Exam practice questions

Ed Co. has owned 100 per cent of the shares in Clem Co. for five years. These were bought for $450 000 when the net assets of Clem Co. were $415 000. In the year of acquisition, Clem Co. was impaired by $5000 due to a drop in profitability. Clem Co. has again suffered a loss of profits in the year ended 31 December 20X9, and accordingly goodwill is to be impaired by 20 per cent of book value. Extracts from the two companies' statements of profit or loss are as follows: Ed Co. Clem Co. $ $ Cost of sales 320 000 126 000 Administrative expenses 100 000 36 000 What are the amounts to be reported for group cost of sales and administrative expenses? Cost of sales Administrative expenses $ $ A 439 000 136 000 B 440 000 136 000 C 446 000 129 000 D 446 000 142 000

D

A company made a profit for the year of $12 990 after accounting for depreciation of $1300. During the year, non-current assets were purchased for $6500, receivables increased by $560, inventories decreased by $1100 and payables increased by $230. The increase in cash and bank balances during the year was A $530 B $4420 C $7020 D $8560

D $ Profit for the year 12 990 Depreciation 1 300 Purchase of NCAs (6 500) Increase in receivables (560) Decrease in inventories 1 100 Increase in payables 230 8 560

Flurry Co. prepares its financial statements in its functional currency, the Durham, translating to dollars in order to report to its parent company. The following information is relevant: Net assets (D) Exchange rate 1 January 20X9 650 000 4.3D/$ 31 December 20X9 780 000 4D/$ The retained profits for the year were D115 000 and the average exchange rate was 4.2D/$. What exchange difference arises on translation of the financial statements? A $11 337 loss B $11 337 gain C $12 706 loss D $12 706 gain

D $ $ Opening net assets at 4.3D / $ 151 163 Opening net assets at 4D / $ 162 500 Gain 11 337 Retained profits at 4.2D / $ 27 381 Retained profits at 4D / $ 28 750 Gain 1 369 Total gain 12 706

On 1 January 20X5 Kent Company enters into a three year lease for an asset, paying an initial deposit of $18 000. The present value of the future cash flows is $150 000. The asset they are leasing has a useful life of five years and Kent Company will not obtain ownership at the end of the lease. What is the depreciation expense for the right of use asset for the year ended 31 December 20X5? A $33 600 B $44 000 C $50 000 D $56 000

D $ Deposit 18 000 Present value of future lease payments 150 000 168 000 Depreciation 168 000 / 3 years 56 000

Radley Co. purchased raw materials on credit from a foreign supplier for 375 000 Goldings, halfway through the year ended 31 December 20X9. Half of the goods were paid for on 30 November 20X9 and the remaining half on 31 January 20Y0. Relevant exchange rates are as follows: 30 June 20X9 4.3 G: $1 30 November 20X9 4.6 G: $1 31 December 20X9 4.5 G: $1 31 January 20Y0 5 G: $1 What exchange difference is recognised in Radl ey Co.'s profit or loss in the year ended 31 December 20X9? A $2844 loss B $2844 gain C $4782 loss D $4782 gain

D Settled Outstanding payable payable $ $ Recorded in June (375 000 / 2) / 4.3 43 605 43 605 Settled (375 000 / 2) / 4.6 40 761 Unsettled (375 000 / 2) / 4.5 41 667 Exchange gain 2 844 1 938 Total gain 4 782.

12 Which of the following statements is/are correct? I. An entity can only change an accounting policy if this is required by an accounting standard. II. A change in accounting policy is always applied prospectively, so that the effect of the change is recognised in the current period. A I only B II only C I and II D Neither I nor II

D A change in accounting policy is applied retrospectively (as required by IAS 8), unless (a) it is impracticable to do so or (b) the change is required by a new IFRS and the transitional provisions require/allow prospective application. A change in accounting policy may be made volunt arily, if the change will result in a more relevant or reliable presentation in the financial statements.

Consider the following statements: I. Gains from revaluation of non-current assets are recognised in profit or loss. II. Gains from the sale of non-current assets are not recognised in profit or loss. Which of the statements are correct? A I only B II only C Both statements D Neither statement

D A gain from the sale of a non-current asset is recognised as part of the profit or loss for the period but the revaluation of a non-current asset is not recognised in profit or loss (it is recognised in equity as part of other comprehensive income).

Consider the following statements: I. A provision is a liability for which the amount is an estimate. II. A provision should not be recognised in the financial statements. Which of the statements are correct? A I only B II only C Both I and II D Neither I nor II

D A provision is a liability of uncertain timing and/or amount - the amount is not necessarily an estimate; it may be known and the uncertainty surrounds timing of the payment. Provisions are recognised in the financial statements when certain criteria are met.

What type of assurance is provided by the external auditor's report on an entity's financial statements? A Limited B Absolute C Negative D Reasonable

D An external audit can only provide reasonable, not absolute, assurance.

19 Which of the following statements about equity accounting and associates is correct? A The tax charge relating to an associate must be separately disclosed in the consolidated statement of profit or loss. B Any impairment of an associate is charged to administrative expenses in the consolidated statement of profit or loss. C There is no requirement for an associate to be consolidated or equity accounted using the same accounting policies as those adopted by the group. D Where an associate is loss making, the investor should discontinue including its share of losses when the investor's share of losses of the associate equals or exceeds its interest in the associate.

D Any impairment of an associate is charged against the profits of the associate

Which of the following must be shown in the main financial statements of a typical manufacturing company rather than in the notes to the financial statements? A A classification of expenses B The number of shares in issue C The classes of property, plant and equipment D The classification of assets as current and non-current

D IAS 1 specifies what should be disclosed in the main financial statements.

4 An entity purchases the brand name of a product on 1 November 20X8 for $375 000. The management feel that the brand has an indefinite useful life and have therefore not charged any amortisation in the year ended 31 October 20X9. Which of the following is correct? A Amortisation should be charged based on an assumed maximum useful life of 20 years. B Amortisation should be charged based on an assumed maximum useful life of 50 years. C There is no requirement to charge amortisation, however the brand must be tested for impairment when indications of an impairment arise. D There is no requirement to charge amortisation, however the brand must be tested for impairment each year and in addition, whenever there are indications of an impairment.

D IAS 38 does not require an intangible asset to be amortised where it is assessed to have an indefinite life. In this case the asset must be tested for impairment annually and whenever there are indications of impairment

Which of the following statements about cons olidated financial statements is correct? A IAS 28 states that investments should be held in the investor's individual accounts using the equity method. B IFRS 10 allows subsidiaries to be excluded from consolidation if their activities are dissimilar from those of the parent. C Where a subsidiary uses different accounting policies from its parent company, this must be disclosed in the group accounts. D An investor cannot control another company if it does not have the ability to use its power over the investee to affect the amount of the investor's returns

D IFRS 10 states that all material subsidiari es should be consolidated; investments in group companies in individual entity accounts are held at cost or in accordance with IFRS 9; the accounting policies of the subsidiary must be brought in line with those of the group for the purposes of consolidation.

