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CA Sri Lanka Corporate Level Exam study materials
CA Sri Lanka Corporate Level Exam study resources

CA Sri Lanka Corporate Level Exam practice questions

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Question 1Corporate Level (domain structure not enumerated in source)

Under the Companies Act No. 7 of 2007, a company wishing to reduce its stated capital must follow which principal statutory route?

  1. Pass a special resolution supported by a solvency statement and give public notice Correct answer.
  2. Obtain prior written approval of the Registrar of Companies for each reduction
  3. Secure consent of all secured creditors and file the consent with the Registrar
  4. Obtain court confirmation of the reduction

Explanation

The Companies Act No. 7 of 2007 replaced court-sanctioned capital reduction with a self-help procedure: a special resolution plus a directors' solvency statement, followed by notice to creditors and publication. Court confirmation is not the statutory mechanism under this Act. The Registrar registers the resolution but does not grant approval as a discretionary gatekeeper.

Question 2Corporate Level (domain structure not enumerated in source)

A listed company's audit committee is reviewing a proposed transaction with a director-controlled supplier. Under Sri Lankan listing rules and company law, the most appropriate first step is to:

  1. Approve the transaction because the director has disclosed his interest in writing
  2. Defer the matter until the next annual general meeting for shareholder ratification
  3. Delegate approval to the managing director who is unrelated to the supplier
  4. Refer the transaction to the related party transaction review process with the interested director recused Correct answer.

Explanation

Related party transactions require independent review, and an interested director must not participate in the decision. Disclosure alone does not cure the conflict; recusal and independent approval are the safeguards. Ratification by shareholders may follow in significant cases but is not a substitute for the committee's initial independent assessment.

Question 3Corporate Level (domain structure not enumerated in source)

In a discounted cash flow valuation, which change would increase the estimated value of a firm, all else equal?

  1. A reduction in the projected capital expenditure needed to sustain growth Correct answer.
  2. A rise in the weighted average cost of capital
  3. A fall in the terminal growth rate
  4. A lengthening of the receivables collection period

Explanation

Lower sustaining capital expenditure raises free cash flow and therefore the present value of the firm. A higher discount rate reduces value, and a lower terminal growth rate reduces the terminal value. Slower receivables collection ties up working capital and depresses free cash flow.

Question 4Corporate Level (domain structure not enumerated in source)

A company issues a bond with a coupon rate below the prevailing market yield for comparable risk. The bond will most likely be issued:

  1. At par, because the coupon defines the cash flows
  2. At a discount, so that the yield to maturity matches the market rate Correct answer.
  3. At a premium, to compensate for the low coupon
  4. With a variable coupon that resets to the market rate at each interest date

Explanation

When the coupon is below the market yield, investors will only buy at a price below face value so that the total return matches the required yield. The discount accretes to par as maturity approaches. Par pricing applies only when coupon and market yield coincide.

Question 5Corporate Level (domain structure not enumerated in source)

A firm's degree of operating leverage is high. Which statement best describes the implication for business risk?

  1. The firm's interest cover ratio is automatically stronger than that of a low-leverage peer
  2. The firm can reduce fixed costs quickly if demand falls
  3. A small change in sales produces a proportionally larger change in operating profit Correct answer.
  4. The firm's earnings per share become insensitive to changes in sales volume

Explanation

Operating leverage measures the sensitivity of operating profit to sales, driven by the fixed-cost proportion in the cost structure. High fixed costs magnify profit swings in both directions. It says nothing directly about interest cover or the flexibility of fixed costs.

Question 6Corporate Level (domain structure not enumerated in source)

Under the Sri Lanka Accounting Standards, which of the following is the correct treatment for a research and development project where the research phase is complete and development criteria are met?

  1. Research expenditure is expensed and qualifying development expenditure is capitalised Correct answer.
  2. Both research and development expenditure are expensed as incurred
  3. Research expenditure is capitalised and development expenditure is expensed
  4. Both research and development expenditure are capitalised and amortised over ten years

Explanation

LKAS 38 prohibits capitalising research expenditure because no intangible asset can be demonstrated at that stage. Development expenditure is capitalised only when all recognition criteria, such as technical feasibility and intention to complete, are satisfied. The capitalised amount is then amortised over its useful life.

