lOMoARcPSD|6612766

Answers to MCQs
The regulatory framework

Question 1
The sources of regulation which comprise the regulatory framework for financial reporting
include:
a. Legislation
b. Accounting standards
c. Stock exchange regulations
d. All of the above

Question 2
"Accounting standards set out the broad rules which govern financial reporting but do not lay
down the detailed accounting treatments of transactions and other items". True or False?

a. True
b. False

Question 3
The abbreviation "GAAP" stands for:

a. Globally accepted accounting practice

b. Generally accepted accounting practice
c. Globally accepted accounting principles
d. Generally accepted accounting principles

Question 4
Standards issued by the International Accounting Standards Board (IASB®) are known as:

a. Financial Reporting Standards

b. International Accounting Standards
c. International Financial Reporting Standards
d. Financial Accounting Standards

Question 5
The role of the IFRS Advisory Council is to:

a. Supervise the work of the IASB

b. Interpret the application of international standards
c. Appoint members to the IASB
d. Inform the IASB of the Council's views on standard-setting projects
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Question 6
The body to which the International Accounting Standards Board is responsible is:

a. The IFRS Advisory Council

b. The IFRS Interpretations Committee
c. The IFRS Foundation
d. The Monitoring Board

Question 7
One of the main advantages of standardisation in financial reporting is:

a. Comparability between accounting periods and between entities

b. A greater choice of accounting treatments
c. Increased flexibility in financial reporting
d. The use of creative accounting practices

Question 8
IFRS1 First-time Adoption of International Financial Reporting Standards defines the "date of
transition" to international standards as:

a. The date at the end of the first IFRS reporting period

b. The date at the start of the earliest period for which comparatives are
provided in the first IFRS financial statements
c. The date at the end of the earliest period for which comparatives are provided
in the first IFRS financial statements
d. The date at the start of the first IFRS reporting period

Question 9
"An entity which adopts international financial reporting standards must always adhere to the
requirements of every standard, no matter what the circumstances". True or False?

a. True
b. False
IAS1 allows an entity to depart from the requirements of a standard in the "extremely rare
circumstances" in which compliance would prevent the financial statements from faithfully
representing transactions and other items.
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Question 10
The IASB Preface to International Financial Reporting Standards states that the international
standards are designed to apply to the general purpose financial statements of:

a. Profit-oriented entities
b. Companies only
c. Not-for-profit organisations
d. Public sector organisations only

Question 11
An entity prepares its first IFRS financial statements for the year to 30 September 2018. These
financial statements provide comparative figures for the previous year. The date of transition
to IFRS is:

a. 30 September 2018
b. 30 September 2017
c. 1 October 2016
d. 1 October 2017

Question 12
An entity prepares its first IFRS financial statements for the year to 30 September 2018. These
financial statements provide comparative figures for the previous year. The accounting policies
used when preparing the comparative information for the year to 30 September 2017 must
comply with international standards as at:

a. 30 September 2018
b. 30 September 2017
c. 1 October 2016
d. 1 October 2017

The IASB conceptual framework

Question 13
A conceptual framework for financial reporting is:

a. A set of items which make up an entity's financial statements

b. A set of regulations which govern financial reporting
c. A set of principles which underpin financial reporting
d. A set of financial reporting standards
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Question 14
The 2010 version of the IASB Conceptual Framework was developed jointly with:

a. The UK Financial Reporting Council

b. Accounting standards boards throughout the world
c. The European Union
d. The US Financial Accounting Standards Board

Question 15
The primary users of general purpose financial reports are:

a. Investors and employees

b. Investors and lenders
c. Employees and lenders
d. Investors and customers

Question 16
The fundamental qualitative characteristics of financial information are:

a. Relevance and faithful representation

b. Relevance and comparability
c. Faithful representation and comparability
d. Verifiability and understandability

Question 17
The enhancing qualitative characteristics of financial information include:

a. Relevance and faithful representation

b. Comparability and understandability
c. Relevance and timeliness
d. Understandability and faithful representation

Question 18
Which of the following is not a contributory factor towards faithful representation?

a. Completeness
b. Freedom from error
c. Neutrality
d. Consistency
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Question 19
Allowing a choice of alternative accounting treatments improves the consistency and
comparability of financial statements. True or False?

a. True
b. False

Question 20
The elements of financial statements which relate to financial position are:

a. Income and expenses

b. Income, expenses and equity
c. Assets, liabilities and equity
d. Assets, liabilities, income and expenses

Question 21
If the current cost measurement basis is used, assets are measured at:

a. Replacement cost
b. The amount paid to acquire them
c. The amount which could be obtained by selling them
d. Present value

Question 22
Under the concept of physical capital maintenance, profit is defined in terms of the increase
in an entity's purchasing power during an accounting period. True or False?

a. True
b. False
An increase in purchasing power represents an increase in financial capital. This is not necessarily
matched by an increase in the entity's physical operating capability.