Booth Co. has increased its return on investment (ROI) since last year. Assuming all other factors remain the same, which of the following is the best explanation for this? A Lower interest cover than last year B A lower profit margin than last year C A higher current ratio than last year D A higher asset turnover than last year

D ROI is the product of profit margin and asset turnover. An increase in either of these will increase ROI. Interest cover and the current ratio are irrelevant to ROI.

Details of two of Lord Company's transactions in the month of May are as follows: I. It has sold goods to another customer on credit. The goods have not yet been delivered. II. It has sold an item of machinery to a customer; the machinery has been delivered and Lord Company will undertake specialist installation in two months' time. For which transactions should revenue be recognised in May? A I only B II only C Both I and II D Neither I nor II

D Revenue is not recognised on either transaction as Lord has not satisfied the performance obligations under both contracts.

Classify the following amounts as current or non-current: I. A bank overdraft expected to be in place for two years II. Shares bought in another company for the purpose of resale in the near future III. A receivable arising from a credit sale made to a customer with payment terms of 24 months Current Non-current A I II and III B II I and III C I and III II D I, II and III None

D The credit sale is part of the company's normal operating cycle and so the receivable arising is classified as current. The bank overdraft is repayable on demand and so classified as current. The shares are a current asset investment.

According to the Conceptual Framework for Financial Reporting , information about an entity's financial performance helps users to understand: I. the entity's needs for additional finance. II. the entity's financing and investing activities. III. the efficiency and effectiveness of management. IV. the return that the entity has produced on its economic resources. A IV only B III and IV only C I and III only D I and II only

D The entity's need for additional finance would be shown by its statement of financial position and information about its investing and financing activities would be shown by its statement of cash flows (and, to some extent, by its statement of financial position).

5 The following is relevant to ABC Co. in the year ended 31 December 20X9: $28 000 was spent investigating the properties of a new type of plastic. $340 000 was capitalised relating to the development of a new product which went into commercial production on 1 October 20X9. Sales of the product are expected to remain constant for the first four years of its production and then halve for a further two years. What amounts should be recognised in the financial statements of ABC Co. in the year ended 31 December 20X9? Statement of profit or loss and other comprehensive income Statement of financial position A $17 000 $351 000 B $28 000 $340 000 C $36 500 $331 500 D $45 000 $323 000

D The research costs should be written off to profit or loss. Amortisation on the capitalised development costs commences on 1 October, and mirrors the expected sales pattern: $ Year 1 68 000 Year 2 68 000 Year 3 68 000 Year 4 68 000 Year 5 34 000 Year 6 34 000 Therefore the total charge to profit or loss is: $ Research costs 28 000 Amortisation (3/12 u 68 000) 17 000 45 000 The development costs reported as an asse t are therefore $340 000 - $17 000 = $323 000.

What type of cost does the following definition describe? 'Assets are carried at the present value of cash flows from the continuing use and from its disposal at the end of its useful life of the asset.' A Current cost B Fair value C Historical cost D Value in use

D Value in use.

Which of the following statements about IAS 12 is/are correct? I. Deferred tax liabilities may be classified as current liabilities. II. Tax losses are an example of a taxable temporary difference. III. Deferred tax relating to the revaluation of a property is reported as other comprehensive income. A II only B I and II only C I and III only D II and III only

Deferred tax amounts may not be classified as current. Tax losses are an example of a deductible temporary difference.

Consider the following two statements: I. The Australian Accounting Standards Board (AASB) has adopted the content of IFRS with some minor changes. II. Both Australian companies' legislation and IFRS allow an entity to depart from the requirements of an IFRS in exceptional circumstances. Which of these statements are correct? A I only B II only C Both I and II D Neither I nor II

The AASB has adopted IFRS equivalent standards (with changes made to reflect the Australian legislative environment). Although IFRS allows the use of the 'true and fair/fair presentation override', Australian companies' legislation does not.

The following are extracts from BL's financial statements: $'000 Profit before interest and tax 10,200 Finance costs (1,600) Income tax expense (3,300) Profit for the year 5,300 Share capital 20,000 Reserves 15,600 Net assets 35,600 Non-current loan payable 6,900 42,500 What is BL's return on investment (to the nearest %)? A 24% B 12% C 29% D 15%

The correct answer is: 24% Return on investment = Earnings before interest and tax × 100% Total assets current liabilities less = (10,200/42,500) × 100% = 24%

Consider the following statements: I. The use of a conceptual framework and accounting standards based on that framework would be an example of positive accounting theory. II. An attempt to predict accounting behaviour by observing what actually happens and applying this to particular situations is an example of normative accounting theory. Which statements are correct? A I only B II only C Both I and II D Neither I nor II

The first statement relates to normative theory and the second to positive theory.

Bubble Co. made sales on credit during Ma y 20X7 of $450 000 for goods that were all delivered during May. Sales tax is charged at 5 per cent. They offer all customers a settlement discount of 5 per cent and on average 40 per cent of customers will take up the discount. What is Bubble Co. revenue for May 20X7? A $441 000 B $450 000 C $463 050 D $472 500

a $ Customers expected to take up discount (450 000 u 40% u 95%) 171 000 Customers not expected to take up discount (450 000 u 60%) 270 000 Total 441 000 The sales tax is ignored as this is being collected on behalf of the tax authorities. For the customers who are expected to take up the disc ount revenue is recorded net of the settlement discount as it counts as variable consideration.

5 Which of the following is not a role of the IFRS Advisory Council? A To consult on all major IASB projects B To issue International Financial Reporting Standards C To advise on the prioritisation of the work of the IASB D To comment on the implications of the work of the IASB on users of financial statements

b The IASB is responsible for issuing IFRS

1 Which of the following are correct? I. The term 'reporting entity' may be used to describe a group of companies. II. The principal function of financial statements is to provide information to parties external to a business. III. The main purpose of financial reporting is to provide information aimed at running a business more efficiently. A I and II only B I and III only C II and III only D I, II and III

1 A The provision of information aimed at running a business more efficiently is an objective of management accounting rather than financial accounting. The aim of financial reporting is the provision of information to meet the needs of external users.

3 Consider the following two statements: I. The IASB operates a rules-based system of setting accounting standards. II. The US FASB operates a principles-based system of setting accounting standards. Which of these statements are correct? A I only B II only C Both I and II D Neither I nor II

3 D In each case the reverse is correct: US accounting standards are rules-based and IFRS are principles-based.

4 Which bodies does the IFRS Foundation oversee? A IASB and the Monitoring Board B IASB and IFRS Interpretations Committee only C IFRS Interpretations Committee and IFRS Advisory Council D IFRS Advisory Council, IASB and IFRS Interpretations Committee

4 D The IFRS Foundation is the overseeing body for the IASB, IFRS Interpretations Committee and IFRS Advisory Council. The Monitoring Board serves as a mechanism for communication between capital markets authorities and the IFRS Foundation.

