University of Law PSC Financial and Business
Skills Exam, 2026/2027 – Professional Skills
Course Solicitor Training Competency
Assessment
SECTION 1: FINANCIAL STATEMENTS &
INTERPRETATION (Questions 1-10)
Q1. The balance sheet primarily shows:
A. Profitability over time
B. Cash movement
C. Financial position at a point in time
D. Business strategy
Correct Answer: C. Financial position at a point in time
Rationale: The balance sheet (also known as the statement of financial
position) shows a firm's assets, liabilities, and capital at a specific date,
providing a "snapshot" of financial health. It does not show profitability
(income statement) or cash movement (cash flow statement).
Q2. Which of the following is classified as a current asset?
A. Office building
B. Goodwill
C. Trade receivables
D. Long-term loan
Correct Answer: C. Trade receivables
Rationale: Current assets are assets expected to be converted to cash, sold,
or consumed within 12 months. Trade receivables (amounts owed by clients
,for work done) are current assets. Office buildings and goodwill are non-
current (fixed) assets. A long-term loan is a liability, not an asset.
Q3. Depreciation affects which financial statement?
A. Balance sheet only
B. Cash flow statement only
C. Profit and loss statement (income statement)
D. Capital account only
Correct Answer: C. Profit and loss statement (income statement)
Rationale: Depreciation is a non-cash expense that reduces reported profit
on the income statement. It also reduces the carrying value of fixed assets
on the balance sheet, but the primary impact on profitability is recorded in
the P&L.
Q4. Which ratio measures short-term liquidity?
A. Gross profit margin
B. Current ratio
C. Return on capital
D. Gearing
Correct Answer: B. Current ratio
Rationale: The current ratio (Current Assets ÷ Current Liabilities) measures a
firm's ability to meet short-term obligations. Gross profit margin measures
profitability. Return on capital measures efficiency. Gearing measures long-
term solvency (debt levels).
Q5. Which of the following is a working capital item?
, A. Share capital
B. Trade payables
C. Long-term loan
D. Goodwill
Correct Answer: B. Trade payables
Rationale: Working capital = Current Assets – Current Liabilities. Trade
payables (amounts owed to suppliers) are a current liability affecting day-to-
day cash management. Share capital and long-term loans are long-term
financing. Goodwill is a non-current intangible asset.
Q6. A firm has negative cash flow but positive profit. What does this
most likely suggest?
A. Over-trading
B. Poor accounting
C. Fraud
D. High depreciation
Correct Answer: A. Over-trading (overtrading)
Rationale: Overtrading occurs when a business grows too rapidly without
adequate working capital. Profit appears healthy, but cash is tied up in
increased debtors and stock, straining liquidity. This is common in rapidly
growing law firms.
Q7. Faster collection of client payments would:
A. Decrease profit
B. Improve cash flow and liquidity
C. Reduce WIP
D. Increase VAT liability
Correct Answer: B. Improve cash flow and liquidity
Rationale: Faster collection of receivables converts debtors to cash more
quickly, improving liquidity and reducing lock-up days. This does not directly
Skills Exam, 2026/2027 – Professional Skills
Course Solicitor Training Competency
Assessment
SECTION 1: FINANCIAL STATEMENTS &
INTERPRETATION (Questions 1-10)
Q1. The balance sheet primarily shows:
A. Profitability over time
B. Cash movement
C. Financial position at a point in time
D. Business strategy
Correct Answer: C. Financial position at a point in time
Rationale: The balance sheet (also known as the statement of financial
position) shows a firm's assets, liabilities, and capital at a specific date,
providing a "snapshot" of financial health. It does not show profitability
(income statement) or cash movement (cash flow statement).
Q2. Which of the following is classified as a current asset?
A. Office building
B. Goodwill
C. Trade receivables
D. Long-term loan
Correct Answer: C. Trade receivables
Rationale: Current assets are assets expected to be converted to cash, sold,
or consumed within 12 months. Trade receivables (amounts owed by clients
,for work done) are current assets. Office buildings and goodwill are non-
current (fixed) assets. A long-term loan is a liability, not an asset.
Q3. Depreciation affects which financial statement?
A. Balance sheet only
B. Cash flow statement only
C. Profit and loss statement (income statement)
D. Capital account only
Correct Answer: C. Profit and loss statement (income statement)
Rationale: Depreciation is a non-cash expense that reduces reported profit
on the income statement. It also reduces the carrying value of fixed assets
on the balance sheet, but the primary impact on profitability is recorded in
the P&L.
Q4. Which ratio measures short-term liquidity?
A. Gross profit margin
B. Current ratio
C. Return on capital
D. Gearing
Correct Answer: B. Current ratio
Rationale: The current ratio (Current Assets ÷ Current Liabilities) measures a
firm's ability to meet short-term obligations. Gross profit margin measures
profitability. Return on capital measures efficiency. Gearing measures long-
term solvency (debt levels).
Q5. Which of the following is a working capital item?
, A. Share capital
B. Trade payables
C. Long-term loan
D. Goodwill
Correct Answer: B. Trade payables
Rationale: Working capital = Current Assets – Current Liabilities. Trade
payables (amounts owed to suppliers) are a current liability affecting day-to-
day cash management. Share capital and long-term loans are long-term
financing. Goodwill is a non-current intangible asset.
Q6. A firm has negative cash flow but positive profit. What does this
most likely suggest?
A. Over-trading
B. Poor accounting
C. Fraud
D. High depreciation
Correct Answer: A. Over-trading (overtrading)
Rationale: Overtrading occurs when a business grows too rapidly without
adequate working capital. Profit appears healthy, but cash is tied up in
increased debtors and stock, straining liquidity. This is common in rapidly
growing law firms.
Q7. Faster collection of client payments would:
A. Decrease profit
B. Improve cash flow and liquidity
C. Reduce WIP
D. Increase VAT liability
Correct Answer: B. Improve cash flow and liquidity
Rationale: Faster collection of receivables converts debtors to cash more
quickly, improving liquidity and reducing lock-up days. This does not directly
