Accounting equation and statement of financial position basics

Topic 2: Accounting Equation and Statement of Financial Position Basics — 50 Hard MCQs

1. A business has assets of $84 000 and liabilities of $27 500. The owner then introduces cash of $12 000 and takes goods costing $1500 for personal use.

What is the owner’s capital after these transactions?

A $55 000
B $67 000
C $68 500
D $80 500

2. A sole trader has opening capital of $48 000. During the year, profit was $16 400, drawings were $7200, and additional capital introduced was $5000.

What is closing capital?

A $52 200
B $57 200
C $62 200
D $76 600

3. A business has non-current assets of $90 000, current assets of $36 000, current liabilities of $19 000 and non-current liabilities of $42 000.

What is capital/equity?

A $65 000
B $84 000
C $107 000
D $126 000

4. A trader’s assets increased by $18 000 and liabilities increased by $7000.

What is the effect on capital?

A decreases by $11 000
B increases by $11 000
C increases by $25 000
D no effect

5. Which transaction increases both assets and capital?

A owner introduces cash into the business
B business pays a supplier
C business buys inventory on credit
D owner withdraws cash for personal use

6. Which transaction decreases both assets and capital?

A cash sales
B goods taken by owner for personal use
C purchase of equipment by cheque
D loan received from bank

7. Which transaction increases both assets and liabilities?

A owner introduces cash
B goods bought on credit
C cash paid to supplier
D drawings of inventory

8. Which transaction decreases both assets and liabilities?

A cash paid to supplier
B cash received from customer
C inventory bought on credit
D profit earned for the year

9. Which transaction has no immediate effect on total assets?

A cash received from credit customer
B owner introduces cash
C goods bought on credit
D loan interest paid by cheque

10. A business buys a motor vehicle for $20 000 by cheque.

What is the effect on the accounting equation?

A assets increase, capital increases
B assets decrease, liabilities decrease
C one asset increases and another asset decreases
D assets increase, liabilities increase

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A business buys inventory costing $9000 on credit.

What is the effect?

A assets increase by $9000 and liabilities increase by $9000
B assets increase by $9000 and capital increases by $9000
C liabilities decrease by $9000 and capital increases by $9000
D assets decrease by $9000 and liabilities decrease by $9000

12. A business pays $3000 to a supplier.

What is the effect?

A assets decrease and capital decreases
B assets decrease and liabilities decrease
C assets increase and liabilities increase
D liabilities increase and capital decreases

13. A sole trader takes cash of $800 from the business for personal use.

What is the effect?

A assets decrease and capital decreases
B assets decrease and liabilities decrease
C assets increase and capital increases
D assets decrease and expenses increase

14. A business earns profit of $25 000. Drawings are $9000 and capital introduced is $6000.

What is the net increase in capital?

A $10 000
B $16 000
C $22 000
D $40 000

15. A trader’s opening capital is $60 000 and closing capital is $74 000. During the year, drawings were $12 000 and capital introduced was $5000.

What was the profit for the year?

A $7000
B $14 000
C $21 000
D $31 000

16. A trader’s opening capital is $90 000. Closing capital is $82 000. During the year, drawings were $18 000 and additional capital introduced was $4000.

What was the profit or loss for the year?

A $6000 profit
B $6000 loss
C $22 000 profit
D $30 000 loss

17. Which item is a current asset?

A bank overdraft
B inventory
C debenture repayable in five years
D machinery

18. Which item is a current liability?

A trade receivables
B prepaid insurance
C bank overdraft
D motor vehicle

19. Which item is a non-current liability?

A trade payables
B accrued rent
C bank loan repayable in eight years
D inventory

20. Which item is part of equity?

A trade payables
B retained earnings
C bank overdraft
D accrued expenses

21. Which item should be classified as a non-current asset?

A cash at bank
B inventory held for resale
C delivery van used in the business
D trade receivables

22. Which statement about current assets is correct?

A They are always physical items.
B They are expected to be converted into cash or used within one year.
C They are never used in daily trading.
D They are always more than current liabilities.

23. Which statement about current liabilities is correct?

A They are amounts owed due within one year.
B They are always payable after more than one year.
C They are part of capital.
D They are always secured on non-current assets.

24. A business has current assets of $42 000 and current liabilities of $25 000.

What is working capital?

