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Dipl. Treuhandexperte TREX HFP - independent subject foundations study materials
Dipl. Treuhandexperte TREX HFP - independent subject foundations study resources

Dipl. Treuhandexperte TREX HFP - independent subject foundations practice questions

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Question 1Double entry, reconciliation, errors and recording models

The accounting equation is correctly stated as:

  1. Assets = Liabilities − Equity
  2. Assets + Liabilities = Equity
  3. Assets = Liabilities + Equity Correct answer.
  4. Assets = Equity − Liabilities

Explanation

The fundamental accounting equation is Assets = Liabilities + Equity. Every transaction must keep this equation in balance. Rearrangements that subtract liabilities from equity or add liabilities to assets misstate the relationship.

Question 2Double entry, reconciliation, errors and recording models

Which book of prime entry is used to record credit sales of goods?

  1. Purchases day book
  2. Cash book
  3. Petty cash book
  4. Sales day book Correct answer.

Explanation

Credit sales are listed in the sales day book (sales journal) before posting to the receivables ledger and sales account. The purchases day book records credit purchases; the cash book records cash and bank receipts and payments; the petty cash book records small cash disbursements.

Question 3Double entry, reconciliation, errors and recording models

Under the imprest system of petty cash, the amount reimbursed at the period end equals:

  1. The total of petty cash vouchers paid since the last reimbursement Correct answer.
  2. The original float plus receipts
  3. The cash remaining in the tin
  4. The bank balance per the cash book

Explanation

Under the imprest system the petty cashier starts with a fixed float. Reimbursement restores the float by equalling the vouchers paid, so cash on hand plus vouchers again equals the imprest amount. Remaining cash alone is not the reimbursement; bank balances are unrelated.

Question 4Double entry, reconciliation, errors and recording models

A machine costs GH¢40,000, has residual value GH¢4,000 and a useful life of 6 years. Annual straight-line depreciation is:

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

Explanation

Straight-line depreciation = (cost − residual value) ÷ useful life = (40,000 − 4,000) ÷ 6 = 36,000 ÷ 6 = GH¢6,000 per year. Using cost alone without residual value, or dividing by the wrong life, produces the distractors.

Question 5Double entry, reconciliation, errors and recording models

An asset costing GH¢20,000 is depreciated at 25% per annum on the reducing-balance method. Accumulated depreciation after two full years is:

  1. GH¢5,000
  2. GH¢10,000
  3. GH¢7,500
  4. GH¢8,750 Correct answer.

Explanation

Year 1 charge = 25% × 20,000 = 5,000; carrying amount 15,000. Year 2 charge = 25% × 15,000 = 3,750. Accumulated depreciation = 5,000 + 3,750 = GH¢8,750. Straight-line cumulative or single-year figures produce the wrong options.

Question 6Double entry, reconciliation, errors and recording models

Under IAS 2 Inventories, inventories are measured at:

  1. The lower of cost and net realisable value Correct answer.
  2. Historical cost only
  3. Net realisable value only
  4. Replacement cost

Explanation

IAS 2 requires inventories to be measured at the lower of cost and net realisable value (NRV). Using cost alone can overstate assets when NRV has fallen; using NRV alone when cost is lower would understate; replacement cost is not the IAS 2 measurement basis.

Question 7Double entry, reconciliation, errors and recording models

Inventory cost is GH¢12,000. Estimated selling price is GH¢11,500 and selling costs are GH¢800. At what amount should inventory be reported?

  1. GH¢12,000
  2. GH¢10,700 Correct answer.
  3. GH¢11,500
  4. GH¢11,200

Explanation

NRV = selling price − costs to sell = 11,500 − 800 = 10,700. Inventory is the lower of cost (12,000) and NRV (10,700), so it is reported at GH¢10,700. Reporting cost or selling price alone ignores the NRV write-down rule.

Question 8Double entry, reconciliation, errors and recording models

Rent of GH¢36,000 for the year was paid on 1 April for the year to 31 March. At the 31 December year-end, the prepayment is:

  1. GH¢27,000
  2. GH¢36,000
  3. GH¢12,000
  4. GH¢9,000 Correct answer.

Explanation

The payment covers 12 months from 1 April to 31 March. By 31 December, 9 months (April–December) have been consumed and 3 months (January–March) remain prepaid: 3/12 × 36,000 = GH¢9,000. The expense for the nine months is GH¢27,000.

