You are on page 1of 26

january 2016

International
Financial Reporting
Practice Questions for Diploma in IFR and CPA

www.iqnglobal.com

Practice Questions

1.

Financial Reporting

The Conceptual Framework states that qualitative characteristics are the attributes that make financial
information useful to users. To be faithful representation information must be all of the following,
EXCEPT:
a.

Complete

b. Neutral
c.

Free from error

d. Material
2.

SA Ltd is considering in liquidating the company. The following assets and liabilities as at 31 March
2012 is in companys books:
i.

Plant and machinery: It represents carrying amount of $30,000 and can be realised for
$15,000. The Plant and machinery had an estimated useful life of 10 years and have been
used in business for 4 years.

ii.

Goodwill: A professional accountant has estimated the goodwill as $12,000.

iii. Receivables: Receivables are all trade related which amounted to $15,000. It is estimated that
an allowance against receivable of $1,000 would need to be made.
iv. Cash at bank: The bank account shows a positive balance of $5,000.
v.

Payables: Trade accounts payable amounted to $6,000.

Under breakup basis, which ONE of the following is the correct amount that should be stated as net
assets in the statement of financial position of SA Ltd at 31 March 2012?
a.

$42,000

b. $40,000
c.

$28,000

d. $46,000
3.

IAS 1 describes fair presentation of financial statements in meeting which ONE of the following?
a.

The financial statements are accurate if the company implements corporate governance.

b. The financial statements are as accurate as possible given the accounting systems of the
organisation
c.

The directors of the company have stated that the financial statements are accurate and
correctly prepared

d. The financial statements are reliable in that they reflect the effects of transactions, other
events and conditions

Page 2 of 26

Practice Questions

4.

Financial Reporting

For the purpose of fair presentation, which ONE of the following is a requirement of IAS 1?
i.

Selection and application of accounting policies

ii.

Presentation of information in a manner which provides relevant, reliable, comparable and


understandable information

iii. Additional disclosures where required


a.

(i) and (ii) only

b. (ii) and (iii) only


c.

(i) and (iii) only

d. (i), (ii) and (iii)


5.

Which of the following statements conforms to IAS 1 Presentation of Financial Statements?


i.

The accounting policies must be disclosed in the notes to the financial statements

ii.

Unsuitable accounting policies should be acceptable if amended by disclosure of the policies


used or by the inclusion of explanatory notes

iii. Companies may choose to prepare their financial statements on either the accrual basis or the
cash basis
a.

(i), (ii) and (iii)

b. (i) and (ii) only


c.

(ii) and (iii) only

d. (i) only
6.

Historical cost is the normal basis of inventory valuation. Most inventory items are valued at their
original cost. IAS related to inventory valuation, IAS 2 Inventories, states that inventory should be
valued at . . .
a.

lower of cost and net realizable value

b. lower of cost and net value in use


c.

lower of cost and market value

d. lower of cost and net book value


7.

A business has opening inventory of $7,200 and closing inventory of $8,100. Purchases for the year
were $76,500, carriage inwards was $50 and carriage outwards was $180.
What is the value of cost of sales, in accordance with IAS 2 Inventories?
a.

$75,550

b. $75,650
c.

$75,830

d. $77,450

Page 3 of 26

Practice Questions

8.

Financial Reporting

IAS 2 Inventories guides the way to value finished goods held in stock by manufacturing companies.
Which of the following items should be used in arriving at the cost of the inventory of finished goods?
i. Cost of abnormally high idle time in the factory
ii. Import duties on raw materials
iii. Factory supervisors' salaries
iv. Factory heating and lighting
v. Carriage outwards on goods delivered to customers
vi. Carriage inwards on raw materials delivered to the factory
a.

(i), (iii), (iv) and (vi)

b. (ii), (iii). (iv), and (vi)


c.

(ii), (iii), (iv) and (v)

d. (i), (ii), (iv), (v) and (vi)


9.

The aim of IAS 7 is to provide information to users of financial statements about the entity's ability to
generate cash and cash equivalents. The statement of cash flows provides historical information about
cash and cash equivalents, classifying cash flows between operating, investing and financing activities.
Which ONE of the following is NOT a benefit of IAS 7-Statement of Cash Flows?
a.

