank reconciliation, payments that have not yet cleared the bank must be deducted from the balance shown in the bank statement. B An electronic payment from a customer, which was dishonoured due to a lack of funds in the customer’s bank account, must be corrected making a debit entry in the cash at bank account. C An error by the bank must be corrected by an entry in the cash at bank account. D An overdraft is a debit balance on the bank statement. E Bank charges that only appear on the bank statement must be debited to the cash at bank account. LO 2b 9 Alpha received a statement from its credit supplier Beta, showing a balance to be paid of £8,950. Alpha's payables ledger for Beta shows a balance due to Beta of £4,140. Investigation reveals the following: (1) A bank transfer made to Beta of £4,080 shortly before year end has not been recorded by Beta. (2) Alpha has not adjusted the payables ledger for a £40 cash discount taken by Alpha but not allowed by Beta as payment was not made on time. (3) Goods costing £380 returned by Alpha have not been recorded by Beta. Requirement What discrepancy remains between Alpha's and Beta's records after accounting for these items? A £9,310 B £390 C £310 D £1,070 LO 2a 10 Peri's customer unexpectedly took advantage of an early settlement discount for £300, paying £3,700 on an invoice which totalled £4,000. Peri's bookkeeper was not sure how to record the discount taken and so posted the following journal entry: DEBIT Cash at bank 3,700 DEBIT Suspense account 300 CREDIT Receivables 4,000 Requirement Which of the following journal entries will remove the suspense account and correctly record the discount? A Debit Receivables £300, Credit Suspense account £300 B Debit Revenue £300, Credit Suspense account £300 C Debit Cash at bank £300, Credit Suspense account £300 D Debit Payables £300, Credit Suspense account £300 LO 2c 11 Which two of the following differences between a company's cash at bank account and its bank transaction report balance as at 30 November 20X3 would feature in the bank reconciliation? A Electronic payments which were initiated and recorded in the cash at bank account on 30 November 20X3 which have not yet cleared the bank statement ICAEW 2025 6: Errors and corrections to accounting records and ﬁnancial statements 25 B Omission by the bank of a cash lodgement made by the company on 30 November 20X3 but not recorded by the bank until 1 December 20X3 C Bank charges presented in the bank statement on 28 November 20X3 D A digital wallet payment received from a customer and recorded on 30 November 20X3 but was dishonoured by the customer’s bank LO 2b 12 An error of principle would occur if plant and machinery purchased: A was omitted from the accounting records B was debited to the purchases account C was debited to the equipment account D was debited to the correct account but with the wrong amount LO 2a 13 Asela’s exception report showed £265 received in the business bank account, and correctly recorded in cash at bank, could not be matched by the accounting system and so had been posted to a suspense account. Asela discovered that the receipt was in respect of a sales invoice for £295 on which the customer had unexpectedly taken a prompt payment discount of £30. The customer had paid within the required timeframe and so was entitled to take the discount. Requirement Which of the following journal entries should Asela post to correctly record the receipt and clear the suspense account? A Debit Trade receivables £265, Credit Suspense account £265 B Debit Revenue £30, Debit Suspense account £265, Credit Trade receivables £295 C Debit Suspense account £265, Credit Trade receivables £265 D Debit Trade receivables £295, Credit Revenue £30, Credit Suspense account £265 LO 2b 14 Which of the following statements about bank reconciliations are correct? (1) All differences between the cash at bank account and the bank statement must be corrected by means of a journal entry. (2) In preparing a bank reconciliation, payments received from credit customers before the period end but credited by the bank after the period end should reduce an overdrawn balance in the bank statement. (3) Bank charges not yet entered in the cash at bank account should be dealt with by an adjustment to the balance per the bank statement. (4) If an electronic payment received from a credit customer is subsequently dishonoured by their bank, a credit entry in the cash at bank