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FY13CE Accounting study materials
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FY13CE Accounting practice questions

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Question 1Financial Accounting and Reporting

Under the accrual basis, revenue is recognised when which of the following occurs?

  1. The performance obligation is satisfied and control of the good or service transfers Correct answer.
  2. Cash is received from the customer
  3. The board approves the annual budget
  4. An invoice is printed and mailed to the customer

Explanation

Accrual accounting recognises revenue when the entity satisfies a performance obligation by transferring promised goods or services to the customer, regardless of the timing of cash receipts. Collecting cash is a settlement event, not the recognition trigger.

Question 2Financial Accounting and Reporting

An entity buys equipment for 50,000 with a residual value of 5,000 and a five-year useful life. Using straight-line depreciation, what is the annual depreciation charge?

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

Explanation

Straight-line depreciation spreads the depreciable amount, cost less residual value, evenly over the useful life. Here (50,000 minus 5,000) divided by 5 years equals 9,000 per year.

Question 3Financial Accounting and Reporting

Which inventory cost formula assigns the most recent purchase costs to cost of sales?

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

Explanation

Under last-in, first-out, the latest costs incurred are assumed to be the first costs released to cost of sales, leaving older costs in ending inventory. FIFO does the reverse and weighted average blends all costs.

Question 4Financial Accounting and Reporting

A company reports current assets of 240,000 and current liabilities of 160,000. What is its current ratio?

  1. 1.33
  2. 0.67
  3. 2.40
  4. 1.50 Correct answer.

Explanation

The current ratio equals current assets divided by current liabilities, so 240,000 divided by 160,000 equals 1.50. A ratio above 1 indicates current assets exceed obligations due within a year.

Question 5Financial Accounting and Reporting

Which component of equity represents cumulative profits retained in the business rather than distributed?

  1. Retained earnings Correct answer.
  2. Revaluation surplus
  3. Treasury shares
  4. Share premium

Explanation

Retained earnings accumulate the entity's profits that have not been distributed as dividends or transferred to other reserves. Share premium and revaluation surplus arise from share issuance and asset revaluation respectively.

Question 6Financial Accounting and Reporting

Which of the following is classified as a financing activity in the statement of cash flows?

  1. Cash paid to suppliers for inventory
  2. Cash received from customers
  3. Purchase of property, plant and equipment
  4. Proceeds from issuing bonds Correct answer.

Explanation

Financing activities include transactions that change the size and composition of contributed equity and borrowings, such as issuing bonds. Supplier payments and customer receipts are operating, while asset purchases are investing.

Question 7Financial Accounting and Reporting

Under the allowance method, writing off a specific uncollectible account affects which of the following?

  1. It reduces net income in the write-off period
  2. It increases the allowance for doubtful debts
  3. It reduces accounts receivable and the allowance with no effect on net income Correct answer.
  4. It reduces total assets and total equity

Explanation

A write-off debits the allowance for doubtful debts and credits accounts receivable, so net receivables are unchanged and no expense is recognised at that time. The bad debt expense was already recorded when the allowance was estimated.

Question 8Financial Accounting and Reporting

An entity issues a 100,000 bond at 96. How is the discount accounted for over the bond's life?

  1. It is recognised as a loss immediately at issuance
  2. It is charged directly to retained earnings at maturity
  3. It is added to the bond's face value without amortisation
  4. It is amortised to interest expense over the term of the bond Correct answer.

Explanation

A discount on bonds payable is amortised over the bond term, increasing interest expense above the coupon paid so that total interest reflects the effective yield. Carrying amount accretes toward face value by maturity.

Question 9Financial Accounting and Reporting

A firm sells goods on credit with terms 2/10, net 30 and the customer pays within the discount period. Using the gross method, what is recorded when payment is received?