Question 23
Recognition is the process of:

a. Disclosing information in the notes to the financial statements

b. Determining the amount at which an item should be shown in the financial
statements
c. Incorporating an item in the financial statements
d. Determining where an item should be presented in the financial statements
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Question 24
The underlying assumption that is identified in the 2010 version of the IASB Conceptual
Framework is:

a. The accruals basis

b. The going concern basis
c. Prudence
d. Substance over form

Property, Plant and Equipment and Investment property

Question 25
Which of the following items qualifies as property, plant and equipment?

a. A machine bought for resale to a customer

b. A machine bought for use during a single accounting period
c. A machine bought for use in more than one accounting period
d. Computer software bought for use in more than one accounting period

Question 26
The "carrying amount" of an item of property, plant and equipment generally refers to:

a. The cost of the item

b. The replacement cost of the item
c. The depreciable amount of the item
d. The amount at which the item is recognised in the financial statements

Question 27
A company pays £40,000 to replace a major component of a factory machine. The faulty
component that is replaced is sold for £2,000. The carrying amount of the machine just before
this replacement occurs is £450,000, of which £10,000 relates to the faulty component that is
being replaced. The revised carrying amount of the machine after the replacement occurs and
the profit or loss on disposal of the faulty component are:

a. Carrying amount £490,000, Loss £8,000

b. Carrying amount £480,000, Loss £8,000
c. Carrying amount £480,000, Loss £10,000
d. Carrying amount £490,000, Profit £2,000
Carrying amount is £480,000 (£450,000 – £10,000 + £40,000). Loss on disposal is £8,000 (£10,000
– £2,000).
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Question 28
Which of the following would not be included in the cost of an item of property, plant and
equipment?

a. Delivery and installation charges

b. Testing costs
c. Refundable value added tax
d. Site preparation costs

Question 29
On 31 December 2016, a company acquires land for £500,000. The land is revalued at £530,000
on 31 December 2017 and £460,000 on 31 December 2018. The company prepares financial
statements to 31 December each year and uses the revaluation model in relation to land. The
correct accounting treatment of each revaluation in the statement of comprehensive income is
as follows:

a. 2017 Income £30,000 2018 Expense £70,000

b. 2017 Other comprehensive income £30,000 2018 Expense £70,000
c. 2017 Other comprehensive income £30,000 2018 Negative other
comprehensive income £70,000
d. 2017 Other comprehensive income £30,000 2018 Negative other
comprehensive income £30,000 Expense £40,000

2017 £30,000 is credited to revaluation reserve and shown in other comprehensive income 2018
£30,000 is debited to revaluation reserve and shown as negative other comprehensive income A
£40,000 expense is recognised in the calculation of profit or loss for the year

Question 30
Depreciation is defined as the fall in value of an asset during an accounting period. True or
False?

a. True
b. False

Question 31
On 1 January 2017, a company which prepares financial statements to 31 December each year
buys an item of equipment for £20,000. Useful life is estimated to be six years and residual
value is expected to be approximately £1,500. The company uses the diminishing balance
method of depreciation at a rate of 35% per annum. To the nearest pound, the depreciation of
this item for the year to 31 December 2018 would be:
a. £3,083
b. £7,000
c. £4,550
d. £4,209
WDV at the end of 2017 is £13,000 (65% of £20,000), so depreciation in 2018 is £4,550 (35% of
£13,000).
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Question 32
If investment property is measured using the fair value model, a gain arising from a change in
the fair value of an investment property must be:

a. Recognised in the calculation of profit or loss

b. Recognised as other comprehensive income
c. Credited to a revaluation reserve
d. Ignored

Question 33
If a company adopts the revaluation method in relation to an item of property, plant and
equipment, it is no longer necessary to charge depreciation in relation to that item. True or
False?

a. True
b. False

Question 34
On 1 January 2017, a company which prepares financial statements to 31 December acquires
an item of equipment and receives a government grant of 20% of the item's cost. The item cost
£30,000 and has an expected useful life of seven years with a residual value of approximately
£4,000. The item is depreciated on the diminishing balance basis at a rate of 25% per annum.
To the nearest pound, the amount of the grant that should be recognised as income in the year
to 31 December 2018 is:

a. £1,298
b. £6,000
c. £857
d. £1,125

WDV at the end of 2017 is £22,500 (75% of £30,000), so depreciation in 2018 is £5,625 (25% of
£22,500). This is equal to 21.63% of the item's depreciable amount, so income of £1,298 (21.63%
of £6,000) is recognised in the year to 31 December 2018.