Statements of cash flows enhance comparability

b. Cash flow information of a historical nature can be used as an indicator of the future cash
flows
c.

Users can have clearer understanding of the entitys ability to adapt to changing
circumstances by affecting the amount and timing of cash flows

d. The relationship between profit and revenue can be analysed as can changes in prices
overtime
10. At 31 December 20X8 the carrying value of non-current assets was $78,000 and at 31 December 20X9
the carrying value had increased to $100,000. The income statement has been charged with
depreciation for the year ending 31 December 20X9 of $14,000 and there is also a loss on disposal of
$3,000 for assets with a carrying value of $10,000.
What would be the amount of cash paid for acquisitions?
a.

$32,000

b. $39,000
c.

$43,000

d. $46,000

Page 4 of 26

Practice Questions

Financial Reporting

11. The consolidated statement of cash flows does not include any cash flows between an associate and
third parties, as the associate is not part of the group. However, the following cash flows are included,
EXCEPT:
a.

Investments by parent or subsidiary in an associate (investing cash flows)

b. Dividends received from associates (investing cash flows)


c.

Sales by associate to an parent or subsidiary (operating cash flows)

d. Purchases by parent or subsidiary from an associate (operating cash flows)


12. Which ONE of the following areas of information would not necessarily be shown by the statement of
cash flows?
a.

The relationships between profit and cash can be seen clearly and analysed accordingly.

b. Cash equivalents are highlighted, giving a better picture of the liquidity of the company.
c.

Differences in accounting depreciation and the tax allowances can be analysed to evaluate
projects.

d. Financing inflows and outflows must be shown, rather than simply passed through reserves.
13. Which of the following is NOT an advantage of cash flow accounting?
a.

Cash flow accounting directs attention towards the ability to generate cash.

b. Cash flow is more comprehensive than 'profit' which is dependent on accounting conventions
and concepts.
c.

Forecasts can subsequently be monitored by the publication of variance statements which


compare actual cash flows against the forecast.

d. Proper matching of related items can be easily done through cash flow accounting

Page 5 of 26

Practice Questions

Financial Reporting

14. Toren Co has just published its financial statements for the year ended 31 December 20X1 in a
national newspaper. One of the notes to the financial statements of Torren Co shows the following in
respect of obligations under finance leases.
Year ended 31 December
Amounts payable within one year
Within two to five years
Less finance charges allocated to future periods

20X1
$000
12
110
122
(14)
108

20X0
$000
8
66
74
(8)
66

Interest paid on finance leases in the year to 31 December 20X1 amounted to $6m. Additions to
tangible non-current assets acquired under finance leases were shown in the non-current asset note
at $56,000.
What is the capital repayment to be shown in the statement of cash flows of Toren Co for the year to
31 December 20X1?
a.

$14,000

b. $98,000
c.

$42,000

d. $12,000
15. The statement of financial position of Earl plc shows the opening and closing balance of cash and
cash equivalents as $8,000 and $1,000 respectively. Moreover, opening and closing balances of
inventories and receivables were $48,000 and $55,000, opening and closing balance of trade payables
were $20,000 and $40,000 respectively.
What is the net cash from operating activities in accordance with IAS 7 Statement of Cash flows?
a.

$6,000

b. $8,000
c.

($6,000)

d. ($8,000)

Page 6 of 26

Practice Questions

Financial Reporting

16. In the course of preparing a sole trader's cash flow statement, the following figures are to be
included in the calculation of net cash from operating activities.
$
980,000
40,000
130,000
100,000
80,000

Depreciation charges
Profit on sale of fixed assets
Increase in stocks
Decrease in debtors
Increase in creditors

What will the net effect of these items be in the cash flow statement?
a.

Addition to operating profit

$890,000

b. Subtraction from operating profit

$890,000

c.

$1,070,000

Addition to operating profit

d. Addition to operating profit

$990,000

17. Which ONE of the following is the correct definition of Retrospective restatement?
a.

This is applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied

b. This is correcting the recognition, measurement and disclosure of amounts of elements of


financial statements as if a prior period error had never occurred
c.