account is required. A 2 and 4 B 1 and 4 C 2 and 3 D 1 and 3 LO 2b 26 Accounting ICAEW 2025 15 The following trade payables account contains some errors. All goods are purchased on credit. TRADE PAYABLES £ £ Purchases 945,800 Opening balance 384,600 Cash at bank account 988,400 Purchases (Discounts received from suppliers) 12,600 Trade receivables (contra) 4,200 Closing balance 410,400 ––––––– 1,373,000 1,373,000 Requirement What would be the closing trade payables balance when the errors have been corrected? A £325,200 B £350,400 C £333,600 D £410,400 LO 2b 16 An error of commission is one in which: A a transaction has not been recorded B one side of a transaction has been recorded in the wrong account, and that account is of a different class to the correct account C one side of a transaction has been recorded in the wrong account, and that account is of the same class as the correct account D a transaction has been recorded using the wrong amount LO 2a 17 Owais's trial balance included a suspense account which had been automatically opened by the computerised accounting system. Using the exception report, the bookkeeper identiﬁed that the balance in the suspense account was due to the following unmatched transactions: (1) A payment to a credit supplier for £135 related to an invoice for £120. The business missed the deadline to take the early settlement discount it had expected to take. (2) A receipt of £90 from a credit customer who had unexpectedly (but appropriately) taken an early settlement discount of £10. (3) Interest received in the business bank account of £70. Requirement What is the balance on the suspense account? A Debit £25 B Credit £25 C Debit £65 D Credit £65 LO 2b ICAEW 2025 6: Errors and corrections to accounting records and ﬁnancial statements 27 18 All of Elmo's sales and purchases attract VAT at 20%. A customer has just returned goods sold for £230 excluding VAT. Requirement The double entry for this transaction is: A Debit Trade receivables £276, Credit VAT £46, Credit Revenue £230 B Debit Revenue £276, Credit Trade receivables £276 C Debit Revenue £230, Debit VAT £46, Credit Trade receivables £276 D Debit Trade receivables £230, Debit VAT £46, Credit Revenue £276 LO 2c 19 Incorrectly recording the purchase of stationery by debiting the computer equipment account would result in: A an overstatement of proﬁt and an overstatement of non-current assets B an understatement of proﬁt and an overstatement of non-current assets C an overstatement of proﬁt and an understatement of non-current assets D an understatement of proﬁt and an understatement of non-current assets LO 2a 20 In the trade payables of Magma Ltd, an invoice of £807 from Ferdinand has been recorded as a credit note. Requirement After correcting this error, the trade payables balance will be: A reduced by £807 B reduced by £1,614 C increased by £807 D increased by £1,614 LO 2b 21 Beta Ltd has calculated a draft gross proﬁt of £150,000 and a draft net proﬁt of £83,000 for the year ended 31 December 20X3. Two issues were then discovered: (1) Inventory costing £5,000, with a resale value of £7,500, was received into the warehouse on 2 January 20X4 but had been included in the closing inventory amount at 31 December 20X3. (2) £10,000 relating to staff training costs was incorrectly capitalised as part of the purchase cost of a new machine which had been purchased on 1 July 20X3. Beta Ltd depreciates machinery on a straight-line basis at a rate of 20% per annum. Depreciation should be included as an administrative expense in the year. Requirement After correcting these issues, what amounts should Beta Ltd report for gross proﬁt and net proﬁt? A Gross proﬁt: £142,500; Net proﬁt: £66,500 B Gross proﬁt: £145,000; Net proﬁt: £69,000 C Gross proﬁt: £145,000; Net proﬁt: £74,000 D Gross proﬁt: £142,500; Net proﬁt: £65,500 LO 2a 28 Accounting ICAEW 2025 22 Emery, a sole trader, has taken goods valued at £1,800 for their own use. This has not been recorded in arriving at their draft proﬁt ﬁgure. Requirements To record the drawings, Emery must adjust cost of sales by: A Debit £1,800 B Credit £1,800 As a result, Emery’s reported proﬁt will: C Increase D Decrease LO 2a, 2c 23 Supplier Rufﬂe Ltd has a debit balance of £26 in Staint plc's payables ledger. Requirement Which of the following would, alone, explain this balance? A Staint plc paid an invoice for £26 even though it had recorded a credit note that Rufﬂe Ltd had issued