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TABLE OF CONTENTS THIS IS SAMPLE VERSION

IASB FRAMEWORK ...................................................................................................................................................................... 5

International Accounting Standards (IAS) 1- Presentation of Financial Statements ............................................................... 12

International Accounting Standards (IAS) 2- Inventories ......................................................................................................... 23

International Accounting Standards (IAS) 7- Statement of Cash Flows ................................................................................... 35

International Accounting Standards (IAS) 8- Accounting policies, changes in accounting estimate and errors ................... 43

International Accounting Standards (IAS) 10- Events after the reporting period ................................................................... 45

International Accounting Standards (IAS) 12- Income Taxes ................................................................................................... 52

International Accounting Standard (IAS) 16- Property, Plant and Equipment ....................................................................... 60

International Accounting Standards (IAS) 17- Leases ................................................................................................................ 70

International Accounting Standards (IAS) 18 –Revenue ............................................................................................................ 71

International Accounting Standards (IAS) 19- Employee Benefits ............................................................................................ 72

International Accounting Standards (IAS) 20- Accounting for Government Grants and Disclosure of Government
Assistance......................................................................................................................................................................................... 90

International Accounting Standards (IAS) 21- The Effects of Changes in Foreign Exchange Rates ...................................... 97

International Accounting Standards (IAS) 23- Borrowing Costs ............................................................................................. 117

international accounting Standard (IAS) 24 - Related Party Disclosures ............................................................................... 129

International Accounting Standards (IAS) 27 Separate Financial Statements ....................................................................... 135

International Accounting Standards (IAS) 28 Investments in Associates and Joint Ventures ............................................. 138

International Accounting Standards (IAS) 29 Financial Reporting in Hyperinflationary Economies ................................ 145

International Accounting Standard (IAS) 32 – Financial instruments : presentation ............................................................ 153

International Financial Reporting Standard (IFRS) 9 Financial Instruments........................................................................ 171

International Financial Reporting Standard (IFRS) 7 Financial Instruments: Disclosures ................................................. 221

International Accounting Standard (IAS) 33 Earnings per Share ........................................................................................... 228

International Accounting Standard (IAS) 34 Interim Financial Reporting ............................................................................ 266

International Accounting Standard (IAS) 36 Impairment of Assets ........................................................................................ 274

International Accounting Standard (IAS) 37 Provisions, Contingent Liabilities and Contingent Assets .......................... 314

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International Accounting Standard (IAS) 38 Intangible Assets .............................................................................................. 337

International Accounting Standard (IAS) 40 Investment Property ......................................................................................... 365

International Accounting Standards (IAS) 41 Agriculture ....................................................................................................... 377

International Financial Reporting Standard (ifrs) 1 First-time Adoption of International Financial Reporting
Standard ........................................................................................................................................................................................ 384

International Financial Reporting Standard (IFRS) 2 Share-based Payment ........................................................................ 400

nternational Financial Reporting Standard (IFRS) 3 Business Combinations ....................................................................... 420

International Financial Reporting Standard (IFRS) 4 Insurance Contracts .......................................................................... 459

International Financial Reporting Standard (IFRS) 5 Non-current Assets Held for Sale and Discontinued
Operations ..................................................................................................................................................................................... 466

International Financial Reporting Standard (IFRS) 6 Exploration for and Evaluation of Mineral Resources ................... 485

International Financial Reporting Standard (IFRS) 8 Operating Segments ........................................................................... 489

International Financial Reporting Standard (IFRS) 10 Consolidated Financial Statements ................................................ 502

International Financial Reporting Standard (IFRS) 15 - Revenue from Contracts with Customers ................................... 555

International financial reporting standard (ifrs) 11 Joint Arrangements ............................................................................... 573

International Financial Reporting Standard (IFRS) 12 Disclosure of Interests in Other Entities ........................................ 599

International Financial Reporting Standard (IFRS) 13 Fair Value Measurement ................................................................. 604

International Financial Reporting Standard (IFRS) 14, Regulatory Deferral Accounts ....................................................... 634

International Financial Reporting Standard (IFRS) 16 — Leases ........................................................................................... 640

International Financial Reporting Standard (IFRS)17 — Insurance Contracts..................................................................... 663

IFRIC 1 — Changes in Existing Decommissioning, Restoration and Similar Liabilities ....................................................... 680

IFRIC 2 — Members' Shares in Co-operative Entities and Similar Instruments .................................................................. 683

IFRIC 4 — Determining Whether an Arrangement Contains a Lease .................................................................................... 686

IFRIC5 - Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds ...... 689

IFRIC 6 — Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment .... 691

IFRIC 9 Reassessment of Embedded Derivatives ...................................................................................................................... 694

IFRIC 10 Interim Financial Reporting and Impairment .......................................................................................................... 696

IFRIC 12 Service Concession Arrangements ............................................................................................................................. 697

IFRIC 13 Customer Loyalty Programmes ................................................................................................................................. 701

IFRIC 14 — IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction .... 702
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IFRIC 15 Agreements for the Construction of Real Estate....................................................................................................... 704

IFRIC 16 — Hedges of a Net Investment in a Foreign Operation ............................................................................................ 705

IFRIC 17 Distribution of Non-Cash Assets to Owners .............................................................................................................. 708

IFRIC 18 — Transfers of Assets from Customers ..................................................................................................................... 710

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments .................................................................................. 711

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine .................................................................................... 713

IFRIC 21 — Levies ....................................................................................................................................................................... 715

IFRIC 22 — Foreign Currency Transactions and Advance Consideration ............................................................................ 717

IFRIC 23 — Uncertainty over Income Tax Treatments............................................................................................................ 718

SIC-7 Introduction of the Euro.................................................................................................................................................... 720

SIC-10 — Government Assistance – No Specific Relation to Operating Activities ................................................................ 721

SIC-29 Service Concession Arrangements: Disclosure .............................................................................................................. 723

Conceptual Framework for Financial Reporting 2018 .............................................................................................................. 725

IFRS Practice Statement 'Making Materiality Judgements' .................................................................................................... 730

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 IASB FRAMEWORK
Authoritative Status

1. What is the authoritative status of the Framework?

a. It has the highest level of authority. In case of a conflict between the Framework and a Standard or Interpretation, the
Framework overrides the Standard or Interpretation.
b. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the Framework. In the absence
of a Standard or an Interpretation that specifically applies, the Framework should be followed.
c. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides the Framework. In the absence
of a Standard or an Interpretation that specifically applies to a transaction, management should consider the applicability of
the Framework in developing and applying an accounting policy that results in information that is relevant and reliable.
d. The Framework applies only when IASB develops new or revised Standards. An entity is never required to consider the
Framework.

Answer: (c)
Objective

2. What is the objective of financial statements according to the Framework?

a) To provide information about the financial position, performance, and changes in financial position of an entity that is
useful to a wide range of users in making economic decisions.
b) To prepare and present a balance sheet, an income statement, a cash flow statement, and a statement of changes in equity.
c) To prepare and present comparable, relevant, reliable, and understandable information to investors and creditors.
d) To prepare financial statements in accordance with all applicable Standards and Interpretations.

Answer: (a)

3. The purpose of the Conceptual Framework for Financial Reporting is:

a. to assist the IASB in setting IFRSs?
b. to assist preparers of financial statements in applying IFRSs?
c. to assist auditors in forming an opinion on whether financial statements comply with IFRSs?
d. to assist users of financial statements in interpreting IFRS financial statements?
e. all of the above?
Answer: (e)
Assumptions & Characteristics

4. Which of the following are underlying assumptions of financial statements?

a. Relevance and reliability.
b. Financial capital maintenance and physical capital maintenance.
c. Accrual basis and going concern.

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 d. Prudence and conservatism.

Answer: (c)

5. What are qualitative characteristics of financial statements according to the Framework?

a. Qualitative characteristics are the attributes that make the information provided in financial statements useful to users.
b. Qualitative characteristics are broad classes of financial effects of transactions and other events.
c. Qualitative characteristics are non quantitative aspects of an entity’s position and performance and changes in financial
position.
d. Qualitative characteristics measure the extent to which an entity has complied with all relevant Standards and
Interpretations.

Answer: (a)

6. Which of the following is not a qualitative characteristic of financial statements according to the Framework?
a. Materiality.
b. Understandability.
c. Comparability.
d. Relevance.

