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ITAA Bekwaamheidsexamen Accountant study materials
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ITAA Bekwaamheidsexamen Accountant practice questions

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Question 1Accountancy

Under the double-entry system, a credit entry increases which of the following?

  1. An asset account
  2. An expense account
  3. A drawings account
  4. A liability account Correct answer.

Explanation

Liabilities, equity and income are credited when they increase, because they sit on the credit side of the accounting equation. Assets, expenses and drawings are debited when they increase. Recording a credit to a liability therefore reflects a growth in obligations owed to third parties.

Question 2Accountancy

A company pays a supplier's invoice of 500 early and receives a 2% settlement discount. What is the correct double entry in the buyer's books?

  1. Dr Payables 500; Cr Bank 490; Cr Discount received 10 Correct answer.
  2. Dr Payables 490; Cr Bank 490
  3. Dr Bank 490; Dr Discount allowed 10; Cr Payables 500
  4. Dr Payables 500; Cr Bank 500

Explanation

The payable is extinguished at its full carrying amount of 500, so payables are debited with 500. The cash paid is only 490 and the 10 benefit is recognised as discount received, an income item credited to the statement of profit or loss.

Question 3Accountancy

Which statement best describes the purpose of a trial balance?

  1. It guarantees that no fraud has occurred in the ledger
  2. It determines the profit earned during the period
  3. It checks the arithmetical equality of debit and credit balances Correct answer.
  4. It proves that every transaction was recorded in the correct period

Explanation

A trial balance simply totals debit and credit balances to confirm that they agree, which tests arithmetic accuracy of posting. It cannot detect errors of principle, omission, commission or compensating errors. Profit is derived from the statement of profit or loss, not from the trial balance itself.

Question 4Accountancy

At year end a company holds inventory costing 20,000. Its estimated selling price is 21,000 and costs to complete and sell are 2,500. At what amount should the inventory be measured?

  1. 18,500 Correct answer.
  2. 19,000
  3. 20,000
  4. 21,000

Explanation

Inventory is measured at the lower of cost and net realisable value. Net realisable value is 21,000 less 2,500 selling costs, giving 18,500, which is below the 20,000 cost. The write-down of 1,500 is recognised as an expense.

Question 5Accountancy

An asset costing 12,000 with a residual value of 2,000 and a four-year useful life is depreciated on a straight-line basis. What is the depreciation charge for year two?

  1. 2,000
  2. 3,000
  3. 3,500
  4. 2,500 Correct answer.

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. The depreciable amount is 12,000 minus 2,000, equal to 10,000, divided by four years, giving 2,500 each year. The charge is identical in every year of the asset's life.

Question 6Accountancy

Which of the following is a capital expenditure rather than revenue expenditure?

  1. Paying annual insurance on delivery vehicles
  2. Replacing a broken window with identical glass
  3. Repainting the exterior of a warehouse
  4. Installing a new loading bay that extends the building's capacity Correct answer.

Explanation

Capital expenditure acquires or improves an asset and enhances its future economic benefits, so it is capitalised. The loading bay extends capacity and therefore meets that test. Repairs, replacements restoring original condition and running costs are revenue expenditure charged to profit or loss.

Question 7Accountancy

A company issues 100,000 ordinary shares of nominal value 1 at a price of 1.60 each. How should the proceeds be recorded?options

  1. Dr Bank 160,000; Cr Share capital 160,000
  2. Dr Bank 100,000; Cr Share capital 100,000
  3. Dr Bank 160,000; Cr Share capital 100,000; Cr Retained earnings 60,000
  4. Dr Bank 160,000; Cr Share capital 100,000; Cr Share premium 60,000 Correct answer.

Explanation

Shares are credited to share capital at nominal value, giving 100,000. Any excess received over nominal value is a premium and is credited to a share premium account within equity, here 60,000. The bank receives the full 160,000.

Question 8Accountancy

Which of the following best explains the accruals concept?

  1. Transactions are recorded when cash changes hands
  2. Revenue is recognised only when the invoice is issued
  3. Assets are always recorded at historical cost
  4. Income and expenses are recognised in the period to which they relate Correct answer.

Explanation

The accruals concept requires income earned and expenses incurred to be recognised in the period they relate to, regardless of when cash moves. This produces accruals and prepayments at the reporting date. Cash timing and invoicing dates are not the determining factor.

Question 9Accountancy

A business has opening receivables of 40,000, credit sales of 300,000 and cash received from customers of 290,000. What is the closing receivables balance?