A $17 000
B $25 000
C $42 000
D $67 000

25. A business has working capital of $18 000 and current liabilities of $32 000.

What are current assets?

A $14 000
B $18 000
C $32 000
D $50 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. A business has current assets of $75 000 and working capital of $28 000.

What are current liabilities?

A $28 000
B $47 000
C $75 000
D $103 000

27. A business has total assets of $250 000 and total liabilities of $95 000. The owner withdraws cash of $12 000.

What is capital after the withdrawal?

A $143 000
B $155 000
C $167 000
D $262 000

28. A business has assets of $110 000 and capital of $64 000.

What are liabilities?

A $46 000
B $64 000
C $110 000
D $174 000

29. A business has liabilities of $38 000 and capital of $92 000.

What are assets?

A $54 000
B $92 000
C $130 000
D $168 000

30. A business pays rent of $2400 in advance.

How is this shown in the statement of financial position?

A current asset
B current liability
C non-current asset
D equity

31. A business owes wages of $1800 at the year end.

How is this shown in the statement of financial position?

A current asset
B current liability
C non-current liability
D equity

32. A customer pays $5000 in advance for services to be provided next year.

How is this shown in the statement of financial position?

A current asset
B current liability
C income
D capital

33. A business has earned commission income of $2200 but has not yet received the cash.

How is this shown in the statement of financial position?

A current asset
B current liability
C non-current liability
D equity

34. Which transaction increases working capital?

A paying a current liability using cash
B buying inventory on credit
C receiving cash from a credit customer
D owner introduces cash into the business

35. Which transaction decreases working capital?

A paying a current liability using cash
B buying non-current asset by cheque
C receiving cash from credit customer
D inventory bought on credit

36. Which transaction has no effect on working capital?

A buying inventory on credit
B owner introduces cash
C cash received from trade receivables
D buying equipment by cheque

37. A business pays a trade payable of $7000 by cheque.

What is the effect on working capital?

A decreases by $7000
B increases by $7000
C no effect
D increases by $14 000

38. A business buys inventory for $6000 on credit.

What is the effect on working capital?

A decreases by $6000
B increases by $6000
C no effect
D increases by $12 000

39. A business buys equipment for $15 000 by cheque.

What is the effect on working capital?

A decreases by $15 000
B increases by $15 000
C no effect
D decreases by $30 000

40. A business receives $4000 from a credit customer.

What is the effect on working capital?

A decreases by $4000
B increases by $4000
C no effect
D increases by $8000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A trader has the following balances.

Item	$
equipment	60 000
inventory	18 000
trade receivables	12 000
cash	5000
trade payables	16 000
bank loan repayable in 6 years	25 000

What is capital?

A $54 000
B $70 000
C $79 000
D $95 000

42. Using the information in Question 41, what is working capital?

A $19 000
B $35 000
C $54 000
D $79 000

43. A business has opening capital of $100 000. During the year, assets increased by $30 000 and liabilities increased by $8000. The owner introduced no capital but withdrew $6000.

What was profit for the year?

A $16 000
B $22 000
C $28 000
D $36 000

44. A business has closing capital of $72 000, opening capital of $60 000, drawings of $9000 and capital introduced of $5000.

What was profit for the year?

A $8000
B $12 000
C $16 000
D $26 000

45. A business has opening capital of $45 000. It makes a loss of $7000. The owner introduces cash of $12 000 and takes drawings of $5000.

What is closing capital?

A $33 000
B $45 000
C $47 000
D $59 000

46. Which statement correctly describes capital?

A amount owed by the business to suppliers
B owner’s claim on the net assets of the business
C cash held in the bank account
D total value of current assets

47. Which equation is correct?

A assets + capital = liabilities
B assets – liabilities = capital
C liabilities – assets = capital
D assets + liabilities = drawings

48. Which item reduces owner’s capital?

A profit for the year
B capital introduced
C drawings
D accrued income

49. Which item increases owner’s capital?

A loss for the year
B drawings
C capital introduced
D prepaid expense

50. A business has capital of $80 000. It earns profit of $12 000, introduces capital of $5000, withdraws goods costing $2000 and withdraws cash of $3000.

What is closing capital?