in respect of this amount. B Staint plc bought and paid for some goods for £26 which it then returned, but Rufﬂe Ltd has not yet issued a credit note. C Staint plc received a credit note for £26 from Rufﬂe Ltd but posted it to the account of Rustle Ltd. D Staint plc transferred funds to Rufﬂe Ltd for £53 in respect of an invoice for £79. LO 2a, 2b 24 Catt plc has prepared its draft statement of proﬁt or loss at 31 May 20X1 which shows a gross proﬁt of £99,500. Catt plc has now discovered that at both the beginning and the end of the period, one line of inventory, the Sungsa, has been included at selling price: £1,240 at 31 May 20X1 and £3,720 at 1 June 20X0. The Sungsa is always sold at a mark-up of 25% by Catt plc. Requirement After correcting this error Catt plc's gross proﬁt for the year to 31 May 20X1 is: A £99,996 B £99,004 C £98,880 D £100,120 LO 2a 25 Mayo plc has prepared a draft statement of proﬁt or loss that shows a net proﬁt of £75,000 for the year ended 30 April 20X5. Subsequently, the following matters have been discovered. (1) A subscription notice for £1,000 was received in April 20X5 for the year to 30 April 20X6. Mayo plc pays the subscription in two equal instalments. The ﬁrst instalment was paid on 28 April 20X5 and posted to the cash at bank account and to administrative expenses. No other entries have been made. (2) Goods that cost £400 and sold at a gross margin of 75% were returned by Dandy Ltd on 30 April 20X5, after the inventory count had taken place. No credit note was issued. Requirement Once these matters have been dealt with Mayo plc's net proﬁt for the year ended 30 April 20X5 will be: ICAEW 2025 6: Errors and corrections to accounting records and ﬁnancial statements 29 A £75,400 B £74,300 C £75,100 D £75,700 LO 2a 26 Hood Ltd has a draft net proﬁt of £540,000 for the year ended 31 October 20X2. It discovered the following errors: (1) Repair costs of £6,600 incurred on 1 November 20X1 were debited to ﬁxtures and ﬁttings. Hood Ltd depreciates ﬁxtures and ﬁttings at 25% per annum. (2) An early settlement discount of £1,785 taken unexpectedly, but appropriately, by a customer was debited to trade receivables and credited to sales. Requirement On correction of these errors Hood Ltd's net proﬁt will be: A £535,050 B £531,480 C £533,265 D £536,430 LO 2a 27 Net proﬁt was calculated as being £10,200. It was later discovered that capital expenditure of £3,000 had been treated as revenue expenditure, and revenue receipts of £1,400 had been treated as capital receipts. Requirement What is the net proﬁt after correcting for these errors? A £5,800 B £8,600 C £11,800 D £14,600 LO 2a 28 On reviewing its cash at bank account and the transaction report downloaded from its electronic banking system, Probla plc discovers the following errors: (1) A payment received from a credit customer for £1,095 was manually recorded in trade receivables and cash at bank account as £1,509. (2) A payment made to a credit supplier for £89 was entered incorrectly in trade payables and the cash at bank account as £98. Requirement What is the journal entry to correct these errors? A Debit Receivables £414, Credit Payables £9, Credit Cash at bank £405 B Debit Cash at bank £405, Debit Payables £9, Credit Receivables £414 C Debit Receivables £414, Debit Payables £9, Credit Cash at bank £423 D Debit Cash at bank £423, Credit Receivables £414, Credit Payables £9 LO 2b 30 Accounting ICAEW 2025 29 In relation to trade payables at the year end of 30 April 20X1, Jitka plc has discovered that: (1) a contra of £85 with trade receivables is required; and (2) an early settlement discount of £2,220, which was taken appropriately by a credit customer, was credited to revenue and debited to trade payables. Jitka plc had not expected the customer to take the discount. Before these discoveries, the balance on trade payables was £72,560. Requirement In its statement of ﬁnancial position as at 30 April 20X1 Jitka plc will have a ﬁgure for trade payables of: A £70,255 B £74,695 C £74,865 D £76,915 LO 2a, 3c 30 Topping plc's initial trial balance for the year ended 31 October 20X9 has been prepared. It shows draft proﬁt for the period of £58,147 and a credit balance on a suspense account of £738 in respect of accrued expenses. The bookkeeper was unsure of how to record the accrual and incorrectly debited £738 to prepayments and credited the suspense account. Requirement What is Topping plc's proﬁt for the period