Question 7Corporate Level (domain structure not enumerated in source)

A company's statement of cash flows shows strong operating cash flow but negative free cash flow. The most likely explanation is:

  1. A decrease in the deferred tax liability during the year
  2. An increase in the share premium account from a rights issue
  3. Recognition of a non-cash impairment charge in the income statement
  4. Large capital expenditure and working capital investment exceeding operating cash generation Correct answer.

Explanation

Free cash flow deducts capital expenditure and working capital movements from operating cash flow. Where investment outflows exceed operating generation, free cash flow turns negative despite healthy operations. Non-cash items and equity or deferred tax movements do not by themselves explain the gap.

Question 8Corporate Level (domain structure not enumerated in source)

Which of the following best describes the purpose of a company's articles of association under the Companies Act No. 7 of 2007?

  1. They replace the need for a board of directors in a private company
  2. They set out the internal regulations governing the company's management and the rights of members Correct answer.
  3. They record the company's annual financial results for filing with the Registrar
  4. They constitute the contract between the company and its external creditors

Explanation

The articles are the internal rulebook regulating directors, meetings, shares and member rights, and they bind the company and its members. Creditor relationships are governed by contract and statute rather than the articles. Financial results are reported in annual accounts, not the articles.

Question 9Corporate Level (domain structure not enumerated in source)

A company has earnings before interest and tax of Rs. 40 million, interest expense of Rs. 10 million and a tax rate of 30%. What is the interest cover ratio?

  1. 1.2 times
  2. 2.8 times
  3. 4.0 times Correct answer.
  4. 3.0 times

Explanation

Interest cover is EBIT divided by interest expense, giving 40/10 = 4.0 times. Tax is irrelevant to this ratio because it is calculated before interest and tax. A ratio of 4.0 indicates operating profit covers interest four times over.

Question 10Corporate Level (domain structure not enumerated in source)

In capital budgeting, which item should be treated as a relevant cash flow when evaluating a new project?

  1. Interest payments on the debt used to finance the project
  2. The opportunity cost of land owned by the firm that the project will occupy Correct answer.
  3. Sunk market research costs already incurred
  4. Allocated head office overhead that will not change

Explanation

The opportunity cost of the land reflects the benefit forgone by using it, so it is a relevant incremental cash flow. Sunk costs and unchanged allocated overheads are not incremental. Financing costs are excluded because they are captured in the discount rate.

Question 11Corporate Level (domain structure not enumerated in source)

A company's board is considering a share buyback using distributable profits. Which condition is central to the legality of the buyback under Sri Lankan company law?

  1. The buyback must be funded from the stated capital account
  2. The company must satisfy a solvency test immediately after the distribution Correct answer.
  3. The buyback requires unanimous consent of all shareholders
  4. The company must obtain prior approval of the Colombo Stock Exchange for any buyback

Explanation

Distributions, including buybacks, are lawful only if the company passes the statutory solvency test after the distribution. This protects creditors by ensuring the company can pay its debts as they fall due. Funding must come from distributable profits or permitted sources, not stated capital.

Question 12Corporate Level (domain structure not enumerated in source)

Which of the following is the primary responsibility of an external auditor of a Sri Lankan limited liability company?

  1. Guaranteeing the company's future profitability to investors
  2. Detecting all fraud and error within the company
  3. Preparing the company's financial statements for the directors
  4. Expressing an opinion on whether the financial statements give a true and fair view Correct answer.

Explanation

The external auditor's objective is to obtain reasonable assurance and express an opinion on the truth and fairness of the financial statements. Fraud detection is a responsibility of management, although auditors consider fraud risk. Auditors do not prepare the statements or guarantee future results.

Question 13Corporate Level (domain structure not enumerated in source)

A company's current ratio is 2.0 and its quick ratio is 0.8. Which conclusion is most consistent with these figures?

