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Question 1Financial Accounting and Reporting-I

According to the Conceptual Framework, the primary objective of general purpose financial reporting is to provide financial information that is useful to:

  1. employees in negotiating the level of future wage increases
  2. management in preparing detailed operating budgets for the entity
  3. investors, lenders and other creditors making resource allocation decisions Correct answer.
  4. tax authorities in assessing the taxable profits of an entity

Explanation

The Conceptual Framework states that general purpose financial reports are directed primarily at existing and potential investors, lenders and other creditors. These users cannot demand information directly and rely on the reports to make resource allocation decisions. Tax authorities, management and employees may use the reports, but they are not the primary audience identified by the Framework.

Question 2Financial Accounting and Reporting-I

Under IAS 1, which liability is classified as current in the statement of financial position?

  1. A lease liability due in four years from the reporting date
  2. A loan repayable three years after the reporting date
  3. A trade payable settled within the normal operating cycle Correct answer.
  4. A bond repayable five years after the reporting date

Explanation

IAS 1 requires a liability to be classified as current when it is expected to be settled in the entity's normal operating cycle, is held primarily for trading, is due within twelve months, or the entity has no unconditional right to defer settlement beyond twelve months. A trade payable settled in the normal operating cycle meets the current liability criterion. The other items are long-term obligations.

Question 3Financial Accounting and Reporting-I

Under IAS 2, abnormal storage costs incurred after production is complete are:

  1. recognised as an expense in profit or loss Correct answer.
  2. deducted from the inventory net realisable value
  3. included in the cost of finished goods inventory
  4. capitalised as part of production overhead

Explanation

IAS 2 limits the cost of inventory to costs of purchase, costs of conversion and other costs incurred in bringing the inventory to its present location and condition. Abnormal amounts of wasted materials, labour or other production costs, including abnormal storage costs after production is complete, are expensed. They are not included in inventory cost or net realisable value.

Question 4Financial Accounting and Reporting-I

Under IAS 16, depreciation of an item of property, plant and equipment begins when the asset:

  1. is delivered to the entity's premises
  2. becomes available for use as intended by management Correct answer.
  3. is paid for in full
  4. is ordered from the supplier

Explanation

IAS 16 requires depreciation to begin when the asset is available for use, meaning it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Ordering, delivery or payment does not by itself trigger depreciation. Depreciation continues even if the asset is idle, unless it is fully depreciated or classified as held for sale.

Question 5Financial Accounting and Reporting-I

Under the accrual basis of accounting, an expense is recognised when:

  1. cash is paid to the supplier of the goods or services
  2. the benefit is consumed, not when cash is paid Correct answer.
  3. an invoice is received from the supplier of the goods
  4. the entity's bank account is debited for the amount

Explanation

The accrual basis recognises transactions and events when they occur, not when cash is received or paid. An expense is therefore recognised in the period in which the related economic benefit is consumed. The timing of payment, invoicing or bank debits does not control recognition.

Question 6Financial Accounting and Reporting-I

Which item normally carries a debit balance in a trial balance?

  1. Trade payables
  2. Accumulated depreciation
  3. Retained earnings
  4. Drawings Correct answer.

Explanation

Drawings reduce owner's equity and are recorded as a debit in the owner's equity account. Assets and expenses normally carry debit balances. Accumulated depreciation, trade payables and retained earnings normally carry credit balances.

Question 7Financial Accounting and Reporting-I

Under IAS 7, a cash equivalent is a short-term investment that is:

  1. readily convertible to cash and held for at least one year
  2. held for trading and measured at fair value through profit or loss
  3. subject to significant risk of changes in value
  4. highly liquid, with a maturity of three months or less Correct answer.

Explanation

IAS 7 defines cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. They are normally held with original maturities of three months or less. Investments with longer maturities or significant value risk are not cash equivalents.

Question 8Financial Accounting and Reporting-I

Under IFRS 15, revenue from the sale of goods is recognised when:

  1. the customer places a firm order for the goods
  2. the customer pays the agreed purchase price
  3. control of the goods transfers to the customer Correct answer.
  4. the goods are dispatched from the entity's warehouse

Explanation

IFRS 15 requires revenue to be recognised when a performance obligation is satisfied by transferring a promised good or service to the customer. For goods, this occurs when control of the goods passes to the customer. Order placement, dispatch or payment are only indicators that may help determine when control transfers.