Ray Co. reported the following amounts in its statement of financial position at 31 December 20X8: Liability for company taxes $43 800 Liability for deferred tax $79 320 The 20X8 tax liability was eventually settled at $42 120. At the 20X9 year end, there is a liability for current tax of $52 300 and the total liability for deferred tax is to decrease to $69 780. The decrease in deferred tax liability relates to items recognised within profit or loss. What is Ray Co.'s tax charge for 20X9? A $41 080 B $44 440 C $60 160 D $63 520

A $ Current tax (20X9) 52 300 Over-provision (43 800 - 42 120) (1 680) Deferred tax (79 320 - 69 780) (9 540 ) 41 080

The abbreviated functional currency statement of financial position at 30 November 20X9 of Pedro Co., a subsidiary of Aus Co., bought at the start of the year is as follows: Euro Assets 560 000 Share capital 100 000 Retained earnings b/f 220 000 Profit for the year 70 000 Liabilities 170 000 560 000 Pedro Co. was incorporated on 1 January 20X5. Relevant exchange rates are as follows: 30 November 20X9 $1: euro 0.8 1 December 20X8 $1: euro 0.75 1 January 20X5 $1: euro 0.95 Average for y/e 30 November 20X9 $1: euro 0.77 To the nearest $000 what are the translated retained earnings (including exchange differences) of Pedro Co. at 30 November 20X9? A $354 000 B $362 000 C $366 000 D $382 000

A $'000 Assets (560 / 0.8) 700 Share capital (100 / 0.75) 133 Retained earnings (β) 354 Liabilities (170 / 0.8) 213 700

7 West Co. acquired 90 per cent of the 100 000 shares in East Co. on 1 January 20X7 for $480 000 when the reserves of that company amounted to $320 000. On that date the fair value of the non-controlling interest was valued at $45 000. Included in East Co.'s statement of financial position was land with a book value of $60 000. The fair value was $30 000 higher than this. West Co. group measures the non-controlling interest at fair value. What goodwill arose on the acquisition of East Co.? A $75 000 B $102 000 C $105 000 D $135 000

A $'000 Consideration 480 Fair value of NCI 45 525 Fair value of net assets (100 + 320 + 30) (450 ) 75

West Co. acquired 90 per cent of the 100 000 shares in East Co. on 1 January 20X7 for $480 000 when the reserves of that company amounted to $320 000. On that date the fair value of the non-controlling interest was valued at $45 000. Included in East Co.'s statement of financial position was land with a book value of $60 000. The fair value was $30 000 higher than this. West Co. group measures the non-controlling interest at fair value. What goodwill arose on the acquisition of East Co.? A $75 000 B $102 000 C $105 000 D $135 000

A $'000 Consideration 480 Fair value of NCI 45 525 Fair value of net assets (100 + 320 + 30) (450 ) 75

Which of the following will cause a company's gearing ratio to increase? A The payment of a dividend B A decrease in rental expenses C A decrease in the allowance for receivables D The upward revaluation of a non-current asset

A A decrease in expenses increases profits and so equity and decreases the gearing ratio. A decrease in the allowance for receivables also increases equity. An upward revaluation increases equity and so decreases the gearing ratio.

Consider the following statements: I. Accounting standards are not retrospective. II. Accounting standards are applied to all items in the financial statements. Which statements are correct? A I only B II only C Both I and II D Neither I nor II

A Accounting standards do not apply to immaterial items.

Which of the following statements is/are correct? I. An impairment loss relating to goodwill cannot be reversed. II. Corporate assets must always be allocated to individual CGUs. III. An impairment loss relating to a CGU is allocated to goodwill in the first instance. A I only B II and III only C I, II and III D none of them

A An impairment loss relating to a CGU is initially allocated to any obviously impaired assets. Corporate assets may be allocated to groups of CGUs where allocation to a single CGU cannot be achieved on a reasonable and consistent basis. An impairment loss recognised for goodwill shall not be reversed in a subsequent period.

Which of the following statements about intangible assets is correct? A Goodwill can never be revalued. B An intangible asset must be separable. C Development costs may be capitalised if the criteria laid down in IAS 38 are met. D An intangible asset may be revalued where a fair value can be established through use of an expert valuer.

A An intangible asset need not be separable; it must be identifiable. Development cost smust be capitalised if the criteria laid down in IAS 38 are met. An intangible asset can only be revalued where a fair value is established by reference to an active market.

Which of the following provides evidence of the existence of significant influence? A Material transactions between investor and investee B Power to govern the financial an d operating policies of the entity C Agreement with other shareholders of the entity to vote on their behalf D Power to appoint or remove a majority of members of the board of directors

A Both B and D refer to control.

Train Co. owns 80 per cent of Car Co. Extracts from the companies' statements of financial position are as follows: Train Co. Car Co. $'000 $'000 Receivables 91 67 Cash 23 - Payables 87 53 Overdraft - 9 Included within the receivables of Car Co. is $7000 due from Train Co. Included within the payables of Train Co. is $5600 due to Car Co. The difference is due to cash in transit. What are the consolidated receivables and cash balances? Receivables Cash A $151 000 $23 000 B $151 000 $24 400 C $152 400 $23 000 D $152 400 $24 400

A Car Co.'s accounts should be adjusted as th ough the cash has been received. Therefore, the revised balances are: Receivables $60 000 Overdraft $7 600

Train Co. owns 80 per cent of Car Co. Extracts from the companies' statements of financial position are as follows: Train Co. Car Co. $'000 $'000 Receivables 91 67 Cash 23 - Payables 87 53 Overdraft - 9 Included within the receivables of Car Co. is $7000 due from Train Co. Included within the payables of Train Co. is $5600 due to Car Co. The difference is due to cash in transit. What are the consolidated receivables and cash balances? Receivables Cash A $151 000 $23 000 B $151 000 $24 400 C $152 400 $23 000 D $152 400 $24 400

A Car Co.'s accounts should be adjusted as th ough the cash has been received. Therefore, the revised balances are: Receivables $60000 Overdraft $7600

Which of the following is the correct definition of equity? A The residual interest in the assets of the entity after deducting all its liabilities B A present obligation arising from past events fr om which future economic benefits are expected to flow to the entity C A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity D A present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits

A D is the definition of a liability; C is the definition of an asset; B is a mixture of the definitions of an asset and a liability

Extracts from Hunt Co.'s financial statements in the year ended 31 December 20X9 were as follows: STATEMENT OF PROFIT OR LOSS $ Gross profit 3 216 400 Earnings before interest and tax 2 468 400 Profit before tax 2 094 400 Profit after tax 1 870 000 Earnings per share 7.48c Hunt Co. made no issues of shares during the year. What was the number of Hunt Co. shares in issue throughout the year to the nearest million? A 25 million B 28 million C 33 million D 43 million

A Earnings per share is calculated as the profits attributable to the ordinary shareholders divided by the number of shares. The profits attributable to ordinary shareholders is profit after tax and therefore: 1 870 000 No. of shares = 0.0748 No. of shares = 1 870 000 0.0748 = 25m

10 GF Co is a global mobile phone manufacturer. Re cent result for its trade in The Middle East are as follows: 20X7 20X6 Revenue $8 736 000 $5 582 000 Operating profit margin 10.5% 11.5% Which of the following is the most likely explanation for the movement in the operating profit margin in the Middle East? A GF won a new contract with the largest network provider and retailer in the Middle East on the basis of a bulk buy discount. B There has been an increase in demand for mobile phones in the Middle East. C GF has only just begun selling phones in the Middle East. D There has been an increase in popularity in high-end smartphones in the Middle East.

