I85PREP
⌘ K
HKICPA QP Module 6 Financial Accounting - independent subject foundations study materials
HKICPA QP Module 6 Financial Accounting - independent subject foundations study resources

HKICPA QP Module 6 Financial Accounting - independent subject foundations practice questions

One question at a time. Build your HKICPA QP Module 6 Financial Accounting - independent subject foundations understanding.

First 50 of 190 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

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

Question 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 25Double entry, reconciliation, errors and recording models

A cheque for GH¢4,500 issued to a supplier is still unpresented at the bank statement date. When reconciling from the bank statement balance to the cash-book balance, this cheque is:

  1. Added to the bank statement balance
  2. Ignored because it has cleared
  3. Added to cash-book receipts
  4. Deducted from the bank statement balance Correct answer.

Explanation

Unpresented cheques have been recorded as payments in the cash book but not yet cleared by the bank. Starting from the higher bank-statement balance, deduct unpresented cheques (and add outstanding lodgements) to agree to the cash book. They are not ignored, added to the statement balance, or treated as receipts.

Question 26Double entry, reconciliation, errors and recording models

Outstanding lodgements (deposits in transit) at the reconciliation date are:

  1. Cheques recorded by the bank but not in the cash book
  2. Direct debits on the bank statement
  3. Receipts recorded in the cash book but not yet on the bank statement Correct answer.
  4. Bank charges only

Explanation

Outstanding lodgements are amounts already entered as receipts in the entity's cash book that have not yet appeared on the bank statement. Bank-only items such as direct debits or charges appear on the statement first and require cash-book updates.

Question 27Double entry, reconciliation, errors and recording models

Bank charges of GH¢120 appear on the bank statement but not in the cash book. The correcting cash-book entry is:

  1. Debit bank; credit bank charges expense
  2. Debit bank charges expense; credit bank Correct answer.
  3. Debit suspense; credit bank
  4. No entry is required

Explanation

Bank charges reduce the bank balance and create an expense: debit bank charges expense, credit bank (cash book). Debiting bank would increase the balance incorrectly; suspense is unnecessary once the item is identified; an entry is required to update the cash book.

Question 28Double entry, reconciliation, errors and recording models

A sales invoice of GH¢2,000 was posted to the wrong customer's account in the sales ledger. This is an error of:

  1. Omission
  2. Principle
  3. Commission Correct answer.
  4. Compensating error

Explanation

Posting to the wrong personal account within the same class (wrong customer) is an error of commission. Both receivables still agree in total if the amount is correct, so the control account and trial balance may still agree. Principle involves wrong class; omission leaves it out.

Question 29Double entry, reconciliation, errors and recording models

The receivables control account shows GH¢48,000 but the sales ledger list totals GH¢46,500. A credit note of GH¢1,500 was entered in a customer account but not in the control account. After correction, the control balance should be:

  1. GH¢46,500 Correct answer.
  2. GH¢48,000
  3. GH¢49,500
  4. GH¢45,000

Explanation

Failing to post the credit note to the control account left control GH¢1,500 too high (48,000). Crediting control with GH¢1,500 brings it to GH¢46,500, matching the list of balances. Increasing control further or ignoring the credit note leaves the difference.

Question 30Double entry, reconciliation, errors and recording models

An error of reversal means:

  1. A transaction was recorded twice
  2. Debit and credit sides of an entry were swapped Correct answer.
  3. Two errors cancelled each other
  4. A page total was undercast

Explanation

Error of reversal posts the debit as a credit and the credit as a debit. Recording twice is duplication; cancelling errors are compensating; undercasting is an addition error. Reversal often still lets the trial balance agree because equal amounts remain equal.

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

According to the HKICPA Conceptual Framework for Financial Reporting, what are the two fundamental qualitative characteristics of useful financial information?

  1. Comparability and Understandability
  2. Relevance and Faithful Representation Correct answer.
  3. Timeliness and Verifiability
  4. Prudence and Materiality

Explanation

The Conceptual Framework identifies Relevance and Faithful Representation as the two fundamental qualitative characteristics. Comparability, verifiability, timeliness, and understandability are enhancing qualitative characteristics.

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

Under the revised Conceptual Framework, which of the following is the key criterion that defines control of an economic resource?