Intangible assets

Question 35
Goodwill does not fall within the IAS38 definition of an intangible asset because:

a. It is a monetary asset
b. It is not separable
c. It may not generate future economic benefits
d. None of the above
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Question 36
Which of the following would not be included in the cost of a separately acquired intangible
asset?

a. Non-refundable value added tax

b. Employee costs incurred in preparing the asset for its intended use
c. Costs incurred in using the asset
d. Testing costs

Question 37
How should research and development expenditure be dealt with in an entity's financial
statements?

a. Research and development expenditure should always be written off as an

expense
b. Research and development expenditure should always be capitalised as an
intangible asset
c. Research expenditure should always be written off as an expense but
development expenditure should always be capitalised as an intangible asset
d. Research expenditure should always be written off as an expense but
development expenditure should be capitalised as an intangible asset if it
satisfies certain conditions

Question 38
The revaluation model cannot be used for the measurement of an intangible asset unless:

a. The asset is revalued every year

b. The fair value of the asset is determined by a professional valuer
c. There is an active market in that type of asset
d. The revaluation model is also used for tangible assets

Question 39
Expenditure on advertising and promotion can never be treated as giving rise to the acquisition
of an intangible asset. True or False?

a. True
b. False
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Question 40
On 31 December 2016, a company acquires an intangible asset for £50,000. The asset is
revalued at £42,000 on 31 December 2017 and £57,000 on 31 December 2018. The company
prepares financial statements to 31 December each year and uses the revaluation model in
relation to this class of intangible assets. The correct accounting treatment of each revaluation
in the statement of comprehensive income is as follows

a. 2017 Expense £8,000 2018 Income £8,000 Other comprehensive income

£7,000
b. 2017 Expense £8,000 2018 Income £15,000
c. 2017 Expense £8,000 2018 Other comprehensive income £15,000
d. 2017 Negative other comprehensive income £8,000 2018 Other comprehensive
income £15,000
2017 An £8,000 expense is recognised in the calculation of profit or loss for the year. 2018 £8,000
is recognised as income in the calculation of profit or loss for the year. £7,000 is credited to
revaluation reserve and shown in other comprehensive income.

Question 41
The amortisation method used in relation to an intangible asset should be chosen so as to:

a. Write off the asset as soon as possible

b. Reflect the usage pattern of the asset
c. Evenly spread the cost of the asset over its useful life
d. Maximise the amortisation charge in the early years of the asset's useful life

Question 42
International standard IFRS3 states that goodwill acquired in a business combination is:

a. An asset which arises from the acquired entity's good reputation

b. An asset which arises from the acquired entity's strong customer relationships
c. An asset which arises from assets acquired in the business combination that are
individually identified
d. An asset which arises from assets acquired in the business combination that
are not individually identified

Question 43
Negative goodwill arising on a business combination should be shown as a negative asset in
the statement of financial position. True or False?

a. True
b. False
Negative goodwill should be treated as income and included in the acquirer's profit or loss.
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Question 44
Goodwill acquired in a business combination should subsequently be measured:

a. At cost
b. At cost less accumulated amortisation
c. At cost less accumulated impairment losses
d. At cost less accumulated amortisation and less accumulated impairment losses

Question 45
During the year to 31 March 2018, a company spent £120,000 on research and £80,000 on
development. The development costs meet the criteria for recognition as an intangible asset
and are to be amortised over five years on the straight line basis. Their residual value is
estimated to be £nil. A full year's amortisation charge is made in the year of the expenditure.
The total research and development costs recognised as an expense in the year to 31 March
2018 are:

a. £136,000
b. £200,000
c. £40,000
d. £16,000

The research expense is £120,000. Amortisation of development costs is £16,000 (1/5th of £80,000)
so the total R&D expense is £136,000.

Question 46
A company acquires all the assets and liabilities of an unincorporated business for £1m. The
net fair value of the identifiable assets and liabilities acquired is £1.2m. The assets acquired
include patents with a fair value of £300,000. How should this acquisition be accounted for in
the company's financial statements?

a. Recognise the identifiable assets and liabilities at their fair values and recognise
goodwill of £200,000
b. Recognise the identifiable assets and liabilities at their fair values and
recognise revenue of £200,000.
c. Recognise the patents at £100,000 and recognise all of the other assets and
liabilities at their fair values
d. Recognise the identifiable assets and liabilities at their fair values and recognise
a negative asset of £200,000 in relation to goodwill
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Consolidations

Question 47
The only way in which a parent-subsidiary relationship can be established is for the parent
company to acquire more than 50% of the ordinary shares of the subsidiary company. True or
False?
a. True
b. False
Control may exist if the investor company has the right to direct the investee company's activities,
even if the investor does not own more than 50% of the investee's ordinary share capital.

Question 48
When a parent company acquires a subsidiary, the amount paid for goodwill is equal to the
amount paid by the parent company for its shares in the subsidiary company, less:

a. The nominal value of those shares

b. The market value of those shares
c. The nominal value of those shares plus the parent's stake in the subsidiary's
reserves
d. The market value of those shares plus the parent's stake in the subsidiary's
reserves