Question 9Double entry, reconciliation, errors and recording models

Electricity bills are paid one month in arrears. Annual bills total GH¢24,000 and the year-end is 31 December. If December's bill of GH¢2,200 is unpaid, the accrual at 31 December is:

  1. GH¢2,200 Correct answer.
  2. GH¢24,000
  3. GH¢2,000
  4. GH¢0 because bills are always paid later

Explanation

An accrual recognises expense incurred but not yet paid. December's unpaid bill of GH¢2,200 is a year-end accrual (current liability) and is added to electricity expense. The annual total alone is not the accrual; averaging ignores the known unpaid amount.

Question 10Double entry, reconciliation, errors and recording models

Which source document supports a credit purchase of inventory?

  1. Sales invoice issued by the entity
  2. Purchase invoice received from the supplier Correct answer.
  3. Credit note issued to a customer
  4. Petty cash voucher

Explanation

A purchase invoice from the supplier evidences a credit purchase and is recorded in the purchases day book. The entity's own sales invoice evidences a sale; a credit note to a customer relates to sales returns; a petty cash voucher supports a small cash payment.

Question 11Double entry, reconciliation, errors and recording models

When a non-current asset is purchased for cash, the double entry is:

  1. Debit cash; credit non-current asset
  2. Debit expenses; credit non-current asset
  3. Debit non-current asset; credit cash Correct answer.
  4. Debit non-current asset; credit equity

Explanation

Capitalising a cash purchase increases the asset (debit) and decreases cash (credit). Debiting cash would reverse the cash effect; charging expense immediately treats capital expenditure as revenue; crediting equity invents an owner contribution that did not occur.

Question 12Double entry, reconciliation, errors and recording models

A credit note received from a supplier for returned goods is recorded in the:

  1. Sales returns day book
  2. Purchases returns day book Correct answer.
  3. Sales day book
  4. Petty cash book

Explanation

Returns of goods previously purchased on credit are recorded in the purchases returns (returns outwards) day book, reducing purchases and payables. Sales returns relate to goods the entity sold; the sales day book records credit sales; petty cash is unrelated.

Question 13Double entry, reconciliation, errors and recording models

Trade receivables control account balances are agreed to:

  1. The list of individual customer balances in the sales ledger Correct answer.
  2. The purchases day book totals only
  3. Share capital in the statement of financial position
  4. The petty cash imprest amount

Explanation

The receivables (sales ledger) control account in the general ledger should reconcile to the sum of individual customer balances in the sales ledger. Purchases day book totals relate to payables; share capital and petty cash are unrelated control checks.

Question 14Double entry, reconciliation, errors and recording models

Carriage inwards on inventory purchases is normally treated as:

  1. An administrative expense only
  2. A deduction from sales revenue
  3. A non-current asset
  4. Part of the cost of inventory / purchases Correct answer.

Explanation

Carriage inwards (freight on purchases) is part of bringing inventory to its present location and condition, so it is included in inventory cost / purchases under IAS 2 principles. Carriage outwards is typically a selling expense; it is not a sales deduction or a non-current asset.

Question 15Double entry, reconciliation, errors and recording models

Depreciation for the year is recorded by:

  1. Debit accumulated depreciation; credit depreciation expense
  2. Debit non-current asset cost; credit cash
  3. Debit depreciation expense; credit accumulated depreciation Correct answer.
  4. Debit equity; credit depreciation expense

Explanation

The periodic depreciation entry debits depreciation expense (profit or loss) and credits accumulated depreciation (a contra-asset). Crediting expense and debiting accumulated depreciation reverses the entry; adjusting cost directly is not the usual presentation; equity is not debited for routine depreciation.

Question 16Double entry, reconciliation, errors and recording models

A sole trader introduces additional capital of GH¢15,000 by cheque. The entry is:

  1. Debit capital; credit bank
  2. Debit drawings; credit bank
  3. Debit bank; credit capital Correct answer.
  4. Debit bank; credit sales

Explanation

Capital introduced increases the bank asset (debit) and increases owner's capital (credit). Debiting capital would reduce equity incorrectly; drawings reduce capital when cash leaves the business; crediting sales would misclassify a capital injection as revenue.