after this error has been corrected? A £59,623 B £57,409 C £58,885 D £56,671 LO 2a ICAEW 2025 6: Errors and corrections to accounting records and ﬁnancial statements 31 32 Accounting ICAEW 2025 Chapter 7: Cost of sales and inventories 1 A business has opening inventory of £7,200 and closing inventory of £8,100. Purchases for the year were £76,500, delivery inwards was £50 and delivery outwards was £180. Requirement What is the amount for cost of sales? A £75,550 B £75,650 C £75,830 D £77,450 LO 1d, 3c 2 Platoon plc is preparing its ﬁnancial statements for the year ended 30 April 20X1, having extracted an initial trial balance. It had no opening inventory, its purchases in the period were £686,880 and closing inventories were valued as £18,647 on 30 April 20X1. Requirement Which two of the following journal entries are required to record cost of sales and closing inventories at 30 April 20X1? A Dr Cost of sales: £686,880; Cr Inventories: £686,880 B Dr Purchases: £686,880; Cr Cost of sales: £686,880 C Dr Cost of sales: £686,880; Cr Purchases: £686,880 D Dr Inventories: £18,647; Cr Cost of sales: £18,647 E Dr Cost of sales: £18,647; Cr Inventories: £18,647 F Dr Inventories: £18,647; Cr Purchases: £18,647 LO 3c 3 Muse plc began trading on 1 January 20X8 and had no opening inventories at that date. During 20X8 it made purchases of £455,000, incurred delivery inwards of £24,000, and delivery outwards of £29,000. Closing inventories at 31 December 20X8 were £52,000. Requirement What is the amount of cost of sales for the year ended 31 December 20X8? A £456,000 B £427,000 C £432,000 D £531,000 LO 3c ICAEW 2025 7: Cost of sales and inventories 33 4 Boomerang Co had 200 units in inventory at 30 November 20X1 valued at £800. During December 20X1 it made the following purchases and sales. 2 Dec 20X1 Purchased 1,000 units @ £5.00 each 5 Dec 20X1 Sold 700 units @ £7.50 each 12 Dec 20X1 Purchased 800 units @ £6.20 each 15 Dec 20X1 Purchased 300 units @ £6.60 each 21 Dec 20X1 Sold 400 units @ £8.00 each 28 Dec 20X1 Sold 500 units @ £8.20 each Requirement Which of the following is the closing inventory amount using the ﬁrst in ﬁrst out (FIFO) method? A £4,460 B £4,340 C £4,620 D £3,500 LO 1d 5 The following information relates to Camberwell plc's year-end inventory of ﬁnished goods. Expected Direct costs of Production selling and materials and overheads distribution Expected labour incurred overheads selling price £ £ £ £ Inventories category 1 2,470 2,100 480 5,800 Inventories category 2 9,360 2,730 150 12,040 Inventories category 3 1,450 850 190 2,560 13,280 5,680 820 20,400 Requirement At what amount should ﬁnished goods inventory be stated in the company's statement of ﬁnancial position? A £13,280 B £18,960 C £18,760 D £19,580 LO 1d 34 Accounting ICAEW 2025 6 At its year end Crocodile plc has 6,000 items of product A costing £10 per unit, and 2,000 items of product B costing £5 per unit. The following information is available: Product A – 500 are defective and can only be sold at £8 each. Product B – 100 are to be sold for £4.50 each with selling expenses of £1.50 each. Requirement What amount should be shown in Crocodile plc's statement of ﬁnancial position for inventory? A £57,000 B £68,950 C £68,800 D £70,000 LO 1d, 3c 7 Indicate whether the following statements are true or false. Requirements In a period of rising prices, applying the ﬁrst in ﬁrst out (FIFO) method to determine the cost of inventories will give a lower gross proﬁt ﬁgure than the average cost (AVCO) method. A True B False Closing inventory is a debit in the statement of proﬁt or loss. C True D False LO 1d, 2a 8 Mickey Ltd has calculated the cost of inventory using the average cost (AVCO) method. At 1 June 20X8, there were 60 units in inventory at a cost of £12 each. On 8 June, 40 units were purchased for £15 each, and a further 50 units were purchased for £18 each on 14 June. On 21 June, 75 units were sold for £20.00 each. Requirement What is the carrying amount of closing inventory at 30 June 20X8? A £1,110 B £1,010 C £900 D £1,125 LO 3c ICAEW 2025 7: Cost of sales and inventories 35 9 Morgan plc's direct production cost of each unit of inventory is £46. Production overheads are £15 per unit. Currently the goods can only be sold if they are modiﬁed at a cost of £17 per unit. The selling price of each modiﬁed unit is £80 and selling costs are estimated at 10% of selling price. Requirement At what amount should each unmodiﬁed unit of