There are 50 questions and answers for the Hong Kong Basic Accounting Examination

Section A: Multiple Choice Questions (20 Questions)

1. Which of the following is NOT an asset?
A. Accounts Receivable
B. Inventory
C. Bank Loan
D. Prepaid Rent
Answer: C

2. The accounting equation is:
A. Assets = Liabilities + Equity
B. Equity = Assets + Liabilities
C. Liabilities = Assets – Equity
D. Assets + Liabilities = Equity
Answer: A

3. A credit entry will:
A. Decrease a liability
B. Increase an expense
C. Increase revenue
D. Decrease equity
Answer: C

4. Depreciation is best described as:
A. A valuation method
B. The allocation of a non-current asset’s cost over its useful life
C. A cash expense
D. A reserve for asset replacement
Answer: B

5. Which financial statement shows a company’s financial position at a point in time?
A. Income Statement
B. Statement of Cash Flows
C. Statement of Changes in Equity
D. Statement of Financial Position
Answer: D

6. Accrued expenses are:
A. Expenses paid in advance
B. Expenses incurred but not yet paid
C. Revenues earned but not received
D. Liabilities that do not require payment
Answer: B

7. In Hong Kong, which body sets accounting standards?
A. HKMA
B. HKICPA
C. IRD
D. SFC
Answer: B (HKICPA adopts HKFRS/IFRS)

8. Net profit is calculated as:
A. Revenue – Cost of Sales
B. Gross Profit – Operating Expenses
C. Total Assets – Total Liabilities
D. Cash Inflows – Cash Outflows
Answer: B

9. A trial balance is used to:
A. Prepare tax returns
B. Check arithmetic accuracy of ledger accounts
C. Show profit for the year
D. Replace the general ledger
Answer: B

10. Prepaid insurance appears on the balance sheet as a(n):
A. Liability
B. Expense
C. Asset
D. Equity
Answer: C

11. Which account normally has a debit balance?
A. Sales Revenue
B. Bank Loan
C. Accounts Payable
D. Office Equipment
Answer: D

12. The going concern concept assumes that a business will:
A. Cease operations within one year
B. Continue operating indefinitely
C. Maximize shareholder wealth
D. Report all transactions in HKD
Answer: B

13. Bad debts are recorded by debiting:
A. Accounts Receivable
B. Bad Debt Expense
C. Allowance for Doubtful Debts
D. Cash
Answer: B

14. Sales of HK$10,000 on credit would be recorded as:
A. Debit Sales, Credit Accounts Receivable
B. Debit Cash, Credit Sales
C. Debit Accounts Receivable, Credit Sales
D. Debit Sales, Credit Cash
Answer: C

15. Which of the following is a current liability?
A. Motor Vehicle
B. Retained Earnings
C. Bank Overdraft
D. Share Capital
Answer: C

16. Closing inventory affects:
A. Only the balance sheet
B. Only the income statement
C. Both the income statement and balance sheet
D. Neither
Answer: C

17. Hong Kong does NOT have:
A. Profits Tax
B. Salaries Tax
C. Value Added Tax (VAT)
D. Property Tax
Answer: C

18. The matching principle requires that:
A. All assets be matched with liabilities
B. Expenses be recognized in the same period as related revenues
C. Cash receipts match cash payments
D. Trial balance totals must be equal
Answer: B

19. A bank reconciliation explains differences between:
A. Cash book and bank statement
B. Trial balance and ledger
C. Sales and purchases
D. Assets and liabilities
Answer: A

20. Which is NOT a component of the Statement of Financial Position?
A. Non-current assets
B. Equity
C. Net profit
D. Current liabilities
Answer: C

Section B: True or False (10 Questions)

21. Hong Kong uses IFRS-based accounting standards.
Answer: True

22. Drawings reduce owner’s equity.
Answer: True

23. Accumulated depreciation is a liability.
Answer: False (It’s a contra-asset)

24. Revenue should be recognized when cash is received.
Answer: False (Use accrual basis)

25. The double-entry system means every transaction affects at least two accounts.
Answer: True

26. Trade payables are amounts owed to customers.
Answer: False (Owed to suppliers)

27. Gross profit = Sales – Operating expenses.
Answer: False (= Sales – Cost of sales)

28. A suspense account is used to correct errors temporarily.
Answer: True

29. Capital expenditure appears in the income statement.
Answer: False (Shown as asset on balance sheet)

30. All businesses in Hong Kong must prepare audited financial statements.
Answer: False (Only required for certain entities, e.g., listed companies)

Section C: Short Answer / Calculation (20 Questions)

31. Define “accruals” in accounting.
Answer: Expenses incurred or revenues earned but not yet paid/received in cash.

32. Calculate net book value: Equipment cost HK$50,000, accumulated depreciation HK$20,000.
Answer: HK$30,000

33. Journal entry for paying HK$5,000 electricity bill by cheque.
Answer:
Dr Electricity Expense 5,000
Cr Bank 5,000

34. What is the purpose of a provision for doubtful debts?
Answer: To estimate uncollectible receivables and match potential losses with revenue.

35. List three current assets.
Answer: Cash, Accounts Receivable, Inventory

36. Why is depreciation charged?
Answer: To allocate the cost of a non-current asset over its useful life in accordance with the matching principle.

37. Prepare journal entry: Owner invests HK$100,000 cash into business.
Answer:
Dr Bank 100,000
Cr Capital 100,000

38. What does “prudence” mean in accounting?
Answer: Do not overstate assets or understate liabilities; recognize losses when probable, but gains only when realized.

39. Calculate gross profit: Sales HK$200,000, Cost of Sales HK$120,000.
Answer: HK$80,000

40. Difference between capital and revenue expenditure?
Answer: Capital expenditure acquires long-term assets; revenue expenditure relates to day-to-day operations.

41. Journal entry: Sold goods for HK$8,000 on credit (cost HK$5,000).
Answer:
Dr Accounts Receivable 8,000
Cr Sales 8,000
Dr Cost of Sales 5,000
Cr Inventory 5,000

42. Name the four qualitative characteristics of financial information.
Answer: Relevance, Faithful representation, Comparability, Understandability

43. What is a bank overdraft classified as?
Answer: Current liability

44. Adjusting entry for HK$2,000 accrued wages at year-end.
Answer:
Dr Wages Expense 2,000
Cr Accrued Wages (Liability) 2,000

45. If total assets = HK$500,000 and equity = HK$300,000, what are liabilities?
Answer: HK$200,000

46. Why is the historical cost principle used?
Answer: It provides objective, verifiable, and reliable measurement.

47. What is included in “cost of sales”?
Answer: Opening inventory + Purchases – Closing inventory

48. Effect on accounting equation: Bought equipment for HK$30,000 cash.
Answer: Assets unchanged (Cash ↓30k, Equipment ↑30k); Liabilities and Equity unchanged.

49. Is interest income a revenue or gain?
Answer: Revenue (if from core operations) or other income—typically shown above profit before tax.

50. What financial statement is prepared first in the accounting cycle?
Answer: Income Statement (to determine net profit, which flows into Statement of Changes in Equity and Balance Sheet)