Question 49
On 1 July 2018, A Ltd pays £870,000 to acquire the entire share capital of B Ltd. The equity
of B Ltd on that date consists of ordinary share capital of £400,000 and retained earnings of
£210,000. The fair value of the non-current assets of B Ltd on 1 July 2018 exceeds their
carrying amount by £35,000. The amount paid for goodwill by A Ltd is:

a. £470,000
b. £260,000
c. £295,000
d. £225,000
The equity of B Ltd (including fair value adjustment of £35,000) is £645,000. So the amount paid
for goodwill is £225,000 (£870,000 – £645,000).
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Question 50
On 1 May 2016, C Ltd paid £430,000 to acquire the entire share capital of D Ltd. The equity
of D Ltd on that date consisted of ordinary share capital of £200,000 and retained earnings of
£90,000. All of its assets and liabilities were carried at fair value. On 30 April 2018, the retained
earnings of C Ltd and D Ltd are £970,000 and £115,000 respectively. Goodwill arising on
consolidation has suffered an impairment loss of 25% since 1 May 2016. Group retained
earnings at 30 April 2018 are:

a. £960,000
b. £1,085,000
c. £1,050,000
d. £980,000
The amount paid for goodwill was £140,000 (£430,000 – £290,000). So the impairment loss is
£35,000 (25% of £140,000). The retained earnings of D Ltd have increased by £25,000 since
acquisition. Therefore group retained earnings at 30 April 2018 are (£970,000 + £25,000 – £35,000)
= £960,000.

Question 51
On 1 January 2011, P Ltd paid £480,000 to acquire 65% of the ordinary share capital of Q Ltd.
The equity of Q Ltd on that date consisted of ordinary share capital of £200,000 and retained
earnings of £150,000. The fair value of the non-current assets of Q Ltd on 1 January 2011
exceeded their carrying amount by £250,000. Goodwill arising on consolidation has suffered
an impairment loss of 40% between 1 January 2011 and 31 December 2018. The goodwill
figure which should be shown in the consolidated statement of financial position at 31
December 2018 is:

a. £36,000
b. £54,000
c. £151,500
d. £78,000
The amount paid for goodwill by P Ltd was £90,000 (£480,000 – 65% of (£350,000 + £250,000)).
The impairment loss is £36,000 (40% of £90,000) so the goodwill figure at 31 December 2018 is
£54,000.
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Question 52
On 1 January 2015, E Ltd paid £560,000 to acquire 80% of the ordinary share capital of F Ltd.
The equity of F Ltd on that date consisted of ordinary share capital of £300,000 and retained
earnings of £150,000. All of its assets and liabilities were carried at fair value. On 31 December
2018, the retained earnings of E Ltd and F Ltd are £1,870,000 and £65,000 respectively.
Goodwill arising on consolidation has suffered an impairment loss of 70% since 1 January
2015. The retained earnings figure which should be shown in the consolidated statement of
financial position at 31 December 2018 is:

a. £1,798,000
b. £1,708,000
c. £1,645,000
d. £1,662,000
The amount paid for goodwill was £200,000 (£560,000 – 80% of (£300,000 + £150,000)) so the
impairment loss is £140,000 (70% of £200,000). The retained earnings of F Ltd have decreased by
£85,000 since acquisition. 80% of this is £68,000. Therefore group retained earnings at 31
December 2018 are (£1,870,000 – £68,000 – £140,000) = £1,662,000.

Question 53
A company's preference shareholders are not entitled to a share of the company's reserves. True
or false?
a. True
b. False

Question 54
Which of the following is not an example of an intra-group balance?
a. A loan made by a parent company to a subsidiary
b. A loan made by one subsidiary to another
c. A trade receivable owing to a subsidiary by an individual who is one of its
customers
d. A trade payable owing to a subsidiary by its parent company

Question 55
G Ltd owns 90% of the ordinary share capital of H Ltd. The inventories of H Ltd on 30
November 2017 include goods purchased from G Ltd for £300,000. These goods had been sold
to H Ltd by G Ltd at a markup of 50%. The amount of unrealised profit which should be
subtracted from group inventories and from group retained earnings is:

a. £100,000
b. £90,000
c. £150,000
d. £135,000
The original cost of the goods to G Ltd must have been £200,000, since £200,000 plus 50% is
£300,000. So the unrealised profit is £100,000. This must be eliminated in full, despite the fact that
H Ltd is a partly-owned subsidiary.
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Question 56
During an accounting period, a parent company sells goods to one of its subsidiaries for
£10,000. These goods cost the parent company £6,000. At the end of the accounting period,
three-quarters of the goods have been sold by the subsidiary to customers outside the group but
the remaining one-quarter of the goods are still held in inventories. The adjustments required
when preparing the group statement of comprehensive income are:

a. Subtract £10,000 from group sales revenue and subtract £10,000 from group
cost of sales
b. Subtract £10,000 from group sales revenue and subtract £6,000 from group cost
of sales
c. Subtract £10,000 from group sales revenue and subtract £9,000 from group
cost of sales
d. Subtract £10,000 from group sales revenue and subtract £11,000 from group
cost of sales
Unrealised profit is £1,000 (one-quarter of £4,000). This should be added to group cost of sales,
since a reduction in closing inventories causes an increase in cost of sales. The adjustment to group
cost of sales is therefore £9,000 (£10,000 subtracted to eliminate the intra-group purchase and
£1,000 added in relation to unrealised profit).