A $82 000
B $90 000
C $92 000
D $102 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. B — $67 000

• Opening capital = assets – liabilities

• = $84 000 – $27 500

• = $56 500

• Cash introduced increases capital by $12 000

• Goods taken for personal use reduce capital by $1500

• Closing capital = 56 500 + 12 000 – 1500

• = $67 000

2. C — $62 200

• Closing capital = opening capital + profit + capital introduced – drawings

• = 48 000 + 16 400 + 5000 – 7200

• = $62 200

3. A — $65 000

• Total assets = non-current assets + current assets

• = 90 000 + 36 000 = $126 000

• Total liabilities = current liabilities + non-current liabilities

• = 19 000 + 42 000 = $61 000

• Capital/equity = assets – liabilities

• = 126 000 – 61 000

• = $65 000

4. B — increases by $11 000

• Capital = assets – liabilities

• Assets increased by $18 000

• Liabilities increased by $7000

• Net increase in capital = 18 000 – 7000

• = $11 000

5. A — owner introduces cash into the business

• Cash is an asset, so assets increase.

• Owner’s capital also increases.

• This is capital introduced.

6. B — goods taken by owner for personal use

• Inventory decreases, so assets decrease.

• Drawings increase, which reduces capital.

• This is not an expense of the business.

7. B — goods bought on credit

• Inventory increases, so assets increase.

• Trade payables increase, so liabilities increase.

8. A — cash paid to supplier

• Cash decreases, so assets decrease.

• Trade payables decrease, so liabilities decrease.

9. A — cash received from credit customer

• Cash increases.

• Trade receivables decrease.

• One asset replaces another asset.

• Total assets stay the same.

10. C — one asset increases and another asset decreases

• Motor vehicle increases.

• Bank/cash decreases.

• Total assets stay the same.

• No liability or capital effect.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A — assets increase by $9000 and liabilities increase by $9000

• Inventory increases by $9000.

• Trade payables increase by $9000.

• Capital is not affected immediately.

12. B — assets decrease and liabilities decrease

• Cash/bank decreases.

• Trade payables decrease.

• Paying a supplier reduces both sides.

13. A — assets decrease and capital decreases

• Cash withdrawn reduces assets.

• Drawings reduce owner’s capital.

• Drawings are not business expenses.

14. C — $22 000

• Net increase in capital = profit + capital introduced – drawings

• = 25 000 + 6000 – 9000

• = $22 000

15. C — $21 000

• Closing capital = opening capital + profit + capital introduced – drawings

• 74 000 = 60 000 + profit + 5000 – 12 000

• 74 000 = 53 000 + profit

• Profit = $21 000

16. A — $6000 profit

• Closing capital = opening capital + profit + capital introduced – drawings

• 82 000 = 90 000 + profit + 4000 – 18 000

• 82 000 = 76 000 + profit

• Profit = $6000

17. B — inventory

• Inventory is expected to be sold/used within the trading cycle.

• It is a current asset.

• Machinery is non-current.

• Bank overdraft is a current liability.

18. C — bank overdraft

• Bank overdraft is usually repayable on demand or within one year.

• Therefore, it is a current liability.

19. C — bank loan repayable in eight years

• A liability repayable after more than one year is non-current.

• Trade payables and accrued rent are usually current liabilities.

20. B — retained earnings

• Retained earnings are part of equity.

• They represent accumulated profits kept in the business.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. C — delivery van used in the business

• A delivery van is used for more than one accounting period.

• It is a non-current asset.

• Inventory and receivables are current assets.

22. B — They are expected to be converted into cash or used within one year

• Current assets include inventory, receivables, cash, prepaid expenses.

• They do not have to be physical items.

23. A — They are amounts owed due within one year

• Current liabilities are payable within one year.

• Examples: trade payables, overdraft, accrued expenses.

24. A — $17 000

• Working capital = current assets – current liabilities

• = 42 000 – 25 000

• = $17 000

25. D — $50 000

• Working capital = current assets – current liabilities

• 18 000 = current assets – 32 000

• Current assets = 18 000 + 32 000

• = $50 000

26. B — $47 000

• Working capital = current assets – current liabilities

• 28 000 = 75 000 – current liabilities

• Current liabilities = 75 000 – 28 000

• = $47 000

27. A — $143 000

• Capital before withdrawal = assets – liabilities

• = 250 000 – 95 000

• = $155 000

• Cash withdrawal reduces capital by $12 000

• New capital = 155 000 – 12 000

• = $143 000

28. A — $46 000

• Assets = capital + liabilities

• 110 000 = 64 000 + liabilities

• Liabilities = $46 000

29. C — $130 000

• Assets = liabilities + capital

• = 38 000 + 92 000

• = $130 000

30. A — current asset

• Rent paid in advance is a prepayment.

