Chapter 2 - The accounting equation

Which three of the following are elements of financial statements as identified by the IASB’s Conceptual Framework?

• Expenses

• Profits

• Equity

• Losses

• Income

The capital of a sole trader would change as a result of:

• a credit customer paying by bank transfer

• raw materials being purchased on credit

• non-current assets being purchased on credit

• personal petrol being paid for out of the business’s petty cash

A sole trader purchases goods on credit. Which element(s) of the accounting equation will change due to this transaction?

• Assets and liabilities

• Assets and capital

• Capital and liabilities

• Assets only

The purpose of the financial statement that lists an entity’s total assets and total capital and liabilities is to show:

• the financial performance of the entity over a period of time

• the amount the entity could be sold for in liquidation

• the amount the entity could be sold for as a going concern

• the financial position of the entity at a particular point in time

A business can make a profit and yet have a decreased bank balance. Which of the following might cause this to happen?

• The sale of non-current assets at a loss

• The charging of depreciation in the statement of profit or loss

• The lengthening of the period of credit given to customers

• The lengthening of the period of credit taken from suppliers

A sole trader is £5,000 overdrawn at her bank and receives £1,000 from a credit customer in respect of its account. Which element(s) of the accounting equation will change due to this transaction?

• Assets and liabilities

• Liabilities only

• Assets only

• Assets, liabilities and capital

A sole trader sells goods for cash for £500 which had cost £300. Which element(s) of the accounting equation will change due to this transaction?

• Assets and liabilities

• Assets and capital

• Capital and liabilities

• Assets only

A sole trader borrows £10,000 from a bank. Which element(s) of the accounting equation will change due to this transaction?

• Assets and liabilities

• Assets and capital

• Capital and liabilities

• Assets only

The accounting equation can be written as:

• Assets + profits – drawings – liabilities = closing capital

• Assets – liabilities – drawings = opening capital + profit

• Assets – liabilities – opening capital + drawings = profit

• Opening capital + profit – drawings – liabilities = assets

A sole trader increases the business’s number of motor vehicles by adding his own car to the business’s fleet. Which element(s) of the accounting equation will change due to this transaction?

• Assets only

• Capital only

• Assets and capital

• Assets and liabilities