  1. A debit to sales discounts for the discount amount Correct answer.
  2. A credit to sales discounts for the discount amount
  3. A debit to bad debt expense for the discount amount
  4. No entry is recorded for the discount

Explanation

Under the gross method, receivables are recorded at the full invoice amount and a sales discount (contra-revenue) is debited when the customer takes the discount. This reduces net sales in the period of payment.

Question 10Financial Accounting and Reporting

Which of the following best describes the matching principle in financial reporting?

  1. Liabilities are measured at their settlement amount
  2. Assets are recorded at their original transaction cost
  3. Expenses are recognised in the same period as the revenues they help generate Correct answer.
  4. Revenue is recognised only when cash is collected

Explanation

The matching principle requires that expenses be recognised in the same period as the revenues to which they relate, supporting accrual accounting. It does not govern measurement bases of assets or liabilities.

Question 11Financial Accounting and Reporting

An entity has taxable income of 300,000 and a tax rate of 25%. It also has a deductible temporary difference of 40,000 that will reverse next year. What is the deferred tax asset arising from the temporary difference?

  1. 10,000 Correct answer.
  2. 40,000
  3. 75,000
  4. 85,000

Explanation

A deductible temporary difference gives rise to a deferred tax asset measured at the expected tax rate, so 40,000 multiplied by 25% equals 10,000. The current tax charge is computed separately on taxable income.

Question 12Financial Accounting and Reporting

Which of the following is the correct treatment when a company declares a cash dividend?

  1. Debit retained earnings and credit dividends payable on the declaration date Correct answer.
  2. Debit cash and credit dividends payable on the declaration date
  3. Debit dividends payable and credit retained earnings on the payment date
  4. Debit retained earnings and credit cash on the declaration date

Explanation

On declaration, a liability is created with a debit to retained earnings and a credit to dividends payable. Cash is only reduced when the dividend is actually paid.

Question 13Financial Accounting and Reporting

A company's gross profit is 180,000 and net sales are 600,000. What is the gross profit margin?

  1. 30 percent Correct answer.
  2. 33 percent
  3. 70 percent
  4. 23 percent

Explanation

Gross profit margin equals gross profit divided by net sales, so 180,000 divided by 600,000 equals 30 percent. This measures profitability after cost of sales but before operating expenses.

Question 14Financial Accounting and Reporting

Which of the following items would be reported as an intangible asset?

  1. A bank overdraft
  2. Inventory held for resale
  3. A delivery van used in operations
  4. A patent acquired from a third party Correct answer.

Explanation

An acquired patent is an identifiable non-monetary asset without physical substance and is recognised as an intangible asset. Vehicles are property, plant and equipment, inventory is a current asset, and an overdraft is a liability.

Question 15Financial Accounting and Reporting

An entity leases equipment for five years and the lease transfers substantially all the risks and rewards of ownership to the lessee. Under the classification approach, this lease is best described as which of the following?

  1. An operating lease
  2. A finance lease Correct answer.
  3. A contingent lease
  4. A short-term lease

Explanation

A lease that transfers substantially all the risks and rewards incidental to ownership is a finance lease, and the lessee recognises a right-of-use asset and a lease liability. An operating lease leaves those risks and rewards with the lessor.

Question 16Financial Accounting and Reporting

A firm uses the percentage-of-completion method for a long-term construction contract. What is the effect of recognising revenue based on progress toward completion?

  1. Revenue is deferred entirely until the contract is complete
  2. Revenue is recognised when the contract is signed
  3. Revenue is recognised only when the final invoice is issued
  4. Revenue is recognised as performance obligations are progressively satisfied Correct answer.

Explanation

Under percentage-of-completion, revenue is recognised over time as the entity progresses toward satisfying the performance obligation, reflecting the transfer of control. This avoids deferring all profit to completion when outcomes can be measured reliably.

Question 17Financial Accounting and Reporting

Which of the following best explains why a company records an accrued expense at year-end?

