I85PREP
⌘ K
ICAB PL Financial Accounting & Reporting study materials
ICAB PL Financial Accounting & Reporting study resources

ICAB PL Financial Accounting & Reporting practice questions

One question at a time. Build your ICAB PL Financial Accounting & Reporting understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Financial Accounting and Reporting

Under the conceptual framework, which qualitative characteristic requires information to be capable of making a difference in users' decisions?

  1. Comparability
  2. Timeliness
  3. Verifiability
  4. Relevance Correct answer.

Explanation

Relevance means the information is capable of making a difference in the decisions users make, whether through predictive value, confirmatory value, or both. Comparability, timeliness and verifiability are enhancing characteristics that support useful information but do not by themselves determine decision impact.

Question 2Financial Accounting and Reporting

A company receives a bank loan of $50,000 in cash. What is the effect on the accounting equation?

  1. Assets increase and liabilities decrease
  2. Liabilities increase and equity decreases
  3. Assets increase and equity increases
  4. Assets increase and liabilities increase Correct answer.

Explanation

Receiving loan proceeds increases the cash asset while creating an obligation to repay, which increases liabilities by the same amount. Equity is unaffected because the transaction is a financing arrangement with a creditor, not a contribution from owners or revenue.

Question 3Financial Accounting and Reporting

Which of the following is recorded as a liability rather than as revenue?

  1. Cash received from selling a non-current asset at a gain
  2. Cash received from issuing ordinary shares
  3. Cash received in advance for services not yet performed Correct answer.
  4. Cash received for services performed this month

Explanation

An advance payment creates a present obligation to deliver goods or services in the future, so it is recognised as a contract liability until performance occurs. Only when the performance obligation is satisfied is the amount transferred to revenue.

Question 4Financial Accounting and Reporting

A machine costing $40,000 has an estimated residual value of $4,000 and a useful life of six years. Under straight-line depreciation, what is the annual charge?

  1. $7,333
  2. $4,000
  3. $6,000 Correct answer.
  4. $6,667

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. Here ($40,000 − $4,000) ÷ 6 years equals $6,000 per year.

Question 5Financial Accounting and Reporting

Which inventory cost formula assumes that the most recently purchased items are the first ones sold?

  1. Weighted average cost
  2. Specific identification
  3. Last-in, first-out Correct answer.
  4. First-in, first-out

Explanation

Last-in, first-out assigns the cost of the most recent purchases to cost of sales, leaving older costs in closing inventory. First-in, first-out does the opposite, while weighted average blends all costs and specific identification tracks individual items.

Question 6Financial Accounting and Reporting

Which of the following best describes the purpose of a trial balance?

  1. To value the entity's assets at fair value
  2. To confirm that every transaction has been recorded
  3. To measure the profit for the period
  4. To prove that total debits equal total credits Correct answer.

Explanation

A trial balance lists ledger balances and checks the arithmetical equality of debits and credits. It does not detect errors of omission, compensating errors, or transactions recorded in the wrong account, so it is not proof of complete accuracy.

Question 7Financial Accounting and Reporting

An entity's current assets are $180,000 and current liabilities are $120,000. What is the current ratio?

  1. 1.5:1 Correct answer.
  2. 1.2:1
  3. 0.67:1
  4. 2.0:1

Explanation

The current ratio divides current assets by current liabilities. $180,000 ÷ $120,000 gives 1.5, meaning the entity holds $1.50 of current assets for each $1 of current liabilities.

Question 8Financial Accounting and Reporting

Which statement is a primary source of information about an entity's cash-generating ability?

  1. Statement of financial position
  2. Statement of cash flows Correct answer.
  3. Notes on accounting policies
  4. Statement of changes in equity

Explanation

The statement of cash flows reports cash inflows and outflows classified into operating, investing and financing activities, which helps users assess how the entity generates and uses cash. The other statements provide complementary information but do not present cash movements by activity.

Question 9Financial Accounting and Reporting

A company sells goods for $10,000 on credit terms of 2/10, net 30 and uses the gross method. The customer pays on day 8. What amount is recorded as a sales discount?