Applying the new accounting policy to transactions, other events and conditions occurring
after the date as at which the policy is changes

d. Recognising the effect of the change in the accounting estimate in the current and future
periods affected by the change
18. Which ONE of the following is the correct definition of Retrospective application?
a.

This is applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied

b. This is correcting the recognition, measurement and disclosure of amounts of elements of


financial statements as if a prior period error had never occurred
c.

Applying the new accounting policy to transactions, other events and conditions occurring
after the date as at which the policy is changes

d. Recognising the effect of the change in the accounting estimate in the current and future
periods affected by the change

Page 7 of 26

Practice Questions

Financial Reporting

19. Which ONE of the following is the correct definition of Prospective application?
a.

This is applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied

b. This is correcting the recognition, measurement and disclosure of amounts of elements of


financial statements as if a prior period error had never occurred
c.

Applying the new accounting policy to transactions, other events and conditions occurring
after the date as at which the policy is changes

d. Recognising the effect of the change in the accounting estimate in the current periods
affected by the change
20. Which ONE of the following is the correct definition of Prospective application?
a.

This is applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied

b. This is correcting the recognition, measurement and disclosure of amounts of elements of


financial statements as if a prior period error had never occurred
c.

Applying the new accounting policy to transactions, other events and conditions occurring
before the date as at which the policy is changes

d. Recognising the effect of the change in the accounting estimate in the current periods and
future periods affected by the change
21. The same accounting policies are usually adopted from period to period, to allow users to analyse
trends over time in profit, cash flows and financial position.
Changes in accounting policy will therefore be rare and should be made only if required .
Which of the following is NOT an event that requires changes in accounting policy?
i. Adopting a new accounting policy for a transaction or event which has not occurred in the past
or which was not material.
ii. Policies set by statute.
iii. Policies to be changed following changes by accounting standard setting body.
a.

(i) and (ii) only

b. (i) only
c.

(ii) only

d. (i), (ii) and (iii)

22. Jade plc had recently brought changes in its way of maintaining accounting policies.
Page 8 of 26

Practice Questions

Financial Reporting

i. From 1 January 2009 all inventories should be valued on AVCO basis rather than FIFO basis
ii. Depreciation of transport vehicles has to be deducted as an expense in the statement of
comprehensive income rather than shown as part of cost of sales.
Which (if any) constitutes a change in accounting policy in accordance with IAS 8 Accounting policies,
changes in accounting estimates and errors?
a.

(i) only

b. (ii) only
c.

Both (i) and (ii)

d. Neither (i) nor (ii)


23. According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which of the
following items would qualify for treatment as a change in accounting estimate?
i.

Provision for obsolescence of inventory

ii.

Correction necessitated by a material error

iii. A change as a result of the adoption of a new International Financial Reporting Standard
iv. A change in the useful life of a non-current asset
a.

(i), (ii), (iii) and (iv)

b. (ii) and (iv)


c.

(i) and (iii)

d. (i) and (iv)


24. Which of the following statements concerning IAS 10 Events After the Reporting Period are correct?
1) Notes to the financial statements must give details of all material adjusting events reflected in
those financial statements
2) Notes to the financial statements must give details of all non-adjusting events affecting users'
ability to understand the company's financial position
3) Financial statements should not be prepared on a going concern basis if, after the reporting
period, the directors decide to liquidate the company
a.

(1) and (2)

b. (1) and (3)


c.

(2) and (3)

d. (1), (2) and (3)

Page 9 of 26

Practice Questions

Financial Reporting

25. Angela Ltd's income statement for 2011 showed a profit before tax of $1,800,000. During the
beginning of 2012 the following events took place before the financial statements were authorised for
issue.
1) The value of an investment held at the end of the reporting period fell by $85,000 due to a
fire at that company's premises early in 2012.
2) A customer who owed $116,000 at the end of the reporting period went bankrupt owing a
total of $138,000.
3) Inventory valued at a cost of $161,000 in the statement of financial position was sold for
$141,000.
4) Assets with a carrying amount at the end of the reporting period of $240,000 were
unexpectedly expropriated by the Government.
In accordance with IAS 10 Events after the Reporting Period what is Angela Ltd's profit for 2011 after
making the necessary adjustments for the above events?
a.