inventory be included in the statement of ﬁnancial position? A £48 B £55 C £64 D £61 LO 3c 10 Indicate whether each of the following statements are true or false. Requirements A van for resale by a dealer is shown as a non-current asset in its statement of ﬁnancial position. A True B False Import duties are included in the cost of inventory. C True D False LO 3c 11 Which two of the following may be included when arriving at the cost of ﬁnished goods inventory for inclusion in the ﬁnancial statements of a manufacturing company? A Delivery inwards B Delivery outwards C Depreciation of delivery vehicles D Finished goods storage costs E Production line wages LO 1d 12 Which of the following statements about inventory for the purposes of the statement of ﬁnancial position is correct? A Average cost (AVCO) and last in ﬁrst out (LIFO) are both acceptable methods, under IAS 2, Inventories, of arriving at the cost of inventories. B The cost of inventories of ﬁnished goods may include labour and materials cost only, without including overheads. C Inventories should be included at the lowest of cost, net realisable value and replacement cost. D It may be acceptable for the cost of inventories to be based on selling price less estimated proﬁt margin. LO 1d 36 Accounting ICAEW 2025 13 A company's closing inventory at 31 January 20X3 amounted to £284,700. The following items were included, at cost, in the total: (1) 400 coats, which had cost £80 each and are normally sold for £150 each. Owing to a defect in manufacture, they were all sold after 31 January 20X3 at 50% of their normal selling price. Selling expenses amounted to 5% of the proceeds. (2) 800 skirts, which had cost £20 each. These too were found to be defective. Remedial work in February 20X3 cost £5 per skirt, and selling expenses were £1 per skirt. They were sold for £28 each. Requirement What should be the inventory value after considering the above items? A £281,200 B £282,800 C £329,200 D £284,700 LO 1d 14 Sahara plc sells three products: Basic, Super and Luxury. The following information was available at the year end. Basic Super Luxury £ per unit £ per unit £ per unit Original cost 6 9 18 Estimated selling price 9 12 15 Selling and distribution costs to be incurred 1 4 5 Units Units Units Units of inventory 200 250 150 Requirement What is the value of inventory at the year end? A £3,600 B £4,700 C £5,100 D £6,150 LO 1d ICAEW 2025 7: Cost of sales and inventories 37 15 A company uses the ﬁrst in ﬁrst out (FIFO) method to arrive at its inventory cost. At 1 May 20X2 the company had 700 engines in inventory, valued at £190 each. During the year ended 30 April 20X3 the following transactions took place: 20X2 1 July Purchased 500 engines at £220 each 1 November Sold 400 engines for £160,000 20X3 1 February Purchased 300 engines at £230 each 15 April Sold 250 engines for £125,000 Requirement What is the cost of the company's closing inventory of engines at 30 April 20X3? A £188,500 B £195,500 C £161,500 D £167,500 LO 1d 16 An inventory record has been extracted from the computerised accounting system. It shows the following details. 1 February 50 units in inventory at a cost of £40 per unit 7 February 100 units purchased at a cost of £45 per unit 14 February 80 units sold 21 February 50 units purchased at a cost of £50 per unit 28 February 60 units sold Requirement What is the cost of inventory at 28 February using the ﬁrst in ﬁrst out (FIFO) method? A £2,450 B £2,500 C £2,700 D £2,950 LO 1d 38 Accounting ICAEW 2025 17 For the year ended 31 October 20X3 a company carried out a physical count of inventory on 4 November 20X3, leading to an inventory cost at this date of £483,700. The following transactions took place between 1 November 20X3 and 4 November 20X3: (1) Goods costing £38,400 were received from suppliers. (2) Goods that had cost £14,800 were sold for £20,000. (3) A customer returned, in good condition, some goods which had been sold to them in October for £600 and which had cost £400. (4) The company returned goods that had cost £1,800 in October to the supplier, and received a credit note for them. Requirement What amount should be shown in the company's ﬁnancial statements at 31 October 20X3 for closing inventory, based on this information? A £458,700 B £505,900 C £508,700 D £461,500 LO 3c 18 In preparing its ﬁnancial statements for the current year, a company's closing inventory was understated by £300,000. Requirement What will be