  1. $100
  2. $500
  3. $200 Correct answer.
  4. $0

Explanation

Under the gross method, receivables are initially recorded at the full invoice price, and a discount is recognised only if the customer pays within the discount period. A 2% discount on $10,000 is $200.

Question 10Financial Accounting and Reporting

At year end an entity has receivables of $250,000 and estimates that 4% will be uncollectible. The allowance account already has a credit balance of $3,000. What is the required allowance adjustment?

  1. Debit bad debt expense $3,000
  2. Debit bad debt expense $10,000
  3. Debit bad debt expense $7,000 Correct answer.
  4. Credit bad debt expense $7,000

Explanation

The target allowance is 4% of $250,000, or $10,000. Because $3,000 already exists as a credit balance, only the $7,000 difference is charged to expense to bring the allowance to the required level.

Question 11Financial Accounting and Reporting

A company uses the revaluation model for a building. Its carrying amount is $800,000 and its fair value is $950,000. There is no previous revaluation surplus. How is the increase treated?

  1. Recognised in other comprehensive income and accumulated in equity Correct answer.
  2. Recognised immediately in profit or loss
  3. Recognised as a deferred liability
  4. Recognised as a reduction of accumulated depreciation only

Explanation

An upward revaluation is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a previous decrease recognised in profit or loss. The gain is not reported in profit or loss because it is an unrealised remeasurement of a non-current asset.

Question 12Financial Accounting and Reporting

An entity issues a $100,000 zero-coupon bond for $78,000. Under the effective interest method, how is the $22,000 difference treated?

  1. As a reduction in the bond's nominal value
  2. As a loss recognised immediately on issue
  3. As a dividend to bondholders
  4. As finance cost recognised over the bond's life Correct answer.

Explanation

The difference between proceeds and the redemption amount is a financing cost that is recognised over the term using the effective interest rate. Amortised cost of the liability increases each period until it equals the redemption amount at maturity.

Question 13Financial Accounting and Reporting

Which cost is excluded from the cost of a self-constructed item of property, plant and equipment?

  1. Direct labour costs
  2. Costs of site preparation
  3. Abnormal waste of materials Correct answer.
  4. Professional fees directly attributable

Explanation

The cost of an asset includes directly attributable costs necessary to bring it to working condition, but abnormal waste of materials or labour is not a directly attributable cost. Such waste is expensed rather than capitalised.

Question 14Financial Accounting and Reporting

A lessee classifies a lease as a finance lease. How is the lease liability initially measured under IFRS 16?

  1. At the amount of the first rental payment
  2. At the total undiscounted lease payments
  3. At the present value of remaining lease payments Correct answer.
  4. At the fair value of the underlying asset

Explanation

The lease liability is initially measured at the present value of lease payments not yet paid, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate. Undiscounted totals ignore the time value of money.

Question 15Financial Accounting and Reporting

Which item gives rise to a deferred tax liability?

  1. Tax depreciation exceeding accounting depreciation in early years Correct answer.
  2. An operating loss carried forward
  3. Revenue received in advance taxed when cash is received
  4. A fine that is not deductible for tax

Explanation

Accelerated tax depreciation creates a taxable temporary difference because the carrying amount of the asset exceeds its tax base, producing a deferred tax liability. The difference reverses in later years as accounting depreciation catches up.

Question 16Financial Accounting and Reporting

An entity recognises a provision for a restructuring plan. Which condition must be satisfied at the reporting date?

  1. A present obligation arising from a past event that can be reliably estimated Correct answer.
  2. A future operating loss expected from the plan
  3. Approval of the plan by the board after the reporting date
  4. A guarantee that the plan will increase profit

Explanation

A provision is recognised only when a present obligation exists from a past obligating event, an outflow is probable, and the amount can be reliably estimated. A plan approved only after the reporting date does not create an obligation at that date.

Question 17Financial Accounting and Reporting

An entity issues 10,000 ordinary shares with a nominal value of $1 each at $4 per share. What is recorded in the share premium account?

  1. $10,000
  2. $0
  3. $40,000
  4. $30,000 Correct answer.

