A Level Accounting (A2) MCQs with answers
Practise A Level Accounting (A2) (9706) with 212 exam-style MCQs, each with the answer and a short explanation. Every test is marked the moment you finish and shows your score chapter by chapter, so you know what to revise next. It is free and needs no sign-up.
212 questions · 2 chapters
What each chapter covers 2 chapters
The questions follow the syllabus chapter by chapter. You can test the whole subject or one chapter at a time.
- Financial accounting 123 questionsPreparation of financial statements, Regulatory and ethical considerations, Business acquisition and merger, Computerised accounting systems, Analysis and communication of accounting information
- Cost and management accounting 89 questionsActivity based costing (ABC), Standard costing, Budgeting and budgetary control, Investment appraisal
Sample A Level Accounting (A2) MCQs with answers 12 questions
12 questions from the test, one or two from each chapter. Try each one, then open the answer.
1. A club needs money to build a new pavilion. Which method of raising the money does not create a liability for the club?
- A
a bank loan secured on the existing clubhouse
- B
an appeal for donations from members and local businesses
- C
loans from members, repayable in five years
- D
debentures issued to members at a fixed rate of interest
Show answer
Answer: B. Donations do not have to be repaid and carry no interest, so no liability arises. Bank loans, members’ loans and debentures must all be repaid, and they add interest costs to future income and expenditure accounts.
2. Why is $1000 received in three years’ time worth less than $1000 received today?
- A
money received today can be invested to earn a return before then
- B
money received in the future will be taxed at a higher rate
- C
future cash flows are always smaller than current cash flows
- D
money received today cannot be affected by any risk
Show answer
Answer: A. This is the time value of money: cash available now can be reinvested to earn interest, and there is also the effect of inflation and risk on future receipts. Discounting converts future cash into present value terms.
3. A company’s profit from operations is $96 000. During the year it paid debenture interest of $6000 and bank overdraft interest of $2000. What is its interest cover?
- A
11.0 times
- B
16.0 times
- C
14.7 times
- D
12.0 times
Show answer
Answer: D. Interest cover = profit from operations ÷ interest payable = $96 000 ÷ ($6000 + $2000) = 12.0 times. Profit from operations is before interest, so interest must not be deducted first, and all interest payable is included.
4. Which is an advantage of a standard costing system?
- A
managers can focus on significant variances (management by exception)
- B
standards never need to be revised once they have been agreed and set
- C
it removes the need for the business to prepare any budgets
- D
it guarantees that actual costs will be equal to standard costs
Show answer
Answer: A. Comparing actual results with standards highlights where things differ from plan, so managers can investigate the significant variances and leave the rest. Standards must be kept up to date and they are used alongside budgets.
5. A company’s trade receivables turnover is 42 days, its inventory turnover is 55 days and its trade payables turnover is 35 days. What is its working capital cycle?
- A
132 days
- B
48 days
- C
62 days
- D
22 days
Show answer
Answer: C. Working capital cycle = trade receivables days + inventory days − trade payables days = 42 + 55 − 35 = 62 days: the time between paying suppliers and receiving cash from customers.
6. What is meant by the payback period of an investment project?
- A
the time taken for total profits to equal the initial investment
- B
the number of years over which the asset is depreciated
- C
the time taken for the net present value to become positive
- D
the time taken for net cash inflows to equal the initial investment
Show answer
Answer: D. Payback measures how quickly the cash invested is recovered from the project’s net cash inflows. It uses cash flows, not profits, and it ignores the timing of flows within the payback period and all flows after it.
7. An investor wants a steady income from shares with little risk that the dividend will be cut. Which company would best suit her?
- A
one with a high dividend yield and a low dividend cover
- B
one with a low dividend yield and a high gearing ratio
- C
one with a high price/earnings ratio and no dividend
- D
one with a high dividend yield and a high dividend cover
Show answer
Answer: D. A high dividend yield gives a good income relative to the share price, and a high dividend cover means profits could fall considerably before the dividend became unaffordable. Low cover or high gearing makes the dividend less secure.
8. A project has a positive net present value when discounted at the company’s cost of capital. What does this indicate?
- A
the project will pay back its cost within the first year
- B
the project earns a return greater than the cost of capital
- C
the project’s accounting rate of return must be above 50%
- D
the project earns exactly the cost of capital
Show answer
Answer: B. A positive NPV means the discounted inflows exceed the initial investment, so the project earns more than the rate used to discount it and increases the value of the business. It should be accepted on financial grounds.
9. A company’s dividend cover has fallen from 4.0 times to 1.2 times. What does this indicate?
- A
the company is retaining a larger share of its profit than before
- B
the company’s profit for the year must have increased
- C
most of the profit is now paid out, so the dividend is less secure
- D
the market price of the company’s shares must have risen
Show answer
Answer: C. Dividend cover shows how many times the dividend could be paid from profit. At 1.2 times, most profit is distributed and little is retained; a small fall in profit could make the current dividend unaffordable.
10. What is meant by the internal rate of return (IRR) of a project?
- A
the discount rate that the company uses as its cost of capital
- B
the average annual profit as a percentage of the average investment
- C
the discount rate at which the net present value of the project is zero
- D
the rate of interest charged on a loan to finance the project
Show answer
Answer: C. The IRR is the discount rate that makes the present value of the inflows equal to the initial investment. A project is acceptable if its IRR is higher than the cost of capital. Average profit over average investment is the ARR.
11. A manufacturer transfers finished goods from the factory at production cost plus 25%. Inventory of finished goods, at transfer price, was $15 000 at the start of the year and $22 500 at the end. What is the adjustment to the provision for unrealised profit for the year?
- A
an increase of $1875, which reduces the profit for the year
- B
an increase of $1500, which increases the profit for the year
- C
an increase of $1500, which reduces the profit for the year
- D
an increase of $4500, which reduces the profit for the year
Show answer
Answer: C. The unrealised profit in each inventory figure is 25/125 of it: $3000 at the start and $4500 at the end. The provision must rise by $1500, and this increase is charged against profit. Taking 25% of the transfer price, rather than 25/125, gives $1875.
12. A project requires an investment of $90 000 in equipment with no residual value. Expected profits after depreciation are $8000, $12 000 and $13 000 in years 1 to 3. What is the accounting rate of return, based on average investment?
- A
12.2%
- B
24.4%
- C
91.1%
- D
36.7%
Show answer
Answer: B. Average profit = ($8000 + $12 000 + $13 000) ÷ 3 = $11 000. Average investment = $90 000 ÷ 2 = $45 000. ARR = $11 000 ÷ $45 000 × 100 = 24.4%. Adding depreciation back turns profit into cash flow, which is not used in ARR.
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