Question 57
During an accounting period, a parent company sells goods to one of its subsidiaries for
£200,000. This represents cost plus 25%. At the end of the accounting period, one-fifth of these
goods are still held in the subsidiary's inventories. The cost of sales figures reported in the
parent's and the subsidiary's financial statements are £890,000 and £530,000 respectively. The
parent company has a 60% interest in the subsidiary's ordinary shares. The cost of sales figure
that should appear in the consolidated statement of comprehensive income for the year is:

a. £1,212,000
b. £1,228,000
c. £1,230,000
d. £1,096,000
The goods that were sold by the parent to the subsidiary must have cost the parent £160,000 (since
£160,000 plus 25% = £200,000). Therefore the profit loading was £40,000 and the unrealised profit
is £8,000 (one-fifth of £40,000). Group cost of sales is £1,228,000 (£890,000 + £530,000 –
£200,000 + £8,000). The fact that the subsidiary is partly-owned is irrelevant to this calculation.

Question 58
The difference between the end of the reporting period of a subsidiary and that of its parent
should not exceed six months. True or False?

a. True
b. False
The difference should not exceed three months.
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Question 59
A parent company owns 73% of a subsidiary's ordinary shares. The non-controlling interest in
the group statement of financial position is measured at the appropriate proportion of the
subsidiary's identifiable net assets. An impairment loss in relation to goodwill arising on
consolidation should be accounted for in the group statement of comprehensive income as
follows:

a. Recognise 100% of the impairment loss as a group expense

b. Recognise 73% of the impairment loss as a group expense and subtract the
remaining 27% from the profit attributable to the non-controlling interest
c. Do nothing
d. Recognise 73% of the impairment loss as a group expense but make no further
adjustments

Question 60
The amount of profit attributable to the non-controlling interest in a 90% subsidiary is generally
equal to:

a. 10% of the group profit before tax

b. 10% of the group profit after tax
c. 10% of the subsidiary's profit before tax
d. 10% of the subsidiary's profit after tax

Question 61
When preparing a set of group financial statements, the correct treatment of dividends paid by
a subsidiary company to its non-controlling shareholders is to:

a. Deduct them in the non-controlling interest column in the group statement

of changes in equity
b. Cancel them against dividends received by the parent company
c. Ignore them completely
d. Add them in the non-controlling interest column in the group statement of
changes in equity

Question 62
In an accounting period, a parent company has sales of £867,000 and its 80% subsidiary has
sales of £121,000. The group sales figure for the period is £963,800. True or False?

a. True
b. False
Group sales should include 100% of the subsidiary's sales regardless of whether it is wholly-owned
or partly-owned. The correct figure is £988,000.
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Question 63
In an accounting period, a parent company has pre-tax profits of £5m. Its 75% subsidiary has
pre-tax profits of £2m. The tax expense for both companies is equal to 20% of profit before
tax. The profit attributable to the non-controlling interest is:

a. £500,000
b. £1,200,000
c. £400,000
d. £1,400,000
The subsidiary's tax expense is £400,000 (20% of £2m) so its profit after tax is £1.6m. Profit
attributable to the NCI is £400,000 (25% of £1.6m).

Question 64
If a subsidiary company is acquired part of the way through an accounting period, the group's
share of the subsidiary's pre-acquisition profit is included in the statement of comprehensive
income for the period. True or False?

a. True
b. False
The group's share of the subsidiary's post-acquisition profit is included.

Question 65
Which of the following is an example of an intra-group item which is cancelled out when
preparing the group statement of comprehensive income?

a. Interest payable by a subsidiary to its parent

b. Management expenses charged by one subsidiary to another
c. Administrative fees charged by a parent to a subsidiary
d. All of the above

Question 66
A parent company and its subsidiaries form a single entity for legal purposes. True or False?
a. True
b. False
A parent company and its subsidiaries form a single entity for economic purposes but they are all
separate entities for legal purposes.

Associates
Question 67
An associate is an entity over which the investor has:

a. Control
b. Joint control
c. Significant influence
d. Power
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Question 68
Which of the following would normally indicate that an investor has significant influence over
an investee?

a. The investor has the right to direct the investee to enter into transactions for the
investor's benefit
b. The investor has the right to appoint or remove members of the investee's key
management personnel
c. The investor owns 55% of the investee's ordinary shares
d. The investor owns 21% of the investee's ordinary shares

Question 69
An investment in an associate is normally accounted for using the equity method. This method
requires that the investment in the associate is:

a. Initially recognised at cost and not adjusted thereafter

b. Initially recognised at cost and then adjusted in each subsequent
accounting period to reflect the investor's share of the associate's profit or
loss for the period
c. Recognised at fair value
d. Initially recognised at cost and then adjusted to fair value in subsequent
accounting periods

Question 70
On 1 May 2017, V Ltd acquired 35% of the ordinary share capital of W Ltd at a cost of
£472,500. This amount was equal to 35% of the fair value of the identifiable net assets of W
Ltd on that date. In the year to 30 April 2018, W Ltd made a profit after tax of £80,000 and
paid an ordinary dividend of £32,000. In the financial statements of V Ltd, the carrying amount
of the investment in W Ltd as at 30 April 2018 should be:

a. £472,500
b. £489,300
c. £520,500
d. £500,500
V Ltd's share of the profit of W Ltd for the year is £28,000 (35% of £80,000). Similarly, V Ltd's share
of the dividend is £11,200 (35% of £32,000). The carrying amount of the investment becomes
£489,300 (£472,500 + £28,000 – £11,200)
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Question 71
An investor company has a 22% interest in an associate. During an accounting period, the
investor bought goods from the associate for £70,000. These goods had cost the associate
£50,000. One-quarter of the goods remained in the investor's inventories at the end of the
period. The unrealised profit is:

a. £1,100
b. £5,000
c. £4,400
d. £20,000
The unrealised profit is £1,100 (22% of one-quarter of £20,000)

