Chapter 2: The accounting equation

Which of the following best explains what is meant by 'capital expenditure'? Capital expenditure is expenditure:

• on non-current assets, including repairs and maintenance

• on expensive items over £10,000

• on the acquisition of non-current assets, or improvement in their earning capacity

• on items relating to owners' capital

Which of the following should be accounted for as capital expenditure?

• The annual cost of painting a factory floor

• The repair of a window in a building

• The purchase of a vehicle by a garage for re-sale

• Legal fees incurred on the purchase of a building

Which of the following items should be treated as capital expenditure in the financial statements of a sole trader?

• £500 taken by the proprietor to buy himself a music system

• £800 spent on purchasing a new laptop to replace his secretary's old one

• £2,000 on purchasing a machine for resale

• £150 paid to a painter for redecorating his office

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

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

• 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

• The sale of non-current assets at a loss

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 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 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

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