Explanation

Proceeds of $40,000 are split between share capital at nominal value of $10,000 and share premium for the excess of $30,000. Share premium represents consideration received above nominal value and is not revenue.

Question 18Financial Accounting and Reporting

Which event after the reporting date is normally classified as an adjusting event?

  1. A fire that destroyed a warehouse after the year end
  2. A court judgment confirming a present obligation at the year end Correct answer.
  3. A decline in market value of investments after the year end
  4. A major business combination announced after the year end

Explanation

An adjusting event provides evidence of conditions that existed at the reporting date, such as a judgment confirming an obligation already present. It requires adjustment of the amounts recognised in the financial statements.

Question 19Financial Accounting and Reporting

A company reports profit before tax of $300,000, depreciation of $45,000, an increase in inventory of $20,000 and a decrease in payables of $10,000. What is cash generated from operations using the indirect method?

  1. $375,000
  2. $315,000 Correct answer.
  3. $285,000
  4. $355,000

Explanation

Starting from profit before tax, non-cash depreciation is added back and working capital movements are adjusted: an inventory increase and a payables decrease both consume cash. $300,000 + $45,000 − $20,000 − $10,000 equals $315,000.

Question 20Financial Accounting and Reporting

An entity holds a financial asset measured at fair value through other comprehensive income. How are fair value gains treated?

  1. Recognised as a direct adjustment to retained earnings
  2. Recognised only when dividends are received
  3. Recognised in other comprehensive income until derecognition Correct answer.
  4. Recognised in profit or loss each period

Explanation

For debt instruments measured at fair value through other comprehensive income, fair value changes are recognised in other comprehensive income and recycled to profit or loss on derecognition. This differs from fair value through profit or loss, where changes are recognised immediately in profit or loss.

Question 21Financial Accounting and Reporting

An entity's defined benefit obligation rises by $500,000 due to a change in actuarial assumptions, with no plan assets. How is this remeasurement recognised?

  1. In other comprehensive income Correct answer.
  2. As a reduction of the plan asset ceiling
  3. In profit or loss as an operating expense
  4. As a prior period adjustment to opening equity

Explanation

Under IAS 19, actuarial gains and losses arising from remeasurement of the defined benefit obligation are recognised in other comprehensive income and are not recycled to profit or loss. Service cost and net interest are recognised in profit or loss instead.

Question 22Financial Accounting and Reporting

A parent owns 80% of a subsidiary. The subsidiary reports profit of $200,000. What amount is attributed to non-controlling interests?

  1. $200,000
  2. $0
  3. $40,000 Correct answer.
  4. $160,000

Explanation

Non-controlling interests are attributed their share of the subsidiary's profit, being 20% of $200,000, or $40,000. The parent's owners are attributed the remaining 80%, and both amounts are presented as allocations of total profit.

Question 23Financial Accounting and Reporting

An entity sells goods to a customer with a right of return and cannot reliably estimate returns. How should revenue be recognised?

  1. Immediately for the full amount of consideration received
  2. Only when the return period has expired or returns can be estimated reliably Correct answer.
  3. Only when the customer confirms acceptance in writing
  4. Net of an estimated refund liability based on historical data

Explanation

Revenue is recognised only when the entity can reasonably estimate returns, because until then the variable consideration cannot be reliably constrained. If returns cannot be estimated, revenue is deferred until the uncertainty is resolved.

Question 24Financial Accounting and Reporting

An entity changes an accounting policy that is required by a new standard with no transitional provisions. How is the change applied?

  1. Retrospectively, restating comparatives and adjusting opening equity Correct answer.
  2. Prospectively, affecting only current and future periods
  3. By disclosing the change without adjusting amounts
  4. By adjusting the current period profit only

Explanation

When a new standard requires retrospective application without specific transitional rules, prior period comparatives are restated and opening equity is adjusted as if the new policy had always applied. Prospective application is permitted only where retrospective treatment is impracticable or specified.

Question 25Financial Accounting and Reporting

A company has profit after tax of $240,000, 100,000 ordinary shares outstanding all year and 20,000 convertible preference shares that would save $16,000 of preference dividends if converted. What is the diluted earnings per share?

  1. $2.00
  2. $1.60
  3. $2.40
  4. $2.13 Correct answer.