the effect of this error if it remains uncorrected? A The current year's proﬁt will be overstated and next year's proﬁt will be understated. B The current year's proﬁt will be understated but there will be no effect on next year's proﬁt. C The current year's proﬁt will be understated and next year's proﬁt will be overstated. D The current year's proﬁt will be overstated but there will be no effect on next year's proﬁt. LO 2a 19 At 30 September 20X3 the closing inventory of a company amounted to £386,400. The following items were included in this total at cost: (1) 1,000 items which had cost £18 each. These items were all sold in October 20X3 for £15 each, with total selling expenses of £800. (2) Five items which had been in inventory for many years, and which had been purchased for £100 each, were sold in October 20X3 for £1,000 each, net of selling expenses. Requirement What is the amount of closing inventory at 30 September 20X3? A £382,600 B £390,200 C £368,400 D £400,600 LO 3c ICAEW 2025 7: Cost of sales and inventories 39 20 The cost of inventory in the ﬁnancial statements of Quebec Ltd for the year ended 31 December 20X4 of £836,200 was based on an inventory count on 4 January 20X5. Between 31 December 20X4 and 4 January 20X5, the following transactions took place: £ Purchases of goods 8,600 Sales of goods (proﬁt margin 30% on sales) 14,000 Goods returned by Quebec Ltd to a supplier 700 Requirement What amount should be included in the ﬁnancial statements for inventories at 31 December 20X4? A £838,100 B £842,300 C £818,500 D £834,300 LO 3c 21 The closing inventory of Epsilon Ltd amounted to £284,000 at cost at the year end of 30 September 20X1. This total includes the following two inventory lines. (1) 500 items which had cost £15 each and which were included at £7,500. These items were found to have been defective at the date of the statement of ﬁnancial position. Remedial work after that date cost £1,800 and they were then sold shortly afterwards for £20 each. Selling expenses were £400. (2) 100 items which had cost £10 each. After the date of the statement of ﬁnancial position they were sold for £8 each, with selling expenses of £150. Requirement What amount should be shown in Epsilon Ltd's statement of ﬁnancial position for inventory at 30 September 20X1? A £283,650 B £284,350 C £284,650 D £291,725 LO 3c 22 Lamp Ltd makes the following purchases in the year ending 31 December 20X9: Units £/unit Total (£) 1 21 January 20X9 100 12.00 1,200 2 30 April 20X9 300 12.50 3,750 3 31 July 20X9 40 12.80 512 4 1 September 20X9 60 13.00 780 5 11 November 20X9 80 13.50 1,080 40 Accounting ICAEW 2025 At the year-end 200 units are in inventory but 8 are damaged and are only worth £10 per unit. These are identiﬁed as having been part of the 11 November 20X9 delivery. Lamp Ltd measures the cost of inventory using the FIFO method. Requirement What is the correct ﬁgure for inventories at 31 December 20X9? A £2,450 B £2,525 C £2,594 D £2,700 LO 1d 23 Bouncy Balls plc has 40 items in inventory as at 30 November 20X7. The product costs £5 per unit to manufacture and can be sold for £15 per unit. Half of the units in inventory at the year-end have been damaged and will require rectiﬁcation work costing £10 per unit before they can be sold. Selling costs are £1 per unit. Requirement What is the value of inventory at 30 November 20X7? A £160 B £180 C £200 D £600 LO 1d 24 The closing inventory of Stacks plc amounted to £58,200 excluding the following two inventory lines: (1) 200 items which had cost £15 each. These items were found to be defective at the year-end date. Rectiﬁcation work after that date amounted to £1,200 for the batch, after which they were sold for £17.50 each, with selling expenses totalling £300 for the batch. (2) 400 items which had cost £2 each. All were sold after the year-end date for £1.50 each, with selling expenses of £200 for the batch. Requirement What amount for inventory should be shown in the statement of ﬁnancial position of Stacks plc? A £62,000 B £61,600 C £60,600 D £61,000 LO 3c 25 Fenton plc is a manufacturer of tablets. The company makes two different models, the M1 and M2, and has 100 of each in inventory at the year end. Costs and related data for a unit of each model are as follows: ICAEW 2025 7: Cost of sales and inventories 41 M1 M2 £ £ Costs to date 230 350 Selling price 400 500 Modiﬁcation costs to enable sale 110 – Delivery outwards 65 75 Requirement What ﬁgure