A GF won a new contract with the largest network provider and retailer in the Middle East on the basis of a bulk buy discount.

What is one of the main advantages of using historical cost as a measurement basis? A It is objective. B It is subjective. C It is a reasonable estimate. D It can use a formula for calculation.

A Historical cost is objective in that it is equivalent to the amount paid to obtain an asset. No estimation nor cost formulae are required.

11 Why is information about a reporting entity's net cash flows helpful to users? A It helps them to predict future cash flows. B It helps them to assess the stewardship of management. C It helps them to understand the claims against the entity. D It helps them to understand the entity's financial performance.

A Information about a reporting entity's cash flows during a period helps users assess the entity'sability to generate future net cash inflows

Which of the following would appear in the statement of financial position as a current liability? A Sales tax owing B Employee wages paid C Prepayments of expenses D Revaluation surplus on a non-current asset

A Prepayments are current assets; employee wages are an expense; a revaluation surplus forms part of equity.

2 Which of the following groups of users of accounts is interested primarily in the liquidity of a company? A Suppliers B The government C The management D The tax authorities

A Suppliers' interest in their customers' accounts lies in the fact that they wish to be repaid in a timely fashion. They are therefore interested primarily in the liquidity of a company.

Which of the following should be recognised as an asset in the statement of financial position according to the definition of an asset and recognition criteria provided in the Conceptual Framework? A A football player acquired on a contract for a transfer fee B An amount spent on investigating the healing powers of an Amazonian plant C An amount spent on training staff which is expected to result in increased productivity D An amount spent on advertising that is expected to result in increased sales for the next three years

A The amount spent on investigating the healing powers of the plant is research rather than development. At this stage it does not meet the recognition criteria as commercial development and economic benefit is too distant. The training costs do not meet the definition of an asset as the resultant benefit is not controlled by the company (i.e. the trained staff could leave the organisation). The advertising costs do not meet the definition of an asset as the resultant benefit is not controlled by the company and there is no certainty of a future economic benefit .

Consider the following statements: I. The auditor's report must be disclosed in a set of financial statements. II. The auditors' report confirms that the financial statements are correct. A I only B II only C Both I and II D Neither I nor II

A The auditors' report must be disclosed in the financial statements. It gives an opinion as to whether the financial statements show a true and fair view and/or are fairly presented.

Which of the following statements about the directors' report are correct? I. It includes details of the individual directors on the board. II. It includes a review of the entity's operations during the period. III. It shows the members of the board who sit on the various committees, such as audit, remuneration and nomination committees. A I and II only B I and III only C II and III only D I, II and III

A The details of the members of the various committees are detailed in the corporate governance report.

Which of the following items is not required to be shown in a separate line in the statement of changes in equity? A Revaluation of a property. B A prior period adjustment resulting from a change in accounting policy. C A share issue in the year. D Dividends paid to ordinary shareholders.

A The revaluation of a property would not be required to be disclosed separately as they would be automatically included in the 'total comprehensive income for the year' figure.

Which of the following does this definition describe? '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'. A Fair value B Current value C Residual value D Economic value

A This is the definition of fair value contained within a number of IFRS.

Wiley Co. has made tax trading losses for two ye ars, totalling $87 600. $23 000 of these were used to relieve other taxable income in accordance with tax law. At the 31 December 20X9 year end, Wiley Co. signs a large contract with a new customer which indicates that it will return to profitability. Wiley Co.'s tax rate is 20 per cent. Wh at is the deferred tax implication of the losses? A A deductible temporary difference of $64 600 arises and a deferred tax asset of $12 920 is recognised at 31 December 20X9 B A taxable temporary difference of $64 600 arises and a deferred tax liability of $12 920 is recognised at 31 December 20X9 C A taxable temporary difference of $87 600 arises and a deferred tax liability of $17 520 is recognised at 31 December 20X9 D A deductible temporary difference of $87 600 arises and a deferred tax asset of $17 520 is recognised at 31 December 20X9

A deferred tax asset arises in respect of lo sses carried forward which can be utilised against future profits. Losses to be carried forwar d are ($87 600 - 23 000) = $64 600 giving rise to a deferred tax asset of ($64 600 x 20%) = $12 920.

Axis Co. transferred an asset to its 75 per cent subsidiary Yves Co. on 31 October 20X9 for $25 000. The asset cost $32 000 on 1 November 20X7 and was depreciated monthly by Axis Co. at 20 per cent per annum on cost. Yves Co. did not amend the original useful life on the transfer and continued to depreciate the asset over its remaining life. At 31 December 20X9, extracts from the two companies' accounts were as follows: Axis Co. $ Yves Co. $ Non-current assets 165 000 180 000 What is the consolidated figure for non-current assets? A $339 200 B $339 522 C $343 522 D $345 000

B

P Co. acquired 80 per cent of the ordinary share capital in S Co. on 31 August 20X9. Extracts from the two companies' statements of profit or loss for the year ended 31 October 20X9 were as follows: P Co. S Co. Revenue 2 900 1 800 Cost of sales 1 500 900 During the year, P Co. made sales of $10 000 to S Co. each month, realising a mark up of 25 per cent. At the end of the year S Co. had none of these goods in inventory. What is the group gross profit for the year ended 31 October 20X9? A $1 546 000 B $1 550 000 C $1 625 000 D $2 300 000

B

Roulston Co. holds a 75 per cent investment in Hudson Co. and a 35 per cent investment in White Co. During the year ended 30 November 20X9, Roulston Co. sold goods to Hudson Co. for $400 000 and White Co. sold goods to Roulston Co. for $210 000. The companies' revenue as reported in their individual financial statements was as follows: $'000 Roulston Co. 1490 Hudson Co. 430 White Co. 1200 What is the consolidated revenue figure? A $1 383 500 B $1 520 000 C $2 510 000 D $2 583 000

B

A business had non-current assets with a carrying amount of $90 000 at the start of the financial year. During the year the business sold machinery that had cost $12 000 and been depreciated to a carrying amount of $3400. The carrying amount of non-current assets at the end of the year was $91 500. How much cash has been used to purchase non-current assets? A $1900 B $4900 C $10 500 D $13 500

B $ Carrying amount b/f 90 000 Disposals at carrying amount (3 400) Purchase of non-current assets (balancing figure) 4 900 Carrying amount c/f 91 500

Extracts from a company's statement of financ ial position showed balances as follows: 20X9 20X8 $ $ Share capital 94 000 77 000 During 20X9 debentures of $70 000 were issued, a dividend of $12 000 was received and interest of $4000 was paid. What is the net cash flow from financing activities? A $17 000 inflow B $87 000 inflow C $95 000 inflow D $99 000 inflow

B $ Issue of shares 17 000 Issue of debentures 70 000 87 000 Dividends received is a cash flow from investing activities. Interest paid is a cash flow from operating activities.