Question 72
Any positive goodwill which is included in the carrying amount of an investment in an
associate is not separately recognised and is not separately tested for impairment. True or
False?

a. True
b. False

Question 73
If an investor company owns less than 20% of an investee's voting power, the investor cannot
have significant influence over the investee and therefore the investee cannot be the investor's
associate. True or False?

a. True
b. False
Significant influence can be evidenced in a number of ways, even if the investor does not own at
least 20% of the investee's voting power.

Question 74
The two categories of joint arrangement recognised by international standard IFRS11 are:

a. Joint operations and joint assets

b. Joint ventures and joint enterprises
c. Joint operations and joint ventures
d. Joint ventures and joint assets

Question 75
An interest in a joint operation must be accounted for by the equity method. True or False?

a. True
b. False
An interest in a joint venture is normally accounted for by the equity method, but not an interest in
a joint operation
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Question 76
With the equity method of accounting, the investor's share of the investee's revenue is added to
the investor's own revenue in the investor's statement of comprehensive income. True or False?

a. True
b. False
With the equity method, the investor's share of the investee's profit or loss is shown as a single
figure in the investor's statement of comprehensive income.

Cash flow statement

Question 77
Which of the following is not a characteristic of an entity's cash equivalents, as defined by
international standard IAS7?

a. A short-term investment
b. A highly liquid investment
c. An investment which is readily convertible into known amounts of cash
d. An investment which is subject to significant risk of changes in value

Question 78
Bank overdrafts are generally regarded as a component of an entity's cash and cash equivalents.
True or False?
a. True
b. False

Question 79
Cash inflows and outflows arising from operating activities do not include:

a. Cash receipts from the sale of goods and services

b. Cash receipts from the sale of property, plant and equipment
c. Cash payments to employees
d. Cash payments to suppliers for goods and services

Question 80
Which of the following is a cash inflow or outflow arising from investing activities?

a. Cash received from the repayment of loans made to other parties

b. Royalties received
c. Cash repaid to lenders
d. Cash received on the issue of loan stock
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Question 81
Which of the following is not a cash inflow or outflow arising from financing activities?

a. Cash proceeds of a share issue

b. Cash proceeds from issuing debentures
c. Cash payments to acquire equity of other entities
d. Cash repayments of amounts borrowed

Question 82
If cash flows from operating activities are reported using the direct method, the statement of
cash flows does not show:

a. Cash received from customers

b. Depreciation charges
c. Cash paid to suppliers
d. Cash paid to employees

Question 83
A company uses the indirect method for reporting cash flows from operating activities. During
an accounting period, inventories have risen by £5,000, trade receivables have fallen by £4,000
and trade payables have risen by £3,000. When calculating the net cash inflow or outflow from
operating activities, the required adjustments are as follows:

a. Subtract £5,000, Add £4,000, Subtract £3,000

b. Add £5,000, Subtract £4,000, Add £3,000
c. Add £5,000, Subtract £4,000, Subtract £3,000
d. Subtract £5,000, Add £4,000, Add £3,000

Question 84
A company uses the indirect method for reporting cash flows from operating activities. During
an accounting period, plant which had cost £30,000 some years ago was sold for £3,000. The
accumulated depreciation on this plant at the time of disposal was £25,000. The effects of this
transaction on the statement of cash flows are as follows:

a. Operating activities: Subtract loss on disposal £2,000 Investing activities: Cash

received on disposal of plant £3,000
b. Operating activities: Add disposal proceeds £3,000 Investing activities:
Subtract loss on disposal of plant £2,000
c. Operating activities: Add back loss on disposal £2,000 Investing activities:
Cash received on disposal of plant £3,000
d. Operating activities: Subtract disposal proceeds £3,000 Investing activities:
Add back loss on disposal £2,000
The loss on disposal is £2,000 (£30,000 – £25,000 – £3,000). This is a non-cash expense and
requires an adjustment when calculating the net cash flow from operating activities.
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Question 85
The sale of an investment which ranks as a cash equivalent is treated as a cash inflow from
investing activities. True or False?

a. True
b. False
The sale of a cash equivalent is simply a movement between one component of cash and another.
This is neither a cash inflow nor a cash outflow.