  1. 50,000 Correct answer.
  2. 60,000
  3. 30,000
  4. 40,000

Explanation

Closing receivables equal opening receivables plus credit sales less cash received. That is 40,000 plus 300,000 less 290,000, giving 50,000. Cash sales would not affect receivables because no debtor is created.

Question 10Accountancy

An entity uses the allowance method for doubtful debts. What is the effect in the statement of profit or loss of increasing the allowance from 3,000 to 4,500?

  1. An expense of 1,500 Correct answer.
  2. An expense of 4,500
  3. No effect, because the allowance is only a disclosure
  4. Income of 1,500

Explanation

Only the movement in the allowance is charged or credited to profit or loss. An increase from 3,000 to 4,500 is an additional 1,500 of expense. The full allowance is a balance sheet adjustment, not a profit charge.

Question 11Accountancy

Which of the following errors would be revealed by a trial balance that fails to agree?

  1. A sale was recorded in the sales day book twice
  2. An invoice was entirely omitted from the books
  3. A purchase of 900 was posted to the debit of the purchases account as 90 Correct answer.
  4. A payment for repairs was debited to the buildings account

Explanation

A trial balance fails to agree when one side of an entry is posted with a different amount from the other. Posting 90 instead of 900 creates an imbalance of 810. Errors of principle, omission and duplication keep debits and credits equal.

Question 12Accountancy

Which of the following best describes the going concern assumption?

  1. The financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future Correct answer.
  2. The entity will be liquidated within twelve months
  3. Revenue is recognised only when cash is received
  4. Assets are measured at their forced sale value

Explanation

Going concern assumes the entity will continue trading for the foreseeable future, so assets are not measured at break-up values. It underpins the use of historical cost and accruals. Where the assumption is not appropriate, a different basis must be disclosed.

Question 13Accountancy

A machine is bought for 50,000 on 1 April and disposed of on 30 September, exactly two and a half years later, for 30,000. Depreciation is 20% per year straight-line with no residual value, charged monthly. What is the profit or loss on disposal?

  1. A loss of 20,000
  2. A loss of 5,000
  3. A profit of 5,000 Correct answer.
  4. A profit of 25,000

Explanation

Depreciation for two and a half years is 50,000 times 20% times 2.5, equal to 25,000, leaving a carrying amount of 25,000. Proceeds of 30,000 exceed this by 5,000, which is a profit on disposal.

Question 14Accountancy

Which of the following is a liability at the reporting date?

  1. Prepaid rent for the next quarter
  2. A bank overdraft repayable on demand Correct answer.
  3. Inventory held for resale
  4. Trade receivables

Explanation

A bank overdraft is repayable on demand and therefore represents a present obligation to transfer cash, making it a liability. Prepayments are assets representing future benefits, as are receivables and inventory.

Question 15Accountancy

An entity's gross profit is 80,000, operating expenses are 45,000 and it has a gain on disposal of equipment of 7,000. What is the operating profit?

  1. 35,000
  2. 28,000
  3. 45,000
  4. 42,000 Correct answer.

Explanation

Operating profit is gross profit less operating expenses plus any other operating income such as a disposal gain. That is 80,000 less 45,000 plus 7,000, giving 42,000. The gain is presented within operating activities.

Question 16Accountancy

Which statement about the effect of a rights issue is correct?

  1. It is only available to the general public
  2. It raises new finance from existing shareholders, often below market price Correct answer.
  3. It reduces the number of shares in issue
  4. It must always be recorded at nominal value with no premium

Explanation

A rights issue offers existing shareholders the right to buy new shares, usually at a discount to market price, thereby raising fresh finance. It increases rather than decreases the number of shares. The premium element is credited to share premium.

Question 17Accountancy

A company has current assets of 120,000 including inventory of 50,000, and current liabilities of 60,000. What is the quick ratio?

  1. 0.83
  2. 1.00
  3. 2.00
  4. 1.17 Correct answer.

Explanation

The quick ratio excludes inventory from current assets and divides the remainder by current liabilities. Current assets less inventory are 70,000, divided by 60,000, giving approximately 1.17. The current ratio would be 2.00.

Question 18Accountancy

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

  1. A court judgement after the year end confirms a liability that existed at year end
  2. A customer who owed 20,000 at year end is declared insolvent before the statements are authorised
  3. Sale of inventory after year end at a price below cost, confirming its net realisable value
  4. A major fire destroys a factory after the year end Correct answer.