A business' bank balance increased by $960 000 during its last financial year. In this period, it: issued shares raising $1 400 000 repaid a loan of $230 000 purchased current asset investments of $800 000 charged depreciation of $190 000 Working capital increased by $120 000 during the year. The business' profit for the year was: A $280 000 B $520 000 C $660 000 D $1 400 000

B $ Profit (β) 520 000 Increase in working capital (120 000) Depreciation 190 000 Current asset investment (800 000) Loan (230 000) Share issue 1 400 000 Increase in cash 960 000

Try Co. bought 80 per cent of the ordinary shares in Ply Co. when the retained earnings of that company were $400 000. Goodwill arising on acquisition amounted to $68 000, and 25 per cent of this amount was written off in the year ended 31 October 20X7. During the year ended 31 October 20X9, Try Co. sold $50 000 goods to Ply Co., achieving a 20 per cent mark up. At the year end, Ply Co. retained half of these in inventory. The two companies' retained earnings at 31 October 20X9 were as follows: Try Co. $680 900 Ply Co. $532 000 What are group retained earnings at 31 October 20X9? A $553 300 B $765 333 C $782 333 D $1 085 333

B $ Try Co. 680 900 Ply Co. 80% (532 000 - 400 000) 105 600 Goodwill impairment 25% 68 000 (17 000) URP 20 / 120 $50 000 ½ (4 167 ) Group retained earnings at 31 October 20X9 765 333

10 Try Co. bought 80 per cent of the ordinary shares in Ply Co. when the retained earnings of that company were $400 000. Goodwill arising on acquisition amounted to $68 000, and 25 per cent of this amount was written off in the year ended 31 October 20X7. During the year ended 31 October 20X9, Try Co. sold $50 000 goods to Ply Co., achieving a 20 per cent mark up. At the year end, Ply Co. retained half of these in inventory. The two companies' retained earnings at 31 October 20X9 were as follows: Try Co. $680 900 Ply Co. $532 000 What are group retained earnings at 31 October 20X9? A $553 300 B $765 333 C $782 333 D $1 085 333

B $ Try Co. 680 900 Ply Co. 80% (532 000 - 400 000) 105 600 Goodwill impairment 25% 68 000 (17 000) URP 20 / 120 $50 000 ½ (4 167) Group retained earnings at 31 October 20X9 765 333

The following information is relevant to Drive Co.'s non-current assets at 31 October 20X8 and 20X9: 20X9 20X8 Cost $765 400 $697 600 Accumulated depreciation $239 140 $202 300 Accumulated capital allowances $347 800 $278 000 Drive Co. pays corporate income tax at a rate of 20 per cent. What is Drive Co.'s deferred tax liability at 31 October 20X9, and deferred tax charge for the year ended 31 October 20X9? Tax liability Tax charge $ $ A 15 140 15 140 B 21 732 6 592 C 21 732 21 732 D 108 660 32 960

B 20X9 20X8 Carrying amount 526 260 495 300 Tax written down value 417 600 419 600 Temporary difference 108 660 75 700 u 20% 21 732 15 140 Increase in liability = charge to tax $21 732 - $15 140 = $6592

Axis Co. transferred an asset to its 75 per cent subsidiary Yves Co. on 31 October 20X9 for $25 000. The asset cost $32 000 on 1 November 20X7 and was depreciated monthly by Axis Co. at 20 per cent per annum on cost. Yves Co. did not amend the original useful life on the transfer and continued to depreciate the asset over its remaining life. At 31 December 20X9, extracts from the two companies' accounts were as follows: Axis Co. $ Yves Co. $ Non-current assets 165 000 180 000 What is the consolidated figure for non-current assets? A $339 200 B $339 522 C $343 522 D $345 000

B Axis Co. 165 000 Yves Co. 180 000 NCA PURP adjustment (see below) (5 478) Consolidated figure for non-current assets 339 522 Unrealised profit on sale $25 000 - ($32 000 - ($32 000) x 20% 2)) 5 800 Reduction in depreciation ($32 000 20% 2 / 12) - ($25 000 / 3yrs u 2 / 12) (322 ) 5 478

Taunton Co. owns a property which was revalued to $900 000 at the start of the current accounting year. At that time the property had a remaining useful life of 25 years. As a result of market conditions, an impairment test is carried out at the end of the year and the property is found to have a value in use of $860 000 and a fair value of $870 000. Costs of disposal would amount to 5 per cent of fair value. What impairment loss, if any, must be recorded in the year? A $nil B $4000 C $37 500 D $40 000

B Carrying amount (900 000 u 24/25) $864 000 Value in use $860 000 Fair value less costs of disposal ($870 000 u 95%) $826 500 Recoverable amount $860 000 Impairment loss $4 000

At the current year end, Claxon Co. has undertaken impairment tests on two machines. The following information is relevant: Machine 1 Machine 2 Cost $450 000 $250 000 Useful life 10 years 15 years Age 4 years 3 years Fair value $300 000 $230 000 Costs of disposal $15 000 $35 000 Value in use $260 000 $198 000 At what carrying amount should machinery be recognised in the accounts of Claxon Co? A $455 000 B $468 000 C $470 000 D $498 000

B Machine 1 Machine 2 $ $ Cost 450 000 250 000 Depreciation (4/10 and 3/15) (180 000 ) (50 000 ) Carrying amount 270 000 200 000 FV less costs of disposal 285 000 195 000 Value in use 260 000 198 000 Therefore recoverable amount 285 000 198 000 Revised carrying amount 270 000 198 000 Total 270 000 + 198 000 = $468 000

North Co. acquired 80 per cent of South Co. on 1 February 20X8 for consideration totalling $560 000. At this date the fair value of a 20 per cent holding in South Co. was $130 000, and the net assets of South Co. were $620 000. In the year ended 31 January 20X9, South Co. reported profits of $75 000. North Co. group measures the non-controlling interest using the proportion of net assets method. What is the non-controlling interest to be reported in the consolidated statement of financial position at 31 January 20X9? A $137 750 B $139 000 C $143 750 D $145 000

B 20% u (620 000 + 75 000)