• The business has paid for a benefit it will receive later.

• Prepaid expense = current asset.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. B — current liability

• Wages owing are accrued expenses.

• The business owes money, usually payable soon.

• Therefore, it is a current liability.

32. B — current liability

• Cash received in advance means the business owes goods/services.

• Until the service is provided, it is a liability.

• This is income received in advance.

33. A — current asset

• Commission has been earned but not yet received.

• This is accrued income.

• Accrued income is a current asset.

34. D — owner introduces cash into the business

• Cash increases.

• Current assets increase.

• Current liabilities do not change.

• Therefore, working capital increases.

35. B — buying non-current asset by cheque

• Cash decreases.

• Non-current assets increase.

• Current liabilities stay the same.

• Working capital decreases because current assets decrease.

36. A and C both have no effect — question needs correction

• A buying inventory on credit:

  • inventory increases

  • trade payables increase

  • working capital unchanged

• C cash received from trade receivables:

  • cash increases

  • trade receivables decrease

  • working capital unchanged

• To make this a clean MCQ, replace A with “buying inventory by cheque” or replace C with “receiving cash from owner”.

37. C — no effect

• Cash decreases by $7000.

• Trade payables decrease by $7000.

• Current assets and current liabilities both fall by the same amount.

• Working capital stays the same.

38. C — no effect

• Inventory increases by $6000.

• Trade payables increase by $6000.

• Current assets and current liabilities both increase equally.

• Working capital stays the same.

39. A — decreases by $15 000

• Equipment is a non-current asset.

• Cash is a current asset.

• Buying equipment by cheque reduces current assets.

• Working capital decreases by $15 000.

40. C — no effect

• Cash increases by $4000.

• Trade receivables decrease by $4000.

• One current asset replaces another.

• Working capital stays the same.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A — $54 000

• Total assets = equipment + inventory + receivables + cash

• = 60 000 + 18 000 + 12 000 + 5000

• = $95 000

• Total liabilities = trade payables + bank loan

• = 16 000 + 25 000

• = $41 000

• Capital = 95 000 – 41 000

• = $54 000

42. A — $19 000

• Current assets = inventory + trade receivables + cash

• = 18 000 + 12 000 + 5000

• = $35 000

• Current liabilities = trade payables = $16 000

• Working capital = 35 000 – 16 000

• = $19 000

43. C — $28 000

• Assets increased by $30 000.

• Liabilities increased by $8000.

• So capital increased by $22 000.

• Closing capital = 100 000 + 22 000 = $122 000

• Closing capital = opening capital + profit – drawings

• 122 000 = 100 000 + profit – 6000

• Profit = $28 000

44. C — $16 000

• Closing capital = opening capital + profit + capital introduced – drawings

• 72 000 = 60 000 + profit + 5000 – 9000

• 72 000 = 56 000 + profit

• Profit = $16 000

45. B — $45 000

• Closing capital = opening capital – loss + capital introduced – drawings

• = 45 000 – 7000 + 12 000 – 5000

• = $45 000

46. B — owner’s claim on the net assets of the business

• Capital = assets – liabilities.

• It represents the owner’s claim on business net assets.

• It is not just cash in the bank.

47. B — assets – liabilities = capital

• The accounting equation is:

• Assets = capital + liabilities

• Therefore:

• Assets – liabilities = capital

48. C — drawings

• Drawings are withdrawals by the owner.

• They reduce owner’s capital.

• They are not expenses.

49. C — capital introduced

• Capital introduced increases the owner’s claim on the business.

• Profit also increases capital, but it is not one of the correct options here.

• Drawings and losses reduce capital.

50. C — $92 000

• Opening capital = $80 000

• Add profit = $12 000

• Add capital introduced = $5000

• Less goods drawings = $2000

• Less cash drawings = $3000

• Closing capital = 80 000 + 12 000 + 5000 – 2000 – 3000

• = $92 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.