Answer: (a)

7. When should an item that meets the definition of an element be recognized, according to the Framework?
a. When it is probable that any future economic benefit associated with the item will flow to or from the entity.
b. When the element has a cost or value that can be measured with reliability.
c. When the entity obtains control of the rights or obligations associated with the item.
d. When it is probable that any future economic benefit associated with the item will flow to or from the entity and the item
has a cost or value that can be measured with reliability.

Answer: (d)

8. The fundamental qualitative characteristics are:

a. comparability and relevance?
b. relevance and reliability?
c. relevance, reliability and comparability?
d. relevance and faithful representation?
e. comparability, relevance and faithful representation?
Answer: (d)

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 9. verifiability means knowledgeable and independent observers:
a. would reach complete agreement that a depiction is a faithful representation?
b. cannot reach consensus that a depiction is a faithful representation?
c. could reach consensus, but not necessarily complete agreement, that a depiction is a faithful representation?
Answer: (d)

10. which statement/s are true?

a) Relevance is a fundamental qualitative characteristic.
b) Financial information without both relevance and faithful representation is not useful.
c) Financial information without both relevance and faithful representation cannot be made useful by being more
comparable, verifiable, timely or understandable.
d) Financial information that is relevant and faithfully represented may still be useful even if it does not have any of the
enhancing qualitative characteristics
e) All of the above statements.
f) None of the above statements.
Answer: (e)
Objective of general purpose financial reporting

11. The objective of general purpose financial reporting is:

a. provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the entity?
b. to inform government statistics?
c. to support the entity’s tax return?
d. to meet all the information needs of all the users of an entity’s financial statements?
e. to inform economic decision-making by a broad range of users (including managers, investors, creditors and prudential
regulators)?
Answer: (a)

12. Which of the following could most closely be associated with the objective of financial reporting:
a. have a bias toward understating assets and income and overstating liabilities and expenses?
b. transparency and neutrality?
c. financial stability through conservatism/prudence?
d. management discretion in reporting financial information?
Answer: (b)

13. Expenses are recognised in comprehensive income (profit or OCI):

a) using the matching basis—on the basis of a direct association between the costs incurred and the earning of specific items
of income?

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 b) using the accrual basis—items are recognised as assets, liabilities, equity, income or expenses when they satisfy the
definitions and recognition criteria for those items?
c) at the discretion of management?

Answer: (b)
14. Recognition criteria determine when to recognise an item.
Measurement is determining the monetary amounts at which to measure an item.
Uncertainties about the extent of future cash flows:

a) only affect the decision about whether to recognise?

b) only affect the estimation of the amount at which to measure the item?
c) could affect both recognition and measurement?

Answer: (c)

15. How many measurement bases does IFRSs specify for the measurement of assets?
a) one—historical cost
b) one—fair value
c) two—historical cost and fair value
d) many—including historical cost, fair value, value in use, estimated selling price less costs to complete and sell, etc

Answer: (d)

16. The Conceptual Framework:

a) is an IFRS?
b) overrides all other IFRS requirements?
c) does not define standards for any particular measurement or disclosure issue?
d) is in the hierarchy that management must in the absence of a specific IFRS requirement apply in developing an accounting
policy that results in information that is relevant?

Answer: (d)

17. A conceptual framework for accounting is..

a) A set of financial statements
b) A set of rules governing financial reporting
c) A set of components of financial statements
d) A set of principles underpinning financial reporting
Answer: d)

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Advantage & Disadvantage

18. Which of the following is not an advantage of having a conceptual framework of accounting?

a) Development of accounting standards is subject to less political pressure

b) A consistent balance sheet or income statement approach is used to setting standards
c) Considers the needs of all users
d) Avoids a mixed up approach to setting standards

Answer: c)

[One of the disadvantages of using a conceptual framework of accounting is that it cannot consider the needs of all users even
though each user will have different needs and requirements.]

19. Which of the following is not a chapter of the IASB Framework?

a) The objective of financial statements
b) The elements of financial statements
c) Concepts of capital and capital maintenance
d) Concepts of income and expenditure
e) Recognition of the elements of financial statements

Answer: d)

[There is no chapter called “Concepts of income and expenditure”. The chapters of the IASB Framework are:
– The objective of financial statements
– Underlying assumptions
– Qualitative characteristics of financial statements
– The elements of financial statements
– Recognition of the elements of financial statements
– Measurement of the elements of financial statements
– Concepts of capital and capital maintenance]

20. Which of the following is not a disadvantage of having a conceptual framework of accounting?
a) It does not allow for different conceptual bases depending on the user
b) It does not make the setting of accounting standards easier
c) It may hamper the development of preparing accounting standards
d) It may lead to inconsistent accounting practices
Answer: d)
[One of the benefits of having a conceptual framework of accounting is that it leads to the development of consistent accounting
practices. However, this does not make the preparation of accounting standards easier and may even hamper their development as
each new standard will have to be checked for consistency with the framework.]

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 21. A conceptual framework sets out the detailed accounting treatment of transactions and other items.
a) True
b) False

Answer: b)

[A conceptual framework sets out the broad rules for governing financial reporting, the accounting standards provide the detailed
accounting treatment.]

22. Conceptual frameworks limit the consistency and comparability of financial statements.
a) True
b) False
Ans: b)

[A conceptual framework improves the consistency and comparability of financial statements by removing choices of alternative
accounting treatments.]

23. Which of the following are components of Generally Accepted Accounting Practice (‘GAAP’)?

a) Stock exchange requirements

b) Regional bodies (eg. European Union directives)
c) National accounting standards
d) National company law
e) All of these
Answer: e)

[GAAP is a constantly changing concept, which is influenced by the major components required above. In most countries it is not
specifically defined or hold any authority.]

24. Which of the following relate to financial position in a set of financial statements?
a) Assets, liabilities, income and expenses
b) Assets, liabilities, income and equities
c) Income and expenses
d) Income, expenses and liabilities

Answer: b)

[Assets, liabilities and equity are found in a Statement of Financial Position. They show the entity’s finances at a fixed moment in
time.
Income and expenses are used in the Statement of Comprehensive Income and show how a company has performed financially

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 between two dates (eg, a year, or accounting period)]

25. Which of the following is not a purpose of a financial reporting conceptual framework?
a) Development of new reporting practices
b) Evaluation of existing reporting practices
c) Enforcement of existing reporting practices
Answer: c)

[The theoretical principles of a financial reporting conceptual framework allow for the evaluation of existing reporting practices
and the development of new reporting practices.]

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INTERNATIONAL ACCOUNTING STANDARDS (IAS) 1- PRESENTATION OF
FINANCIAL STATEMENTS

Related Interpretations
• IAS 1 (2003) superseded SIC-18 Consistency - Alternative Methods

• IFRIC 17 Distributions of Non-cash Assets to Owners

• SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease

• SIC-29 Disclosure - Service Concession Arrangements

Amendments to IAS 1
1. As per IAS 1 amendments on classification issued by the IASB On 23 January 2020- Classification of Liabilities as Current or
Non-Current depends on:
a. the expectations about whether an entity will exercise its right to defer settlement of a liability
b. the rights that are in existence at the end of the reporting period
Answer: (b)
2. The amendments in Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) only affect the:
a. presentation of liabilities in the statement of financial position.
b. the amount or timing of recognition of any asset, liability income or expenses
c. the information that entities disclose about those items
Answer: (a)
3. As per IAS 1 amendments an entity can classify a liability as non-current only when :
a. the entity has a right’ to defer settlement by at least 12 months and rights in place ‘at the end of the reporting period’
b. it is expected (based on past practice that) entity will exercise its right to defer settlement of liability
Answer:(a)
4. Effective date of IAS 1 amendments on classification is:
a. 01 Jan 2020
b. 01 Jan 2021
c. 01 Jan 2022
Answer: (c)

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 The International Accounting Standards Board (IASB) has issued limited amendments to IAS 1 Presentation of Financial Statements
to clarify how to classify debt and other liabilities as current or non-current, to promote greater consistency.
The changes are intended to provide a more general approach to the classification of liabilities under IAS based on the contractual
arrangements in place at the reporting date.
The amendments aim to help companies determine whether, in the statement of financial position, debt and other liabilities with an uncertain
settlement date should be classified as current (due or potentially due to be settled within one year) or non-current. The amendments include
clarifying the classification requirements for debt a company might settle by converting it into equity.
The amendments in Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) only affect the presentation of
liabilities in the statement of financial position.
They do not change the amount or timing of recognition of any asset, liability income or expenses, or the
information that entities disclose about those items.
Instead, they clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the
end of the reporting period.
The wording in all affected paragraphs has been aligned so that it refers to the ‘right’ to defer settlement by at least 12 months
and makes explicit that only rights in place ‘at the end of the reporting period’ should affect the classification of a
liability.
They also make clear that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a
liability, and make clear that settlement refers to the transfer to the counter party of cash, equity instruments, other assets or ser vices.
Since the amendments clarify, but do not change, existing requirements, they are not expected to affect
companies’ financial statements significantly.
However, IASB says they could result in companies reclassifying some liabilities from current to non-current, and vice versa; this could affect
a company’s loan covenants.
To give companies time to prepare for the amendments, the changes will be effective from accounting periods starting 1 January 2022. Early
application of the amendments is permitted.