Question 9Financial Accounting and Reporting-I

Under IAS 16, a revaluation increase on an item of property, plant and equipment is recognised in:

  1. retained earnings directly, bypassing profit or loss
  2. profit or loss for the current period
  3. other comprehensive income and accumulated in equity Correct answer.
  4. deferred income and released over the asset's useful life

Explanation

IAS 16 requires a revaluation surplus to be recognised in other comprehensive income and accumulated in equity under a revaluation surplus reserve. It is not recognised in profit or loss. The surplus may be transferred to retained earnings as the asset is used or when it is derecognised.

Question 10Financial Accounting and Reporting-I

Inventory has a cost of CU100,000 and a net realisable value of CU85,000. Under IAS 2, the inventory is measured at:

  1. CU100,000, with no adjustment required
  2. CU85,000, with a write-down of CU100,000
  3. CU85,000, with a write-down of CU15,000 Correct answer.
  4. CU92,500, the average of cost and NRV

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Since NRV of CU85,000 is below cost of CU100,000, the inventory is written down by CU15,000. The write-down is recognised as an expense in profit or loss.

Question 11Financial Accounting and Reporting-I

Under IAS 37, a provision is recognised when there is:

  1. a possible obligation whose existence will be confirmed by a future event
  2. a present obligation from a past event, regardless of the probability of outflow
  3. a future obligation that may arise from a planned business decision
  4. a present obligation, probable outflow and a reliable estimate Correct answer.

Explanation

IAS 37 requires a provision to be recognised only when a present obligation exists as a result of a past event, an outflow of economic benefits is probable, and a reliable estimate can be made. All three conditions must be met. A possible obligation is a contingent liability and is not recognised as a provision.

Question 12Financial Accounting and Reporting-I

Under IAS 10, which event after the reporting period is an adjusting event?

  1. Bankruptcy of a customer whose receivable existed at the year end Correct answer.
  2. A major business combination announced after the year end
  3. A fire that destroyed a warehouse after the year end
  4. A decline in market value of investments after the year end

Explanation

Adjusting events provide evidence of conditions that existed at the reporting date. The bankruptcy of a customer whose receivable already existed at the year end provides evidence about the recoverable amount of that receivable and requires adjustment. Events such as a later fire or a new business combination concern conditions that arose after the reporting date.

Question 13Financial Accounting and Reporting-I

Under IAS 7, cash paid to acquire property, plant and equipment is classified as:

  1. a non-cash transaction
  2. an investing activity Correct answer.
  3. a financing activity
  4. an operating activity

Explanation

IAS 7 classifies cash flows from acquiring and disposing of long-term assets as investing activities. Purchases of property, plant and equipment are therefore investing cash outflows. Operating activities relate to day-to-day revenue-producing activities, while financing activities relate to equity and borrowings.

Question 14Financial Accounting and Reporting-I

Under IFRS 15, the first step in the five-step revenue model is to:

  1. allocate the transaction price to the performance obligations
  2. recognise revenue when a performance obligation is satisfied
  3. identify the contract with the customer Correct answer.
  4. determine the transaction price

Explanation

The IFRS 15 five-step model begins with identifying the contract with the customer. The remaining steps are identifying performance obligations, determining the transaction price, allocating it, and recognising revenue when obligations are satisfied. The steps are applied in sequence.

Question 15Financial Accounting and Reporting-I

Under IAS 38, research expenditure is:

  1. recognised as an expense only if the project is abandoned
  2. recognised as an expense when it is incurred Correct answer.
  3. capitalised and amortised over the expected useful life
  4. capitalised as an intangible asset if it is technically feasible

Explanation

IAS 38 requires research expenditure to be recognised as an expense when it is incurred because the entity cannot demonstrate that an intangible asset exists. Development expenditure may be capitalised only after specified recognition criteria are met. Feasibility alone does not permit capitalisation of research costs.

Question 16Financial Accounting and Reporting-I

A taxable temporary difference arises when the carrying amount of an asset is:

  1. higher than its tax base Correct answer.
  2. lower than its tax base
  3. equal to its tax base
  4. not related to its tax base

Explanation

A taxable temporary difference exists when the carrying amount of an asset exceeds its tax base. Recovering the asset will produce taxable economic benefits greater than the amount that will be deductible for tax purposes. This difference gives rise to a deferred tax liability.