  1. Having legal ownership and possession of the resource
  2. The present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it Correct answer.
  3. Bearing all the risks of ownership, such as damage or obsolescence
  4. The resource being recognized on the statement of financial position as a non-current asset

Explanation

Control under the revised Conceptual Framework is defined as the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. Legal ownership is not always necessary for control (e.g., leases).

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

Which body within the Hong Kong Institute of Certified Public Accountants (HKICPA) is responsible for the standard-setting process and issuing Hong Kong Financial Reporting Standards (HKFRSs)?

  1. The Council of the HKICPA
  2. The Financial Reporting Standards Committee (FRSC) Correct answer.
  3. The Financial Reporting Council (FRC)
  4. The Accounting Standards Board (ASB)

Explanation

The Financial Reporting Standards Committee (FRSC) is the committee of the HKICPA responsible for standard-setting and issuing HKFRSs.

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

Which section of the Hong Kong Companies Ordinance (Cap. 622) provides the primary legal backing requiring Hong Kong incorporated companies to prepare financial statements that give a 'true and fair view'?

  1. Section 379
  2. Section 380 Correct answer.
  3. Section 388
  4. Section 436

Explanation

Section 380 of the Hong Kong Companies Ordinance (Cap. 622) sets out the requirements for the content of financial statements, stating that they must give a 'true and fair view' and comply with the accounting standards issued by the HKICPA.

Question 35Financial statements, assets, inventory and cash-flow models

Which of the following describes the impact of the going concern assumption on the measurement of assets in the financial statements?

  1. Assets must always be measured at their net realizable value or liquidation value
  2. It justifies measuring assets at historical cost or other carrying values rather than their immediate break-up or liquidation value Correct answer.
  3. It requires all non-current assets to be classified as current assets
  4. It mandates that all assets be measured at fair value through profit or loss

Explanation

Under the going concern assumption, an entity is expected to continue operations for the foreseeable future. This justifies measuring assets at historical cost or other amortized bases, rather than liquidation or break-up value which would be required if liquidation were imminent.

Question 36Financial statements, assets, inventory and cash-flow models

Under the revised Conceptual Framework, how is the measurement basis 'Value in Use' defined, and how does it differ from 'Fair Value'?

  1. Value in Use is an entry value reflecting purchase costs, while Fair Value is an exit value reflecting selling price
  2. Value in Use is an entity-specific value representing the present value of cash flows an entity expects to derive from the use and ultimate disposal of an asset, whereas Fair Value is a market-based measurement Correct answer.
  3. Value in Use is measured using current replacement cost, while Fair Value is measured using historical cost
  4. Value in Use represents the undiscounted cash flows of an asset, while Fair Value represents discounted cash flows

Explanation

Value in Use is an entity-specific measurement representing the present value of cash flows that the entity expects to derive from the asset's use and disposal. In contrast, Fair Value is market-based and reflects the assumptions that market participants would use, not entity-specific factors.

Question 37Financial statements, assets, inventory and cash-flow models

Under the revised Conceptual Framework, which of the following best describes the conditions under which an asset or liability should be recognized in the financial statements?

  1. Recognition is automatic if the item meets the definition of an asset or liability, regardless of cost or measurement uncertainty
  2. An asset or liability is recognized only if it is virtually certain that future economic benefits will flow to or from the entity
  3. Recognition is appropriate if it results in relevant information and a faithful representation of the asset or liability, after considering cost-benefit constraints Correct answer.
  4. Recognition is only permitted if the asset or liability has a legal contract backing its existence

Explanation

The revised Conceptual Framework states that an asset or liability is recognized only if recognition provides users of financial statements with information that is relevant and offers a faithful representation, subject to cost-benefit constraints. The old threshold of 'probability of cash flows' has been replaced by this qualitative evaluation.

Question 38Financial statements, assets, inventory and cash-flow models

In the standard-setting process of the HKICPA, what is the role of an 'Exposure Draft'?

  1. It is a final standard issued for immediate adoption by Hong Kong entities
  2. It is a consultative document issued to invite public comment and feedback on proposed standards or amendments before they are finalized Correct answer.
  3. It is an internal briefing note sent only to the Council of the HKICPA
  4. It is a legal document submitted to the Legislative Council for standard approval

Explanation

An Exposure Draft is a key part of the HKICPA's due process. It is published to seek comments from stakeholders, preparers, and auditors on proposed accounting standards or amendments before issuing the final HKFRS.

Question 39Financial statements, assets, inventory and cash-flow models

Under the Hong Kong Companies Ordinance (Cap. 622), which of the following private companies is ineligible to prepare simplified financial statements under the SME-FRF & SME-FRS?