5. IAS1 does not prescribe any format for presentation of general purpose financial statements but prescribes the minimum
disclosures required to be made.
i. True
ii. False
Ans:i

[ IAS1 does not prescribe any format for presentation of general purpose financial statements but prescribes the minimum disclosures
required to be made. However, IAS27, Consolidated and Separate Financial Statements, lays down the formats of consolidated financial
statements for companies.In addition to the above, it may be noted that formats for presentation will be governed by the applicable laws
and regulations.]

6. Para 10 (a) of IAS1 requires the statement of changes in equity to be shown as part of the balance sheet. How should such
presentation be made?

i. It will be appropriate to present separately from the balance sheet, a statement titled “statement of changes in equity
forming part of balance sheet”.
ii. It will be appropriate to present changes in equity within the balance sheet under the head Equity.

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 iii. It will be appropriate to present within the balance sheet under the head Reserve and Surplus.
Ans:i

7. It is not acceptable to disclose information required by IAS1 in management/directors’ Report forming part of annual report
without making such disclosures in the financial statements?
i. True
ii. False
Ans:i
[Paragraphs 13 and 14 of IAS1 give examples of various reports that entities present outside the financial statements, e.g., financial review
by management, environmental reports, value added statements, etc. Paragraph 14 of IAS1 states “reports and statements presented outside
the financial statements are outside the scope of IAS”. Information appearing in reports presented outside the financial statements may
repeat information given in the financial statements or draw reference to the same. However, financial statements cannot omit any
disclosures required by IASs because it is included in other reports outside the financial statements. Even drawing reference to the
information given in the reports outside the financial statements would not be sufficient unless permitted by an IAS.]

8. An entity cannot claim compliance with IASs if it has not complied with one or more IASs and its financial statements state the
fact that the entity complies with IASs, except for compliance with one or more Standards?
i. True
ii. False
Ans:i
[Paragraph 16 of IAS1 states that an entity whose financial statements comply with IASs shall make an explicit and unreserved statement
of such compliance in the notes. An entity shall not describe financial statements as complying with IASs unless they comply with all the
requirements of IASs. Therefore, unless all the requirements of IASs are complied with, the entity cannot claim compliance with the
IASs.]

9. An entity prepares its financial statements that contain an explicit and unreserved statement of compliance with IASs. However,
the auditor’s report on those financial statements contains a qualification because of disagreement on application of one
Accounting Standard. In such case, it is acceptable for the entity to make an explicit and unreserved statement of compliance with
IASs.
i. True
ii. False
Ans:i

fication because of disagreement on application of accounting standard(s), as the preparation of financial statements is the prerogative of
the management.]

10. Offsetting of revenue against expenses, permissible in case of a company acting as an agent and having sub agents, where

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 commission is paid to sub agents from the commission received as an agent.
i. True
ii. False
Ans:ii

[Net presentation in the given case would not be appropriate, as it would not reflect substance of the transaction and would detract from the
ability of users to understand the transaction. Therefore, commission paid to sub agent should not be offset against commission earned by
the company.][ Para 32, 33 and 35 of IAS1]

11. Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed by the subsidiary. In the separate books of
the holding company, the expenditure and related reimbursement of expenses can be offset.
i. True
ii. False
iii. Require further information to analyze
Ans:iii

[As per Paragraph 33 of IAS1, offsetting is permitted only when the offsetting reflects the substance of the transaction In this case, the
agreement/arrangement, if any, between the holding and subsidiary company needs to be considered. Only if the arrangement is to
reimburse the cost incurred by the holding company on behalf of the subsidiary company, the same may be presented net. It should be
ensured that the substance of the arrangement is that the payments are actually in the nature of reimbursement.]

12. Profit on sale of an asset against loss on sale of other asset can be offset.
i. True
ii. False
Ans:i
[Paragraph 35 of IAS1 requires an entity to present on a net basis gains and losses arising from a group of similar transactions.
Accordingly, gains or losses arising on disposal of various items of property, plant and equipment shall be presented on net basis.
However, gains or losses should be presented separately if they are material.]

13. When services are rendered in a transaction with an entity and services are received from the same entity in two different
arrangements, the receivable and payable can be off set with each other.
i. True
ii. False
Ans:i
[IAS1 prescribes that assets and liabilities, and income and expenses should be reported separately, unless offsetting reflects the substance
of the transaction. In addition to this, as per paragraph 42 of IAS32, a financial asset and a financial liability should be offset if the entity
has legally enforceable right to set off and the entity intends either to settle on net basis or to realise the asset and settle the liability

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simultaneously. In accordance with the above, the receivable and payable should be offset against each other assuming that the entity has a
legal right to set off and the entity intends to do so.]

14. It is appropriate to conclude that restatement of comparative amounts is impracticable on the basis that it would involve undue
cost.

i. True
ii. False
Ans:ii

[It is not appropriate to conclude that restatement is impracticable merely because of the cost involved. As per paragraph 7 of IAS1
applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. What are reasonable
efforts to conclude that it is impracticable to restate the comparative amounts depend on the facts and circumstances of each case.]

15. An entity often makes financial statements more understandable by presenting information in thousands, lakhs, millions or crores
of units of the presentation currency. An entity can adopt different levels of rounding for different disclosures that are made in the
financial statements.

i. True
ii. False
Ans:ii
[Paragraph 53 of IAS1 permits the use of rounding off provided an entity discloses the level of rounding and does not omit material
information. To maintain consistency within the financial statements, the same unit of measurement should be used throughout the
financial statements. Moreover, the revised Schedule VI contains an explicit requirement to use the same unit of measurement consistently
for presentation of financial statements. Consequently, an entity should use a uniform unit of measurement. However, to ensure that any
material information is not omitted, additional information containing exact figures can be provided for the items considered necessary.]

16. Cash and cash equivalent under IAS1 have the same meaning as cash and cash equivalent as per IAS7, Statement of Cash Flows.

i. True
ii. False
Ans:ii
[Generally, there should not be a difference in the amount of cash and cash equivalent as per IAS1 and as per IAS7. However, as per
paragraph 8 of IAS7 “where bank overdrafts which are repayable on demand form an integral part of an entity’s cash management,
bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the
bank balance often fluctuates from being positive to overdrawn.” Although IAS7 permits bank overdrafts to be included as cash and
cash equivalent, for the purpose of presentation in the balance sheet, it would not be appropriate to include bank overdraft in the line

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 item cash and cash equivalents unless the netting off conditions as given in paragraph 42 of IAS32, Financial Instruments:
Presentation, are complied with. Bank overdraft, in the balance sheet, will be included within financial liabilities. Just because the
bank overdraft is included in cash and cash equivalents for the purpose of IAS7, does not mean that the same should be netted off
against the cash and cash equivalent balance in the balance sheet. Instead Paragraph 45 of IAS7 requires a disclosure of the
components of cash and cash equivalent and a reconciliation of amounts presented in the cash flow statements with the equivalent
items reported in the balance sheet. Another element on account of which there could be difference between the cash and cash
equivalents presented in the balance sheet and the statement Generally, there should not be a difference in the amount of cash and
cash equivalent as per IAS1 and as per IAS7. However, as per paragraph 8 of IAS7 “where bank overdrafts which are repayable on
demand form an integral part of an entity’s cash management, bank overdrafts are included as a component of cash and cash
equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to
overdrawn.” Although IAS7 permits bank overdrafts to be included as cash and cash equivalent, for the purpose of presentation in the
balance sheet, it would not be appropriate to include bank overdraft in the line item cash and cash equivalents unless the netting off
conditions as given in paragraph 42 of IAS32, Financial Instruments: Presentation, are complied with. Bank overdraft, in the balance
sheet, will be included within financial liabilities. Just because the bank overdraft is included in cash and cash equivalents for the
purpose of IAS7, does not mean that the same should be netted off against the cash and cash equivalent balance in the balance sheet.
Instead Paragraph 45 of IAS7 requires a disclosure of the components of cash and cash equivalent and a reconciliation of amounts
presented in the cash flow statements with the equivalent items reported in the balance sheet. Another element on account of which
there could be difference between the cash and cash equivalents presented in the balance sheet and the statement of cash flows is
unrealised gains or losses arising from changes in foreign currency exchange rates, which are not considered to be cash flows.