  1. The company's long-term debt exceeds its equity
  2. A large proportion of current assets is held as inventory Correct answer.
  3. The company is highly liquid and holds mostly cash
  4. The company has no trade payables

Explanation

The gap between the current ratio and the quick ratio arises because inventory is excluded from the quick ratio. A current ratio of 2.0 with a quick ratio of 0.8 implies inventory is a substantial part of current assets. The ratios say nothing about payables absence or capital structure.

Question 14Corporate Level (domain structure not enumerated in source)

Which of the following best explains why a company might prefer debt finance to equity finance?

  1. Debt has no repayment obligation at maturity
  2. Debt finance dilutes existing shareholders' control
  3. Interest payments are tax deductible, lowering the effective cost of debt Correct answer.
  4. Debt holders share in the company's residual profits

Explanation

Interest is generally deductible for tax, creating a tax shield that lowers the effective cost of debt relative to equity. Debt holders do not share profits and do not dilute control, which are further advantages. However, debt carries mandatory repayment and increases financial risk.

Question 15Corporate Level (domain structure not enumerated in source)

A company is evaluating two mutually exclusive projects with different lives. Which method is most appropriate for comparing them?

  1. Equivalent annual annuity, because it normalises value across different lives Correct answer.
  2. Payback period, because it measures recovery speed
  3. Internal rate of return, because it ignores project scale
  4. Accounting rate of return, because it uses profit figures

Explanation

When projects have unequal lives, comparing net present values directly is misleading. The equivalent annual annuity converts each project's NPV into a constant annual value, allowing a like-for-like comparison. Payback and accounting rate of return ignore the time value of money.

Question 16Corporate Level (domain structure not enumerated in source)

Under LKAS 37, a provision should be recognised when:

  1. The board has approved a budget for future expenditure
  2. A contingent asset is virtually certain to be realised
  3. A present obligation exists from a past event, an outflow is probable and the amount can be reliably estimated Correct answer.
  4. The company intends to incur the cost in a future period regardless of obligation

Explanation

LKAS 37 requires a present obligation arising from a past event, a probable outflow of resources and a reliable estimate before a provision is recognised. Future intentions or budgets do not create a present obligation. Contingent assets are not recognised as provisions.

Question 17Corporate Level (domain structure not enumerated in source)

A company's weighted average cost of capital is 12% and it is evaluating a project with an expected return of 14% but with risk substantially higher than the firm's existing operations. The most appropriate decision is to:

  1. Accept the project because higher risk always means higher return
  2. Accept the project because its return exceeds the WACC
  3. Reject the project because its return is below the risk-adjusted hurdle rate Correct answer.
  4. Reject the project because it exceeds the firm's cost of equity

Explanation

The WACC reflects the firm's average risk, so it is not the correct discount rate for a project with materially different risk. A risk-adjusted rate for that project should be used, and if the 14% return falls below it, the project destroys value. Accepting on the WACC alone would understate the required return.

Question 18Corporate Level (domain structure not enumerated in source)

Which document must a newly incorporated company file with the Registrar to commence business and obtain its registration number?

  1. A prospectus approved by the Securities and Exchange Commission
  2. An annual return for the first financial year
  3. A solvency statement signed by the company secretary
  4. A certificate of incorporation issued after filing the application and constitutional documents Correct answer.

Explanation

Incorporation results from filing the application with the constitutional documents and the Registrar issuing a certificate of incorporation, which evidences the company's existence. A solvency statement relates to distributions, and annual returns and prospectuses serve different purposes after incorporation.

Question 19Corporate Level (domain structure not enumerated in source)

A company reports a gross profit margin of 25% and a net profit margin of 5%. Which factor most likely explains the difference?

  1. A reduction in the cost of goods sold
  2. High operating expenses and interest costs relative to sales Correct answer.
  3. A change in the company's accounting year end
  4. An increase in sales volume without any cost change

Explanation

The gap between gross and net margin reflects operating expenses, interest and tax deducted after gross profit. A 20 percentage point difference points to substantial operating and financing costs. Changes in cost of goods sold or sales volume would affect gross margin itself, not merely the gap.