Question 17Financial Accounting and Reporting-I

Under IAS 23, borrowing costs that are directly attributable to the acquisition of a qualifying asset are:

  1. recognised in other comprehensive income
  2. deducted from the related loan liability
  3. capitalised as part of the cost of the asset Correct answer.
  4. expensed in the period in which they are incurred

Explanation

IAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the asset's cost. Other borrowing costs are expensed. Capitalisation begins when expenditures and borrowing costs are incurred and activities necessary to prepare the asset are underway.

Question 18Financial Accounting and Reporting-I

Under IAS 21, a foreign currency transaction is initially recognised using the:

  1. spot exchange rate at the date of the transaction Correct answer.
  2. forward exchange rate for the settlement date
  3. closing exchange rate at the reporting date
  4. average exchange rate for the reporting period

Explanation

IAS 21 requires a foreign currency transaction to be recorded initially at the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. A rate that approximates the actual spot rate, such as an average rate for a week or month, may be used if exchange rates do not fluctuate significantly.

Question 19Financial Accounting and Reporting-I

Basic earnings per share under IAS 33 is calculated as profit attributable to ordinary shareholders divided by the:

  1. weighted average number of ordinary shares outstanding Correct answer.
  2. total number of shares issued during the period
  3. weighted average number of ordinary and preference shares
  4. ordinary shares outstanding at the reporting date

Explanation

IAS 33 defines basic EPS using the weighted average number of ordinary shares outstanding during the period. The weighting reflects changes in the number of shares during the period. Profit is adjusted for preference dividends and other items attributable to preference shareholders.

Question 20Financial Accounting and Reporting-I

Under IAS 8, a change in an accounting estimate is accounted for:

  1. by adjusting the opening balance of retained earnings
  2. prospectively, only if it is impracticable to restate
  3. prospectively, by recognising its effect in the current period Correct answer.
  4. retrospectively, by restating prior period financial statements

Explanation

A change in accounting estimate results from new information or developments and is accounted for prospectively. Its effect is recognised in the current period, or in current and future periods if it affects both. Retrospective restatement applies to changes in accounting policy and corrections of prior period errors.

Question 21Financial Accounting and Reporting-I

Under IFRS 16, a lessee initially recognises a lease as:

  1. a prepayment and a deferred tax liability
  2. a lease expense on a straight-line basis
  3. a right-of-use asset and a lease liability Correct answer.
  4. an intangible asset and a finance liability

Explanation

IFRS 16 requires a lessee to recognise a right-of-use asset and a lease liability at the commencement date for most leases. The liability is measured at the present value of future lease payments. The right-of-use asset is adjusted for initial direct costs and other specified amounts.

Question 22Financial Accounting and Reporting-I

In impairment testing of a cash-generating unit that includes goodwill, an impairment loss is allocated first to:

  1. the other assets of the unit on a pro rata basis
  2. the deferred tax assets recognised in the unit
  3. the goodwill allocated to the cash-generating unit Correct answer.
  4. the assets with the shortest remaining useful lives

Explanation

IAS 36 requires an impairment loss for a cash-generating unit with goodwill to be allocated first to reduce the carrying amount of the goodwill. Any remaining loss is then allocated to the other assets of the unit pro rata to their carrying amounts. This allocation is subject to the constraint that no asset is reduced below the highest of its fair value less costs of disposal, value in use and zero.

Question 23Financial Accounting and Reporting-I

Under IFRS 3, goodwill on a business combination is measured as the consideration transferred plus NCI plus previously held interest, less the:

  1. book value of the parent's investment in the subsidiary
  2. fair value of the consideration transferred
  3. fair value of the identifiable net assets acquired Correct answer.
  4. carrying amount of the subsidiary's net assets

Explanation

IFRS 3 measures goodwill as the sum of the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest, less the fair value of the identifiable net assets acquired. The identifiable net assets are measured at fair value at the acquisition date. Goodwill represents future economic benefits arising from assets that are not individually identified and separately recognised.

Question 24Financial Accounting and Reporting-I

Under IAS 12, a deferred tax asset is recognised only to the extent that it is:

  1. approved by the taxation authority before the reporting date
  2. probable that future taxable profit will be available Correct answer.
  3. expected to reverse within twelve months of the reporting date
  4. supported by taxable temporary differences in the same period

Explanation

A deferred tax asset arises from deductible temporary differences, unused tax losses and unused tax credits. IAS 12 requires recognition only to the extent that it is probable that taxable profit will be available against which the deductible amount can be utilised. The assessment considers future taxable profits and tax planning opportunities.