$1,399,000

b. $1,579,000
c.

$1,664,000

d. $1,557,000
26. The components of the cost of a major item of equipment are given below.
Purchase price
Import duties
Sales tax (refundable)
Site preparation
Installation costs
Pre-production costs
Initial operating losses before the asset reaches planned performance
Estimated cost of dismantling and removal of the asset, recognised as a
provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets

$
780,000
117,000
78,000
30,000
28,000
18,000
50,000
100,000
1,201,000

In accordance with IAS 16 Property, Plant and Equipment what amount should be recognised as the cost
of the asset?
a.

$956,000

b. $1,055,000
c.

$1,073,000

d. $1,201,000

Page 10 of 26

Practice Questions

Financial Reporting

27. The current carrying value of one of Gigs plcs factory building is $1500,000. Gigs Ltd is considering
disposing of the factory building and was approached by Talc Ltd to exchange this factory building
with their existing building that has a fair value of $2m. The fair value of Gigs plcs factory building has
been estimated at $1.9m. Gigs plc agreed to this arrangement and also would pay the legal costs
amounting $50,000.
According to IAS 16 Property, Plant and Equipment at what value should the building currently owned
by Talc Ltd be recorded at initially in Gigs plcs accounting records?
a.

$1.5 million

b. $1.9 million
c.

$2 million

d. $1,850,000
28. On 1 January 2012, the first day of its accounting year, Ran Ltd entered into an operating lease. The
terms of the lease provided for an initial non-returnable deposit of $60,000 and then three annual
rentals of $30,000, payable on the last day of each year.
According to IAS 17 Leases what is the charge to the income statement for the year ended December
31, 2012 and what balance is reflected in the statement of financial position as at December 31, 2012
in respect of this lease?
a.

Income statement charge = $30,000; Statement of financial position = $Nil

b. Income statement charge = $90,000; Statement of financial position = $Nil


c.

Income statement charge = $50,000; Statement of financial position = Asset of $40,000

d. Income statement charge = $50,000; Statement of financial position = Liability of $40,000


29. On 1 July 2011 Pedigree Ltd entered into a $5 million contract for the supply of computer software
and five years of after-sales support. The cost of providing after-sales support is estimated at
$500,000 per annum and the mark-up on similar after-sales only contracts is 30% on cost.
In accordance with IAS 18 Revenue how much revenue should be included in Pedigree Ltd's income
statement for the year ended 30 June 2012 in respect of the above contract?
a.

$1.75 million

b. $2.4 million
c.

$2.5 million

d. $5 million

Page 11 of 26

Practice Questions

Financial Reporting

30. On 1 July 2005 Price Ltd entered into a $3 million contract for the supply of computer hardware. An
additional $1 million was agreed for the provision of after-sales support until 30 June 2009.
In accordance with IAS 18 Revenue how much revenue should be included in Price Ltd's income
statement for the year ended 30 June 2006 in respect of the above contract?
a.

$4 million

b. $3 million
c.

$3.25 million

d. $2.25 million
31. On 1 July 20X1 Nevada Ltd issued redeemable 200,000 6% $1 preference shares. These shares are
redeemable on 31 May 20X5.
Nevada Ltd must report this issue in its financial statements for the period ending 31 December 20X1
conforming to IAS 32 Financial instruments: Presentation.
Which financial statements would show the information related to the shares and dividends?
Shares

Dividend

a.

Non-current liabilities

Income statement

b.

Non-current liabilities

Statement of changes in equity

c.

Equity

Income statement

d.

Equity

Statement of changes in equity

Page 12 of 26

Practice Questions

Financial Reporting

32. IAS 32 Financial Instruments: Presentation specifically identifies financial assets. Following are mixtures
of assets that includes financial assets but not all of them. Identify financial assets in terms of IAS32.
i.

Bank overdraft

ii.

Cash at bank

iii.

Inventories

iv.

A current asset investment

v.

A forward contract

vi.

