A Level Accounting (A2) chapter 1: Financial accounting MCQs with answers

By Team Megalecture · Updated 4 Nov 2026

123 exam-style questions on Financial accounting, each with the answer and a short explanation. Ten of them are below to try. The chapter test draws ten fresh questions each time and is marked the moment you finish, with your score by topic.

123 questions · 5 topics · 10 per test

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What chapter 1 covers

Ten Financial accounting questions with answers

Try each one, then open the answer. These ten stay the same; the test draws new ones every time.

1. A club needs money to build a new pavilion. Which method of raising the money does not create a liability for the club?

  1. A
    a bank loan secured on the existing clubhouse
  2. B
    an appeal for donations from members and local businesses
  3. C
    loans from members, repayable in five years
  4. 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. 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?

  1. A
    11.0 times
  2. B
    16.0 times
  3. C
    14.7 times
  4. 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.

3. 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?

  1. A
    132 days
  2. B
    48 days
  3. C
    62 days
  4. 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.

4. An investor wants a steady income from shares with little risk that the dividend will be cut. Which company would best suit her?

  1. A
    one with a high dividend yield and a low dividend cover
  2. B
    one with a low dividend yield and a high gearing ratio
  3. C
    one with a high price/earnings ratio and no dividend
  4. 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.

5. A company’s dividend cover has fallen from 4.0 times to 1.2 times. What does this indicate?

  1. A
    the company is retaining a larger share of its profit than before
  2. B
    the company’s profit for the year must have increased
  3. C
    most of the profit is now paid out, so the dividend is less secure
  4. 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.

6. 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?

  1. A
    an increase of $1875, which reduces the profit for the year
  2. B
    an increase of $1500, which increases the profit for the year
  3. C
    an increase of $1500, which reduces the profit for the year
  4. 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.

7. A company uses the revaluation model of IAS 16 for its buildings. A building is revalued upwards for the first time. Where is the increase in value credited?

  1. A
    revaluation reserve
  2. B
    statement of profit or loss
  3. C
    share premium account
  4. D
    retained earnings
Show answer

Answer: A. An upward revaluation is an unrealised gain. It is recognised in other comprehensive income and credited to a revaluation reserve within equity, not to profit for the year.

8. A partner lends $20 000 to the partnership and the partnership agreement allows interest of 6% a year on the loan. How is the interest of $1200 for the year treated?

  1. A
    as an expense in the statement of profit or loss
  2. B
    as an appropriation in the appropriation account
  3. C
    as a deduction from the partner’s capital account
  4. D
    as an addition to the partner’s drawings for the year
Show answer

Answer: A. Interest on a partner’s loan is a charge against profit, like interest on any other loan, so it is an expense in the statement of profit or loss. Interest on capital, by contrast, is an appropriation of profit.

9. A company makes a bonus issue of one new ordinary share for every four held. Its profit for the year and the total amount paid as ordinary dividends are unchanged. What is the effect on earnings per share and dividend cover?

  1. A
    earnings per share falls; dividend cover falls
  2. B
    earnings per share is unchanged; dividend cover falls
  3. C
    earnings per share falls; dividend cover is unchanged
  4. D
    earnings per share rises; dividend cover is unchanged
Show answer

Answer: C. The same profit is shared among more shares, so earnings per share falls. Dividend cover compares total profit with the total dividend, and neither has changed, so cover is unchanged.

10. Why may a manufacturer transfer goods from its factory to its warehouse at a price that includes a factory profit?

  1. A
    to increase the profit for the year reported to shareholders and tax authorities
  2. B
    to value closing inventory of finished goods at selling price
  3. C
    to reduce the cost of sales shown in the statement of profit or loss
  4. D
    to judge the factory’s efficiency by comparing its cost with buying the goods in
Show answer

Answer: D. A transfer price close to the market price of buying the goods shows whether the factory produces more cheaply than outside suppliers, and it lets factory managers be rewarded on their own profit. Unrealised factory profit is removed, so reported profit is not inflated.

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How many Financial accounting MCQs are there?

123, each with the answer and a short explanation, across 5 topics: Preparation of financial statements, Regulatory and ethical considerations, Business acquisition and merger, Computerised accounting systems, Analysis and communication of accounting information. Every chapter test draws ten of them, so you can take it many times.

Is the A Level Accounting (A2) chapter 1 test free?

Yes. The test, the answers and the explanations are free and need no sign-up. Sign in only if you want your scores kept across devices.

How is the chapter test marked?

The moment you press Finish: your score, the right answer and an explanation for every question, and the ones you got wrong saved in My mistakes to retry.

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