North Co. acquired 80 per cent of South Co. on 1 February 20X8 for consideration totalling $560 000. At this date the fair value of a 20 per cent holding in South Co. was $130 000, and the net assets of South Co. were $620 000. In the year ended 31 January 20X9, South Co. reported profits of $75 000. North Co. group measures the non-controlling interest using the proportion of net assets method. What is the non-controlling interest to be reported in the consolidated statement of financial position at 31 January 20X9? A $137 750 B $139 000 C $143 750 D $145 000

B 20% x (620 000 + 75 000)

14 Green Co. sold an item of plant to Brown Co., its subsidiary on 31 October 20X9 for $200 000. The machine had cost Green Co. $300 000 and had a carrying amount of $220 000 on the date of the transfer, based on a useful life of 15 years on the straight line basis. The remaining useful life of the asset remains unchanged. Green Co. depreciates assets on a monthly basis. What adjustment is required to Green Co.'s profit in respect of this transfer in the year ended 31 December 20X9? A $18 182 to add back to profit B $19 697 to add back to profit C $20 303 to add back to profit D $20 303 to deduct from profit

B 20X9 is the year of transfer and therefore the URP is made up of the loss on transfer and the difference in depreciation charge: $ Proceeds 200 000 Carrying amount at transfer (220 000 ) Loss on transfer 20 000 to add back to profit Depreciation: 'old' $300 000 / 15 2 / 12 3 333 'new' $200 000 / 11 2 / 12 3 030 303 extra to charge to profit Therefore, the overall adjustment is $19 697 to add back to profit.

13 Black Co. sold an item of machinery to Red Co., its subsidiary on 31 December 20X8 for $340 000. The machine had cost Black Co. $400 000 and had a carrying amount of $320 000 on the date of the transfer, based on annual depreciation at 10 per cent on the straight line basis. The remaining useful life of the asset remains unchanged. Companies in the Black Co. Group depreciate any asset held on the last day of the accounting period for a full year. Depreciation is charged to cost of sales. What adjustment is required to the Black Co. cost of sales in respect of this transfer in the year ended 31 December 20X9? A A decrease of $22 500 B A decrease of $2500 C An increase of $2500 D An increase of $17 500

B A decrease of $2500

Which of the following qualities are required to achieve a faithful representation of economic phenomena? I. Error free II. Neutrality III. Verifiability IV. Comparability V. Completeness A I, II and III only B I, II and V only C I, III and V only D II, IV and V only

B A faithful representation is complete, neutral and free from error.

A statement of cash flows prepared in accordance with the indirect method reconciles profit before tax to cash generated from operations. Which of the following includes only items which should be added to profit before tax in the reconciliation? A Depreciation charge, investment income and increase in inventories B Increase in payables, loss on disposal of non-current assets and depreciation C Decrease in receivables, finance cost and profit on disposal of non-current assets D Decrease in payables, depreciation charge and loss on disposal of non-current assets

B A loss on disposal and depreciation are non cash expenses and so must be added back in the reconciliation (a profit on disposal is no n-cash income which must be deducted). An increase in payables (or decrease in receivables or inventory) is added back in the reconciliation (a decrease in payables or increase in receivables or inventory is deducted). Finance cost is added back to profit before tax in the reconciliation (investment income is deducted).

7 Consider the following statements: I. A management buy-in occurs when exis ting managers purchase the business. II. In a share option scheme, employees are given a number of share options, each of which gives the holder the right after a certain date to subscribe for shares in the company at a fixed price. Which of the statements are correct? A I only B II only C Both I and II D Neither I nor II

B A management buy-in is where external managers purchase the company.

10 Rawlin Co. purchased a depreciable asset a number of years ago at a cost of $200 000. On 1 January 20X8, when it had 20 years of its useful life remaining, the asset was revalued to $600 000, with a revaluation surplus of $480 000 recognised as other comprehensive income. At 31 December 20X9, the value in use of the asset is $535 000 and its fair value less costs of disposal is $532 000. What impairment loss must be recognised and where? Loss Recognised in A $5 000 Profit or loss B $5 000 Other comprehensive income C $35 000 Other comprehensive income D $65 000 Other comprehensive income

B Carrying amount of property at 31 December 20X9 $ $600 000 u 18 / 20 years 540 000 Recoverable amount 535 000 Impairment loss 5 000 As the property has previously been revalued t he impairment is charged against the revaluation surplus and reported as other comprehensive income.

Anton Co. has identified a cash generating unit made up of the following assets: Carrying amount $ Property 200 000 Machinery 50 000 Goodwill 25 000 Receivables 15 000 Inventory 10 000 An impairment loss of $55 000 has been identified. What is the carrying amount of the machinery after this loss has been accounted for? A $39 000 B $42 727 C $43 333 D $44 000

B Carrying amount of property at 31 December 20X9 $ $600 000 u 18 / 20 years 540 000 Recoverable amount 535 000 Impairment loss 5 000 As the property has previously been revalued t he impairment is charged against the revaluation surplus and reported as other comprehensive income.

Which of the following is not a chapter in the IASB's Conceptual Framework? A Financial statements and the reporting entity B Concepts and conventions C The elements of financial statements D Recognition and derecognition

B Concepts and conventions are contained within the Conceptual Framework, however this is not the title of a chapter.

Which of the following statements is/are correct? I. Departure from an IFRS is allowed only where approved by the IASB. II. In the case of a true and fair override the financial impact of the departure from IFRS should be disclosed. A I only B II only C I and II D Neither I nor I

B Departure from an IFRS is allowed where compliance would be misleading. Prior agreement with a regulatory body is not required.

Which of the following statements about the consolidated statement of profit or loss are correct? I. Dividend income in the parent company's statement of profit or loss is never carried across to the consolidated statement of profit or loss. II. The non-controlling interest in profit is presented separately from group profits in the consolidated statement of profit or loss to leave profit allocated to the owners of the parent company. A I only B II only C Both I and II D Neither I nor II

B Dividend income relating to investments other than subsidiaries (and associates) is carried across to the consolidated statement of profit or loss. Statement II is correct.

1 Where in a company's financial statements are dividends paid found? A The statement of financial position B The statement of changes in equity C The statement of profit or loss and other comprehensive income D The statement of profit or loss and the statement of changes in equity

B Dividends must not be reported in the statement of profit or loss and other comprehensive income as they are not an expense and therefore do not relate to the performance of an entity in a reporting period. Dividend payments are re ported in the statement of changes in equity because they represent a transaction between the business and the equity owners in their capacity as owners.

A Bank has provided a long-term loan to NV Co. Which of the following pairs of ratios is most likely to provide the bank with relevant information? A Asset turnover and expenses to sales B Gearing and interest cover C Return on capital employed and gross profit margin D Return on shareholders' equity and earnings per share

B Gearing and interest cover ratios. Although all these ratios could be of interest to the bank, as a long-term loan creditor the bank will be particularly interested in factors that affect the company's ability to pay interest. These include: whether it is getting into further debt or improving its situation (improving gearing ratio by lowering the gearing ratio); and the level of profit in relation to interest expense.