Question 17Double entry, reconciliation, errors and recording models

An allowance for doubtful debts is increased by GH¢1,500. The effect on profit for the year is:

  1. Increase profit by GH¢1,500
  2. Decrease profit by GH¢1,500 Correct answer.
  3. No effect on profit
  4. Increase assets by GH¢1,500

Explanation

An increase in the allowance is charged as an expense (or as part of impairment of receivables), reducing profit by GH¢1,500. It also increases the allowance contra, reducing net receivables - it does not increase assets or leave profit unchanged.

Question 18Double entry, reconciliation, errors and recording models

FIFO inventory valuation assumes that:

  1. The oldest units are sold first Correct answer.
  2. The newest units are sold first
  3. Average cost is always used
  4. Units cannot be identified

Explanation

FIFO (first-in, first-out) assumes the oldest purchases are issued/sold first, so closing inventory reflects more recent costs. LIFO assumes newest first (not permitted under IAS 2); weighted average uses average cost; specific identification is used when items are distinguishable.

Question 19Double entry, reconciliation, errors and recording models

Which ledger typically contains the individual personal accounts of credit customers?

  1. General ledger only
  2. Purchases (payables) ledger
  3. Nominal ledger cash book only
  4. Sales (receivables) ledger Correct answer.

Explanation

The sales (receivables) ledger holds individual customer accounts. The purchases ledger holds supplier accounts. The general/nominal ledger holds impersonal accounts and control totals; the cash book records cash and bank.

Question 20Double entry, reconciliation, errors and recording models

A machine costing GH¢50,000 with accumulated depreciation GH¢30,000 is sold for GH¢18,000 cash. The profit or loss on disposal is:

  1. GH¢18,000 profit
  2. GH¢12,000 profit
  3. GH¢20,000 loss
  4. GH¢2,000 loss Correct answer.

Explanation

Carrying amount = 50,000 − 30,000 = 20,000. Proceeds 18,000 give a loss of GH¢2,000. Treating proceeds as profit ignores carrying amount; comparing proceeds only to cost or accumulated depreciation produces the other wrong figures.

Question 21Double entry, reconciliation, errors and recording models

An error of principle occurs when:

  1. A transaction is completely omitted from the books
  2. Two equal and opposite errors cancel in the trial balance
  3. A transaction is posted to the wrong class of account (e.g. capital vs revenue) Correct answer.
  4. Figures are transposed when writing an amount

Explanation

An error of principle posts a transaction to the wrong type of account - for example treating capital expenditure as an expense. Omission leaves the transaction out entirely; compensating errors cancel each other; transposition is a form of error of original entry / casting.

Question 22Double entry, reconciliation, errors and recording models

Which error will NOT cause a trial balance disagreement?

  1. Posting only one side of a double entry
  2. An error of omission of an entire transaction Correct answer.
  3. Adding the debit column incorrectly
  4. Recording unequal debit and credit amounts

Explanation

Omitting a transaction entirely means both debit and credit are missing, so the trial balance can still agree. One-sided postings, incorrect casting, and unequal amounts cause the trial balance to disagree and may require a suspense account.

Question 23Double entry, reconciliation, errors and recording models

A purchase of GH¢900 was entered in both the purchases account and the supplier account as GH¢90. This is an error of:

  1. Original entry Correct answer.
  2. Omission
  3. Commission
  4. Principle

Explanation

Both sides used the same incorrect amount from the source, so it is an error of original entry. Omission would leave it out; commission posts to the wrong personal account of the same class; principle posts to the wrong class of account.

Question 24Double entry, reconciliation, errors and recording models

A suspense account is primarily used to:

  1. Hold a trial-balance difference until errors are found and corrected Correct answer.
  2. Record drawings of the owner
  3. Replace the cash book permanently
  4. Measure goodwill on partnership admission

Explanation

When the trial balance disagrees, the difference is posted to a suspense account so books can proceed; correcting journals clear suspense as errors are found. It is not a drawings, cash-book or goodwill account.