  1. A private company that is a subsidiary of a listed company, provided it meets the size criteria
  2. A private company that operates a banking business Correct answer.
  3. A private company that has an annual revenue of HK$80 million and assets of HK$80 million
  4. A private company whose shareholders unanimously agree to adopt the SME-FRS and meets the qualified size criteria

Explanation

Under S359 of Cap. 622, certain entities are excluded from reporting under the SME-FRF & SME-FRS (the reporting exemption). These include institutions carrying on banking businesses, insurance businesses, or stockbroking businesses, regardless of their size.

Question 40Financial statements, assets, inventory and cash-flow models

In 2005, Hong Kong fully converged its local accounting standards (previously HKSS) with International Financial Reporting Standards (IFRS). Which statement best describes the ongoing relationship between HKFRS and IFRS?

  1. HKFRSs are completely independent of IFRSs, and the HKICPA does not look to the IASB when setting standards
  2. HKFRSs are word-for-word identical to IFRSs in all respects, with no local differences allowed or transitional provisions ever applied
  3. HKFRSs are actively converged with IFRSs, meaning they are substantially identical to IFRSs, although minor differences in transition dates or specific local guidance have occasionally existed Correct answer.
  4. IFRS is not recognized in Hong Kong, and listed companies must use US GAAP if they do not use HKFRS

Explanation

Since 2005, HKFRS has been fully converged with IFRS. The standards are structurally identical word-for-word, though there have occasionally been minor differences in effective dates, transitional provisions, or specific interpretations (such as around historical land use rights).

Question 41Financial statements, assets, inventory and cash-flow models

Under the physical capital maintenance concept, a profit is earned only if:

  1. The historical cost of net assets at the end of the period exceeds the historical cost of net assets at the beginning of the period
  2. The nominal financial capital at the end of the period exceeds that at the beginning of the period
  3. The physical productive capacity (or operating capability) of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding distributions to and contributions from owners Correct answer.
  4. The fair value of net assets exceeds their historical cost at the reporting date

Explanation

Under physical capital maintenance, profit is defined as the increase in physical productive capacity during the period. Price changes affecting the assets of the entity are treated as capital maintenance adjustments (equity) rather than profit.

Question 42Financial statements, assets, inventory and cash-flow models

How does the Conceptual Framework define 'Materiality'?

  1. A fixed threshold of 5% of profit before tax, above which all items must be disclosed
  2. An entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity's financial report Correct answer.
  3. The precision with which an asset's valuation can be verified by independent auditors
  4. The minimum value of transactions that must be recorded in the general ledger

Explanation

Materiality is defined as an entity-specific aspect of relevance. Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial reports make.

Question 43Financial statements, assets, inventory and cash-flow models

An entity has a pending lawsuit with highly uncertain outcomes, where estimating the potential payout has extreme measurement uncertainty. Under the revised Conceptual Framework, how should the entity approach recognition?

  1. The entity must recognize a provision at the maximum possible payout to be conservative
  2. The entity should not recognize a liability if the level of uncertainty is so high that estimating the liability would result in information that lacks relevance and cannot be faithfully represented; instead, disclosure in the notes is preferred Correct answer.
  3. The entity must recognize a liability because the definition of a liability is met, and measurement uncertainty can never justify non-recognition under the revised Framework
  4. The entity should recognize the liability at zero and adjust it when the lawsuit is finalized

Explanation

Under the revised Conceptual Framework, high measurement uncertainty is a factor that can affect whether recognition provides relevant information. If the level of uncertainty is so high that the estimate has low relevance, the asset or liability should not be recognized, and disclosure in the notes is appropriate.

Question 44Financial statements, assets, inventory and cash-flow models

Under Section 380(4) of the Hong Kong Companies Ordinance (Cap. 622), if compliance with a specific HKFRS standard would prevent financial statements from giving a true and fair view, what is the required course of action?

  1. The entity must comply with the HKFRS standard regardless, as standards override the law
  2. The entity must depart from the standard to the extent necessary to give a true and fair view, disclose the particulars of the departure, the reasons for it, and its financial effect Correct answer.
  3. The entity should obtain permission from the HKICPA Council before preparing the statements
  4. The entity must qualify its audit opinion and prepare the accounts under US GAAP instead

Explanation

Under Cap. 622, if complying with an accounting standard would conflict with the primary requirement to give a true and fair view, the directors must depart from the standard. This is known as the 'true and fair override' and requires detailed disclosures of the nature and financial impact of the departure.

