IGCSE Accounting Paper-2: Specimen Questions with Answers 49 - 51 of 103

Passage

Daffy Ltd had a profit of £500000, after charging depreciation of £100000 on assets and transferring an amount of £150000 to general reserve. The Goodwill amortized was £35000, and a profit was gained on the sale of machinery amounting to £15000. Other changes in current assets and current liabilities was as follows:

(i) Increase in trade receivables £15000

(ii) Increase in trade payables £30000

(iii) Increase in prepaid expenses £1000

(iv) Decrease in outstanding expenses £10000

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What is meant by Operating activities? Give two examples of operating income and

Operating expenditure.

Explanation

In any business enterprise, the operating activities become the main source of revenue and expenditure. Hence it becomes essential to ascertain the cash flows into the business from such activities. Example of operating expenses is payment of taxes; Purchase of stock. Example of operating revenue is Receipts from royalties; Profit from sale of goods.

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What is the objective of preparing a cash flow statement?

Explanation

A cash flow statement provides information about the cash inflows and outflows of cash and its equivalent. The basic objective of cash flow statement is to provide the enterprise with information regarding the inflows and outflows of cash under the various heads such as: Operating activities; Financing activities and investing activities. It enables the users to evaluate the ability of the enterprise to generate cash and its equivalents.

Passage

Miss. Rosy started a small business as a sole proprietor in the year 2013 and had the following transaction during the year:

  • Commenced business with cash £200000
  • Purchases made for cash £80000 and credit £120000
  • Made Sales of £160000 in cash of goods costing £120000
  • Rent paid £2000 and outstanding rent for the year was £400
  • Bought car on credit £20000
  • Purchased a mobile phone for personal use £20000
  • Purchased a land for cash £80000

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What is the other name for accounting equation and how does the name justify itself?

Explanation

Accounting equation is also otherwise called as the Balance sheet equation. It gets the name of balance sheet because of its basic feature of double entry system. It depicts the fundamental relationship among all the elements present in a balance sheet namely the assets, Liabilities and capital. The equality of the asset and liabilities side of the balance sheet justifies the name of accounting equation as the balance sheet equation.