Question 25Financial statements, assets, inventory and cash-flow models

Under IAS 1 'Presentation of Financial Statements', a complete set of financial statements MUST include all of the following EXCEPT:

  1. A statement of financial position
  2. A statement of profit or loss and other comprehensive income
  3. A statement of cash flows
  4. A statement of board-approved budget for the next year Correct answer.

Explanation

IAS 1 requires: (1) a statement of financial position, (2) a statement of profit or loss and OCI, (3) a statement of changes in equity, (4) a statement of cash flows (per IAS 7), and (5) notes. A budget statement is internal management information - not part of IFRS financial statements.

Question 26Financial statements, assets, inventory and cash-flow models

Under IAS 16 'Property, Plant and Equipment', the COST of a self-constructed asset includes all of the following EXCEPT:

  1. Directly attributable costs of bringing the asset to working condition
  2. Initial estimate of decommissioning costs
  3. Borrowing costs (where IAS 23 applies)
  4. Internal profits/markups added by the construction division Correct answer.

Explanation

Internal profits or notional intra-group markups are eliminated when capitalising self-constructed assets. IAS 16 cost includes purchase price, directly attributable costs, decommissioning provisions (per IAS 37), and capitalised borrowing costs under IAS 23 for qualifying assets.

Question 27Financial statements, assets, inventory and cash-flow models

Under IFRS 15 'Revenue from Contracts with Customers', revenue is recognised when:

  1. Cash is received from the customer
  2. Control of the goods or services transfers to the customer Correct answer.
  3. The contract is signed
  4. The invoice is issued

Explanation

IFRS 15's core principle: revenue is recognised when (or as) the entity satisfies a performance obligation by transferring control of a promised good or service to the customer. The 5-step model: identify contract → identify POs → determine transaction price → allocate price to POs → recognise revenue when PO is satisfied.

Question 28Financial statements, assets, inventory and cash-flow models

Under IFRS 16 'Leases', a lessee must generally recognise:

  1. Only an expense in profit or loss for all leases
  2. A right-of-use asset and a lease liability for most leases Correct answer.
  3. Lease payments only as cash flows from financing
  4. Only operating leases on the balance sheet

Explanation

IFRS 16 (effective 2019) requires lessees to recognise a right-of-use (ROU) asset and a corresponding lease liability for substantially all leases. Exemptions exist for short-term leases (<12 months) and low-value assets. This eliminates the previous IAS 17 operating-lease off-balance-sheet treatment.

Question 29Financial statements, assets, inventory and cash-flow models

Under IAS 36 'Impairment of Assets', the recoverable amount of an asset is the:

  1. Original cost less accumulated depreciation
  2. Higher of fair value less costs of disposal and value in use Correct answer.
  3. Lower of fair value less costs of disposal and value in use
  4. Tax-base value

Explanation

IAS 36 defines recoverable amount as the HIGHER of (a) fair value less costs of disposal, and (b) value in use (the present value of future cash flows from the asset). An impairment loss arises when carrying amount exceeds recoverable amount.

Question 30Financial statements, assets, inventory and cash-flow models

Under IAS 37 'Provisions, Contingent Liabilities and Contingent Assets', a PROVISION is recognised when:

  1. A possible obligation may or may not exist
  2. There is a present obligation, probable outflow, and reliable estimate Correct answer.
  3. Management decides to set aside funds
  4. An asset is acquired

Explanation

IAS 37 requires three conditions to recognise a provision: (1) a present obligation (legal or constructive) from a past event, (2) probable (more likely than not) outflow of economic benefits, and (3) reliable estimate of the amount. Otherwise, a contingent liability is disclosed (or, if remote, ignored).

Question 31Financial statements, assets, inventory and cash-flow models

Under IFRS 9 'Financial Instruments', loans and most trade receivables are subject to which impairment model?

  1. Incurred loss model
  2. Expected credit loss (ECL) model Correct answer.
  3. Lower-of-cost-or-market model
  4. FIFO impairment model

Explanation

IFRS 9 replaced the IAS 39 'incurred loss' model with a forward-looking 'expected credit loss' (ECL) model. Entities must recognise lifetime ECL on origination for trade receivables and a 12-month ECL (or lifetime if credit risk has significantly increased) on financial assets at amortised cost.