  1. To write off an uncollectible receivable
  2. To recognise an expense incurred but not yet paid or invoiced Correct answer.
  3. To record a payment made in advance for next year
  4. To reverse a prior year's revenue

Explanation

An accrued expense recognises costs incurred during the period even though no invoice has been received or cash paid, ensuring expenses match the period benefited. A prepayment is the opposite situation and is recorded as an asset.

Question 18Financial Accounting and Reporting

A company reports net income of 90,000, depreciation of 15,000, and an increase in accounts receivable of 20,000. What is cash flow from operating activities using the indirect method?

  1. 105,000
  2. 85,000 Correct answer.
  3. 125,000
  4. 95,000

Explanation

Starting with net income of 90,000, add back non-cash depreciation of 15,000 and subtract the 20,000 increase in receivables, giving 85,000. An increase in receivables means sales exceeded cash collected.

Question 19Financial Accounting and Reporting

An asset is revalued upward under the revaluation model. Where is the surplus recognised when there is no prior revaluation deficit for that asset?

  1. As an increase to share capital
  2. As a reduction of the asset's residual value
  3. In other comprehensive income and accumulated in a revaluation reserve Correct answer.
  4. Directly in profit or loss for the period

Explanation

An upward revaluation is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a prior deficit recognised in profit or loss. It does not flow through current profit.

Question 20Financial Accounting and Reporting

A parent owns 80 percent of a subsidiary. The subsidiary reports net income of 200,000. What amount is attributed to non-controlling interests?

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

Explanation

Non-controlling interests share the subsidiary's profit in proportion to the equity they hold, so 20 percent of 200,000 equals 40,000. The parent's owners are attributed the remaining 160,000.

Question 21Financial Accounting and Reporting

An entity has a defined benefit obligation of 500,000 and plan assets of 460,000 at year-end. How is the net position presented?

  1. A net defined benefit asset of 40,000
  2. A net defined benefit liability of 500,000
  3. No amount is recognised until benefits are paid
  4. A net defined benefit liability of 40,000 Correct answer.

Explanation

The net defined benefit liability equals the present value of the obligation less the fair value of plan assets, so 500,000 minus 460,000 equals 40,000 liability. A surplus would be recognised as an asset subject to the asset ceiling.

Question 22Financial Accounting and Reporting

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

  1. Reported as a prior period error
  2. Applied retrospectively with restatement of prior periods
  3. Adjusted directly against opening retained earnings
  4. Applied prospectively in the current and future periods Correct answer.

Explanation

Changes in accounting estimates are applied prospectively because they result from new information about conditions that existed or new developments. Retrospective restatement applies to changes in accounting policy and corrections of errors.

Question 23Financial Accounting and Reporting

A company factors its receivables without recourse. What is the effect on the balance sheet when the transfer qualifies for derecognition?

  1. Receivables are written off against retained earnings
  2. Receivables are reclassified as long-term assets
  3. Receivables are removed and any gain or loss on disposal is recognised Correct answer.
  4. Receivables remain and a secured borrowing is recorded

Explanation

When a transfer of receivables without recourse transfers control and the risks and rewards of ownership, the receivables are derecognised and any difference between proceeds and carrying amount is a gain or loss. A secured borrowing is recorded only when derecognition criteria are not met.

Question 24Financial Accounting and Reporting

Which of the following correctly states the relationship between the accounting equation and double-entry bookkeeping?

  1. Double-entry requires that debits always exceed credits
  2. Every transaction affects only one account but in two directions
  3. Every transaction increases total assets and total equity equally
  4. Every transaction affects at least two accounts, keeping assets equal to liabilities plus equity Correct answer.

Explanation

Double-entry bookkeeping records each transaction with equal debits and credits across at least two accounts, preserving the equality of assets, liabilities and equity. Total debits must always equal total credits.

Question 25Financial Accounting and Reporting

An entity reports a gross profit of 120,000, operating expenses of 70,000, and interest expense of 10,000. What is its profit before tax?