Explanation

Diluted EPS adds back the preference dividend saved and increases the share count by the conversion shares: ($240,000 + $16,000) ÷ 120,000 shares equals $2.13. Dilution arises because the incremental earnings per incremental share is below basic EPS.

Question 26Financial Accounting and Reporting

Under the IASB Conceptual Framework, which qualitative characteristic requires that information be capable of making a difference in the decisions made by users?

  1. Timeliness
  2. Faithful representation
  3. Comparability
  4. Relevance Correct answer.

Explanation

Relevance is the fundamental qualitative characteristic that requires information to be capable of making a difference in users' decisions, either through predictive value, confirmatory value, or both. Faithful representation is the other fundamental characteristic, while comparability and timeliness are enhancing characteristics.

Question 27Financial Accounting and Reporting

An entity purchases equipment for $50,000 with a residual value of $5,000 and a useful life of 5 years. Using the straight-line method, what is the annual depreciation expense?

  1. $10,000
  2. $11,000
  3. $9,000 Correct answer.
  4. $8,000

Explanation

Straight-line depreciation allocates the depreciable amount, which is cost less residual value, evenly over the useful life. Here the depreciable amount is $45,000 divided by 5 years, giving $9,000 per year.

Question 28Financial Accounting and Reporting

Which inventory cost formula is prohibited by IAS 2?

  1. Weighted average cost
  2. Specific identification
  3. Last-in, first-out Correct answer.
  4. First-in, first-out

Explanation

IAS 2 permits specific identification for items that are not ordinarily interchangeable and first-in, first-out or weighted average cost for other items. The last-in, first-out formula is explicitly prohibited because it does not reflect a reliable current cost of inventory.

Question 29Financial Accounting and Reporting

An entity has a bank overdraft of $15,000 that is repayable on demand and forms an integral part of its cash management. How should the overdraft be presented in the statement of cash flows?

  1. As an operating cash inflow
  2. As a component of cash and cash equivalents Correct answer.
  3. As an investing cash inflow
  4. As a financing cash inflow

Explanation

Under IAS 7, bank overdrafts are included as a component of cash and cash equivalents when they are repayable on demand and form an integral part of the entity's cash management. Movements in such overdrafts are therefore not presented as financing cash flows.

Question 30Financial Accounting and Reporting

An entity issues 1,000 convertible bonds with a face value of $1,000 each. The liability component is measured at $900,000. What amount is recognised in equity for the conversion option?

  1. $100,000 Correct answer.
  2. $0
  3. $1,000,000
  4. $900,000

Explanation

Under IFRS 9, a compound financial instrument is split into a liability component and an equity component. The equity component is the residual amount after deducting the liability component from the proceeds, which is $1,000,000 less $900,000, equal to $100,000.

Question 31Financial Accounting and Reporting

Which of the following is an example of a cash flow from investing activities?

  1. Interest paid on a bank loan
  2. Payment of dividends to shareholders
  3. Purchase of a subsidiary's shares Correct answer.
  4. Proceeds from issuing ordinary shares

Explanation

Investing activities include the acquisition and disposal of long-term assets and other investments not classified as cash equivalents. Purchasing shares of another entity is therefore an investing cash outflow, while interest, dividends and share issues are classified elsewhere.

Question 32Financial Accounting and Reporting

An entity's inventory cost is $80,000 and its net realisable value is $75,000. At what amount should the inventory be measured under IAS 2?

  1. $77,500
  2. $75,000 Correct answer.
  3. $80,000
  4. $5,000

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Since net realisable value of $75,000 is below cost of $80,000, the inventory is written down to $75,000.

Question 33Financial Accounting and Reporting

Which of the following is a fundamental qualitative characteristic of useful financial information?

  1. Faithful representation Correct answer.
  2. Comparability
  3. Understandability
  4. Timeliness

Explanation

The Conceptual Framework identifies relevance and faithful representation as the two fundamental qualitative characteristics. Comparability, timeliness and understandability are enhancing characteristics that improve the usefulness of information but are not fundamental.