for inventory should be shown in the statement of ﬁnancial position at the year end? A £57,500 B £58,000 C £65,000 D £65,500 LO 3c 26 When calculating the cost of inventory, which of the following shows the correct method of arriving at cost? A Include inward delivery costs, Exclude production overheads B Exclude inward delivery costs, Include production overheads C Include inward delivery costs, Include production overheads D Exclude inward delivery costs, Exclude production overheads LO 1d 27 A trader who sets her selling prices by adding 50% to cost, only managed to achieve a mark-up of 45%. Requirement Which of the following factors could account for the shortfall? A Sales were lower than expected. B The value of the opening inventories had been overstated. C The closing inventories of the business were higher than the opening inventories. D Goods taken from inventories by the proprietor were recorded by debiting drawings and crediting purchases with the cost of the goods. LO 2a 28 The gross proﬁt margin is 20% where: A cost of sales is £100,000 and sales are £120,000 B cost of sales is £100,000 and sales are £125,000 C cost of sales is £80,000 and gross proﬁt is £16,000 D cost of sales is £80,000 and sales are £96,000 LO 2a 29 Which of the following factors could cause a company's gross proﬁt margin to fall below the expected level? 42 Accounting ICAEW 2025 A Overstatement of closing inventories B The incorrect inclusion in purchases of invoices relating to goods supplied in the following period C The inclusion in sales of the proceeds of sale of non-current assets D Increased cost of delivery borne by the company on goods sent to customers LO 1d 30 An extract from a business's statement of proﬁt or loss is as follows: £ £ Revenue 115,200 Opening inventory 21,000 Purchases 80,000 Closing inventory (5,000) (96,000) 19,200 Requirement What mark-up has the business applied? A 14.8% B 16.7% C 20.0% D 83.3% LO 1d 31 A company uses the average cost (AVCO) method when valuing its closing inventory. At 1 August 20X4 it held inventory of 2,400 units, valued at £10 each. In the year to 31 July 20X5 there were the following inventory movements: 14 November 20X4 Sales 900 units 28 January 20X5 Purchase 1,200 units for £20,100 7 May 20X5 Sales 1,800 units Requirement What was the cost of closing inventory of at 31 July 20X5? A £11,700 B £9,000 C £15,075 D £35,100 LO 1d 32 For many years Wrigley plc has experienced rising prices for raw material X and has kept constant inventory levels. It has always used the average cost (AVCO) method to arrive at the cost of inventory. Requirement What would the result be if Wrigley plc had always used the ﬁrst in ﬁrst out (FIFO) method in each successive year's ﬁnancial statements? ICAEW 2025 7: Cost of sales and inventories 43 A Lower cost of sales and higher closing inventory B Lower cost of sales and lower closing inventory C Higher cost of sales and lower closing inventory D Higher cost of sales and higher closing inventory LO 1d, 3a 33 During the year ended 31 March 20X4 Boogie plc suffered a major ﬁre at its factory, in which inventory that had cost £36,000 was destroyed. An insurance payment of 80% of the cost has been agreed but not received at the year end. Requirement Which of the following correctly completes the journal entry to take account of these matters? Debit trade and other receivables with £28,800 and: A Debit Administrative expenses £36,000, Credit Purchases £28,800, Credit Revenue £36,000 B Debit Administrative expenses £7,200, Credit Purchases £36,000 C Debit Administrative expenses £36,000, Credit Purchases £36,000, Credit Other income £28,800 D Debit Administrative expenses £7,200, Credit Inventory £36,000 LO 2a, 2c 34 Percy plc started trading on 1 April 20X4 and made a loss in the year to 31 March 20X5. The cost of inventory shown in Percy plc's statement of ﬁnancial position at 31 March 20X5, using the average cost (AVCO) basis, was £6,420. Had the ﬁrst in ﬁrst out (FIFO) basis been used, the cost would have been £8,080. Requirement What is the effect of adopting the FIFO basis on Percy plc's ﬁnancial statements for the year ended 31 March 20X5? A decreases losses and decrease current assets by £1,660 B increase current assets and decrease losses by £1,660 C increase capital and decrease current assets by £1,660 D increase current assets and increase losses by £1,660 LO 1d, 3a, 3c

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