  1. 40,000 Correct answer.
  2. 60,000
  3. 50,000
  4. 120,000

Explanation

Profit before tax equals gross profit less operating expenses and interest expense, so 120,000 minus 70,000 minus 10,000 equals 40,000. Interest is deducted after operating profit when deriving profit before tax.

Question 26Financial Accounting and Reporting

Which of the following best describes the purpose of the conceptual framework for financial reporting?

  1. To assist in developing consistent standards and in resolving issues not covered by a specific standard Correct answer.
  2. To set the audit procedures an independent auditor must perform on each engagement
  3. To prescribe the exact account titles and journal entries an entity must use
  4. To guarantee that reported profit equals taxable income for every reporting entity

Explanation

The conceptual framework establishes the objective of general purpose financial reporting and the qualitative characteristics, elements, recognition and measurement concepts that underpin standards. It is a tool for standard setters and preparers when no specific standard addresses an issue, not a chart of accounts or an auditing manual. It therefore supports consistency across standards rather than dictating detailed procedures.

Question 27Financial Accounting and Reporting

An entity purchases inventory for 50,000 with payment due in 60 days. Which pair of accounts is increased by this transaction?

  1. Purchases and share capital
  2. Inventory and retained earnings
  3. Inventory and accounts payable Correct answer.
  4. Accounts payable and retained earnings

Explanation

The transaction increases an asset, inventory, and simultaneously increases a liability, accounts payable, because payment has not yet been made. The accounting equation stays in balance with assets and liabilities each rising by 50,000. Equity is unaffected at the point of purchase.

Question 28Financial Accounting and Reporting

Which of the following statements about the going concern assumption is correct?

  1. It applies only to entities that have never reported a loss
  2. It assumes the entity will continue in operation for the foreseeable future Correct answer.
  3. It requires assets to be measured at their liquidation value at each reporting date
  4. It permits revenue to be recognised before it is earned

Explanation

Going concern means financial statements are prepared on the basis that the entity will continue operating for the foreseeable future without the need to liquidate or curtail operations. If this assumption is not appropriate, the basis of preparation and asset measurement must change. It is unrelated to profitability history or to revenue recognition timing.

Question 29Financial Accounting and Reporting

An entity reports profit before tax of 240,000, a tax rate of 25%, and a non-deductible fine of 20,000 included in that profit. What is the tax expense for the year?

  1. 65,000 Correct answer.
  2. 55,000
  3. 60,000
  4. 48,000

Explanation

A non-deductible expense is added back to accounting profit to arrive at taxable profit, giving 240,000 plus 20,000 equals 260,000. Applying the 25% rate gives tax expense of 65,000. The fine creates a permanent difference and therefore no deferred tax.

Question 30Financial Accounting and Reporting

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

  1. Initial operating losses incurred while demand builds up
  2. Direct material and direct labour costs incurred in construction Correct answer.
  3. Costs of relocating the entity's head office
  4. General staff training on how to operate the new asset

Explanation

The cost of a self-constructed asset comprises all directly attributable costs necessary to bring the asset to the location and condition for its intended use, which includes direct materials and direct labour. Training, relocation and start-up losses are not part of the asset's cost. Those items are expensed as incurred.

Question 31Financial Accounting and Reporting

An entity sells goods for 10,000 with a right of return that is expected to be exercised for 5% of the goods. Under the revenue standard, how much revenue is recognised at the point of sale?

  1. 10,000, with a provision for 500 in operating expenses
  2. 9,500, with a refund liability for 500 Correct answer.
  3. 5,000, because return rights are always recognised at half the sale value
  4. 10,000, with no further adjustment

Explanation

Revenue is recognised only to the extent that it is highly probable there will not be a significant reversal, so expected returns are excluded from revenue. The entity recognises revenue of 9,500 and a refund liability of 500, while the returned goods are treated as a right to recover product. The refund liability is presented separately from operating expense provisions.

Question 32Financial Accounting and Reporting

Which of the following best describes the treatment of borrowing costs on a qualifying asset under the allowed benchmark approach?