Question 32Financial statements, assets, inventory and cash-flow models

Under F1 principles of taxation, which of the following BEST describes the difference between tax avoidance and tax evasion?

  1. Avoidance is legal, evasion is illegal Correct answer.
  2. Avoidance is illegal, evasion is legal
  3. Both are illegal
  4. Both are legal

Explanation

Tax avoidance uses legal means (allowances, structures, deductions) to reduce tax liability. Tax evasion is the illegal non-payment or under-payment of tax (e.g., concealing income, false invoices). CIMA's ethics framework also flags 'aggressive avoidance' as ethically questionable even if legal.

Question 33Financial statements, assets, inventory and cash-flow models

An asset has a carrying amount of £1,000,000 and a tax base of £700,000. The tax rate is 25%. What deferred tax balance arises under IAS 12?

  1. £75,000 deferred tax asset
  2. £75,000 deferred tax liability Correct answer.
  3. £300,000 deferred tax liability
  4. Nil

Explanation

Taxable temporary difference = Carrying amount £1,000,000 − Tax base £700,000 = £300,000. Deferred tax liability = £300,000 × 25% = £75,000. (When carrying > tax base for an asset, a DTL arises because the larger future taxable economic benefits will be taxed.)

Question 34Financial statements, assets, inventory and cash-flow models

Under IFRS, the statement of cash flows (IAS 7) classifies cash outflows for the purchase of property, plant and equipment as:

  1. Operating activities
  2. Investing activities Correct answer.
  3. Financing activities
  4. Other comprehensive income

Explanation

IAS 7 classifies cash flows into three categories: operating (principal revenue-producing activities), investing (acquisition/disposal of long-term assets), and financing (changes in equity and borrowings). Buying PP&E is investing.

Question 35Group reporting, control and consolidation foundations

Under IFRS 10 'Consolidated Financial Statements', a parent must consolidate an entity if it has CONTROL, defined as having:

  1. Just over 50% of voting rights only
  2. Power, exposure to variable returns, AND the ability to use power to affect returns Correct answer.
  3. Any equity stake
  4. A board representative

Explanation

IFRS 10 defines control by three elements (all required): (1) power over the investee, (2) exposure or rights to variable returns, and (3) the ability to use that power to affect those returns. This 'principle-based' definition can result in control even with less than 50% (de facto control) or no control with more (e.g., protective rights only).

Question 36Group reporting, control and consolidation foundations

Under IFRS 3 'Business Combinations', goodwill arising on acquisition is calculated as:

  1. Consideration paid only
  2. Consideration + Non-controlling interest + previously held interest − Fair value of identifiable net assets acquired Correct answer.
  3. Net assets acquired only
  4. Consideration − Book value of net assets

Explanation

Full IFRS 3 goodwill: Goodwill = (Consideration transferred + NCI at fair value or proportionate share of net assets + Fair value of any previously held interest) − Fair value of identifiable net assets acquired. Goodwill is then tested annually for impairment under IAS 36 (no amortisation).

Question 37Group reporting, control and consolidation foundations

P acquires 80% of S for £400. Fair value of S's identifiable net assets at acquisition = £450. NCI is measured at proportionate share of net assets. Goodwill on acquisition = ?

  1. £40 Correct answer.
  2. £50
  3. £90
  4. Negative goodwill (gain on bargain purchase)

Explanation

Proportionate-share method: NCI = 20% × £450 = £90. Goodwill = (£400 + £90) − £450 = £40. Under the full goodwill (fair value) method, NCI fair value (often given) would replace the £90 figure.

Question 38Group reporting, control and consolidation foundations

Under IAS 28 'Investments in Associates and Joint Ventures', an associate is normally one in which the investor holds:

  1. More than 50% of voting rights
  2. Significant influence - typically 20% to 50% of voting rights Correct answer.
  3. Less than 5%
  4. 100% of equity

Explanation

An associate is an entity over which the investor has significant influence - the power to participate in financial and operating decisions but not control. The 20-50% holding range gives a presumption of significant influence. Associates are accounted for using the equity method.