17. Is it mandatory for an entity to present current and non-current assets, and current and non-current liabilities, as separate
classification in its balance sheet even if such classification is difficult?
i. Yes
ii. No
Ans:i
[it is mandatory for entities to present the current/non-current classification of assets and liabilities as required by paragraph
60 of IAS1, except when a presentation based on liquidity provides information that is relevant and reliable. Non-
classification of assets and liabilities as current/non-current on grounds of difficulty is not permissible.

18. Which of the following(s) is the basis for classification of assets as current or noncurrent as per IAS1 Paragraph 66
i. an entity expects to realise the asset or intends to sell or consume it in the normal operating cycle;
ii. the entity holds the asset primarily for the purpose of trading;
iii. the entity expects to realise the asset within twelve months after the reporting period;
iv. the asset is a cash or cash equivalent (as defined in IAS7) unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting period.
v. i and iv
vi. all the above

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 vii. iii and iv

Ans vi

19. An entity manufactures passenger vehicles. The time between purchasing of underlying raw materials to manufacture the
passenger vehicles and the date the entity completes the production and delivers to its customers is 11 months. Customers settle
the dues after a period of 8 months from the date of sale.
Will the inventory and the trade receivables be
i. current in nature
ii. Non current in nature
iii. Information is not sufficient to distinguish

Ans i

[Inventory and debtors need to be classified in accordance with the requirement of paragraph 66(a) of IAS1, which provides that an asset
shall be classified as current if an entity expects to realise the same, or intends to sell or consume it in its normal operating cycle. (a) In this
case, time lag between the purchase of inventory and its realisation into cash is 19 months [11 months + 8 months]. Both inventory and the
debtors would be classified as current if the entity expects to realise these assets in its normal operating cycle.]

20. An entity is in the real estate business. As per the industry under which it operates, the entity constructs residential apartments for
customers and the construction normally takes three to four years. How should the entity classify its construction work in progress
–
i. current
ii. non-current
Ans i
[As per paragraph 68 of IAS1, where an entity’s normal operating cycle is such that its assets, such as, inventory/trade receivables are not
realised in cash within a period of twelve months, these assets would still be current in nature. Since the entity expects to realise the
construction work in progress through sale to its customers, in its normal operating cycle, the construction work in progress will be current
in nature. Additional information as required by paragraph 61 of IAS1 will be required to be made by the entity, which provides
“Whichever method of presentation is adopted, an entity shall disclose the amount expected to be recovered or settled after more than
twelve months for each asset and liability line item that combines amounts expected to be recovered or settled: (a) No more than twelve
months after the reporting period, and (b) More than twelve months after the reporting period.” ]

21. A holding company [being the entity under consideration] gives a loan/ intercorporate deposit to a subsidiary that is recoverable
on demand, at a rate of interest at 10%. Such loan should be disclosed as a

18
 i. Current asset in the books of the holding company
ii. Non-current asset in the books of the holding company
iii. More information about commercial reality of the transaction be in comparison to the legal terms of the transaction
is require

Ans iii
[Paragraph 66 (c) of IAS1 provides that an asset shall be classified as current when an entity expects to realise the asset within a period of
twelve months after the reporting period. To determine the expectation of the entity, the commercial reality of the transaction should also
be considered. If the loans have been given with an understanding that these loans would not be called for repayment even though a clause
may have been added that these are recoverable on demand, it should be classified as a non-current asset.]

22. A holding company [being the entity under consideration] gives a loan/ intercorporate deposit to a subsidiary that is recoverable
on demand, at a rate of interest at 10%.
Such loan should be disclosed as a

i. Current liability in the books of the subsidiary company

ii. Non-current liability in the books of the subsidiary company

Ans ii
[Paragraph 69(c) of IAS1 provides that a liability should be classified as current if the liability is due to be settled within twelve
months after the reporting period. Since the loan/inter- corporate deposit would become due immediately as and when demanded and
presuming that the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the
reporting period, it should be classified as current liability.]

23. Paragraph 69(d) of IAS1 states “An entity shall classify a liability as current when it does not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting period. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its classification.” A Gas Agency requires an
amount to be deposited as security deposit, which is refundable when the gas connection is surrendered. The Gas Agency should
classify such deposits as
i. current
ii. non- current

Ans i

[Although it is expected that most of the customers will not surrender their connection and the deposit will need not to be refunded,

19
 but surrendering of gas connection by the customer is a condition that is not within the control of the entity. Hence the Gas Agency
does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
Accordingly, the deposit will have to be classified as current liability.]

24. Paragraph 69 (a) of IAS1 states “An entity shall classify a liability as current when it expects to settle the liability in its normal
operating cycle”. An entity develops tools for customers and this normally takes a period of around 2 years for completion. The
material is supplied by the customer and hence the entity only renders a service. For this, the entity receives payments upfront and
credits the amount so received to “Income Received in Advance”. This “Income Received in Advance” should be classified, as
i. Current
ii. Non-current
Ans i

[Paragraph 70 of IAS1 provides “Some current liabilities, such as trade payables and some accruals for employee and other operating
costs, are part of the working capital used in the entity’s normal operating cycle. An entity classifies such operating items as current
liabilities even if they are due to be settled more than twelve months after the reporting period.” In accordance with the above, income
received in advance would be classified as current liability since it is a part of the working capital, which the entity expects to earn in its
normal operating cycle.]
25. An entity manufactures batteries for the automobile industry. Based on terms of warranty, a provision is made by the entity. The
warranty provision should be presented in the balance sheet, as
i. current
ii. non-current
iii. terms of the warranty will determine its classification
Ans iii

[Terms of the warranty will determine its classification i.e., current or noncurrent. Warranties that are due for more than twelve months
from the reporting date, should be classified as non-current. However, in accordance with paragraph 61 of IAS1, the entity shall disclose
separately the warranty provision expected to be settled/expired no more than twelve months, and more than twelve months after the
reporting period.]

26. An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months from the end of the reporting
period. Prior to the end of the reporting period, the entity and the bank enter into an arrangement, whereby the existing
outstanding loan will, unconditionally, roll into the new facility which expires after a period of 5 years.
such loan should be classified in the balance sheet of the entity as
i. current
ii. non-current

Ans ii

20
 [The loan is not due for payment at the end of the reporting period. The entity and the bank have agreed for the said roll over prior to
the end of the reporting period for a period of 5 years. Since the entity has an unconditional right to defer the settlement of the
liability for at least twelve months after the reporting period, the loan should be classified as non-current.]

27. An entity has a long term loan facility with a bank. As per the loan facility, certain financial ratios are required to be maintained
on a quarterly basis failing which the loan becomes repayable on demand. Information regarding such compliance is required to
be submitted to the bankers after a period of 1 month from the end of every quarter. Determination of such ratios requires the
drawing up of the financial statements of the entity. The entity did not have any breach until the 3rd quarter. With respect to the
4th quarter, the entity realised that there was a breach, only after the financials were drawn up after the end of the reporting period
and the bank has not condoned the breach before the financial statements are approved for issue. Reporting of the compliance is
required to be made after a period of 1 month from the end of the 4th quarter.
The loan should be classified, consequent to the breach of the loan covenant as
i. Current
ii. Non-current

Ans i

[The loan should be classified as current. Circumstances will always arise when a loan covenant can be assessed only after the end of the
reporting period, which are based on financial information as at the end of the reporting period. In this case, even though the breach has
been identified after the reporting period, the loan should be classified as current since the conditions resulting into breach existed at the
reporting date.]