Consider the following statements: I. The IASB's Conceptual Framework underpins the preparation of financial statements; when an IFRS conflicts with the framework, the framework guidance should be followed. II. One of the purposes of the IASB's Conceptual Framework is to assist the IASB to develop IFRS that are based on consistent concepts. Which of the statements is correct? A I only B II only C Both I and II D Neither I nor II

B If the Conceptual Framework conflicts with an IFRS, the IFRS should be followed. Therefore I is incorrect.

1 Which of the following ratios provide a measure of profitability? I. Interest cover II. Dividend cover III. Return on equity IV. Gross profit margin A I and IV only B III and IV only C I, II and IV only D I, II, III and IV

B Interest cover is an indicator of solvency; dividend cover is an investor ratio.

10 What is shown by an entity's economic resources and the claims against it? A Its operations B Its financial position C Its ownership interest D Its financial performance

B Its financial position (i.e. its assets and liabilities).

1 Raleigh Co. holds the following investments: 30 per cent of the voting shares in Well Co. The remaining 70 per cent are held by a third, unrelated, company, Slim Co., which refuses to communicate with Raleigh Co. 18 per cent of the voting shares in Vic Co. One of Raleigh's Directors also sits on the Board of Vic Co. and takes an active part in formulating strategy. How should the investments be accounted for? Well Co. Vic Co. A Associate Associate B Investment Associate C Associate Investment D Investment Investment

B Raleigh Co. cannot have significant influence over Well Co., since Slim Co. already has control and refuses to listen to Raleigh Co. Therefore, only constitute and investment. Vic Co. is an associate by virtue of the fact that Raleigh Co. has active representation on Vic Co.'s board of directors.

The trial balance of Vine Co. at 31 December 20X8 shows a credit balance on the tax payable account of $450. The estimated current tax liability of $28 760 has not yet been accrued. What amounts are reported in the financial statements in respect of current tax for the year? Tax liability Tax charge $ $ A 28 310 28 310 B 28 760 28 310 C 28 760 29 210 D 29 210 29 210

B The credit balance on the tax account represents the previous year's overprovision. This is deducted from the current year tax charge ($28 760 - 450) = $28 310. The current year liability is not adjusted for the over-provision.

Which of the following conditions must be met, in order to capitalise development costs according to IAS 38? I. completion of the asset is technically feasible II. resources are available to complete the project III. there is a contract to sell or written commitment to use the item under development A I only B I and II only C II and III only D I, II and III

B The entity developing the item must be able to sell or use the asset but no formal written commitment to do so is required.

Allister Co. reports the following amounts in its statement of financial position: 20X9 20X8 $ $ Inventory 13 500 14 200 Receivables ? 12 840 Prepayments 1 280 1 880 Cash 348 - Payables 10 760 17 200 Overdraft - 1 200 Deferred tax 3 700 4 200 Assuming that Allister Co. maintained its quick ratio at the same level in 20X9, what was the receivables figure in that year? A $1770 B $6980 C $7771 D $11 822

B The quick ratio of 20X8 was: 12 840 + 1 880 17 200 + 1 200 = 0.8 Therefore in 20X9: ? + 1 280 + 348 10 760 = 0.8 ? + 1 628 = 0.8 10 760 ? + 1 628 = 8 608 Receivables = 6 98

Which of the following is not an advantage of voluntary disclosures by companies? A It can be focused on future strategies and objectives B Provision of additional information to other companies in the same business C Provides investors with further yardsticks to judge the performance of management D Gives shareholders a better idea of the environ ment within which the company is operating and how it is responding to that environment

B is not an advantage; competitors may use th e information contained within such disclosures in order to gain advantages in the market.

20 Arm Co. Group bought 16 per cent of the voting shares in Leg Co. on 1 January 20X9 for $160 000, and on the same date started trading with Leg Co. such that 80 per cent of Leg Co.'s sales were made to Arm Co. In the year ended 31 December 20X9, Leg Co. made $98 000 profits, 80 per cent of these relating to sales to Arm Co. None of the goods purchased from Leg Co. remained in the inventory of Arm Co. at the year end. How is the investment in Leg Co. shown in Arm Co.'s group statement of financial position at 31 December 20X9? A A trade investment of $160 000 B An investment in associate of $156 080 C An investment in associate of $175 680 D An investment in associate of $179 600

C

7 Dray Co. holds a 90 per cent investment in Ray Co. and a 25 per cent investment in Lay Co. Extracts from their statements of profit or loss are as follows: Dray Co. Ray Co. Lay Co. $ $ $ Revenue 136 500 127 800 67 000 Cost of sales 86 500 73 400 24 000 During the year Dray Co. sold $40 000 goods to Ray Co. and $10 000 to Lay Co. at a 25 per cent mark up. In each case all of these goods remained in inventory at the year end. What is the consolidated cost of sales figure? A $109 900 B $111 900 C $127 900 D $128 400

C

10 Which of the following is a non-mandatory disclosure in a listed company's annual report? A Statement of cash flows B Statement of financial position C Social and environment report D Corporate governance disclosures

C A statement of financial position and statement of cash flows are required by IAS 1 and IAS 7; corporate governance disclosures are required as part of compliance with listing rules.

An entity purchases a specialised machine on 1 January 20X8 for $400 000 together with production rights to manufacture a patented component, for $20 000. These production rights are worthless without the specialised machine, and the machine may not be used without the production rights. Which of the following statements is correct? A $420 000 is capitalised as an intangible asset. B $420 000 is capitalised as a tangible non-current asset. C $400 000 is capitalised as a tangible non-curr ent asset and $20 000 as an intangible asset. D $400 000 is capitalised as a tangible non-curr ent asset and $20 000 is expensed in the period.

C Although the production rights are not separable (i.e. capable of separate disposal), they are contractual and therefore meet the IAS 38 definition of identifiable. The rights must therefore be recognised as an intangible asset in their own right.

2 Dry Co. holds 20 per cent of the voting shares in Wet Co. and has agreed with the other shareholders that it will direct the operating activities of that company. Dry Co. also holds 40 per cent of the voting shares in Cloud Co., participating in the policy making process of that company, and 25 per cent of the voting shares in Drizzle Co. How should these investments be treated in the Dry Co. group accounts? Wet Co. Cloud Co. Drizzle Co. A Consolidated Consolidated Held at cost B Equity accounted Equity accounted Held at cost C Consolidated Equity accounted Equity accounted D Equity accounted Consolidated Equity accounted

C Dry Co. controls Wet Co. by virtue of the fact that it directs the relevant activities (operating activities) of that company. Dry Co. has significant influence over Cloud Co., evidenced by the 40 per cent shareholding and participation in the policy-making process. Dry Co. has significant influence over Drizzle Co., evidenced by the 25 per cent shareholding.