Question 39Group reporting, control and consolidation foundations

Under the equity method (IAS 28) for associates, the investment is initially recognised at COST and subsequently:

  1. Marked to market through OCI
  2. Adjusted for the investor's share of the associate's post-acquisition profit/loss and OCI, less dividends received Correct answer.
  3. Held at cost less impairment only
  4. Consolidated line by line

Explanation

Equity method: investment = Cost + share of post-acquisition profits − share of post-acquisition losses − dividends received − impairment. Share of profit appears in P&L, share of OCI in OCI. Associates are NOT line-by-line consolidated (that's for subsidiaries under IFRS 10).

Question 40Group reporting, control and consolidation foundations

Intra-group sales between parent and subsidiary in a consolidated income statement must be:

  1. Doubled to show both sides
  2. Eliminated in full to avoid double counting Correct answer.
  3. Disclosed as related-party transactions only without elimination
  4. Reported as exceptional items

Explanation

Consolidation eliminates intra-group transactions in full to present the group as a single economic entity. Intra-group sales are removed from revenue and cost of sales. Unrealised profit on inventory still held at year-end is also eliminated (provision for unrealised profit, PURP).

Question 41Group reporting, control and consolidation foundations

Under IAS 21 'The Effects of Changes in Foreign Exchange Rates', a foreign subsidiary's statement of financial position items are translated at:

  1. Historical exchange rate
  2. Average rate for the period
  3. Closing (spot) rate at the reporting date Correct answer.
  4. Rate set by the parent's central bank

Explanation

IAS 21 closing-rate (current-rate) method for foreign subsidiaries: SFP items at closing rate; income statement items at the rate at the date of the transaction (or an average rate if rates do not fluctuate significantly); resulting exchange differences in OCI (translation reserve).

Question 42Group reporting, control and consolidation foundations

Return on Capital Employed (ROCE) is calculated as:

  1. Operating profit ÷ (Equity + Long-term debt) Correct answer.
  2. Net profit ÷ Total revenue
  3. Gross profit ÷ Total assets
  4. Operating cash flow ÷ Net assets

Explanation

ROCE = Operating profit (PBIT) ÷ Capital employed, where capital employed = total equity + long-term debt (or total assets − current liabilities). Used widely for analysis in F2/F3 and for measuring divisional performance in P2.

Question 43Group reporting, control and consolidation foundations

Earnings Per Share (EPS) under IAS 33 (basic) is calculated as:

  1. Profit attributable to ordinary shareholders ÷ Weighted average number of ordinary shares outstanding Correct answer.
  2. Net profit ÷ Total assets
  3. Dividend ÷ Share price
  4. Profit ÷ Number of shares issued at year-end

Explanation

Basic EPS = Profit/loss attributable to ordinary equity holders ÷ Weighted average number of ordinary shares outstanding. The weighted average reflects shares issued/repurchased during the period. Diluted EPS adjusts for potential ordinary shares (convertibles, options, warrants).

Question 44Group reporting, control and consolidation foundations

Under IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', a non-current asset classified as held for sale is measured at:

  1. Higher of carrying amount and fair value less costs to sell
  2. Lower of carrying amount and fair value less costs to sell Correct answer.
  3. Always at fair value
  4. Always at historical cost

Explanation

IFRS 5: a non-current asset (or disposal group) classified as held for sale is measured at the LOWER of carrying amount and fair value less costs to sell. Depreciation ceases. The asset is presented separately on the SFP. Discontinued operations are presented as a single line on the income statement.

Question 45Group reporting, control and consolidation foundations

Under IFRS 8 'Operating Segments', segment information must be disclosed based on:

  1. Geographical regions only
  2. Industry sectors only
  3. The components reviewed by the chief operating decision maker (CODM) - the 'management approach' Correct answer.
  4. All entities equally

Explanation

IFRS 8 adopts the 'management approach': segments reported externally must mirror the components for which discrete financial information is regularly reviewed by the CODM (e.g., the CEO or executive team) for resource allocation. This may be by product, geography, customer, or otherwise.

