CIMA BA3 · Chapter 9
Accruals, prepayments, inventory and receivables MCQs with Answers
10 multiple-choice questions on Accruals, prepayments, inventory and receivables for CIMA BA3 Fundamentals of Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A business forgets to record a closing accrual for telephone costs. What is the effect on its financial statements?
- A) Profit is understated and liabilities are overstated
- B) Profit is overstated and liabilities are understated
- C) Profit is overstated and assets are overstated
- D) Profit is understated and assets are understated
Show answer & explanation
Answer: B) Profit is overstated and liabilities are understated
Omitting an accrual leaves out an expense, so profit is too high, and leaves out a current liability, so liabilities are too low. Assets are unaffected.
Question 2
A business with a 31 December year end pays rent quarterly in advance on 1 January, 1 April, 1 July and 1 October. Annual rent was $12,000 until 31 March 20X5 and $15,000 a year from 1 April 20X5. What is the rent expense for the year ended 31 December 20X5?
- A) $12,000
- B) $13,500
- C) $14,250
- D) $15,000
Show answer & explanation
Answer: C) $14,250
January to March: $12,000 x 3/12 = $3,000. April to December: $15,000 x 9/12 = $11,250. Total expense = $3,000 + $11,250 = $14,250. Because rent is paid in advance at the start of each quarter, there is no accrual or prepayment at the year end.
Question 3
During the year a business paid electricity bills of $4,860. At the start of the year there was an accrual for electricity of $520, and at the end of the year an accrual of $610 is required. What is the electricity expense for the year?
- A) $4,770
- B) $4,860
- C) $4,950
- D) $5,990
Show answer & explanation
Answer: C) $4,950
Expense = cash paid - opening accrual + closing accrual = $4,860 - $520 + $610 = $4,950. The opening accrual relates to last year's electricity paid this year, so it is removed; the closing accrual is this year's usage not yet paid.
Question 4
On 1 October 20X4 a business paid an insurance premium of $2,400 for the year to 30 September 20X5. Its year end is 31 December 20X4. What is the prepayment at 31 December 20X4?
- A) $600
- B) $1,200
- C) $1,800
- D) $2,400
Show answer & explanation
Answer: C) $1,800
Three months (October to December) relate to 20X4, giving an expense of $600. The remaining nine months relate to next year, so the prepayment = $2,400 x 9/12 = $1,800.
Question 5
A business lets part of its premises. During the year it received rent of $18,200. At the start of the year the tenant had paid $1,400 in advance. At the end of the year the tenant owes $900. What is the rental income for the year?
- A) $15,900
- B) $17,700
- C) $18,700
- D) $20,500
Show answer & explanation
Answer: D) $20,500
Rent received in advance at the start is income of this year, so it is added. Rent owed at the end has been earned but not yet received, so it is also added. Income = $18,200 + $1,400 + $900 = $20,500.
Question 6
At the year end a business holds three product lines: Product X: cost $4,200, selling price $4,500, selling costs $450 Product Y: cost $2,600, net realisable value $3,100 Product Z: cost $1,900, selling price $1,700, selling costs $100 At what amount should inventory be measured under IAS 2 Inventories?
- A) $8,250
- B) $8,500
- C) $8,700
- D) $8,750
Show answer & explanation
Answer: A) $8,250
Each line is measured at the lower of cost and net realisable value (NRV = selling price less costs to sell). X: NRV $4,050 < cost $4,200, so $4,050. Y: cost $2,600 < NRV $3,100, so $2,600. Z: NRV $1,600 < cost $1,900, so $1,600. Total = $8,250.
Question 7
A business had opening inventory of 100 units at $5 each. It bought 300 units at $6 and then 200 units at $7. It sold 450 units in the period. What is the value of closing inventory using FIFO?
- A) $750
- B) $900
- C) $925
- D) $1,050
Show answer & explanation
Answer: D) $1,050
Closing inventory = 100 + 300 + 200 - 450 = 150 units. Under FIFO the oldest units are sold first, so the 150 units remaining come from the latest purchase: 150 x $7 = $1,050. Distractors: weighted average would give ($500 + $1,800 + $1,400) / 600 = $6.1667 x 150 = $925 (exact, no rounding needed); valuing the closing units at $6 gives $900 and at $5 gives $750.
Question 8
Under IAS 2 Inventories, which of the following costs must NOT be included in the cost of inventory?
- A) Import duties on purchased goods
- B) Selling costs
- C) Carriage inwards
- D) Production overheads based on normal capacity
Show answer & explanation
Answer: B) Selling costs
Cost of inventory includes costs of purchase (including import duties and carriage inwards), costs of conversion (including production overheads allocated on normal capacity) and other costs of bringing the inventory to its present location and condition. Selling costs are excluded and recognised as expenses.
Question 9
At the year end a business has receivables of $64,000 before writing off an irrecoverable debt of $2,500. It wants an allowance for receivables of 4% of the remaining receivables. The allowance brought forward is $2,900. What is the total charge to profit or loss for irrecoverable debts and the allowance for the year?
- A) $2,060
- B) $2,940
- C) $4,960
- D) $5,400
Show answer & explanation
Answer: A) $2,060
Receivables after write-off = $64,000 - $2,500 = $61,500. Required allowance = 4% x $61,500 = $2,460. The allowance falls from $2,900 to $2,460, a decrease of $440, which is credited to profit or loss. Total charge = $2,500 - $440 = $2,060.
Question 10
A debt of $800 that was written off as irrecoverable last year is unexpectedly received in full this year. What is the double entry to record the cash received?
- A) Debit Bank, Credit Sales
- B) Debit Receivables, Credit Bank
- C) Debit Bank, Credit Irrecoverable debts expense (or other income)
- D) Debit Allowance for receivables, Credit Bank
Show answer & explanation
Answer: C) Debit Bank, Credit Irrecoverable debts expense (or other income)
The debt was removed from receivables last year, so the receipt is recognised in profit or loss by crediting the irrecoverable debts account (or a separate recoveries income account). It is not a new sale.