Amendments to IAS 1 and IAS 8

The amendment relates to the definition of material information.
According to the new definition, information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity.
The new items in a definition are highlighted above and as you can see, the definition became more precise.
The amendments clarify that materiality will depend on the nature or magnitude of information. An entity will need to assess whether the
information, either individually or in combination with other information, is material in the context of the financial statements. A
misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.
Obscuring information
By including the concept of ‘obscuring information’ in the new definition, the IASB intends to address concerns that the definition could
be perceived by stakeholders to focus only on information that cannot be omitted (material information), but not on why the inclusion of
immaterial information could potentially mislead the users of the financial statements. The amendments explain that information is

21
obscured if it is communicated in a way that would have a similar effect as omitting or misstating the information.
The amendments include examples of circumstances that may result in material information being obscured. Material information may be
obscured if information regarding a material item, transaction or other event is scattered throughout the financial statements, or disclosed
using a language that is vague or unclear. Material information can also be obscured if dissimilar items, transactions or other events are
inappropriately aggregated, or conversely, if similar items are inappropriately disaggregated. In addition, the understandability of the
financial statements is reduced if material information is hidden because of immaterial information.
New threshold
The IASB replaced the threshold ‘could influence’ with ‘could reasonably be expected to influence’ in the defintion of ‘material’, such
that, in the amended definition, it is clarified that the materiality assessment will need to take into account how primary users could
reasonably be expected to be influenced in making economic decisions. This wording is intended to address concerns raised that the ‘could
influence’ threshold is too low and might be applied too broadly, with the result that information that is not capable of influencing the
decisions of the primary users must be included in the financial statements.
The amendments clarify that, in assessing whether an information could reasonably be expected to influence decisions of the primary
users, an entity must consider the characteristics of those users as well as its own circumstances.
Primary users of the financial statements
The current definition refers to ‘users’ but does not specify their characteristics, which can be interpreted to imply that an entity is required
to consider all possible users of the financial statements when deciding what information to disclose. Consequently, the IASB decided to
refer to primary users in the new definition to help respond to concerns that the term users may be interpreted too widely.
The amendments explain that many existing and potential investors, lenders and other creditors cannot require reporting entities to provide
them with information directly and, as such, they rely on general purpose financial statements for much of the financial information they
need. Therefore, these groups are the primary users to whom general purpose financial statements are directed.
Other amendments
The IASB has amended the definition of material in the Conceptual Framework to align it with the revised definition of material in IAS 1
and IAS 8. The Board has also amended the PS to align it with the new definition of material.
The Board does not expect the guidance in the Conceptual Framework and the PS to be affected by these amendments.
Effective date and transition
The amendments to IAS 1 and IAS 8 are required to be applied for annual periods beginning on or after 1 January 2020. The amendments
must be applied prospectively and earlier application is permitted.

22
INTERNATIONAL ACCOUNTING STANDARDS (IAS) 2- INVENTORIES

1. Inventory should be stated at

a. Lower of cost and fair value.
b. Lower of cost and net realizable value.
c. Lower of cost and nominal value.
d. Lower of cost and net selling price.
e. Choices b and d.
f. Choices a and c.
g. Choices a, b, and d.
Answer: (b)

2. Which of the following cost models is not permitted under IAS 2?

a) First in, First out (‘FIFO’)
b) Last in, Last out (‘LIFO’)
c) Weighted Average
d) Actual cost
Answer: b)
[The LIFO cost model was allowed prior to the 2003 revision of IAS 2, but is not longer permitted.]

3. Inventories are assets

a. Used in the production or supply of goods and services for administrative purposes.
b. Held for sale in the ordinary course of business.
c. Held for long-term capital appreciation.
d. In the process of production for such sale.
e. In the form of materials or supplies to be consumed in the production process or the rendering of services.
f. Choices b and d.
g. Choices b, d, and e.

Answer: (g)

4. Which of the following items are excluded from the scope of IAS 2 – Inventories?
a) Agricultural produce at the point of harvest
b) Inventories that are stated at Net Realisable Value
c) Assets held for sale in the ordinary course of business
d) Inventories whose fair value is more than the cost
Ans:a)
[Agricultural produce at the point of harvest is dealt with under IAS 41 – Agriculture. Once the produce is
23
 harvested, it is recorded under IAS 2.]

5. Which of the following is allowed as a cost of inventory?

a) Abnormal waste
b) Storage costs
c) Selling costs
d) Variable manufacturing overheads
e) General administration overheads
Ans: d)
[Variable manufacturing overheads are allowed as a cost of inventory.
Inventory cost should not include:
• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign
currency
• interest cost when inventories are purchased with deferred settlement terms.]

6. Inventories are stated at:

a) Lower of cost and carrying value
b) Lower of fair value and net realisable value
c) Lower of cost and net realisable value
d) Cost of production
Ans:c)

7. Inventory excludes…
a) Goods purchased for resale
b) Finished goods produced
c) Construction works in progress
d) Raw materials
Ans: c)

[Construction works in progress are covered by IAS 11 – Construction Contracts.

Standard works in progress are inventories.]

8. When actual production output is abnormally high, the fixed overheads allocated should be reduced.

a) True

b) False
Ans: a)

24
[True – This is to avoid the inventory being stated at more than its actual cost.]

9. The cost of inventory should not include

a. Purchase price.
b. Import duties and other taxes.
c. Abnormal amounts of wasted materials.
d. Administrative overhead.
e. Fixed and variable production overhead.
f. Selling costs.
g. Choices c, d, and f.

Answer: (g)

10. Which of the following costs must be expensed under IAS 2?

a) Costs of purchase that are paid to the suppliers of raw materials

b) Import duties on raw materials that are paid to the authorities

c) Variable production overheads that are allocated to each unit based on actual usage

d) Selling and distribution overheads incurred in the ordinary course of business

Ans:d)

[Selling costs are now allowed as a cost of inventory and must be expensed.
Inventory cost should not include:
• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreign exchange differences
• interest]

11. Which of the following is not permitted as a cost of inventory?

a) Non-recoverable taxes
b) Shipping
c) Fixed manufacturing overheads
d) Storage costs
Ans:d)

[Storage costs are not permitted as a cost of inventory under IAS 2.

Inventory cost should include all:
• costs of purchase (including taxes, transport, shipping and handling) net of trade discounts received
• costs of conversion (including fixed and variable manufacturing overheads) and
• other costs incurred in bringing the inventories to their present location and condition]

25
12. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labour.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory supervisor).
d. Factory overheads based on normal capacity.
Answer: (c)

13. How are unallocated overheads treated as per IAS 2?

a) Recognise as an expense so long as there is a profit in the current period
b) Recognise as an expense in the period in which they are incurred
c) Treated as deferred expenditure
d) Capitalised with the cost of inventories

Ans:b)

14. Fixed Production overheads are those…

a) Indirect costs of production that remain constant regardless of the volume of production
b) Direct costs attributable to the product or service that remain constant regardless of the volume of
production
c) Indirect costs of production that vary directly with the volume of production
d) Direct costs attributable to the product or service that vary regardless of the volume of production
Ans:a)
[These may include things such as rent and insurance.]

15. By allocating fixed factory overheads on normal production levels, low actual production levels will result in
greater fixed overhead allocation to each unit of production.

a) True
b) False

Answer:b)

[If actual production is lower than normal production, the fixed overhead allocation will be lower than if
actual output rates were used.]
16. Which of the following items should be disclosed as per the requirements of IAS 2?

26
 a) Average holding period of inventories of the entity as at the end of the reporting period
b) List of major customers to whom the inventories were sold during the reporting period
c) Average lead time of procurement for major classes of inventories
d) Carrying amount of inventories pledged as security for liabilities

Ans:d)

17. The estimated selling price in the ordinary course of business, less any completion costs and costs of sale
is called…
a) Present value

b) Market value

c) Net realisable value

d) Fair value

Ans: c)

18. Treated as a deferred expense and written off based on the average inventory holding period
a) Recognised as an expense in the period in which the write-down occurs
b) Recognised as an expense in the subsequent period in which such write-down is warranted
c) Recognized as a current liability in the Balance Sheet

Ans:b)

[Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Also,
any reversal should be recognised in the income statement in the period in which the reversal occurs.]