Question 34Financial Accounting and Reporting

An entity has profit before tax of $200,000. Tax depreciation exceeds accounting depreciation by $30,000 and a non-deductible fine of $10,000 was paid. The tax rate is 25%. What is the current tax expense?

  1. $45,000 Correct answer.
  2. $55,000
  3. $50,000
  4. $60,000

Explanation

Taxable profit is accounting profit adjusted for permanent and temporary differences. Adding the non-deductible fine and deducting the excess tax depreciation gives $200,000 + $10,000 - $30,000 = $180,000, and 25% of that is $45,000.

Question 35Financial Accounting and Reporting

Which of the following is an adjusting event after the reporting period under IAS 10?

  1. A fire destroying a warehouse after the year end
  2. A decline in market value of investments after the year end
  3. A major business combination announced after the year end
  4. A customer's bankruptcy confirming a receivable was impaired at year end Correct answer.

Explanation

Adjusting events provide evidence of conditions that existed at the end of the reporting period. A customer's bankruptcy that confirms a receivable was already impaired at year end is an adjusting event, whereas events arising after the year end are non-adjusting.

Question 36Financial Accounting and Reporting

Under IFRS 15, when should an entity recognise revenue from a contract with a customer?

  1. When the performance obligation is satisfied Correct answer.
  2. When the invoice is issued
  3. When the contract is signed
  4. When cash is received

Explanation

The core principle of IFRS 15 is that revenue is recognised when control of the promised goods or services transfers to the customer, which occurs when the performance obligation is satisfied. Cash receipt, invoicing and contract signing do not by themselves determine the timing of revenue.

Question 37Financial Accounting and Reporting

An entity sells goods for $50,000 with a right of return. It estimates that 5% of goods will be returned and the cost of those goods is $20,000. What amount of revenue should be recognised?

  1. $52,500
  2. $50,000
  3. $2,500
  4. $47,500 Correct answer.

Explanation

Under IFRS 15, revenue is recognised only to the extent that it is highly probable that a significant reversal will not occur. The entity expects returns of $2,500, so revenue of $47,500 is recognised and a refund liability is recorded for the expected returns.

Question 38Financial Accounting and Reporting

Which of the following costs is expensed as incurred under IAS 38?

  1. Direct costs of acquiring a licence
  2. Legal fees to register a patent
  3. Development costs meeting all capitalisation criteria
  4. Research costs Correct answer.

Explanation

IAS 38 requires research costs to be expensed as incurred because no intangible asset can be demonstrated at that stage. Development costs are capitalised only when all specified criteria are met, and direct acquisition costs of intangibles are capitalised.

Question 39Financial Accounting and Reporting

An entity has a building with a carrying amount of $500,000. Its recoverable amount is $450,000 and its fair value less costs of disposal is $460,000. What is the impairment loss under IAS 36?

  1. $40,000
  2. $10,000
  3. $50,000 Correct answer.
  4. $0

Explanation

An impairment loss arises when the carrying amount exceeds the recoverable amount, which is the higher of fair value less costs of disposal and value in use. Since recoverable amount is $460,000, the loss is $500,000 less $460,000, equal to $40,000.

Question 40Financial Accounting and Reporting

Which of the following is a non-current liability?

  1. Current tax payable
  2. Trade payables due in 30 days
  3. Accrued wages payable
  4. A bank loan repayable in five years Correct answer.

Explanation

A liability is classified as non-current when the entity has an unconditional right to defer settlement for at least twelve months after the reporting period. A bank loan repayable in five years meets this criterion, whereas the other items are due within the normal operating cycle.

Question 41Financial Accounting and Reporting

An entity has a defined benefit obligation of $800,000 and plan assets with a fair value of $750,000. What amount is recognised in the statement of financial position?

  1. $750,000 asset
  2. $50,000 asset
  3. $800,000 liability
  4. $50,000 liability Correct answer.

Explanation

The net defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets. Since the obligation exceeds plan assets by $50,000, a net liability of $50,000 is recognised.

Question 42Financial Accounting and Reporting

A parent owns 75% of a subsidiary. The subsidiary reports profit of $400,000 and other comprehensive income of $40,000. What amount is attributed to non-controlling interests?