Which of the following statements is or are correct? I. Exchange differences are always reported in profit or loss. II. The currency that mainly influences sales prices set by an entity is likely to be the functional currency. III. A revalued 'foreign' asset is translated at the exchange rate in force on the date of the revaluation. A I and II only B I and III only C II and III only D I, II and III

C Exchange differences arising on settlement of currency items or the retranslation of monetary items are reported in profit or loss. Exchange differences arising on the translation of financial statements into the presentation currency are reported as other comprehensive income.

Which of the following conditions must be met in order for a parent to avoid presenting consolidated financial statements? I. All subsidiaries operate under severe long-term restrictions. II. Its securities are not publicly traded and it is not in the process of issuing securities in public securities markets. III. The ultimate or intermediate parent publishes consolidated financial statements that comply with International Financial Reporting Standards. IV. The parent is itself a wholly-owned subsidiary or it is a partially-owned subsidiary of another entity and its other owners do not object to t he parent not presenting consolidated financial statements. A I, II and III only B I, III and IV only C II, III and IV only D I, II, III and IV

C IFRS 10 requires that II, III and IV are all met in order to avoid presenting consolidated financial statements. I is irrelevant as where subsidiaries operate under long-term restrictions, control may have been lost. In this case, they are no longer subsidiaries and so consolidated accounts are not required, as there is no group.

Which of the following are conditions that permit revenue to be recognised over a period of time? I. The customer has paid in advance. II. The customer simultaneously receives and consumes the benefits as the performance takes place. III. The entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced. A I only B I and II only C II and III only D I, II and III

C IFRS 15 says any of three criteria must be met for revenue to be recognised over a period of time. II and III are two of these and the third o ne is the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date..

What effect on ratios would an upwards revalu ation of property, plant and equipment be likely to lead to? A Gearing ratio will increase. B The current ratio will decrease. C Net profit margin will decrease. D Interest cover will increas

C Net profit margin will decrease because as t he assets are revalued upwards, the depreciation will increase making profit lower and the profit margin decrease accordingly assuming all else stays the same. A revaluation will have no effect on the current ratio. An upwards revaluation of property, plant and equipment and will make gearing ratio (debt/equity) decrease as equity has increased. Interest cover is likely to decrease because profit before interest and tax will fall due to the higher depreciation. Non-current asset turnover is calculated as revenue/non-current assets, therefore, it too will decrease.

Which type of capital maintenance concept is described by the following statement? 'Capital is looked at as the capacity to maintain a level of assets'. A Equity capital maintenance B Financial capital maintenance C Operating capital maintenance D Proprietary capital maintenance

C Operating capital maintenance is based on the productive capacity of an entity, and therefore requires a maintained level of assets.

Drayton Co. purchased a new non-current asset on 1 January 20X9 costing HK$ 1 450 000, agreeing 18 months' extended credit with the supplier. The exchange rate on 1 January 20X9 was 6.75HK$: $1. At 31 December 20X9, the exchange rate had moved to 7.2HK$:$1. How are the asset and payable presented in the statement of financial position at 31 December 20X9? Asset Payable A $201 389 $201 389 B $201 389 $214 815 C $214 815 $201 389 D $214 815 $214 815

C The asset is a non-monetary asset and should not be re-translated at the year end (1 450 000 / 6.75) = $214 815; the payable is a monetary amount and must be re-translated (1 450 000 / 7.2) = $201 388.

8 The preparation of the financial statements is the responsibility of: A the finance director. B the external auditors. C the board of directors. D the internal audit department.

C The board of directors are responsible for preparing the financial statements (even though the actual preparation is probably carried out by staff within the finance department with the assistance of the external auditors).

Blue Co. has a number of subsidiaries as well as a 45 per cent investment in Pink Co. bought for $190 000 some years ago. Since acquisition, Pink Co. has made $450 000 profits and suffered no impairment. During the year ended 31 October 20X9, Pink Co. sold $30 000 goods to Blue Co. at a 20 per cent margin. Half of these goods remained in Blue Co.'s warehouse at the year end. What is the investment in associate shown in the Blue Co. Group statement of financial position at 31 October 20X9? A $386 500 B $389 500 C $391 150 D $392 500

C The group share of the URP is adjusted against the investment in the associate: $ Cost 190 000 Share of post-acquisition profits $450 000 45% 202 500 URP ($15 000 20% 45%) (1 350 ) 391 150

On 1 January 20X5 Cornwall Company entered into a three-year lease for new computer equipment. A non-refundable set-up costs of $2000 was paid on this date. The first lease payment of $8000 will be made on 1 January 20X6, in arrear s with two further payments of $8000 being paid on 1 January 20X7 and 20X8 also in arrears. Cornwall Company elected to treat the lease as a low value lease. What expense will be shown in the profit or loss for the year ended 31 December 20X5? A $2000 B $6000 C $6500 D $8000

C The total amount of lease payment of $26 000 calculated as $2000 + (3 payments u $8000) will be spread over three years to give an annual expense of $6500

Which of the following, taken together, would make up the working capital of a business? A inventory, equity, cash at bank, receivables B receivables, bank loan, payables, inventory C payables, receivables, inventory, cash at bank D inventory, bank loan, cash at bank, prepayments

C The working capital of a business is its current assets and current liabilities.

Which of the following statements is correct? A The interpretation of an entity's financial statements using ratios is only useful for potential investors. B Ratios based on historical data always predict the future performance of an entity. C The analysis of financial statements using ratios provides useful information when compared with previous performance or industry averages. D An entity's management will not assess an entity's performance using financial ratios.

C This is correct because ratios are only useful if they can be compared to other relevant and comparable information so relative performance and position can be considered. The other statements are incorrect for the following reasons: Ratios are a useful tool to all stakeholders (including management) not just investors. Ratios based on past performance are not necessarily indicative of what will happen in the future - for example, the general economy might change, a new competitor might enter the market, an entity might introduce a new product.

Consider the following statements: I. In a time of rising prices, borrowers benefit. II. Under current purchasing power (CPP) accounting, monetary items are restated to take into account the effect of general price inflation. Are these statements correct or incorrect? Statement I Statement II A Correct Correct B Incorrect Correct C Correct Incorrect D Incorrect Incorrect

C Under CPP accounting it is non-monetary items which are restated for the effects of general price inflation.

The underlying assumption in preparing and using general purpose financial reports is: A accruals. B materiality. C going concern. D substance over form.

C Users of financial statements are entitled to assume that they have been prepared on the basis that the entity in question is a going concern, unless there is a clear statement to the contrary.

The two fundamental qualitative characteristics of useful financial information are: A relevance and verifiability. B verifiability and timeliness. C faithful representation and relevance. D faithful representation and timeliness.

C Verifiability and timeliness are not fundamental characteristics but are two of the four enhancing qualitative characteristics (the others are comparability and understandability).