19. Under IAS 2, fixed production overheads should be allocated to items of inventory because of ____
production capacity.
a) Actual
b) Normal
c) Abnormal
d) Estimated

Ans:b)

27
 20. FAR WEST INC. manufactures and sells paper envelopes. The stock of envelopes was included in the closing inventory as of
December 31, 2015, at a cost of $50 each per pack. During the final audit, the auditors noted that the subsequent sale price for the
inventory at January 15, 2016, was $40 each per pack. Furthermore, inquiry reveals that during the physical stock take, a water
leakage has created damages to the paper and the glue. Accordingly, in the following week, FAR WEST INC. spent a total of $15
per pack for repairing and reapplying glue to the envelopes. The net realizable value and inventory write-down (loss) amount to
a. $40 and $10 respectively.
b. $45 and $10 respectively.
c. $25 and $25 respectively.
d. $35 and $25 respectively.
e. $30 and $15 respectively.

Answer: (c)

[The net realizable value is the subsequent sale price, $40, less any cost incurred to bring the good to its salable condition, $15. Thus,
NRV= $40 – $15 = $25 per pack. The loss (inventory write-down) per pack is the difference between cost and net realizable value:
$50 – $25= $25 per pack.]

21. A company determined the following values for its inventory as of the end of its fiscal year:

Historical cost $100,000

Current replacement cost 70,000

Net realizable value 90,000

Net realizable value less a normal profit margin 85,000

Fair value 95,000

Under IAS, what amount should the company report as inventory on its balance sheet?

a. $70,000
b. $85,000
c. $90,000
d. $95,000

Answer: (c)

22. Wander Limited had inventory with a cost of $10,000 at the end of the financial period, 31 December 2013.
It estimated the net realisable value of this inventory was $9,000 at 31 December. One week later, the
inventory was sold for $7,000.
If their financial statements were finalised on 14 February 2014, what value should be assigned to this
inventory
a) $10,000
b) $9,000
c) $7,000

28
 d) None of these

Ans:C)
[The inventory was sold just one week after the end of the financial period. The change in value confirmed
conditions existing at the end of the period. We can assume the value of this inventory at 31 December
2013 was actually $7,000.]

23. Under IAS 2, which of the following inventory items are not valued at the lower of cost or net realizable value?
a. Manufactured inventory items.
b. Retail inventory items.
c. Biological inventory items.
d. Industrial inventory items.
Answer: (c)

[biological inventory items are valued at fair value less the cost to sell at the point of harvest.]

24. An entity holds inventories of 10000 units and it could sell the same in the market @ $10/- each after selling expenses. The entity
has an order in hand to sell the inventories @ $ 11/-. In this situation, fair value and net realisable value is
i. $ 11/- each & $10/- each
ii. $ 10/- each & $11/- each
iii. $ 11/- each & $11/- each
iv. $ 10/- each & $10/- each

Ans ii
[Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. In accordance with the above definitions, net realisable value
refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. Whereas, fair value
reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantageous) market for that
inventory would take place between market participants at the measurement date. The former is an entity-specific measurement; the latter
is market-based measurement. Net realisable value for inventories may not be equal to fair value less costs to sell.]

25. Lipstick Corp manufacturers and sells adhesive warning signs for workplaces. The stock of signs was
included in the closing inventory as of 31 December 2013 at a cost of $50 per pack.
During the final audit the auditors noted that the subsequent selling price for the inventory at 15th January

29
 2014 was $40 per pack. Furthermore, inquiry reveals that during the physical stock take, a water leakage
has damaged the signs and glue. Accordingly in the following week, Lipstick Corp spent a total of $15 per
pack for repairing and reapplying the glue to the signs.
The net realizable value and inventory write-down (loss) amount to…
a) $40 and $10 respectively
b) $25 and $25 respectively
c) $35 and $25 respectively
d) $30 and $15 respectively
Ans:b)

Net realisable value = [$40 (selling price) minus $15 (repair cost)] = $25
Write down (loss) = [$50 (carrying amount) minus $25 (NRV)] = $25

26. As per Paragraphs 3(a) and 3(b), IAS2 does not apply to the inventories held by producers of agricultural and forest products,
agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value
and inventories held by the commodity broker-traders who measure their inventories at fair value less cost to sell
i. True
ii. False
Ans ii
[Only measurement criteria is not applicable to the inventories held by producers of agricultural and forest products, agricultural produce
after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value and inventories held by the
commodity broker-traders who measure their inventories at fair value less cost to sell. Paragraphs 4 and 5 of IAS2 clearly state that these
types of inventories are excluded from only the measurement requirements of this Standard. In other words, the other requirements laid
down in the Standard are applicable. For example, disclosure requirements of this Standard are applicable to these types of inventories,
say, disclosure of accounting policies adopted in measuring inventories.]

27. Inventories include…

a) Equipment used in the ordinary course of business
b) Tangible assets lying in the store, which are intended for sale
c) Machinery used in the production process which is for sale
d) Materials and supplies used for maintaining property, plant and equipment
e) Intangible assets used in the production process, but not intended for sale

Ans:b)

[Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the
ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials).]

30
 28. As per paragraph 8 of IAS2, inventories include ‘materials and supplies awaiting use in the production process’. All packing
material and publicity material are covered by the term ‘materials and supplies awaiting use in the production process’.
i. True
ii. False
Ans ii

[While the primary packing material may be included within the scope of the term ‘materials and supplies awaiting use in the production
process’ but the secondary packing material and publicity material cannot be so included, as these are selling costs which are required to be
excluded as per IAS2. For this purpose, the primary packing material is one which is essential to bring an item of inventory to its saleable
condition, for example, bottles, cans etc., in case of food and beverages industry. Other packing material required for transporting and
forwarding the material will normally be in the nature of secondary packing material.]

29. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised
as
i. a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
ii. an addition in the amount of inventories recognised as an income in the period in which the reversal occurs.
iii. a reduction in the amount of inventories recognised as an income in the period in which the reversal occurs.
iv. an addition in the amount of inventories recognised as an expense in the period in which the reversal occurs.
Ans i

[Paragraph 34 of IAS2 ‘inter alia’ provides, ‘the amount of any reversal of any write-down of inventories, arising from an increase in net
realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the
reversal occurs’. Paragraph 36(f) requires the disclosure of ‘the amount of any reversal of any write-down that is recognised as a reduction
in the amount of inventories recognised as expense in the period in accordance with paragraph 34’.]

30. An entity can use different cost formulae for inventories held at different geographical locations having similar nature and use to
it
i. True
ii. False

Ans ii
[Paragraph 25 of IAS2 prescribes that the cost of inventories, other than the items of inventories which are not ordinarily interchangeable
as dealt with in paragraph 23, shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use

31
the same cost formula for all inventories having similar nature and use to it. In this case, since the inventories held at different geographical
location are of similar nature and use to the entity, different cost formula cannot be used for inventory valuation purposes.]

31. Lippy Machines is in the business of procuring a specific type of machine and sells them to international
markets. During the year, the Company bought four machines costing $120,000, $140,000, $130,000 and
$100,000 respectively. During the year it sold only one machine for $140,000 and follows the FIFO method
of valuation. Which of the following statements is TRUE?
a. The cost of Inventory is $370,000 and the cost of sales is $100,000
b. The cost of Inventory is $390,000 and the cost of sales is $140,000
c. The cost of Inventory is $370,000 and the cost of sales is $120,000
d. The cost of Inventory is $370,000 and the cost of sales is $490,000
Answer: c)
[As Lippy Machines uses the First On, First Out (‘FIFO’) method of inventory valuation, the first machine,
costing $120,000 is the machine sold. Therefore, cost of sales is $120,000.
The remaining machines are valued using FIFO as $140,000, $130,000 plus $100,000 which is $370,000.]

32. Unallocated fixed overheads may be applied to the inventory valuation at the end of the financial period.
i. True
ii. False

Answer: ii)
[Unallocated fixed overheads must be expensed in the period they were incurred.]