Question 86
IAS7 requires that all entities which comply with international standards should present a
statement of cash flows. True or False?

a. True
b. False

Question 87
The carrying amount of a company's property, plant and equipment was £740,000 at the
beginning of an accounting year and £835,000 at the end of the year. The depreciation charge
for the year was £100,000. Plant with a carrying amount of £25,000 was sold during the year
for £10,000 and a property was revalued upwards by £50,000. The cash outflow caused by the
acquisition of property, plant and equipment during the year was:

a. £220,000
b. £155,000
c. £205,000
d. £170,000
£25,000 of the opening balance is removed when the disposal occurs (leaving £715,000). This is
reduced to £615,000 by depreciation of £100,000 and then increased to £665,000 by the
revaluation. The closing balance is £835,000, so the amount spent on PPE must be £170,000
(£835,000 – £665,000)
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Question 88
The current tax liability shown in a company's statement of financial position at 31 December
2017 is £392,000. The comparative figure at 31 December 2016 was £355,000. The tax expense
shown in the statement of comprehensive income for the year to 31 December 2017 is
£410,000. A transfer of £5,000 was made to the deferred tax account during the year. The
amount of tax paid during the year to 31 December 2017 was:

a. £368,000
b. £373,000
c. £378,000
d. £442,000

£5,000 of the tax expense is deferred tax so the current tax expense for the year is £405,000.
Adding this to the liability b/f gives £760,000. The liability c/f is £392,000, so the amount of tax
paid in the year must have been £368,000 (£760,000 – £392,000)

Inventories and Borrowing costs

Question 89
The definition of "inventories" given by international standard IAS2 states that items qualify
as inventories only if they are assets held for sale in the ordinary course of business or assets
in the process of production for such sale. True or False?

a. True
b. False
The IAS2 definition of inventories also includes materials or supplies to be consumed in the
production process or in the rendering of services

Question 90
Which of the following items cannot be included in the cost of inventories?

a. Irrecoverable import duties payable on the acquisition of inventories

b. Fixed production overheads
c. The cost of abnormal wastage of materials and labour
d. Variable production overheads

Question 91
Which of the following items should be included in the cost of inventories?

a. Conversion costs
b. The cost of abnormal wastage of materials and labour
c. Selling costs
d. The cost of storing finished goods
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Question 92
The cost formulas permitted by IAS2 are:

a. FIFO and LIFO

b. FIFO and AVCO
c. LIFO and AVCO
d. FIFO, LIFO and AVCO

Question 93
The FIFO cost formula assumes that:

a. The inventory items which are sold or consumed are those acquired most
recently
b. The inventory items which are sold or consumed are those acquired longest
ago
c. The inventory items which are sold or consumed are a mixture of those acquired
previously
d. Newer inventory items are sold or consumed before older inventory items

Question 94
The net realisable value of inventories is defined by IAS2 as:

a. Selling price
b. Cost price
c. Selling price less costs of completion
d. Selling price less costs of completion and selling costs

Question 95
On 31 December 2017, a company has partly-completed inventory with a cost to date of
£26,300. It is expected that further costs of £8,900 will be incurred in order to complete the
inventory. It will then be sold for £47,500. Selling costs will be £2,000. The cost and the net
realisable value of this inventory at 31 December 2017 are:

a. £26,300 and £36,600

b. £26,300 and £38,600
c. £35,200 and £45,500
d. £35,200 and £47,500
Cost is £26,300 NRV = £47,500 – £8,900 – £2,000 = £36,600
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Question 96
IAS2 states that inventories should be measured at:

a. The higher of cost and net realisable value

b. Cost
c. The lower of cost and net realisable value
d. Net realisable value

Question 97
If production is abnormally low, the amount of fixed overheads allocated to each unit of
production should be calculated by dividing total fixed overheads by the number of units
produced.

a. True
b. False
If production is abnormally low, the allocation of fixed overheads should be based upon normal
capacity. Unallocated fixed overheads are recognised as an expense

Question 98
A company's inventories should be measured at the lower of total cost and total net realisable
value. True or False?

a. True
b. False
The cost and NRV of inventories must normally be compared item by item rather than in total

Question 99
At the end of an accounting period, the cost of a company's inventory is £450,000. This includes
damaged items with a cost of £25,000 which are expected to be sold for only £10,000 (less
selling expenses of 5%). All other items of inventory have a net realisable value which exceeds
cost. The amount at which the company's inventory should be recognised at the end of the
period is:

a. £450,000
b. £434,500
c. £425,000
d. £435,000
The NRV of the damaged items is £9,500, which is £15,500 less than cost. Therefore inventory
should be measured at £434,500 (£450,000 – £15,500)
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Question 100
A company which makes only one type of product incurs fixed production overheads of
£180,000 for an accounting year. Actual production during the year was 30,000 units. Normal
production is 24,000 units per annum. The amount of fixed production overheads that should
be allocated to each unit of production is:

a. £7.50
b. £nil
c. £30
d. £6
When production is abnormally high, the allocation of fixed overheads should be based upon actual
production. Therefore the amount that should be allocated to each unit is £6 (£180,000 ÷ 30,000)

Question 101
Borrowing costs that are directly attributable to the acquisition of a qualifying asset must be
capitalised as part of the cost of that asset. True or False?

