IGCSE Accounting Paper-1: Specimen Questions with Answers 239 - 239 of 338
Question number: 239
True-False▾
Statements
Cash method provide a better indicator of a business profits’ or losses
A customer’s promise to pay is called account payable to the seller
Cash withdrawn by the proprietor from the business should be treated as an expense.
As prepaid expenses are used, the expired costs of assets become expenses
Choices
| Choice (4) | |
|---|---|
a. | Only statement Ⅳ is true. |
b. | Both statement Ⅰ & statement Ⅱ are true. |
c. | Statement Ⅰ, Ⅱ & Ⅲ are all true. |
d. | Statement Ⅰ, Ⅲ & Ⅳ are all true. |
Answer
a.Explanation
Cash Method of accounting records revenue when it is actually received in cash and expenses when they are paid. It does not provide a better indicator of a business’ profits or losses. A business which run mostly on credit sales if uses cash method of accounting, will understate the sales figure and hence the profits.
A customer’s mere promise to pay does not become account payable to the seller. The promise to pay must be in WRITTEN form to constitute account payable.
Cash withdrawn by the proprietor from the business should be treated as an expense only when it is used for business purpose. When the withdrawn cash is used for personal purpose, it should be treated as drawings.
Prepaid Expenses are assets not expenses. The part of expenses paid in advance that accrues in the subsequent periods become expenses on their accrual.