33. Inventory held in different geographical locations may use different cost models.
i. True
ii. False
Answer: II)

[ IAS 2 states the same cost model should be used for inventory having similar nature and use to the entity.
Difference in geographical location is not sufficient to justify using a different cost model.]

32
 34. Which of the following costs are not included while computing the cost of purchase?
a) Purchase Price
b) Recoverable taxes
c) Import duties
d) Shipping costs
Answer:b)

35. General storage costs must be expensed.

a. True
b. False
Answer:a)
[Storage costs are not related to the production of inventory, they must be expensed in the period they are
incurred. If the storage is used in the production of the inventory, from one stage to the next, it may be allocated to
the inventory cost.]

36. Shaw & Co., imported raw materials from China worth $100,000. They paid $8,000 as import duties and
$2,000 as import taxes (the import taxes were subsequently refunded by the local government). They paid
$15,000 for transportation of the materials from China and another $2,000 as port handling charges for
loading the materials at China.Marketing expenses were $1,000 and the general administrative overheads
amounted to $2,000. What will be the value of inventories as per IAS 2?

a) $127,000
b) $125,000
c) $128,000
d) $130,000

Answer: b)
[Materials $100,000
Non-refundable import duties $8,000
Transportation $15,000
Handling $2,000
Total = $125,000
Marketing and selling costs, general overheads and refundable taxes are not permitted as a cost of inventory.]

37. The estimated selling price in the ordinary course of business less estimated cost of completion and
estimated cost of sale is called…
a) Market value
b) Fair value

33
c) Current value
d) Net realisable value

Answer: d)

34
INTERNATIONAL ACCOUNTING STANDARDS (IAS) 7- STATEMENT OF CASH
FLOWS

1. An entity purchases a building and the seller accepts payment partly in equity shares and partly in debentures of the entity. This
transaction should be treated in the cash flow statement as follows:
a. The purchase of the building should be investing cash outflow and the issuance of shares and the debentures financing
cash outflows.
b. The purchase of the building should be investing cash outflow and the issuance of debentures financing cash outflows
while the issuance of shares investing cash outflow.
c. This does not belong in a cash flow statement and should be disclosed only in the footnotes to the financial statements.
d. Ignore the transaction totally since it is a noncash transaction. No mention is required in either the cash flow statement or
anywhere else in the financial statements.
Answer: (c)

2. Statement of cash flows should be prepared only for annual reporting period
i. True
ii. False

Ans ii
[According to paragraph 1 of IAS7, statement of cash flows forms an integral part of financial statements for each period for which
financial statements are presented. According to IAS1, Presentation of Financial Statements, complete set of financial statements include
among other statements, a statement of cash flows for the period. From the above, it is clear that statement of cash flows is an integral part
of financial statements and the same should be prepared for each period for which financial statements are presented i.e., annual period as
well as interim reporting period. In this regard, it may be noted that IAS34, Interim Financial Reporting, states that interim financial report
shall comply with all of the requirements of IFRS. IAS34 provides that interim financial report means a financial report containing either a
complete set of financial statements or a set of condensed financial statements for an interim period. Accordingly, statement of cash flows
can be presented in complete or condensed form.]

3. An entity (other than a financial institution) receives dividends from its investment in shares. How should it disclose the dividends
received in the cash flow statement prepared under IAS7?
a. Operating cash inflow.
b. Either as operating cash inflow or as investing cash inflow.
c. Either as operating cash inflow or as financing cash inflow.
d. As an adjustment in the “operating activities” section of the cash flow because it is included in the net income for the
year and as a cash inflow in the “financing activities” section of the cash flow statement.
Answer: (b)

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4. How should gain on sale of an office building owned by the entity be presented in a cash flow statement?
a. As an inflow in the investing activities section of the cash flow because it pertains to a long-term asset.
b. As an inflow in the “financing activities” section of the cash flow statement because the building was constructed with a
long-term loan from a bank that needs to be repaid from the sale proceeds.
c. As an adjustment to the net income in the “operating activities” section of the cash flow statement prepared under the
indirect method.
d. Added to the sale proceeds and presented in the “investing activities” section of the cash flow statement.
Answer: (c)

5. How should an unrealized gain on foreign currency translation be presented in a cash flow statement?
a. As an inflow in the “financing activities” section of the cash flow statement because it arises from a foreign currency
translation.
b. It should be ignored for the purposes of the cash flow statement, as it is an unrealized gain.
c. It should be ignored for the purposes of the cash flow statement as it is an unrealized gain but it should be disclosed in
the footnotes to the financial statements by way of abundant precaution.
d. As an adjustment to the net income in the “operating activities” section of the statement of cash flows.

Answer: (d)

6. How should repayment of a long-term loan comprising repayment of the principal amount and interest due to date on the loan be
treated in a cash flow statement?
a. The repayment of the principal portion of the loan is a cash flow belonging in the “investing activities” section; the
interest payment belongs either in the “operating activities” section or the “financing activities” section.

b. The repayment of the principal portion of the loan is a cash flow belonging in the “investing activities” section; the
interest payment belongs either in the “operating activities” section or the “investing activities” section.

c. The repayment of the principal portion of the loan is a cash flow belonging in the “investing activities” section; the
interest payment belongs in the “operating activities” section (because IAS7 does not permit any alternatives in case of
interest payments).

d. The repayment of the principal portion of the loan is a cash flow belonging in the “investing activities” section; the
interest payment should be netted against interest received on bank deposits, and the net amount of interest should be
disclosed in the “operating activities” section.
Answer: (a)

7. Glenda Corporation prepares its financial statements in accordance with IFRS. Glenda must report finance costs on the statement
of cash flows
a. In operating activities.
b. Either in operating activities or financing activities.
c. In financing activities.
d. In investing activities or financing activities.
Answer: (b)

[Finance costs (interest expense) may be reported in either the operating or financing section of the statement of cash flows.
However, once it is disclosed in a particular section, it must be reported on a consistent basis.]

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 8. Larimer Corporation prepares its financial statements in accordance with IAS. Larimer acquired equipment by issuing 5,000
shares. How this transaction be reported on the statement of cash flows?
a. As an outflow of cash from investing activities and inflow of cash from financing activities.
b. As an inflow of cash from financing activities and an out flow of cash from operating activities.
c. At the bottom of the statement of cash flows as a significant noncash transaction.
d. In the notes to the financial statements as a significant noncash transaction.
Answer: (d)
[This transaction did not involve an exchange of cash; therefore, it is not included on the statement of cash flows. IAS7
requires that significant non-cash transactions be reported in the notes to the financial statements.]

9. For IAS 7 purposes, cash advances and loans from bank overdrafts should be reported on the statement of cash flows as
a. Operating activities.
b. Investing activities.
c. Financing activities.
d. Other significant noncash activities.
Answer: (a)

10. Following item(s) qualifies to be a cash equivalent:

i. Balances with bank in short-term deposits say not more than three months
ii. Short-term money market instruments, such as, 91 days’ treasury bills, certificate of deposit.
iii. three month loan given to a party to help in managing party’s short-term liquidity position
iv. i and ii
v. i and iii
vi. i, ii and iii
Ans iv
[Cash equivalents are held for the purpose of meeting short-term cash requirements rather than for investment or other purposes. An
investment normally qualifies to be a cash equivalent only when it has a short maturity (say not more than three months) from the date of
acquisition, readily convertible to a known amount of cash and is subject to an insignificant risk of changes in value. Accordingly, readily
convertible investments for which the amount of cash that will be received is known at the time of initial investment will be treated as cash
equivalents for the purpose of statement of cash flows. An overriding test is that cash equivalents are held to meet short-term cash
requirements of the entity rather than for investment or other purposes.]

11. Which one of the following statement is true?

i. conversion of term loan or debt into equity is part of financing activities
ii. redemption of preference shares by conversion into equity is part of investing activities
iii. purchase of goods on credit is part of operating activities
iv. None of the above

Ans iv [Any transaction which does not have any effect on cash and cash equivalents is outside the purview of statement of cash
flows.]