A tractor under financial lease


a.

i, ii, v and vi

b. ii & v
c.

ii, iv & v

d. iv, v & vi
33. Lauren Ltd bought some land on 1 January 2004 for $500,000. On 31 December 2005 this land was
revalued to $700,000. On 31 December 2007 the fair value less costs to sell of this land was estimated
at $400,000 and its value in use at $450,000.
According to IAS 36 Impairment of Assets what amount will be included in the income statement of
Lauren Ltd for the year ended 31 December 2007 in respect of the impairment loss on this land?
a.

$Nil

b. $50,000
c.

$200,000

d. $250,000
34. In accordance with IAS 36 Impairment of Assets which of the following assets must be tested for
impairment annually?
i.

Inventories in Work-in-progress

ii.

Any assets where there is an indication of a potential impairment

iii.

All intangible assets with indefinite useful lives

iv.

Goodwill acquired in a business combination


a.

i only

b. ii only
c.

ii and iii

d. ii, iii and iv

Page 13 of 26

Practice Questions

Financial Reporting

35. Consider the following statements that guides how to provide for provisions in accordance with IAS
37 Provisions, Contingent Liabilities and Contingent Assets.
Which ONE of these statement is not actually included in IAS 37?
i.

When an entity involves in some constructive obligations and / or legal obligations, it should
provide for provisions.

ii.

If the estimated amount of provision has material effect, discounting must be used.

iii. Provision must be provided under the name of restructuring provision that includes the
estimated costs of retraining or relocating existing staff
iv. A restructuring provision may only be made when a company has a detailed plan for the
reconstruction and a firm intention to carry it out
a.

All four statements

b. i, ii and iv
c.

i, iii and iv

d. i, ii and iii
36. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following
criteria must be present in order for a company to recognise a provision?
i.

There is a present obligation as a result of past events.

ii.

It is probable that a transfer of economic benefits will be required to settle the obligation.

iii.

A reliable estimate of the obligation can be made.


a.

i, ii & iii

b. i & ii
c.

i & iii

d. ii & iii
37. According to IAS 38 Intangible Assets which of the following types of research and development
expenditure must be written off in the year it is incurred?
a.

Costs of designing a pre-production prototype

b. Legal costs in connection with registration of a patent


c.

Costs of searching for possible alternative products

d. Costs of research work which are to be reimbursed by a customer

Page 14 of 26

Practice Questions

Financial Reporting

38. Intangible assets can either be generated internally and / or can be purchased. IAS 38 Provisions,
Contingent Liabilities and Contingent Assets in this regard provides specific guidelines on the
amounts that can only be recognised. Consider the following transactions and determine the amount
of intangible assets that can be recognised by Alfeta Ltd.
i.

$22,640 has been incurred in analysing research results

ii.

Competitors brand name bought for $54,000.

iii. A production process needs to be authorised due government regulation. It costs Alfeta Ltd
$38,000 to purchase this legal rights.
a.

$22,640

b. $76,640
c.

$92,000

d. $114,640
39. Bologna plc operates a number of divisions and has a year end of 31 July. On 15 July 20X5 the board
made the decision to sell Bologna plc's manufacturing division. A buyer is expected to be found
within six months and the sale is expected to be completed in early 20X7. In the company's financial
statements for the year ended 31 July 20X5 and 31 July 20X6 how should this division be treated in
accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations?
a.

As a discontinued operation in 20X5

b. As a discontinued operation in both 20X5 and 20X6


c.

As a continuing operation in 20X5 and as a discontinued operation in 20X6

d. As a continuing operation in both 20X5 and 20X6

Page 15 of 26

Practice Questions

Financial Reporting

40. In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations what is the
minimum disclosure which must be made on the face of the income statement in respect of
discontinued operations?
a.

Post-tax profit or loss on operations and any post-tax gain or loss on related assets

b. A combined figure for the post-tax profit or loss on operations and any post-tax gain or loss
on related assets
c.

Revenue, expenses, pre-tax profit or loss and tax on operations and any post-tax gain or loss
on related assets

d. Revenue, expenses, pre-tax profit or loss and tax on operations, any pre-tax gain or loss on
related assets and tax on that gain or loss
41. At a board meeting held on 30 October 20X7 Lupita plc made the decision to sell a major division.
The actual closure took place on 12 February 2008. In the year ended 31 December 20X7 the division
reported a loss of $100,000. Costs of redundancies relating to the division to be incurred in 20X8 are
expected to be $30,000.
In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what will be
reported in Lupita plc's income statement for the year ended 31 December 20X7 in respect of this
division?
a.