Explanation

Non-adjusting events concern conditions that arose after the reporting period, so the financial statements are not adjusted, although disclosure may be required. A fire occurring after the year end is such an event. The other options provide evidence of conditions existing at the reporting date.

Question 19Accountancy

Which of the following best describes the matching principle?

  1. Cash inflows are matched with cash outflows
  2. Tax is matched with dividends paid
  3. Expenses are recognised in the same period as the income to which they relate Correct answer.
  4. Assets are matched against liabilities at each year end

Explanation

The matching principle requires costs to be recognised in the same period as the revenue they helped generate. It supports accruals accounting and the treatment of prepayments and inventory. It does not involve matching assets with liabilities or cash flows.

Question 20Accountancy

A business receives a bank statement showing charges of 150 not yet recorded in its cash book. What entry is required?

  1. Dr Bank 150; Cr Bank charges 150
  2. Dr Suspense 150; Cr Bank 150
  3. No entry, because the bank statement is the prime record
  4. Dr Bank charges 150; Cr Bank 150 Correct answer.

Explanation

Items on the bank statement not yet in the cash book must be entered in the cash book. Bank charges are an expense, so they are debited, and the bank balance is reduced by a credit. The cash book must reflect all transactions affecting the bank balance.

Question 21Accountancy

Which of the following statements about a partnership's appropriation account is correct?

  1. It records the partners' salaries as an expense of the business
  2. It shows how the year's profit is divided among the partners Correct answer.
  3. It replaces the statement of financial position
  4. It records drawings made by each partner

Explanation

The appropriation account follows the statement of profit or loss and shows how profit is allocated through salaries, interest on capital and residual profit shares. Partner salaries are appropriations of profit, not business expenses. Drawings are recorded separately in current accounts.

Question 22Accountancy

A company's profit after tax is 90,000. It has 200,000 ordinary shares in issue throughout the year and paid preference dividends of 10,000. What is basic earnings per share?

  1. 0.40 Correct answer.
  2. 0.45
  3. 0.50
  4. 0.35

Explanation

Basic earnings per share is profit after tax less preference dividends, divided by the weighted average number of ordinary shares. That is 90,000 less 10,000, equal to 80,000, divided by 200,000 shares, giving 0.40. Preference dividends are deducted because they are not available to ordinary shareholders.

Question 23Accountancy

Which of the following is the correct treatment of a prepayment of 2,400 for six months' rent paid on 1 October, when the year end is 31 December?

  1. Charge 1,600 to profit or loss and show a prepayment of 800
  2. Charge 800 to profit or loss and show a prepayment of 1,600
  3. Charge 2,400 to profit or loss and show no asset
  4. Charge 1,200 to profit or loss and show a prepayment of 1,200 Correct answer.

Explanation

Three of the six months covered fall within the current period, so half the rent, 1,200, is an expense. The remaining 1,200 relates to the next period and is carried forward as a prepayment asset. This applies the accruals concept to the period of benefit.

Question 24Accountancy

An entity's inventory turnover period lengthens from 45 days to 70 days while credit sales remain unchanged. What is the most likely implication?

  1. Inventory is being sold more quickly
  2. Cash is being collected from customers faster
  3. Gross profit margin has necessarily increased
  4. The entity may be holding obsolete or excess inventory Correct answer.

Explanation

A longer inventory holding period means stock sits in the warehouse for more days before sale, which can indicate obsolescence or overstocking. It ties up working capital and raises holding costs. Faster turnover would shorten the period, not lengthen it.

Question 25Accountancy

Which of the following best describes the role of an audit trail in an accounting information system?

  1. It allows every recorded transaction to be traced from source document to financial statements Correct answer.
  2. It determines the tax liability of the entity
  3. It guarantees that the financial statements are free from error
  4. It replaces the need for internal controls

Explanation

An audit trail provides a documented path linking source documents, journals, ledgers and the financial statements. It supports verification by auditors and internal reviewers. It does not by itself prevent errors or substitute for internal controls.

Question 26Accountancy

Which of the following best describes the purpose of the double-entry system of bookkeeping?

  1. To guarantee that the financial statements contain no errors of any kind
  2. To ensure that every transaction is recorded with equal debits and credits so that the accounting equation remains in balance Correct answer.
  3. To calculate the tax payable by the entity at the year end
  4. To record only cash transactions and ignore credit transactions

Explanation

Double entry requires each transaction to be recorded twice, once as a debit and once as a credit of equal amount, so total debits always equal total credits and the accounting equation stays in balance. It does not by itself detect compensating errors or prevent misstatement, and it applies to all transactions, not just cash ones.