Question 20Corporate Level (domain structure not enumerated in source)

Which statement about the doctrine of separate legal personality is correct in the Sri Lankan context?

  1. The company ceases to exist when the majority shareholder dies
  2. The company is a legal person distinct from its shareholders and directors Correct answer.
  3. Shareholders are personally liable for all company debts
  4. Directors own the company's assets in trust for creditors

Explanation

Separate legal personality means the company is a distinct legal person that owns assets, contracts and sues in its own name. Shareholders' liability is generally limited to unpaid amounts on their shares. The company's existence is unaffected by changes in shareholding.

Question 21Corporate Level (domain structure not enumerated in source)

A company's trade receivables days have risen from 45 to 75 while sales remain constant. What is the most likely consequence?

  1. Higher gross profit margin due to delayed cash collection
  2. Increased investment in working capital and higher financing costs Correct answer.
  3. Reduced risk of bad debts from customers
  4. Improved operating cash flow and reduced financing needs

Explanation

Slower collection means more cash is tied up in receivables, increasing working capital and the need for short-term finance. It does not improve cash flow or margins. Longer credit exposure typically increases, rather than reduces, the risk of bad debts.

Question 22Corporate Level (domain structure not enumerated in source)

Which of the following best describes the role of the Audit Committee under the Code of Best Practice on Corporate Governance in Sri Lanka?

  1. To prepare the company's financial statements and select accounting policies
  2. To oversee financial reporting, internal controls and the independence of the external auditor Correct answer.
  3. To approve all related party transactions without board involvement
  4. To set the remuneration of the chief executive officer

Explanation

The Audit Committee oversees the integrity of financial reporting, the effectiveness of internal controls and the independence and performance of external auditors. Management prepares the financial statements, and remuneration matters sit with the Remuneration Committee. Related party approvals involve the board with independent members.

Question 23Corporate Level (domain structure not enumerated in source)

A company has a dividend payout ratio of 60% and a return on equity of 15%. Using the sustainable growth rate formula, what is the approximate sustainable growth rate?

  1. 15.0%
  2. 24.0%
  3. 9.0%
  4. 6.0% Correct answer.

Explanation

The sustainable growth rate equals retention ratio multiplied by return on equity. With a 60% payout, the retention ratio is 40%, so 0.40 x 15% = 6.0%. This represents growth financeable from internally generated funds without changing leverage.

Question 24Corporate Level (domain structure not enumerated in source)

Which of the following transactions would be classified as a financing activity in the statement of cash flows?

  1. Payment of dividends to shareholders Correct answer.
  2. Collection of cash from trade receivables
  3. Payment of income tax to the Inland Revenue Department
  4. Purchase of property, plant and equipment for cash

Explanation

Financing activities include transactions that change the size and composition of equity and borrowings, such as dividend payments and loan proceeds. Purchases of non-current assets are investing activities, while receivables collection and tax payments are operating.

Question 25Corporate Level (domain structure not enumerated in source)

A company is assessing whether to hedge a forecast foreign currency purchase. Which statement best reflects sound treasury practice?

  1. Hedging decisions should be made informally by the dealer without board oversight
  2. All foreign currency exposures should be left unhedged to avoid transaction costs
  3. Hedging should be undertaken only when management expects the currency to move favourably
  4. Hedging should be based on a documented exposure and an approved policy with clear objectives Correct answer.

Explanation

Sound treasury practice requires a documented underlying exposure, an approved hedging policy and clear objectives, supported by controls and reporting. Speculating on currency direction is not hedging because it creates rather than reduces risk. Informal dealing without oversight breaches basic control principles.

Question 26Corporate Level (domain structure not enumerated in source)

Under the Companies Act No. 7 of 2007, which of the following statements about the memorandum of association of a Sri Lankan company is correct?