  1. Borrowing costs are charged directly to retained earnings
  2. Borrowing costs directly attributable to acquisition or construction are capitalised as part of the asset's cost Correct answer.
  3. Borrowing costs are recognised as an intangible asset separate from the qualifying asset
  4. All borrowing costs are expensed as incurred regardless of the asset

Explanation

Under the benchmark treatment, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. All other borrowing costs are expensed. Capitalisation begins when expenditures and borrowing costs are being incurred and activities to prepare the asset are underway.

Question 33Financial Accounting and Reporting

A company has current assets of 300,000, inventory of 120,000, and current liabilities of 150,000. What is the quick ratio?

  1. 2.00
  2. 1.20 Correct answer.
  3. 0.80
  4. 1.50

Explanation

The quick ratio excludes inventory from current assets, giving 300,000 minus 120,000 equals 180,000, divided by current liabilities of 150,000, which equals 1.20. Inventory is excluded because it may not be readily convertible to cash. The result indicates the entity can cover short-term obligations without selling inventory.

Question 34Financial Accounting and Reporting

Which of the following items is presented within other comprehensive income rather than in profit or loss?

  1. Revaluation surplus on property, plant and equipment under the revaluation model Correct answer.
  2. Depreciation of office equipment
  3. Gain on remeasuring a financial asset held for trading
  4. Interest expense on a bank loan

Explanation

A revaluation surplus on property, plant and equipment is recognised in other comprehensive income when there is no prior revaluation decrease for that asset. Trading gains, depreciation and interest expense all flow through profit or loss. Other comprehensive income captures items that standards require to bypass profit or loss.

Question 35Financial Accounting and Reporting

An entity issues 200,000 of 5% convertible bonds at par. The liability component is measured at 180,000 using a market interest rate for similar non-convertible debt. How is the equity component initially recognised?

  1. 180,000, equal to the liability component
  2. 20,000, measured as the residual after deducting the liability from the proceeds Correct answer.
  3. 200,000, because the whole issue is equity until conversion
  4. Zero, because convertible bonds are always wholly liabilities

Explanation

A compound instrument is split into a liability component, measured first at the fair value of a similar liability without the equity option, and an equity component measured as the residual. The residual here is 200,000 less 180,000, which equals 20,000. The equity component is not subsequently remeasured.

Question 36Financial Accounting and Reporting

Which of the following best describes how a finance lease is presented by the lessee at commencement?

  1. As a reduction of share capital equal to the lease term value
  2. As a right-of-use asset and a corresponding lease liability at the present value of the lease payments Correct answer.
  3. As a contingent liability disclosed only in the notes
  4. As an operating expense equal to the total lease payments

Explanation

At commencement the lessee recognises a right-of-use asset and a lease liability measured at the present value of the lease payments not yet made. Subsequently the asset is depreciated and the liability is unwound using the interest method. Operating expense treatment applies to short-term or low-value leases where the recognition exemption is elected.

Question 37Financial Accounting and Reporting

An entity has a carrying amount of 500,000 for a cash-generating unit and a recoverable amount of 440,000. Goodwill of 60,000 is included in the carrying amount. How is the impairment loss allocated?

  1. The 60,000 is allocated pro rata across all assets including goodwill
  2. The entire 60,000 is allocated to goodwill, leaving other assets unimpaired Correct answer.
  3. The loss is recognised directly in other comprehensive income
  4. The loss is deferred until the goodwill is disposed of

Explanation

When a cash-generating unit with goodwill is impaired, the impairment loss is first allocated to reduce the carrying amount of goodwill. Only if the loss exceeds goodwill is the remainder allocated to the other assets of the unit on a pro rata basis. Here the loss of 60,000 equals the goodwill, so other assets are unaffected.

Question 38Financial Accounting and Reporting

Which of the following events occurring after the reporting period is classified as an adjusting event?

