Practice Questions: Introduction to Accounting

How to answer theory questions effectively

• Identify the command word: "state" wants a one-line answer, "explain" wants a description with an example, while "compare" wants two items placed side by side against the same criteria.
• Memorise precise definitions for key concepts such as accounting, bookkeeping, the Accounting Cycle, assumptions, principles and constraints, because definition marks are easily lost if the sentence is vague.
• For list questions (e.g. cycle stages, users of Financial Statements, ethical traits), write in numbered points so the examiner can easily spot each item.
• Link the term to its function: state the term, describe its meaning, then show its use to the business entity so the answer is complete and earns full marks.

Answering case-study (application) questions

• Read the scenario twice: identify the business entity, the action taken by the owner or accountant, and the related accounting concept before writing your answer.
• For assumption, principle or constraint questions, use a three-step formula: name the concept, define it, and explain how the case breaches or complies with it.
• For ethics cases, refer to the code of ethics (integrity, objectivity, confidentiality, professional competence, professional behaviour) and recommend the correct action by the accountant.
• Review your application answers so every claim is supported by a reason; an answer like "because it breaks a principle" without further explanation usually does not earn full marks.

Practice Questions

1. Question 1

   Mr Rosli owns Seri Mewah Grocery, a sole proprietorship. He records all daily transactions in a book but does not understand the difference between his daily recording and the work of his accountant.

   (a) State the meaning of accounting.

   (b) Compare the function of bookkeeping with accounting.

   Answer

   (a) Accounting is the process of identifying, recording, classifying, summarising, interpreting and reporting the financial information of an entity to enable users to make economic decisions.

   (b) Bookkeeping: the stage of mechanically recording and classifying daily transactions; no interpretation. Accounting: a wider scope covering bookkeeping plus summarising, analysing, interpreting and reporting information for decision-making.

2. Question 2

   Laju Enterprise Motorcycle Workshop wants to understand the flow of accounting work over a period.

   (a) State the meaning of the Accounting Cycle.

   (b) List five main stages of the Accounting Cycle in order.

   Answer

   (a) The Accounting Cycle is a series of repeating steps carried out in a fixed order within an accounting period to prepare the Financial Statements.

   (b) 1. Source documents / transactions

   2. Recording in the journal

   3. Posting to the ledger

   4. Trial Balance

   5. Financial Statements (Income Statement and Statement of Financial Position).

3. Question 3

   Indah Furniture Sdn. Bhd. is expanding. Its directors need internal reports to plan costs, an annual report for shareholders, an independent verification of the accounts, and computation of company tax.

   (a) Name four sub-fields of accounting related to the needs above.

   (b) Relate the function of financial accounting to auditing and taxation.

   Answer

   (a) (i) Management accounting (internal cost reports)

   (ii) Financial accounting (shareholders' annual report)

   (iii) Auditing (independent verification of accounts)

   (iv) Taxation (company tax computation).

   (b) Financial accounting prepares the Financial Statements. Auditing examines and confirms that these statements give a true and fair view. Taxation then uses the profit reported in the Financial Statements as the basis for computing tax payable. All three rely on the same financial accounting records.

4. Question 4

   Madam Aina, an accountant at Sihat Sejahtera Clinic, is instructed by her employer to inflate the revenue figure in the Financial Statements so it looks more profitable for a bank loan application.

   (a) List four principles of the accounting profession's code of ethics.

   (b) Based on this case, recommend the appropriate action Madam Aina should take and give a reason.

   Answer

   (a) (i) Integrity

   (ii) Objectivity

   (iii) Confidentiality

   (iv) Professional competence and due care (also professional behaviour).

   (b) Madam Aina should refuse the instruction and prepare truthful Financial Statements. Reason: falsely inflating revenue breaches integrity and objectivity, misleads the bank as a user of the statements, and could lead to legal action and loss of trust in the profession.

5. Question 5

   Selera Kampung Restaurant prepares Financial Statements every year for various parties.

   (a) List the types of statements found in the Financial Statements.

   (b) Briefly explain the two fundamental qualitative characteristics of accounting information.

   (c) List three users of this restaurant's Financial Statements.

   Answer

   (a) (i) Income Statement

   (ii) Statement of Financial Position

   (iii) Statement of Changes in Equity

   (iv) Statement of Cash Flows

   (v) Notes to the accounts.

   (b) Relevance: the information influences users' decisions. Faithful representation: the information is complete, neutral and free from error, representing the real situation.

   (c) Examples: the owner, the bank/lender, and the Inland Revenue Board (also employees or suppliers).

6. Question 6

   Consider the following situations at Anggun Trading Boutique (sole proprietorship of Madam Salmah):

   (i) Madam Salmah buys a television for her home using personal money but wants to record it as a business expense.

   (ii) A machine is bought for RM8,000 and recorded at that cost although its market value is now RM9,500.

   (iii) The business uses the same depreciation method every year.

   State and explain the accounting assumption or principle related to each situation.

   Answer

   (i) Separate Entity Assumption: the business and the owner are two separate entities. A television for personal use cannot be recorded as a business expense.

   (ii) Cost Principle: an asset is recorded at historical cost (RM8,000), not market value (RM9,500), because cost can be verified objectively.

   (iii) Consistency Principle: the same accounting method is used from period to period so that statements are comparable.

7. Question 7

   Four friends want to start a business together and ask about the suitable type of business entity.

   (a) List four types of business entities.

   (b) Compare a Sole Proprietorship with a Limited Company in terms of ownership, source of capital and liability.

   Answer

   (a) (i) Sole Proprietorship

   (ii) Partnership

   (iii) Limited Company

   (iv) Cooperative.

   (b) Sole Proprietorship: owned by one person; capital from the owner (limited); unlimited liability. Limited Company: owned by shareholders (at least 1; a Sdn. Bhd. may have up to 50); capital raised through issue of shares (large); liability limited to share capital invested. See the table above for a summary.