12. Which one of the following statement is true?

i. cheques/demand drafts deposited in bank is part of financing activities

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 ii. withdrawal or deposit of cash from/in bank is part of investing activities
iii. cash invested in short-term deposit is part of financing activities
iv. None of the above

Ans iv [Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of
the cash management of an entity rather than part of operating, investing or financing activities.]
13. Which one of the following statement is true?
i. Cash credit from bank is considered as a part of financing activities and bank overdraft forming the part of cash management
is considered as cash equivalent while preparing the statement of cash flows.
ii. Cash credit from bank bank overdraft, both forming the part of cash management are considered as cash equivalent while
preparing the statement of cash flows.
iii. Cash credit from bank and bank overdraft both are considered as a part of financing activities.
Ans i
[Paragraph 8 of IAS7, provides that bank borrowings are usually considered to be part of financing activities. However, where bank
overdrafts which are repayable on demand form an integral part of an entity’s cash management, bank overdrafts are included as a
component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates
from positive to being overdrawn.]

14. Tax impact of short-term capital gain should be classified as

i. investing activity
ii. financing activity
iii. operating activity
Ans iii
[Cash flows arising from taxes on income shall be separately disclosed and classified as cash flow from operating activities, unless they
can be specifically identified with financing and investing activities. If we strictly go by classification of taxes in accordance with the
nature of the related transaction, tax impact of short-term capital gain should be classified as investing activity. Suppose, the entity is
incurring business losses, the same gets adjusted against short-term capital gain for tax purposes. Accordingly, showing tax impact of
short-term capital gain and business losses separately is impracticable. Therefore, tax paid is usually classified as cash flows from
operating activity.]

15. Tax payment by way of long-term capital gain on sale of land, which was used as property, plant and equipment (PPE), shall be
classified as
i. Investing activity
ii. financing activity
iii. operating activity
Ans i

16. Tax payment on dividend received from a foreign company shall be classified as

i. Investing activity
ii. financing activity
iii. operating activity

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Ans i
[Where it is practicable to identify the tax cash flow with an individual transaction that gives rise to cash flows, tax cash flows are
classified as investing or financing activities.]

17. Examples of cash flows that can be reported on a net basis are :
i. receipt of insurance premium from policy holders and refund of premium on cancellation of general insurance policy to policy
holders (under direct method of presenting cash flows from operating activities);
ii. investment and sale of securities by wealth management companies on behalf of customers (under direct method of presenting
cash flows from operating activities);
iii. receipts and payments by an agent on behalf of a principal;
iv. acceptance and repayment of deposits with short maturities;
v. withdrawal and deposits from/in cash credit account with bank.
vi. All the above

Ans vi

18. Cash flows arising from the transactions in a foreign currency shall be recorded in an entity’s
i. functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the
foreign currency at the date of cash flow
ii. reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the
foreign currency at the date of cash flow
iii. functional currency by applying to the foreign currency amount the exchange rate between the reporting currency and the
foreign currency at the date of cash flow
iv. reporting currency by applying to the foreign currency amount the exchange rate between the functional currency and the
foreign currency at the date of cash flow

Ans i
19. Unrealised gains and losses arising from changes in foreign exchange rates is reported as
i. part of operating activities
ii. part of investing activities
iii. part of financing activities
iv. separately in the statement of cash flows in order to reconcile cash and cash equivalents
Ans iv
20. Which of the following classification for reporting cash flows are true in case of a Banking Institution?
i. Interest received on loans and advances given -Operating activities
ii. Interest paid on deposits and other borrowings -Operating activities
iii. Interest and dividend received on investments in subsidiaries, associates and in other entities - Investing activities
iv. Dividend paid on preference and equity shares, including tax on dividend paid on preference and equity shares by other
entities- Financing activities
v. i, iii and iv
vi. ii,iii and iv
vii. all the above

Ans vii

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 21. Which of the following classification for reporting cash flows are true in case of entities other than Banking Institutions?
i. Finance charges paid by lessee under finance lease- Financing activities
ii. Payment towards reduction of outstanding finance lease liability- Financing activities
iii. Interest paid to vendor for acquiring fixed asset under deferred payment basis - Investing activities
iv. all the above
v. i and ii
vi. ii and iii
vii. i and iii
Ans v

22. The examples of cash and cash equivalent balances held by the entity that are not available for use are
i. balance in unpaid dividend account;
ii. balance in unclaimed dividend account;
iii. balance in bank account for share application money, pending allotment of shares;
iv. earmarked bank balances for specific purposes.
v. balance in bank account subject to legal restrictions.
vi. i, iii, iv and v
vii. ii,iii iv and v
viii. all the above
Ans: viii

23. Sale proceeds from a sale and leaseback transaction in case of a financial lease be reported in the statement of cash flows as
i. financing activities
ii. investing activities
iii. operating activities
Ans i

24. If the leaseback is an operating lease, cash flows arising from sale proceeds of the fixed assets should be recorded as
i. investing activities
ii. operating activities
iii. financing activities
Ans ii
[A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The accounting treatment of cash
flows arising from the sale proceeds of a sale and leaseback transaction depends upon the type of lease involved. If the leaseback is a
finance lease, then the transaction is a financial arrangement between the lessor and the lessee in substance, whereby the lessor provides
finance to the lessee with the asset as security. Accordingly, in such a case sale proceeds of the asset should be classified as financing
activities in the statement of cash flows. Lease finance charges and repayment of lease principal in the future are also required to be
reported in the statement of cash flows as financing activities.
If the leaseback is an operating lease, cash flows arising from sale proceeds of the fixed assets should be recorded as investing activities.
The lease payments to be made in future would be classified as cash flows from operating activities.]

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 25. Debt securities purchased at a discount are classified in the statement of cash flows as
i. investing activities
ii. operating activities
iii. financing activities
Ans i

26. Debt securities purchased at a premium are classified in the statement of cash flows as
iv. investing activities
v. operating activities
vi. financing activities
Ans i
[Cash flows from investing activities represent the extent to which expenditure has been made for resources intended to generate future
income and cash flows. Thus, actual cash outflow irrespective of discount or premium will be presented as investing activity.]

27. Cash payments to acquire assets held for rental to others and subsequently held for sale as described in paragraph 68A of IAS16,
Property, Plant and Equipment are cash flow from
i. investing activities
ii. operating activities
iii. financing activities
Ans ii [Paragraph 14 of IAS7, inter alia, states that cash payments to manufacture or acquire assets held for rental to others and
subsequently held for sale as described in paragraph 68A of IAS16, Property, Plant and Equipment are cash flow from operating activities.
The cash receipts from rent and subsequent sale of such assets are also cash flows from operating activities. Therefore, cash flows
associated with these type of assets are classified as cash flows arising from operating activities. This is in contrast with the normal
classification where cash payments made to acquire or manufacture property, plant and equipment and cash receipts from the sale of such
assets are classified as investing activities.]

28. Cash payments for futures contracts, forward contracts, option contracts and swap contracts when the contracts are held for
dealing or trading purposes, are part of
i. investing activities
ii. operating activities
iii. financing activities
Ans iii

29. Cash receipts from futures contracts, forward contracts, option contracts and swap contracts when the contracts are held for
trading purposes, are part of
i. investing activities
ii. operating activities
iii. financing activities
Ans iii [refer Paragraph 16 of IAS7]

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 30. When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in
i. investing activities
ii. operating activities
iii. financing activities
iv. same manner as the cash flows of the position being hedged
Ans iv [classification of cash flows from future contracts, forward contracts, option contracts and swap contracts depends on whether a
contract is accounted for as a hedging instrument for hedged item or not. When a contract is accounted for as a hedge of an identifiable
position the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged. Paragraph 16 of
IAS7]

31. Which of the following(s) is/are example(s) of non-cash transactions:

i. acquisition of an enterprise by means of issue of equity shares;
ii. conversion of debentures or preference shares into equity shares;
iii. conversion of term loan into equity shares;
iv. issue of bonus shares;
v. reduction of capital under restructuring or reduction of capital;
vi. exchange of assets.
vii. i,ii and v
viii. ii,iii,iv and v
ix. all the above
Ans ix [Investing and financing transactions that do not require the use of cash and cash equivalents are excluded from the statement of
cash flows. Such transactions are however required to be disclosed elsewhere in the financial statements in a way that provides all the
relevant information. The disclosure of these significant non-cash transactions is made by way of notes to the financial statements.]

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