  1. It must be renewed annually by filing with the Registrar of Companies.
  2. It is optional for companies limited by guarantee.
  3. It is the document by which the company is formed and states the company name, objects and liability of members. Correct answer.
  4. It sets out the internal management rules binding directors and members.

Explanation

The memorandum is the constitution-forming document that states the company's name, registered office, objects and the nature of members' liability. The articles contain the internal management rules and are subordinate to the memorandum. Both documents are filed at incorporation and neither is renewed annually.

Question 27Corporate Level (domain structure not enumerated in source)

A Sri Lankan company wishes to make a distribution to shareholders. Under the Companies Act No. 7 of 2007, which test must be satisfied before the distribution is made?

  1. The company must have positive retained earnings in the current year.
  2. The distribution must not exceed the current year's net profit.
  3. The distribution must be approved by the Registrar of Companies.
  4. The company must satisfy the solvency test immediately after the distribution. Correct answer.

Explanation

The Act permits distributions only where the company will satisfy the solvency test immediately after the distribution, meaning it can pay its debts as they fall due and its assets exceed its liabilities. The test is forward-looking and applies to the company's whole position, not just the current year's profit.

Question 28Corporate Level (domain structure not enumerated in source)

A company's directors wish to allot new shares to a strategic investor. Which procedural requirement is most relevant under Sri Lankan company law?

  1. Only preference shares may be allotted to a new investor.
  2. Shareholder approval or existing authority in the articles is required for the allotment. Correct answer.
  3. The allotment must be approved by the company's external auditor.
  4. The allotment must be at a price set by the Colombo Stock Exchange.

Explanation

Directors may allot shares only where they have been authorised by the articles or by a resolution of the members, reflecting the principle that share issuance dilutes existing owners. The price is a commercial matter for the board, not one fixed by an exchange, and auditors have no approval role.

Question 29Corporate Level (domain structure not enumerated in source)

A listed company's board is setting up board committees. Which description best reflects the recommended composition of the audit committee under Sri Lankan corporate governance best practice?

  1. A majority of executive directors chaired by the chief executive officer.
  2. Composed of the external auditor and two shareholder representatives.
  3. Entirely composed of the finance director and the internal audit manager.
  4. A majority of independent non-executive directors with a non-executive chair. Correct answer.

Explanation

Best practice requires the audit committee to be dominated by independent non-executive directors so that it can scrutinise management objectively. The chair should not be the chief executive, and executive directors such as the finance director should not dominate it. Auditors attend by invitation but are not members.

Question 30Corporate Level (domain structure not enumerated in source)

A company reports revenue of Rs. 500 million, cost of sales of Rs. 300 million and operating expenses of Rs. 150 million. What is its operating profit margin?

  1. 40%
  2. 60%
  3. 30%
  4. 10% Correct answer.

Explanation

Operating profit is Rs. 500m − Rs. 300m − Rs. 150m = Rs. 50m, and Rs. 50m ÷ Rs. 500m = 10%. Gross margin of 40% and net-type margins must not be confused with the operating margin, which deducts operating expenses but not interest or tax.

Question 31Corporate Level (domain structure not enumerated in source)

A firm has inventory of Rs. 60 million, trade receivables of Rs. 90 million, cash of Rs. 10 million and current liabilities of Rs. 100 million. What is its quick (acid-test) ratio?

  1. 1.50
  2. 1.60
  3. 0.60
  4. 1.00 Correct answer.

Explanation

The quick ratio excludes inventory: (Rs. 90m + Rs. 10m) ÷ Rs. 100m = 1.00. Including inventory would give the current ratio of 1.60, which overstates short-term liquidity where inventory is slow-moving.

Question 32Corporate Level (domain structure not enumerated in source)

A company has annual credit purchases of Rs. 730 million and an average trade payable balance of Rs. 100 million. Using a 365-day year, what is its payable payment period?

  1. 36 days
  2. 50 days Correct answer.
  3. 137 days
  4. 73 days

Explanation

Payable days equal average payables divided by credit purchases, multiplied by 365: (100 ÷ 730) × 365 = 50 days. This measures how long the company takes to settle supplier invoices and feeds into the cash conversion cycle.