Question 45Financial statements, assets, inventory and cash-flow models

Which of the following historical developments marks the legal transition of consolidation requirements in Hong Kong from the 'ownership of more than half of nominal share capital' to the 'control' model under Cap. 622?

  1. The convergence of HKFRS with IFRS in 2005
  2. The commencement of the new Companies Ordinance (Cap. 622) in March 2014, which aligned the legal definition of a subsidiary with the control model of HKFRS 10 Correct answer.
  3. The publication of the SME-FRS in 2011
  4. The establishment of the Financial Reporting Council (FRC) in 2006

Explanation

Prior to Cap. 622, the old Companies Ordinance (Cap. 32) defined a subsidiary primarily based on ownership of more than half of the nominal value of issued share capital. The new Companies Ordinance (Cap. 622), which commenced in March 2014, updated the definition of a subsidiary to align with the 'control' principles found in HKFRS 10.

Question 46Financial statements, assets, inventory and cash-flow models

Which of the following lists the 5 steps of the revenue recognition model under HKFRS 15 in the correct chronological order?

  1. Identify the contract; Determine transaction price; Allocate transaction price; Identify performance obligations; Recognize revenue
  2. Identify the contract; Identify performance obligations; Determine transaction price; Allocate transaction price; Recognize revenue Correct answer.
  3. Identify performance obligations; Identify the contract; Allocate transaction price; Determine transaction price; Recognize revenue
  4. Determine transaction price; Identify performance obligations; Identify the contract; Allocate transaction price; Recognize revenue

Explanation

The 5-step model under HKFRS 15 is: 1) Identify the contract(s) with a customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; 5) Recognize revenue when (or as) the entity satisfies a performance obligation.

Question 47Financial statements, assets, inventory and cash-flow models

Under HKFRS 15, an entity recognizes revenue over time if which of the following criteria is met?

  1. The customer obtains legal title to the asset immediately upon contract signing
  2. The entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced Correct answer.
  3. The entity has a right to payment only upon complete satisfaction of the contract
  4. The asset has a high level of alternative use to the entity, and the entity has no right to payment

Explanation

HKFRS 15.35 outlines three criteria for over-time recognition. One of them is that the entity's performance creates or enhances an asset (e.g., work in progress) that the customer controls as the asset is created or enhanced.

Question 48Financial statements, assets, inventory and cash-flow models

Under HKAS 16, which of the following expenditures must be capitalized as part of the cost of property, plant, and equipment?

  1. Costs of advertising and promotional activities for a new facility
  2. Costs of conducting business in a new location, including staff training costs
  3. Initial delivery and handling costs directly attributable to bringing the asset to its location and condition Correct answer.
  4. Administration and other general overhead costs incurred during the installation period

Explanation

Initial delivery and handling costs are directly attributable costs required to bring the asset to the location and condition necessary for it to operate as intended, and must be capitalized under HKAS 16.16.

Question 49Financial statements, assets, inventory and cash-flow models

When an entity changes the depreciation method for an item of property, plant, and equipment (e.g., from straight-line to reducing balance), how is this change accounted for under HKAS 8 and HKAS 16?

  1. As a change in accounting policy, applied retrospectively
  2. As a change in accounting estimate, applied prospectively Correct answer.
  3. As a correction of a prior period error, requiring retrospective restatement
  4. By adjusting retained earnings directly without affecting future depreciation expenses

Explanation

A change in depreciation method is treated as a change in accounting estimate under HKAS 16 and HKAS 8 because it reflects a change in the expected pattern of consumption of future economic benefits. It is applied prospectively.

Question 50Financial statements, assets, inventory and cash-flow models

Under HKAS 38 Intangible Assets, how should costs incurred during the research phase of an internal project be treated?

  1. Capitalized as an intangible asset if they exceed HK$100,000
  2. Capitalized and amortized over 5 years
  3. Expensed in the period in which they are incurred Correct answer.
  4. Deferred as an asset until the project starts generating commercial revenue

Explanation

Under HKAS 38, expenditure on research (or the research phase of an internal project) must be recognized as an expense when it is incurred. Capitalization is strictly prohibited during the research phase because the entity cannot demonstrate that an intangible asset exists that will generate future economic benefits.