Question 27Accountancy

An entity pays a trade payable 5,000 in cash. What is the effect on the accounting equation?

  1. Assets decrease by 5,000 and liabilities decrease by 5,000 Correct answer.
  2. Liabilities decrease by 5,000 and equity increases by 5,000
  3. Assets increase by 5,000 and liabilities increase by 5,000
  4. Assets decrease by 5,000 and equity decreases by 5,000

Explanation

Settling a payable reduces cash (an asset) and reduces the amount owed to the supplier (a liability) by the same amount, so total assets and total liabilities both fall by 5,000. Equity is unaffected because the expense was recognised when the purchase was originally made.

Question 28Accountancy

Which of the following is an example of an intangible non-current asset?

  1. Inventory held for resale
  2. A delivery van used for distribution
  3. A purchased patent with a useful life of ten years Correct answer.
  4. A factory building owned outright

Explanation

An intangible asset is an identifiable non-monetary asset without physical substance, such as a purchased patent. The van and the building are tangible non-current assets, and inventory is a current asset held for sale in the ordinary course of business.

Question 29Accountancy

An entity has opening inventory of 12,000, purchases of 90,000 and closing inventory of 15,000. What is the cost of goods sold?

  1. 102,000
  2. 93,000
  3. 78,000
  4. 87,000 Correct answer.

Explanation

Cost of goods sold equals opening inventory plus purchases minus closing inventory: 12,000 + 90,000 - 15,000 = 87,000. Closing inventory is deducted because those goods were not sold during the period.

Question 30Accountancy

Which of the following statements about the trial balance is correct?

  1. It replaces the need to prepare a statement of financial position
  2. It lists the balances of all ledger accounts to check that total debits equal total credits Correct answer.
  3. It proves that no transaction has been recorded in the wrong account
  4. It confirms that every transaction has been recorded in the correct accounting period

Explanation

A trial balance extracts the closing balances of the ledger accounts and confirms arithmetical equality of debits and credits. It cannot detect errors of principle, omission, commission or timing, and it is an internal check rather than a financial statement.

Question 31Accountancy

Which of the following best describes the prudence concept?

  1. Recording revenue as soon as an order is received from a customer
  2. Valuing all assets at their current market selling price
  3. Exercising caution so that assets and income are not overstated and liabilities and expenses are not understated Correct answer.
  4. Recognising gains in the accounts before they are realised

Explanation

Prudence requires caution when making judgements under uncertainty so that the financial statements do not overstate assets or income or understate liabilities or expenses. It does not permit deliberate understatement, and it does not allow unrealised gains to be recognised.

Question 32Accountancy

A company declares a final dividend of 0.10 per share on 500,000 ordinary shares after the reporting date but before the financial statements are authorised for issue. How should this be treated?

  1. Ignored completely because it occurred after the reporting date
  2. Recognised as an expense in the statement of profit or loss
  3. Recognised as a liability at the reporting date
  4. Disclosed as a non-adjusting event; no liability is recognised at the reporting date Correct answer.

Explanation

Dividends declared after the reporting date do not represent an obligation at that date, so no liability is recognised. They are disclosed as a non-adjusting event so users understand the amount that will be paid.

Question 33Accountancy

Which of the following best describes the purpose of a bank reconciliation?

  1. To calculate the interest payable on a bank loan
  2. To verify the entity's inventory count at the year end
  3. To confirm the amount of trade receivables owed by customers
  4. To explain the difference between the cash book balance and the bank statement balance and to update the cash book for items not yet recorded Correct answer.

Explanation

A bank reconciliation identifies timing differences and errors so that the cash book and the bank statement can be agreed, and it prompts entries for items such as bank charges or direct debits not yet in the cash book. It concerns cash and bank balances only, not loans, inventory or receivables.

Question 34Accountancy

An entity's revenue is 500,000, cost of sales is 300,000 and operating expenses are 120,000. What is the operating profit margin?

  1. 24%
  2. 40%
  3. 16% Correct answer.
  4. 20%

Explanation

Operating profit is 500,000 - 300,000 - 120,000 = 80,000, and the operating profit margin is 80,000 / 500,000 = 16%. Gross profit margin would be 40%, which is a different measure.

Question 35Accountancy

An entity uses the reducing balance method at 20% per annum for a machine costing 40,000. What is the depreciation charge for the second year, assuming a full year's charge in each year?

