What is one advantage of operating as a sole trader?
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B. Easy to set up This is correct because sole traders can start their business quickly and with minimal formalities. Limited liability (A) and shared decision-making (C) are advantages of partnerships or companies, not sole traders. Access to large amounts of capital (D) is typically more associated with limited companies.
Which type of business can a sole trader operate?
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D. A trading, service, manufacturing business or a combination of these This is correct because a sole trader can operate any type of business or a combination of these. The other options (A, B, C) are too restrictive and do not cover all possibilities.
Why is it important for a sole trader to prepare a statement of profit or loss?
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C. To determine the financial performance of the business This is correct because the statement of profit or loss shows how much profit or loss the business has made during a specific period. While it can also help calculate tax (B), its primary purpose is to show performance. Option A is incorrect as it focuses on personal income, and option D describes the purpose of a statement of financial position.
What is the correct format for the statement of financial position of a sole trader?
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A. Assets = Liabilities + Capital This is correct because the accounting equation for a sole trader is Assets = Liabilities + Capital. The other options (B, C, D) do not correctly represent the accounting equation.
Which of the following is a current asset?
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C. Inventory This is correct because inventory is expected to be converted into cash within one year. Land and buildings (A) and motor vehicles (B) are non-current assets, and patents (D) are intangible assets.
If a sole trader’s capital increases by £5,000, what will happen to the total assets or liabilities?
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A. Total assets will increase by £5,000 This is correct because, according to the accounting equation (Assets = Liabilities + Capital), an increase in capital must be matched by an increase in assets. The other options (B, C, D) do not correctly represent the relationship between assets, liabilities, and capital.
Which depreciation method applies a fixed percentage to the net book value of the asset each year?
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B. Reducing balance method This is correct because the reducing balance method applies a fixed percentage to the net book value of the asset each year. The straight-line method (A) applies a fixed amount, the revaluation method (C) adjusts the value based on market conditions, and the units of production method (D) is based on the usage of the asset.
What adjustment is needed if a sole trader has paid insurance for the next 6 months?
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B. Prepaid expense This is correct because a prepaid expense is an expense that has been paid in advance for services or goods that have not yet been received or used. The other options (A, C, D) do not match the scenario described.
How should a sole trader account for a debt that is unlikely to be recovered?
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A. Write off the debt by crediting the trade receivables account and debiting the profit or loss account This is correct because writing off a debt involves removing it from the trade receivables and reducing the profit. Option B is used to create a provision for doubtful debts, not for writing off a specific debt. Option C is incorrect as it does not follow accounting principles, and option D is not a standard accounting treatment for irrecoverable debts.
What is the effect on the profit or loss account if the owner takes goods for personal use?
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C. Decrease in the profit or loss account This is correct because taking goods for personal use reduces the inventory, which in turn reduces the cost of goods sold, leading to a decrease in profit. The other options (A, B, D) do not correctly represent the impact on the profit or loss account.
Which of the following is an example of a non-current asset?
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D. Plant and machinery This is correct because plant and machinery are expected to be used for more than one year. The other options (A, B, C) are examples of current assets, which are expected to be converted into cash within one year.
What is the purpose of a statement of financial position for a sole trader?
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B. To record the assets and liabilities on a specific date This is correct because the statement of financial position shows what the business owns (assets) and owes (liabilities) at a specific point in time. The other options (A, C, D) describe the purposes of other financial statements or personal income.
How should a sole trader account for accrued income?
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A. Debit the income account and credit the trade receivables account This is correct because accrued income is income that has been earned but not yet received. The other options (B, C, D) do not correctly represent the accounting treatment for accrued income.
What is the effect on the statement of financial position if a sole trader purchases a non-current asset using a bank loan?
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B. Increase in non-current assets and increase in non-current liabilities This is correct because purchasing a non-current asset increases the non-current assets, and taking a bank loan increases the non-current liabilities. The other options (A, C, D) do not correctly represent the impact on the statement of financial position.
Which of the following is an example of a current liability?
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B. Trade payables This is correct because trade payables are amounts owed to suppliers for goods or services that are expected to be paid within one year. The other options (A, C, D) are either non-current liabilities, owner’s equity, or intangible assets.