A Level Business (A2) chapter 5: Finance and accounting MCQs with answers
By Team Megalecture · Updated 4 Nov 2026
121 exam-style questions on Finance and 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.
Try each one, then open the answer. These ten stay the same; the test draws new ones every time.
1. What is the purpose of the auditors’ report in a company’s annual report?
A
To give an independent opinion that the accounts give a true and fair view
B
To prepare the accounts and the notes on behalf of the company’s directors
C
To forecast the company’s profit for the year after the accounts date
D
To decide the size of the dividend paid to the shareholders each year
Show answer
Answer: A. Auditors are independent of the directors and report on whether the financial statements are properly prepared and fairly presented. They do not write the accounts or set dividends.
2. What is the effect of a depreciation charge on the financial statements?
A
It reduces cash held and also increases the profit for the year
B
It increases the value of the non-current asset in the statement of financial position
C
It reduces profit and also reduces the amount of cash held by the business
D
It reduces profit and the carrying value of the non-current asset
Show answer
Answer: D. Depreciation is an expense in the statement of profit or loss, lowering profit, and it reduces the asset’s value in the statement of financial position. No cash leaves the business when depreciation is charged.
3. What is the main purpose of the statement of financial position?
A
To show the profit earned during the year and how it was distributed
B
To show cash inflows and outflows in the year, and the balance at each date
C
To show what a business owns, owes and is worth at a particular date
D
To show the value of the firm’s brand
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Answer: C. It is a snapshot of what the business owns and owes at one point in time. Profit over the period is shown by the statement of profit or loss.
4. What does the liquidity of a business measure?
A
How much profit it makes from each dollar of sales it achieves
B
How much of its capital comes from loans and other long-term debt
C
How quickly it sells its inventory to customers over the year
D
Its ability to pay its short-term debts as they fall due
Show answer
Answer: D. Liquidity is about having enough cash or assets that can quickly be turned into cash to pay current liabilities. Profit, gearing and inventory turnover are separate measures.
5. A firm’s gross profit is $60 000. It then writes $5 000 of damaged inventory down to its net realisable value, and the write-down is included in cost of sales. What is the gross profit after the write-down?
A
$65 000
B
$55 000
C
$60 000
D
$5 000
Show answer
Answer: B. The write-down is an additional cost of sales, so gross profit falls by $5 000 to $55 000. Inventory in current assets also falls by $5 000.
6. A company grows quickly. Its credit sales rise from $1.0m to $1.4m, but its trade receivables rise from $100 000 to $190 000. What has happened to trade receivables turnover?
A
It has shortened from 49.5 days to 36.5 days, so cash is released as the firm grows
B
It is unchanged at 36.5 days, since both receivables and sales have risen
C
It has lengthened from 36.5 days to 90 days
D
It has lengthened from 36.5 to 49.5 days, so cash is tied up as the firm grows
Show answer
Answer: D. Days = receivables ÷ credit sales × 365: 100 ÷ 1 000 × 365 = 36.5 and 190 ÷ 1 400 × 365 = 49.5. Growth has been funded partly by giving customers longer to pay, which can cause liquidity problems.
7. A business’s gross profit margin falls from 35% to 32%, but its operating profit margin rises from 10% to 11%. What is the most likely explanation?
A
Expenses fell by 4 percentage points as a share of revenue
B
Revenue must have fallen from the first year to the second
C
Cost of sales fell as a percentage of revenue
D
Expenses rose as a percentage of revenue
Show answer
Answer: A. Operating margin = gross margin − expenses as a % of revenue. Expenses were 25% of revenue before (35 − 10) and are 21% now (32 − 11), a fall of 4 points, which more than offsets the 3-point fall in gross margin and lifts the operating margin by 1 point.
8. Which is a limitation of the payback method?
A
It ignores the initial cost of the project and only counts inflows
B
It ignores cash flows that occur after the payback period
C
It cannot be calculated from cash-flow forecasts for the project
D
It always gives its answer as a percentage return
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Answer: B. Two projects can have the same payback but very different returns after it, and payback shows nothing about them. It is simple to calculate and expressed in time.
9. Just before the year end a company delays paying its suppliers, so its cash balance in the statement of financial position is higher than usual. Which limitation of ratio analysis does this illustrate?
A
Year-end figures can be manipulated and may not be typical of the year
B
Ratios cannot be calculated from figures in the statement of financial position
C
Ratios ignore amounts owed to trade payables, so payment dates do not matter
D
Ratios use forecast figures rather than the actual results of past years
Show answer
Answer: A. Accounts show the position on one date, so a business can time payments to make that date look better and the ratios may not reflect the rest of the year. Ratios can be calculated from the statement of financial position and are based on past results.
10. A company’s non-current assets are $800 000, current assets $300 000, current liabilities $220 000 and non-current liabilities $350 000. Its issued shares are $200 000. What are its reserves?
A
$330 000
B
$530 000
C
$130 000
D
$680 000
Show answer
Answer: A. Net assets = 800 + 300 − 220 − 350 = $530 000 and this equals equity, so reserves = 530 000 − 200 000 = $330 000. $680 000 forgets the non-current liabilities.
121, each with the answer and a short explanation, across 4 topics: Financial statements, Analysis of published accounts, Investment appraisal, Finance and accounting strategy. Every chapter test draws ten of them, so you can take it many times.
Is the A Level Business (A2) chapter 5 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.