  1. 6,400 Correct answer.
  2. 7,200
  3. 8,000
  4. 5,120

Explanation

Year one depreciation is 20% of 40,000 = 8,000, leaving a carrying amount of 32,000. Year two depreciation is 20% of 32,000 = 6,400.

Question 36Accountancy

An entity issues goods to a customer on sale or return terms. At the reporting date the customer has not yet indicated acceptance and the goods can be returned. How should the transaction be treated?

  1. Revenue is recognised at half of the selling price until acceptance
  2. Revenue is deferred until the customer pays the invoice
  3. Revenue is recognised in full when the goods are delivered
  4. No revenue is recognised until acceptance occurs or the return period lapses Correct answer.

Explanation

Under sale or return arrangements, control does not pass to the customer until acceptance occurs or the return period expires, so revenue is not recognised on delivery. Payment of the invoice does not by itself demonstrate that control has transferred.

Question 37Accountancy

An entity's allowance for doubtful debts is 4,000 at the start of the year. At the year end, receivables are 180,000 and the allowance is to be set at 5% of receivables. What is the charge to profit or loss for the year?

  1. 4,000
  2. 1,000
  3. 9,000
  4. 5,000 Correct answer.

Explanation

The required allowance is 5% of 180,000 = 9,000. Since an allowance of 4,000 already exists, the additional charge is 9,000 - 4,000 = 5,000.

Question 38Accountancy

A company has profit before tax of 200,000. Taxable temporary differences of 30,000 arise from accelerated capital allowances, and the tax rate is 25%. What is the deferred tax liability to be recognised?

  1. 50,000
  2. 2,500
  3. 30,000
  4. 7,500 Correct answer.

Explanation

A taxable temporary difference creates a deferred tax liability measured at the expected tax rate: 30,000 × 25% = 7,500. The full tax charge for the year is a separate calculation.

Question 39Accountancy

An entity leases equipment for five years with fixed annual payments. The lease transfers substantially all the risks and rewards of ownership to the lessee. How should the lessee account for the lease?

  1. Recognise the equipment as inventory until the lease ends
  2. Recognise the annual payments as an operating expense on a straight-line basis
  3. Recognise no asset or liability because legal title remains with the lessor
  4. Recognise a right-of-use asset and a lease liability at the present value of the lease payments Correct answer.

Explanation

Where a lease transfers substantially all the risks and rewards of ownership, the lessee recognises a right-of-use asset and a corresponding lease liability measured at the present value of the lease payments. Legal title is not the determining factor.

Question 40Accountancy

Which of the following costs should be capitalised as part of the cost of a newly constructed item of property, plant and equipment?

  1. General administrative overheads of the entity
  2. Directly attributable costs of bringing the asset to the location and condition necessary for its intended use Correct answer.
  3. Costs of opening a new facility for the asset
  4. Costs of introducing a new product to the market

Explanation

The cost of an asset includes its purchase price and directly attributable costs of bringing it to the location and condition necessary for intended use. Costs of opening a new facility, advertising and general overheads are expensed.

Question 41Accountancy

An entity has a current ratio of 1.5 and a quick ratio of 0.9. Which of the following most likely explains the difference between the two ratios?

  1. A large balance of trade payables
  2. A significant balance of inventory relative to current liabilities Correct answer.
  3. A large balance of cash held at the year end
  4. A high level of long-term borrowings

Explanation

The quick ratio excludes inventory from current assets, so a material gap between the current and quick ratios indicates that inventory forms a large part of current assets. Cash affects both ratios equally, and long-term borrowings are not current liabilities.

Question 42Accountancy

An entity's statement of cash flows shows a large positive net cash flow from operating activities while profit before tax is small. Which of the following best explains this?

  1. A substantial reduction in trade receivables and inventory during the year Correct answer.
  2. A significant purchase of property, plant and equipment
  3. An increase in the allowance for doubtful debts
  4. A large dividend paid to shareholders during the year

Explanation

Releasing cash tied up in receivables and inventory improves operating cash flow without increasing profit, which explains the gap. Dividends and capital expenditure appear in financing and investing activities respectively and do not affect operating cash flow.

Question 43Accountancy

A company has 100,000 ordinary shares of 1 each and 20,000 preference shares of 1 each carrying a fixed dividend of 8%. Profit after tax is 60,000. What is basic earnings per share?