  1. A decline in market value of investments after the reporting date
  2. A major business combination announced after the reporting date
  3. Settlement of a court case after the reporting date that confirms a present obligation at the reporting date Correct answer.
  4. Destruction of a major plant by fire after the reporting date

Explanation

An adjusting event provides evidence of conditions that existed at the reporting date, such as the settlement amount of a lawsuit that confirms the obligation already existed. Non-adjusting events indicate conditions that arose after the reporting date. Business combinations, market declines and fire damage are typically non-adjusting.

Question 39Financial Accounting and Reporting

An entity has 100,000 of profit for the year and 20,000 of preference dividends, with 50,000 weighted average ordinary shares. What is basic earnings per share?

  1. 2.00
  2. 1.20
  3. 0.40
  4. 1.60 Correct answer.

Explanation

Basic earnings per share is profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares. Profit is reduced by preference dividends, giving 100,000 minus 20,000 equals 80,000, divided by 50,000 shares, which equals 1.60. Preference dividends belong to preference shareholders and are excluded from the ordinary share calculation.

Question 40Financial Accounting and Reporting

Which of the following best describes a provision as defined in the standard on provisions, contingent liabilities and contingent assets?

  1. A liability of uncertain timing or amount Correct answer.
  2. A contingent liability that is disclosed but never recognised
  3. An obligation that is certain in both timing and amount
  4. A possible asset arising from past events

Explanation

A provision is a liability of uncertain timing or amount, recognised when a present obligation exists from a past event, an outflow is probable, and a reliable estimate can be made. Certainty of timing and amount would make it an ordinary liability rather than a provision. Contingent liabilities and assets are not recognised on the balance sheet.

Question 41Financial Accounting and Reporting

An entity uses the revaluation model for a building and later sells it. How is any remaining revaluation surplus treated on disposal?

  1. It is transferred directly to retained earnings and is not recycled through profit or loss Correct answer.
  2. It is recognised as a gain in profit or loss in the year of disposal
  3. It is written off against share capital
  4. It is used to reduce the cost of the replacement asset

Explanation

On disposal of a revalued asset, the revaluation surplus may be transferred directly to retained earnings rather than through profit or loss. This transfer is a movement within equity and does not affect reported profit. The gain or loss on disposal itself is measured using the revalued carrying amount.

Question 42Financial Accounting and Reporting

A company reports net sales of 800,000, cost of goods sold of 500,000, and average inventory of 100,000. What is the inventory turnover ratio?

  1. 3.0 times
  2. 1.6 times
  3. 8.0 times
  4. 5.0 times Correct answer.

Explanation

Inventory turnover equals cost of goods sold divided by average inventory, which is 500,000 divided by 100,000, equal to 5.0 times. Cost of goods sold is used rather than sales because inventory is carried at cost. The ratio indicates how many times inventory is sold and replaced during the period.

Question 43Financial Accounting and Reporting

Which of the following best describes the treatment of research costs and development costs under the standard on intangible assets?

  1. Both research and development costs are always capitalised
  2. Research costs are expensed and development costs are capitalised when the recognition criteria are met Correct answer.
  3. Both research and development costs are always expensed
  4. Development costs are expensed and research costs are capitalised when criteria are met

Explanation

Research expenditure is expensed as incurred because no intangible asset can be demonstrated at that stage. Development expenditure is capitalised only when the entity can demonstrate technical feasibility, intention and ability to complete, probable future benefits, and reliable measurement. This distinction reflects the greater certainty that attaches to development activity.

Question 44Financial Accounting and Reporting

An entity's functional currency is the euro, but it holds a bank account denominated in US dollars. At the reporting date the dollar balance is translated at the closing rate. Where is the resulting exchange difference recognised?