Question 33Corporate Level (domain structure not enumerated in source)

A company has a cash conversion cycle of 95 days and wants to reduce it by 20 days. Which combination of actions would achieve this?

  1. Increase inventory days by 10 and reduce payable days by 10.
  2. Increase receivable days by 20 and hold payables constant.
  3. Reduce payable days by 20 and hold inventory constant.
  4. Reduce receivable days by 15 and increase payable days by 5. Correct answer.

Explanation

The cash conversion cycle equals inventory days plus receivable days minus payable days, so cutting receivables by 15 and stretching payables by 5 shortens the cycle by 20 days. Actions that lengthen inventory or receivable days, or shorten payables, extend the cycle instead.

Question 34Corporate Level (domain structure not enumerated in source)

A project requires an initial outlay of Rs. 10 million and generates annual net cash inflows of Rs. 3 million for five years. At a discount rate of 10%, the annuity factor for five years is 3.791. What is the net present value?

  1. Rs. 1.373 million Correct answer.
  2. Rs. 5.000 million
  3. Rs. 0.373 million
  4. Rs. 11.373 million

Explanation

The present value of inflows is Rs. 3m × 3.791 = Rs. 11.373m, and deducting the Rs. 10m outlay gives an NPV of Rs. 1.373m. A positive NPV indicates the project earns more than the 10% required return and adds value.

Question 35Corporate Level (domain structure not enumerated in source)

A project has an internal rate of return of 15% and the company's cost of capital is 12%. Which conclusion is correct?

  1. The project should be rejected because IRR exceeds the cost of capital.
  2. The project's NPV at 12% must be negative.
  3. The IRR method cannot be applied when cash flows change sign.
  4. The project is acceptable because its IRR exceeds the required return. Correct answer.

Explanation

A project creates value when its IRR exceeds the cost of capital, because the return earned on the investment exceeds the return investors require. At a discount rate below the IRR, the NPV is positive.

Question 36Corporate Level (domain structure not enumerated in source)

A company is financed 60% by equity and 40% by debt. The after-tax cost of debt is 6% and the cost of equity is 14%. What is the weighted average cost of capital?

  1. 10.0%
  2. 8.4%
  3. 12.0%
  4. 10.8% Correct answer.

Explanation

WACC equals the weighted average of after-tax component costs: (0.60 × 14%) + (0.40 × 6%) = 8.4% + 2.4% = 10.8%. The after-tax cost of debt is used because interest is tax-deductible in Sri Lanka.

Question 37Corporate Level (domain structure not enumerated in source)

A company's beta is 1.4, the risk-free rate is 9% and the market risk premium is 5%. Using the capital asset pricing model, what is the cost of equity?

  1. 12.0%
  2. 19.0%
  3. 16.0% Correct answer.
  4. 14.0%

Explanation

CAPM gives cost of equity = risk-free rate + beta × market risk premium = 9% + (1.4 × 5%) = 16%. Beta scales the market risk premium for the company's systematic risk.

Question 38Corporate Level (domain structure not enumerated in source)

A company with high operating gearing (high fixed costs relative to variable costs) is considering how its risk profile compares with a low-operating-gearing peer. Which statement is correct?

  1. Its financial risk is unaffected by the level of debt in its capital structure.
  2. Its break-even point is lower than that of the low-gearing peer.
  3. Its profits are more sensitive to changes in sales volume than those of the low-gearing peer. Correct answer.
  4. Its business risk is lower because fixed costs do not vary with sales.

Explanation

High operating gearing means a larger share of costs is fixed, so a given percentage change in sales produces a magnified change in operating profit. It also raises the break-even point, and business risk is higher, not lower.

Question 39Corporate Level (domain structure not enumerated in source)

Under Sri Lanka Accounting Standard 12 (Income Taxes), how should a deductible temporary difference generally be treated?