  1. $120,000
  2. $88,000
  3. $100,000
  4. $110,000 Correct answer.

Explanation

Non-controlling interests are attributed their share of the subsidiary's profit or loss and other comprehensive income. The NCI share is 25% of $400,000 plus 25% of $40,000, giving $100,000 plus $10,000, equal to $110,000.

Question 43Financial Accounting and Reporting

Under the equity method, how is an investor's share of an associate's profit recognised?

  1. As other comprehensive income
  2. As dividend income when received
  3. As an increase in the investment carrying amount and income Correct answer.
  4. As a liability in the statement of financial position

Explanation

The equity method requires the investor to recognise its share of the associate's profit or loss in profit or loss and to increase the carrying amount of the investment. Dividends received reduce the carrying amount rather than being recognised as income.

Question 44Financial Accounting and Reporting

An entity issues 10,000 ordinary shares with a nominal value of $1 each at $4 per share. What amount is recorded in the share premium account?

  1. $30,000 Correct answer.
  2. $10,000
  3. $40,000
  4. $0

Explanation

The share premium is the excess of the issue proceeds over the nominal value of the shares issued. Proceeds are $40,000 and nominal value is $10,000, so the share premium is $30,000.

Question 45Financial Accounting and Reporting

Which of the following is a non-adjusting event after the reporting period under IAS 10?

  1. The bankruptcy of a customer after the year end
  2. The discovery of fraud that shows the financial statements were misstated
  3. A decline in the market value of investments after the year end Correct answer.
  4. The resolution of a court case that confirms a present obligation at year end

Explanation

Non-adjusting events are those that arise after the reporting period and do not concern conditions existing at the end of the period. A decline in market value after the year end reflects conditions arising after the reporting date and is non-adjusting.

Question 46Financial Accounting and Reporting

Which of the following is a cash flow from financing activities?

  1. Purchase of inventory
  2. Repayment of a bank loan Correct answer.
  3. Proceeds from the sale of equipment
  4. Interest received on a bank deposit

Explanation

Financing activities include cash flows that change the size and composition of contributed equity and borrowings. Repaying a bank loan is a financing cash outflow, while asset sales, inventory purchases and interest received are classified as investing or operating.

Question 47Financial Accounting and Reporting

An entity has profit after tax of $300,000 and 100,000 ordinary shares outstanding throughout the year. It also has 10,000 convertible preference shares that are convertible into 20,000 ordinary shares. What is the diluted earnings per share?

  1. $2.40
  2. $2.50 Correct answer.
  3. $3.00
  4. $2.75

Explanation

Diluted earnings per share assumes conversion of dilutive potential ordinary shares. Profit of $300,000 divided by the diluted weighted average of 120,000 shares gives $2.50, assuming the preference dividend is not deducted because the shares are assumed converted.

Question 48Financial Accounting and Reporting

Which of the following is an example of a provision under IAS 37?

  1. A warranty obligation for products sold Correct answer.
  2. A bank overdraft
  3. Trade payables
  4. Accrued interest

Explanation

A provision is a liability of uncertain timing or amount. A warranty obligation for products already sold meets the definition because the entity has a present obligation arising from a past event and the amount is uncertain.

Question 49Financial Accounting and Reporting

An entity changes an accounting policy due to a new standard that has no transitional provisions. How should the change be applied?

  1. By disclosing the change without adjustment
  2. By adjusting opening retained earnings only
  3. Prospectively from the date of change
  4. Retrospectively with restatement of comparatives Correct answer.

Explanation

IAS 8 requires voluntary changes in accounting policy and changes required by a new standard without specific transitional provisions to be applied retrospectively. Comparative information is restated and the cumulative effect is adjusted against opening equity.

Question 50Financial Accounting and Reporting

Which of the following is a current asset?

  1. Inventory expected to be sold within 12 months Correct answer.
  2. A patent with a remaining life of 10 years
  3. Land held for long-term investment
  4. A loan receivable due in 3 years

Explanation

An asset is classified as current when it is expected to be realised, sold or consumed in the normal operating cycle or within twelve months. Inventory expected to be sold within twelve months meets this criterion.