  1. As an adjustment to the cost of the bank account
  2. In other comprehensive income as a translation reserve
  3. In profit or loss for the period Correct answer.
  4. Directly against retained earnings without passing through profit or loss

Explanation

Exchange differences arising on translating monetary items such as foreign currency bank balances at a different rate from the initial transaction rate are recognised in profit or loss in the period in which they arise. Translation reserves in other comprehensive income relate to translating foreign operations, not to individual monetary items. The bank balance is not an asset whose cost is adjusted.

Question 45Financial Accounting and Reporting

A parent sells inventory to its subsidiary at a profit of 30,000, and 40% of those goods remain in the subsidiary's inventory at year-end. The parent owns 75% of the subsidiary. What unrealised profit is eliminated in the consolidated financial statements?

  1. 30,000
  2. 22,500
  3. 12,000 Correct answer.
  4. 7,500

Explanation

Only the profit on goods still held within the group is unrealised, so 30,000 multiplied by 40% equals 12,000. This amount is eliminated in full against inventory and the related profit, irrespective of the non-controlling interest share. The ownership percentage affects the allocation of the subsidiary's profit, not the amount of the elimination.

Question 46Financial Accounting and Reporting

An entity changes from the straight-line to the reducing-balance method of depreciation for an existing class of assets. How is the change accounted for?

  1. Retrospectively, by restating prior period comparatives
  2. By recognising the cumulative effect directly in retained earnings as a prior period error
  3. Prospectively, by adjusting depreciation in current and future periods Correct answer.
  4. By disclosing the change and making no adjustment to depreciation

Explanation

A change in depreciation method is a change in accounting estimate, because it reflects a revised pattern of consumption of economic benefits. It is applied prospectively, affecting the current and future periods rather than restating comparatives. Prior period errors, by contrast, are corrected retrospectively.

Question 47Financial Accounting and Reporting

An entity's statement of cash flows shows an increase in accounts payable of 15,000 and a decrease in inventory of 10,000. Starting from profit before tax of 100,000, what is the net cash generated from operating activities before tax paid using the indirect method?

  1. 100,000
  2. 105,000
  3. 125,000 Correct answer.
  4. 75,000

Explanation

Under the indirect method, an increase in a liability such as accounts payable is added back and a decrease in inventory is also added back, because both conserve cash relative to reported profit. Adding 15,000 and 10,000 to 100,000 gives 125,000. Tax paid would then be deducted separately.

Question 48Financial Accounting and Reporting

Which of the following best describes the effect of issuing ordinary shares at a premium on the financial statements?

  1. Share capital increases by the nominal amount and share premium increases by the excess Correct answer.
  2. Share capital increases by the full issue proceeds
  3. Total equity increases by the nominal amount only
  4. A gain is recognised in profit or loss for the premium

Explanation

The nominal value of the shares issued is credited to share capital, and any consideration received above nominal value is credited to share premium, a separate component of equity. The transaction is a capital contribution and does not generate a gain in profit or loss. Total equity increases by the full proceeds.

Question 49Financial Accounting and Reporting

A company has profit after tax of 180,000, total assets of 1,200,000, and total equity of 600,000. What is the return on equity?

  1. 50%
  2. 30% Correct answer.
  3. 15%
  4. 60%

Explanation

Return on equity is profit after tax divided by total equity, which is 180,000 divided by 600,000, equal to 30%. The ratio measures the return generated for shareholders on their invested capital. Using total assets would produce a return on assets measure instead.

Question 50Financial Accounting and Reporting

Which of the following best explains the treatment of a government grant related to an asset under the deferred income approach?

  1. The grant is recognised as deferred income and amortised to profit or loss over the asset's useful life Correct answer.
  2. The grant is recognised immediately in profit or loss in full
  3. The grant is credited directly to share capital
  4. The grant is netted against the asset's residual value with no further effect

Explanation

Under the deferred income approach, a grant related to an asset is recognised as deferred income and released to profit or loss over the periods in which the related asset's depreciation is charged. This matches the benefit of the grant with the costs it is intended to compensate. The alternative is to deduct the grant from the asset's carrying amount.