  1. Ignored because deferred tax is only recognised for taxable temporary differences.
  2. Recognised as a deferred tax liability in the statement of financial position.
  3. Recognised as a deferred tax asset to the extent that taxable profit will be available against which it can be used. Correct answer.
  4. Recognised immediately as a reduction in the current tax expense without any assessment.

Explanation

Deductible temporary differences and unused tax losses give rise to a deferred tax asset, but recognition requires it to be probable that future taxable profit will be available to absorb the deduction. This recoverability test prevents overstating assets.

Question 40Corporate Level (domain structure not enumerated in source)

A company receives a government grant of Rs. 20 million towards the purchase of equipment costing Rs. 100 million. Under Sri Lanka Accounting Standard 20, which approach is permitted for presenting the grant?

  1. Deduct the grant from the asset's carrying amount and recognise it over the asset's useful life through reduced depreciation. Correct answer.
  2. Recognise the full grant immediately as other income.
  3. Recognise the grant only when the asset is fully depreciated.
  4. Credit the grant directly to retained earnings without any subsequent recognition.

Explanation

LKAS 20 permits either the deferred income approach, where the grant is recognised as income over the periods in which related costs are incurred, or the net presentation approach, where the grant reduces the asset's carrying amount. Both spread the benefit over the asset's life.

Question 41Corporate Level (domain structure not enumerated in source)

A company has an asset with a carrying amount of Rs. 80 million and a recoverable amount of Rs. 65 million under Sri Lanka Accounting Standard 36. What is the required accounting treatment?

  1. Recognise a provision of Rs. 15 million under LKAS 37.
  2. Revalue the asset upwards to its fair value.
  3. Recognise an impairment loss of Rs. 15 million in profit or loss. Correct answer.
  4. Disclose the difference only in the notes without adjusting the carrying amount.

Explanation

An impairment loss arises when the carrying amount exceeds the recoverable amount, which is the higher of fair value less costs of disposal and value in use. The Rs. 15 million excess is written down and recognised in profit or loss unless the asset is carried under the revaluation model.

Question 42Corporate Level (domain structure not enumerated in source)

A company issues a financial instrument that is contractually obliged to deliver a fixed number of its own shares in exchange for a fixed amount of cash. Under LKAS 32, how should the instrument be classified?

  1. As a compound instrument split between liability and equity. Correct answer.
  2. As a contingent asset disclosed only in the notes.
  3. As a financial liability because the issuer has a contractual obligation to deliver shares.
  4. As an equity instrument because it will be settled in the issuer's own shares.

Explanation

A contract to deliver a fixed number of own shares for a fixed amount of cash is a 'fixed-for-fixed' arrangement and is classified as equity. If the number of shares or the cash amount varies, a liability component arises instead.

Question 43Corporate Level (domain structure not enumerated in source)

A company with a 30% tax rate has a taxable temporary difference of Rs. 50 million arising from accelerated tax depreciation. What is the deferred tax consequence?

  1. A deferred tax asset of Rs. 15 million.
  2. A current tax payable of Rs. 15 million.
  3. A deferred tax liability of Rs. 15 million. Correct answer.
  4. No deferred tax is recognised for depreciation differences.

Explanation

Accelerated tax depreciation means tax allowances exceed accounting depreciation, so the asset's tax base is below its carrying amount, creating a taxable temporary difference. Multiplying by the 30% rate gives a deferred tax liability of Rs. 15 million that reverses in future periods.

Question 44Corporate Level (domain structure not enumerated in source)

A company has profit before tax of Rs. 200 million and pays tax at 30%, giving profit after tax of Rs. 140 million. It has 70 million ordinary shares in issue. What is its basic earnings per share?

  1. Rs. 2.00 Correct answer.
  2. Rs. 1.40
  3. Rs. 2.86
  4. Rs. 3.00

Explanation

Basic EPS equals profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares: Rs. 140m ÷ 70m = Rs. 2.00. Using profit before tax would overstate EPS because tax belongs to the earnings available to shareholders.

Question 45Corporate Level (domain structure not enumerated in source)

A company is preparing consolidated financial statements under Sri Lanka Accounting Standard 10. Which statement about the consolidation of a subsidiary is correct?