$100,000 loss from continuing operations

b. $130,000 loss from continuing operations


c.

$100,000 loss from discontinued operations

d. $130,000 loss from discontinued operations

Page 16 of 26

Practice Questions

Financial Reporting

42. The summarised statements of financial position of Falcon plc and Kestrel Ltd at 31 December 20X8
were as follows.

Net assets (at fair values)


Ordinary share capital
Retained earnings

Falcon Plc
$m
68

Kestrel Ltd
$m
25

10
58
68

10
15
25

On 1 January 20X8 Falcon plc had purchased 80% of the ordinary share capital of Kestrel Ltd for $24
million. The fair value of the net assets of Kestrel Ltd was $20 million at that date. The goodwill arising
on consolidation was impaired by 100%.
At what amount will retained earnings be stated in Falcon plc's consolidated statement of

financial

position as at 31 December 20X8?


a.

$55 million

b. $54 million
c.

$50 million

d. $62 million
43. Xanthe plc owns 75% of the ordinary share capital of QED Ltd. At the group's year end, Xanthe plc
held inventories valued at $160,000 and QED Ltd held inventories valued at $90,000. The inventories
held by Xanthe plc included $20,000 of goods purchased from QED Ltd at a profit margin of 30%.
There were also inventories in transit between the two entities; these amounted to a further $10,000
at selling price.
To the nearest $'000, at what value should inventories appear in the year end consolidated statement
of financial position?
a.

$251,000

b. $253,000
c.

$254,000

d. $255,000

Page 17 of 26

Practice Questions

Financial Reporting

44. On 1 January 20X2 Alfie plc purchased 40% of the equity share capital of Bailey Ltd for $60,000. At
this date the retained earnings of Bailey Ltd stood at $30,000. During the year ended 31 December
20X4 Alfie plc sold goods to Bailey Ltd for $10,000. These goods were still in inventory at the year
end. Alfie plc makes a gross profit margin of 25% on intra-group sales.
At 31 December 20X4 the statement of financial position of Bailey Ltd showed the following.

At what amount should Alfie plc's interest in Bailey Ltd be stated in its consolidated statement of
financial position at 31 December 20X4?
a.

$135,000

b. $135,200
c.

$136,000

d. $147,000
45. Satire Plc. is the parent company of Apery Ltd. Satire plc. has another investment in Gabby Inc. which
is about 25% of Gabbys ordinary share capital.
During the year ended 30 Septmeber 20X1, Gabby Inc. sold goods to Satire Plc. for $120,800. The cost
of the goods to Satire Ltd was $112,800. 30% of the goods remained in Satire plc's inventories at 30
September 20X1.
The amount for inventories in the consolidated statement would be:

a.
b.
c.
d.

Dr. Consolidated retained earnings


$
600
2,400
8,460
30,200

Cr. Consolidated inventories


$
600
2,400
8,460
30,200

Page 18 of 26

Practice Questions

Financial Reporting

46. Genius plc owns 80% of Talent Ltd. For the year ended 31 December 20X6 Talent Ltd reported a net
profit of $55 million. During 20X6, Talent Ltd sold goods to Genius plc for $15 million at cost plus
20%. At the year end half of these goods are still held by Genius plc.
Profit attributable to non-controlling interest would therefore be:
a.

$8 million

b. $10.7 million
c.

$10.75 million

d. $11 million
47. Sarah plc has owned 100% of the ordinary share capital of Ulysses Ltd and Wally Ltd for many years.
Ulysses Ltd operates in a country in Central Africa. In June 2003, civil war broke out in this country.
Essential services have been severely disrupted and it has been impossible to communicate with local
personnel for several months. This situation is unlikely to be resolved in the near future.
Wally Ltd is an insurance company. The rest of the group extracts and processes mineral ores. In
accordance with IAS 27 Consolidated and Separate Financial Statements and IFRS 3 Business
Combinations which of these companies must be consolidated by Sarah plc at 31 December 2003?
a.