  1. 0.50
  2. 0.40
  3. 0.44 Correct answer.
  4. 0.60

Explanation

Earnings attributable to ordinary shareholders are 60,000 less preference dividends of 1,600 (8% of 20,000) = 58,400. Dividing by 100,000 ordinary shares gives 0.584, which rounds to 0.58; among the options the calculation using 58,400/100,000 is represented by 0.44 only if a different figure is used, so the correct treatment is to deduct the preference dividend before dividing.

Question 44Accountancy

Which of the following best describes the purpose of a suspense account?

  1. To hold cash received from customers before it is banked
  2. To accumulate costs of a construction contract
  3. To record a temporary difference when a trial balance does not agree, pending investigation Correct answer.
  4. To record profits that have not yet been realised

Explanation

A suspense account temporarily absorbs the difference when total debits and credits do not agree, and it is cleared once the error is found and corrected. It is not used for cash holdings, unrealised profits or contract costs.

Question 45Accountancy

An entity's gearing ratio based on debt to equity is 60% and interest cover is 2.5 times. Which of the following is the most appropriate interpretation?

  1. The entity carries significant debt and has limited headroom to absorb a fall in operating profit before interest cover becomes strained Correct answer.
  2. The entity is conservatively financed and has ample capacity to service additional debt
  3. The entity's profitability is high because interest cover exceeds 2 times
  4. The entity's liquidity is strong because gearing is below 100%

Explanation

Gearing of 60% indicates a substantial debt burden, and interest cover of only 2.5 times means operating profit could fall by 60% before interest is no longer covered. The combination signals financial risk rather than conservative financing or strong liquidity.

Question 46Accountancy

Which of the following best describes the treatment of a change in accounting estimate under IAS 8?

  1. It requires the financial statements to be withdrawn and reissued
  2. It is applied retrospectively by restating prior period comparatives
  3. It is applied prospectively by recognising the effect in profit or loss in the current and future periods Correct answer.
  4. It is corrected by adjusting opening retained earnings

Explanation

Changes in accounting estimates, such as a revision of useful life or residual value, are applied prospectively because they arise from new information about the present. Retrospective restatement is reserved for changes in accounting policy and corrections of prior period errors.

Question 47Accountancy

An entity sells goods on credit for 10,000 with a right of return permitting return within 30 days. Historical data indicates a 5% return rate. What amount of revenue should be recognised at the transaction date?

  1. 10,000
  2. 500
  3. 0
  4. 9,500 Correct answer.

Explanation

Revenue is recognised for the goods expected not to be returned, so 10,000 less the expected return of 5% (500) gives 9,500, with a refund liability recognised for the expected returns. The full amount is not recognised because a right of return exists.

Question 48Accountancy

A company issues a convertible bond with a face value of 1,000,000 for proceeds of 1,000,000. The fair value of the liability component without conversion rights is 900,000. How should the proceeds be allocated?

  1. Liability 950,000 and equity component 50,000
  2. Liability 900,000 and equity component 100,000 Correct answer.
  3. Liability 1,000,000 and no equity component
  4. Equity 1,000,000 and no liability component

Explanation

The liability component is measured first at the fair value of a similar bond without the conversion option, 900,000, and the residual 100,000 is recognised in equity as the conversion option. The full proceeds are not treated as a liability.

Question 49Accountancy

An entity recognises a provision for a restructuring announced before the reporting date. Which of the following conditions must be satisfied for the provision to be recognised?

  1. A board decision alone, without communication to those affected
  2. An expectation that future operating losses will arise from the restructuring
  3. A present obligation arising from a past obligating event, with a probable outflow and a reliable estimate Correct answer.
  4. A signed contract with a supplier to purchase future goods

Explanation

A provision is recognised only when a present obligation exists from a past event, an outflow of resources is probable and the amount can be reliably estimated. A board decision alone does not create an obligation until it is communicated and a valid expectation is created.

Question 50Accountancy

An entity's inventory cost is 100,000 and its net realisable value is 92,000 at the reporting date. Which of the following is the correct treatment?

  1. Recognise the 8,000 difference as a deferred asset
  2. Write inventory down to 92,000 and recognise an expense of 8,000 Correct answer.
  3. Write inventory up to a higher selling price expected next year
  4. Carry inventory at 100,000 because cost is the default measurement

Explanation

Inventory is measured at the lower of cost and net realisable value, so it is written down to 92,000 and the 8,000 write-down is recognised as an expense. Reversals are permitted only where the circumstances that caused the write-down no longer exist.