Question 46Group reporting, control and consolidation foundations

P acquires 100% of S on 1 Jan. S sold inventory to P during the year for £50, originally costing S £30. At year-end, P still holds 60% of these goods. The intra-group profit elimination (PURP) reduces consolidated inventory and group retained earnings by:

  1. £12 Correct answer.
  2. £20
  3. £30
  4. £50

Explanation

Intra-group margin = £50 − £30 = £20. Unsold portion = 60%. Unrealised profit (PURP) = £20 × 60% = £12. The £12 is removed from inventory and from group retained earnings (the seller's profit). Standard F2 consolidation adjustment.

Question 47Financial appraisal, financing and conditional valuation models

In a hypothetical acquisition agreement with no permitted value leakage, what distinguishes a locked-box price mechanism from completion accounts?

  1. In a Locked Box mechanism, the purchase price is fixed based on historical audited balance sheets at a past reference date, with value leakage (Value Leakage) strictly prohibited thereafter; In Completion Accounts, the preliminary price is adjusted post-closing based on actual net working capital and net debt at the closing date Correct answer.
  2. Locked Box requires physical locks on corporate safe boxes
  3. Completion Accounts are used only when a company is bankrupt
  4. Locked Box prices can be renegotiated every week until retirement

Explanation

In M&A SPA practice: 1) Locked Box sets a fixed equity purchase price derived from an agreed historical balance sheet date ('locked box date'). The seller covenants that no value leakage (dividends, management fees) occurs before closing; 2) Completion Accounts dynamically adjust the final purchase price post-closing based on closing cash, net debt, and working capital peg variances.

Question 48Financial appraisal, financing and conditional valuation models

A Swiss fiduciary expert structures an SME succession through a Management Buy-Out (MBO). The enterprise is valued at CHF 10,000,000. Senior managers can raise CHF 1,500,000 in equity. A commercial bank provides a senior loan of CHF 5,000,000. How can the remaining financing gap of CHF 3,500,000 be structured commonly in Swiss fiduciary practice?

  1. Via a subordinated Vendor Loan (Verkäuferdarlehen) granted by the exiting founder and/or Mezzanine financing (Nachrangdarlehen / Partiarisches Darlehen) with profit participation Correct answer.
  2. By printing unofficial currency notes
  3. By forcing all employees to forfeit their monthly salaries for 5 years
  4. By requesting a non-repayable gift from the cantonal debt collection office

Explanation

In Swiss MBO transactions, financing gaps between bank debt capacity (50-60% senior debt) and buyer equity (10-20%) are bridged by Vendor Loans (Verkäuferdarlehen) provided by the seller, often structured as subordinated debt (Nachrangdarlehen) with a multi-year repayment schedule and interest coupon, sometimes combined with mezzanine capital.

Question 49Financial appraisal, financing and conditional valuation models

In Swiss corporate finance and valuation, what is the 'Weighted Average Cost of Capital' (WACC) formula when debt is subject to corporate profit tax deductibility?

  1. WACC = (E / V) × Re + (D / V) × Rd × (1 - Tc) [where E is Equity Market Value, D is Debt Market Value, V = E + D, Re is Cost of Equity, Rd is Pre-tax Cost of Debt, and Tc is Marginal Corporate Profit Tax Rate] Correct answer.
  2. WACC = Re + Rd + Tc
  3. WACC = (Sales - Costs) / Total Assets
  4. WACC = Net Profit / Nominal Share Capital

Explanation

The standard WACC formula discounts after-tax weighted capital costs: WACC = [E/V × Re] + [D/V × Rd × (1 - Tc)]. The factor (1 - Tc) incorporates the Interest Tax Shield (Steuervorteil des Fremdkapitals) resulting from the deductibility of interest expense under Art. 59 DBG.

Question 50Financial appraisal, financing and conditional valuation models

When assessing debt capacity for an SME acquisition, which approach is most defensible?

  1. Model sustainable free cash flow, debt-service coverage, maturities, covenants, and downside scenarios, then size debt to the borrower's resilience Correct answer.
  2. Banks lend 100x EBITDA without equity
  3. Debt capacity is fixed at exactly CHF 10,000 for all companies
  4. LBO financing is prohibited in Switzerland

Explanation

Debt capacity is transaction- and borrower-specific. Sustainable cash flow, debt-service coverage, working-capital needs, maturities, security, covenants, interest-rate sensitivity, and downside cases are more reliable than presenting one market leverage range as a fixed Swiss rule.