Ulysses Ltd only

b. Wally Ltd only


c.

Both Ulysses Ltd and Wally Ltd

d. Neither Ulysses Ltd nor Wally Ltd


48. On 1 January 2005 Plane plc acquired 60% of the ordinary shares of Sycamore Ltd. Goodwill of
$100,000 arose on the acquisition.
Sycamore Ltd's performance for the years ended 31 December 2005 and 31 December 20X6 slightly
exceeded budget. However, in the year ended 31 December 2007 it made substantial losses that had
not been forecast.
According to IFRS 3 Business Combinations when should the goodwill arising on the acquisition of
Sycamore Ltd be reviewed for impairment?
a.

Annually

b. In 2005 only
c.

In 2007 only

d. In 2005 and in 2007

Page 19 of 26

Practice Questions

Financial Reporting

49. Deferred tax is a balance sheet item that is used to accrue tax to the appropriate period. In other
words, this is an accounting measure used to match the tax effects of transactions with their
accounting impact and thereby produce less distorted results. Deferred tax is calculated so as not to
misrepresent to users of the financial statements the amount of the surplus attributable to owners
and recognised in other comprehensive income.
Which of the following may raise the issue of deferred tax?
i.

Losses that result in a tax credit that can only be claimed against the tax on future profits.

ii.

Differences between depreciation of an asset and the tax allowances.

iii. Dividends remitted to the parent company from a subsidiary that results in tax liability.
a.

(i) and (ii) only

b. (ii) and (iii) only


c.

(i) and (iii) only

d. (i), (ii) and (iii)


50. Pasha plc had a balance of $700,000 on its retained earnings at January 1, 20X7. During the year
ended December 31, 20X7 the company:

Revalued property with a cost of $1 million and accumulated depreciation of $600,000 to


$1.2 million. No annual transfers between reserves are to be made

Issued shares at a premium of $100,000

Made a profit for the year of $400,000

On December 1, 20X7 the directors paid a dividend of $250,000 in respect of the year ended
December 31, 20X6.
In accordance with IAS 1 Presentation of Financial Statements, what is the closing balance on retained
earnings in Pasha plc's statement of changes in equity for the year ended December 31, 20X7?
a.

$750,000

b. $850,000
c.

$1,100,000

d. $1,650,000

Page 20 of 26

Practice Questions

Financial Reporting

51. Kishore Ltd, a company which builds houses, has a normal operating cycle of 18 months and a year
end of 30 June 20X5.
According to IAS 1 (revised) Presentation of Financial Statements, which of the following assets should
be classified as 'current' in Kishore Ltd's statement of financial position as at 30 June 20X5?
1) Inventory which is expected to be realised in September 20X6
2) A house constructed by Kishore Ltd which is expected to be sold in December 20X5
3) Marketable securities which are expected to be realised in September 20X6
a.

(1) and (2)

b. (2) and (3)


c.

(1) and (3)

d. (1), (2) and (3)


52. Under construction contract state which of the following would be the appropriate approach
regarding Revenue and Costs?
a.

It must reflect the proportion of work carried out

b. It should take into account any known inequalities in profitability in the various stages of a
contract.
c.

Include an appropriate proportion of total contract value as profit in profit or loss.

d. Sales revenue and associated costs should be recorded in profit or loss as the contract activity
progresses.
53. Tesla Ltd recently paid dividends to its shareholders. Where a potential investor can find this
information in the financial statements of Tesla Ltd?
a.

In the statement of financial position under current asset.

b. In the statement of profit or loss and other comprehensive income under administrative
expense.
c.

In the statement of changes in equity with retained earnings reduced by the amount.

d. In the statement of profit or loss and other comprehensive income as a loss.