a. True
b. False

Question 102
A company has the following general borrowings outstanding throughout the whole of an
accounting year: 6.5% Bank loan of £400,000 8% Bank loan of £800,000 If a qualifying asset
costing £50,000 is funded out of these general borrowings, the capitalisation rate that should
be used is:

a. 7.25%
b. 6.5%
c. 8%
d. 7.5%
Total borrowings are £1,200,000. Total interest is £90,000 (£26,000 + £64,000). This is equivalent
to 7.5% of £1,200,000

Provisions and Events after the reporting period

Question 103
International standard IAS37 defines a provision as:

a. A liability of uncertain timing and amount

b. A liability which is not legally enforceable
c. A liability of uncertain timing or amount
d. A reduction in the carrying amount of an asset
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Question 104
In order that a provision should be recognised in an entity's financial statements, it is necessary
that:

a. The entity has a present obligation

b. The entity has a legally enforceable obligation
c. The entity has a constructive obligation
d. It is possible that an outflow of economic benefits will be required

Question 105
The amount of a provision should be the "best estimate" of the expenditure required to settle
the obligation concerned. This estimate:

a. Should always be discounted to present value

b. Should not be adjusted to reflect future events that may affect the amount of the
required expenditure, whether or not those events are likely to occur
c. Must always be made on the basis of advice from independent experts
d. Should be the amount that would rationally be paid to settle or transfer the
obligation

Question 106
If a provision relates to a large population of items, the amount of the provision should be
calculated as:

a. The maximum expenditure that could possibly be required to settle the

obligation
b. The expected value of the expenditure that will be required to settle the
obligation
c. The minimum expenditure that could possibly be required to settle the
obligation
d. The present value of the maximum expenditure that could possibly be required
to settle the obligation

Question 107
A past event is an obligating event only if it gives rise to a legally enforceable obligation. True
or False?

a. True
b. False
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Question 108
Should a provision be recognised in relation to: (i) future operating losses? (ii) onerous
contracts?

a) (i) No (ii) Yes

b) (i) Yes (ii) No
c) (i) Yes (ii) Yes
d) (i) No (ii) No

Question 109
In general terms, a contingent liability is a possible obligation that depends upon the outcome
of a future event that is within the control of the entity. True or False?

a. True
b. False

Question 110
Contingent liabilities are:

a. Always recognised in the statement of financial position

b. Always disclosed in the notes to the financial statements
c. Recognised in the statement of financial position unless the possibility of an
outflow of economic benefits is remote
d. Disclosed in the notes unless the possibility of an outflow of economic
benefits is remote

Question 111
Contingent assets are:

a. Always recognised in the statement of financial position

b. Always disclosed in the notes to the financial statements
c. Disclosed in the notes if an inflow of economic benefits is probable
d. Disclosed in the notes unless an inflow of economic benefits is only remotely
possible

Question 112
International standard IAS10 requires that financial statements should be adjusted to take
account of any events occurring between the end of the reporting period and the date when the
financial statements are authorised for issue. True or False?

a. True
b. False
Only adjusting events should be taken into account
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Question 113
A company is preparing its financial statements for the year to 31 March 2018. Assuming that
each of the following events occurs after 31 March 2018 but before the financial statements
are authorised for issue, which one of them should be classified as a NON-ADJUSTING event?

a. The sale of inventories which were held on 31 March 2018

b. A change in tax rates that is announced in April 2018 and which has a
material impact on the tax liability for the year to 31 March 2018
c. The bankruptcy of a customer who owed a substantial amount to the company
at 31 March 2018
d. The discovery of a major fraud that had occurred in January 2018

Question 114
Although the accounting treatment of inventories is prescribed by IAS2 Inventories, a company
may also need to apply IAS10 Events After the Reporting Period when determining the
inventories figure which should be shown in its financial statements. True or False?

a. True
b. False
The sale of inventories which were held at the end of the reporting period provides evidence of their
net realisable value and is classed as an adjusting event. Since inventories should be measured at
the lower of cost and net realisable value, such an event may affect the figure at which inventories
should be measured in the financial statements

Related Party Transactions

Question 115
The fact that an entity has related parties cannot have any effect on the entity's financial
performance unless there are transactions between the entity and those parties. True or False?
a. True
b. False

Question 116
International standard IAS24 requires an entity's financial statements to be restated so that
transactions with related parties are reported at the prices that would have applied if the
transactions had been carried out at arm's length. True or False?
a. True
b. False
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Question 117
A person (P) is necessarily related to a reporting entity (R) if:

a. P owns ordinary shares in R

b. P's grandfather has control over R
c. P is an employee of R
d. P is the domestic partner of a director of R

Question 118
A person (P) is not necessarily related to a reporting entity (R) if:

a. P is a major customer of R
b. P is a director of R
c. P is a director of R's parent company
d. P's father has significant influence over R

Question 119
An entity (E) is necessarily related to a reporting entity (R) if:

a. E owns ordinary shares in R

b. E is a major supplier of R
c. E and R are both subsidiaries of the same parent
d. E is a bank which lends money to R

Question 120
An entity (E) is not necessarily related to a reporting entity (R) if:

a. E is an associate of R
b. E has significant influence over R
c. E is a subsidiary of a subsidiary of R
d. E and R have a director in common