  1. Consolidation is optional where the subsidiary operates in a different industry.
  2. The subsidiary is consolidated from the date of the parent's year-end only.
  3. Control is the basis for consolidation, and it exists where the parent has power over the subsidiary, exposure to variable returns and the ability to use that power to affect returns. Correct answer.
  4. The subsidiary is consolidated only if the parent holds more than 50% of its preference shares.

Explanation

SLFRS 10 defines control through three elements: power over the investee, exposure to variable returns and the ability to use power to affect those returns. Consolidation runs from the date control is obtained until control ceases, regardless of industry differences.

Question 46Corporate Level (domain structure not enumerated in source)

A company's sales are Rs. 400 million and its total assets are Rs. 250 million. Management plans to increase sales to Rs. 500 million without changing its asset turnover ratio. What total assets will be required?

  1. Rs. 350.0 million
  2. Rs. 200.0 million
  3. Rs. 312.5 million Correct answer.
  4. Rs. 250.0 million

Explanation

Asset turnover is Rs. 400m ÷ Rs. 250m = 1.6 times. To support Rs. 500m of sales at the same turnover, assets must be Rs. 500m ÷ 1.6 = Rs. 312.5m, implying additional investment of Rs. 62.5m.

Question 47Corporate Level (domain structure not enumerated in source)

A company is considering a sale-and-leaseback of its head office. Which statement best explains the main financial reporting effect under SLFRS 16?

  1. The right-of-use asset is measured at the proportion of the previous carrying amount relating to the retained right, and any gain on the rights transferred is recognised in profit or loss. Correct answer.
  2. The property is derecognised with no lease liability recognised.
  3. The entire gain on sale is recognised immediately in profit or loss.
  4. The transaction is treated as a borrowing secured on the property with no effect on the statement of financial position.

Explanation

Under SLFRS 16 a sale-and-leaseback that qualifies as a sale leads to partial gain recognition: only the gain relating to the rights transferred to the buyer is recognised, and the retained right is measured from the previous carrying amount. This prevents immediate profit from a transaction that is partly a financing arrangement.

Question 48Corporate Level (domain structure not enumerated in source)

A company is deciding whether to accept a one-off export order that uses spare capacity. Fixed costs will not change. Which approach is most appropriate?

  1. Compare the order price with the variable cost per unit plus any incremental costs of the order. Correct answer.
  2. Compare the order price with the average total cost of all production.
  3. Reject the order because it is below the normal selling price.
  4. Compare the order price with full absorption cost per unit.

Explanation

Where spare capacity exists and fixed costs are unaffected, the relevant costs are the incremental variable costs plus any order-specific costs. Any contribution above these relevant costs improves profit, even if the price is below the normal full cost.

Question 49Corporate Level (domain structure not enumerated in source)

A company uses standard costing. The actual wage rate was Rs. 520 per hour against a standard of Rs. 500, and 1,000 hours were worked. What is the direct labour rate variance and is it favourable or adverse?

  1. Rs. 5,000 favourable
  2. Rs. 20,000 adverse Correct answer.
  3. Rs. 10,000 adverse
  4. Rs. 20,000 favourable

Explanation

The labour rate variance is (actual rate − standard rate) × actual hours = (520 − 500) × 1,000 = Rs. 20,000. Because the actual rate is higher than standard, the variance is adverse and reduces profit.

Question 50Corporate Level (domain structure not enumerated in source)

A company is assessing the risk of fraud in its purchasing cycle. Which control is most effective at preventing payments to fictitious suppliers?

  1. Reconciling the bank statement monthly.
  2. Reviewing the aged payables listing annually.
  3. Matching invoices to approved purchase orders and goods received notes before payment. Correct answer.
  4. Allowing the purchasing manager to both create suppliers and approve payments.

Explanation

A three-way match of purchase order, goods received note and supplier invoice confirms that goods were ordered and received before payment is made. This detective and preventive control directly addresses fictitious or duplicate supplier invoices.