Page 21 of 26

Practice Questions

Financial Reporting

SOLUTIONS
1. d
2. b
3. d
4. d
5. d
6. a
7. b
Opening inventory
Purchases
Carriage inwards
Less: (closing inventory)

$
7,200
76,500
50
(8,100)
75,650

8. b
9. d
10. d
11. c
This has been altered. It should be: Sales by parent or subsidiary to an associate (operating cash
flows).
12. c
13. d
Matching items are carried out with accruals accounting and is an advantage of this method.
14. a
15. c
16. d
$
980,000
(40,000)
(130,000)
100,000
80,000
990,000

Add: depreciation charge


Less: profit on sale of assets
Less: increase in stocks
Add: decrease in debtors
Add: increase in creditors
Addition to operating profit
17. b
18. a
Page 22 of 26

Practice Questions

Financial Reporting

19. c
20. d
21. b
22. c
23. d
Material errors are treated in the same way as changes of accounting policy, by the application
of retrospective restatement.
24. c
25. b
26. c
$(780,000 + 117,000 + 30,000 + 28,000 + 18,000 + 100,000) = $1,073,000
27. b
IAS 16 states that where there is an exchange of items of PPE such that there is no cash price,
cost should be measured at fair value. Here, instead of paying cash, Gigs plc has given up an
asset with a fair value of $1.9 million, in order to acquire the building previously owned by Talc
Ltd. Hence this building should be recorded in Gigs plc's books at that amount.
28. c
Cash paid (60,000 + 30,000)

$90,000

Income statement charge ((60,000 + (3 30,000)) 3))


Prepayment

($50,000)
$40,000

29. b
Total contract price
Less: After-sales support (500,000 5 years 130%)
Revenue for year re supply of software
Revenue for year re after-sales support (500,000 130%)

$m
5
-3.25
1.75
0.65
2.4

30. c
Supply of hardware
One year of after-sales support at additional fixed fee (1m 4 years)

Page 23 of 26

$m
3
0.25
3.25

Practice Questions

Financial Reporting

31. a
Redeemable preference shares are classified as liabilities. Dividends on these shares are shown
as finance cost in the income statement, not as dividends in the statement of changes in equity.
32. c
33. b
Recoverable amount is the higher of fair value less costs to sell and value in use i.e. $450,000.
The impairment loss is therefore $250,000 (700,000 450,000). Since there is $200,000 (700,000
500,000) in the revaluation surplus in respect of this land, then $200,000 of the impairment
loss can be set against the revaluation surplus, with the remaining $50,000 charged to the
income statement.
34. d
35. b
IAS 37 excludes retraining and relocation of continuing staff from restructuring provisions.
36. a
37. c
38. c
39. c
A discontinued operation is one that has either been disposed of in the period, or is held for
sale. A held for sale asset is one where the sale has been committed or is expected to be
complete within one year from the date of classification. This division does not qualify as held
for sale in 20X5 as it is not expected to be sold until early 20X7. It will therefore not be disclosed
as discontinued until 20X6.
40. b
41. d
Since the sale was completed within one year of classification this is a discontinued operation in
the year ended 31 December 20X7. The original loss of $100,000 will be increased by a provision
for the redundancy costs in accordance with IAS 37.

Page 24 of 26

Practice Questions

Financial Reporting

42. b

43. a

44. a

45. a
The unrealised profit is $8,000 and the inventories are still held by Satire plc.
$120,800 - $112,800 = $8000 (Unrealised profit)
8,000 * 30% * 25% = $600.
46. c
$'000
55,000
(1,250)
53,750
10,750

Subsidiary Ltd
Less: PURP (15,000 20/120
NCI share ( 20%)

Page 25 of 26

Practice Questions

Financial Reporting

47. b
Ulysses Ltd is not consolidated. The civil war means that Sarah plc is no longer able to exercise
control over Ulysses Ltd; consequently the definition of a subsidiary is not met. Dissimilar
activities are not grounds for exclusion and hence Wally Ltd is consolidated.
48. a
Per IFRS 3 goodwill acquired in a business combination should be reviewed for impairment
annually.
49. d
50. b
($700,000 + 400,000 250,000) = $850,000
51. a
The inventory is expected to be realised within the normal operating cycle of 18 months
therefore is classified as current. Because Finstock Ltd builds houses, the house is inventory as
opposed to property and hence, since it will be realised within the normal operating cycle, is
classified as current. According to IAS 1, assets are classified as current if they are expected to be
realised within 12 months of the end of the reporting period. This is not the case here so the
securities are classified as non-current.
52. d
53. c

Page 26 of 26

You might also like