Question 25Financial Accounting and Reporting-I

An entity recognises a provision of CU100,000 for a lawsuit and has a virtually certain right to reimbursement from an insurer. Under IAS 37, the reimbursement is:

  1. deducted from the provision and presented as a net liability
  2. disclosed in the notes but not recognised as an asset
  3. recognised only when the insurer pays the claim
  4. recognised as a separate asset, with offset only in profit or loss Correct answer.

Explanation

IAS 37 requires a reimbursement to be recognised separately as an asset when it is virtually certain to be received. The reimbursement is not offset against the provision in the statement of financial position. However, the expense relating to the provision may be presented net of the reimbursement in the statement of profit or loss.

Question 26Tax Practices

Under the Income Tax Ordinance, 2001, the tax year of an individual taxpayer ordinarily runs from:

  1. 1 July and ends on 30 June Correct answer.
  2. 1 April and ends on 31 March
  3. 1 October and ends on 30 September
  4. 1 January and ends on 31 December

Explanation

The Ordinance defines the tax year for an individual as the twelve-month period ending on 30 June, i.e. 1 July to 30 June, unless a special or transitional tax year has been allowed.

Question 27Tax Practices

An individual is treated as resident in Pakistan for a tax year if he is physically present in Pakistan for at least:

  1. 270 days or more
  2. 90 days or more
  3. 183 days or more Correct answer.
  4. 150 days or more

Explanation

Residence of an individual is tested mainly by physical presence: 183 days or more in the tax year makes him resident. Certain government employees posted abroad are resident on a separate basis.

Question 28Tax Practices

How many heads of income are recognised by the Income Tax Ordinance, 2001 for computing taxable income?

  1. Three
  2. Five Correct answer.
  3. Six
  4. Four

Explanation

Section 11 divides income into five heads: salary, income from property, income from business, capital gains and income from other sources. Each head has its own computation rules.

Question 29Tax Practices

A salaried individual must furnish the annual income tax return for a tax year by:

  1. 31 December of that tax year
  2. 31 July following the tax year
  3. 30 September following the tax year Correct answer.
  4. 30 June following the tax year

Explanation

The return under section 114 is due by 30 September following the end of the tax year for individuals and associations of persons, while companies have until 31 December. The Commissioner may extend the date in appropriate cases.

Question 30Tax Practices

Income from agriculture in Pakistan is:

  1. outside the federal income tax net but chargeable by the province Correct answer.
  2. taxable federally at the normal slab rates
  3. exempt from all taxes at every level in Pakistan
  4. taxable federally only where very large land holdings exist

Explanation

Section 41 excludes agricultural income from the federal income tax net. Provinces may, however, levy their own agricultural income tax under provincial legislation.

Question 31Tax Practices

For the purposes of the Sales Tax Act, 1990, sales tax is best described as:

  1. a direct tax on the income of the supplier
  2. a levy payable only by importers of goods
  3. a purely provincial levy on services
  4. an indirect tax ultimately borne by the consumer Correct answer.

Explanation

Sales tax is an indirect tax: the registered supplier charges it on the value of taxable supplies, collects it from the buyer and deposits it with the exchequer, so the economic burden falls on the final consumer.

Question 32Tax Practices

Zakat deducted by a bank from a taxpayer's account under the Zakat and Ushr Ordinance, 1980 is treated for income tax purposes as:

  1. a deductible allowance in computing taxable income Correct answer.
  2. income from other sources of the recipient bank
  3. a tax credit of two percent of taxable income
  4. an item wholly ignored in the income tax computation

Explanation

Section 60 allows a deduction for Zakat paid by an individual under the Zakat and Ushr Ordinance, 1980 in computing taxable income for the year. It reduces taxable income rather than being a tax credit.

Question 33Tax Practices

A taxpayer aggrieved by an assessment order may file an appeal before the Commissioner (Appeals) within:

  1. thirty days of the order Correct answer.
  2. sixty days of the order
  3. seven days of the order
  4. ninety days of the order

Explanation

Section 127 prescribes a limitation of thirty days from the date of service of the order for an appeal to the Commissioner (Appeals), accompanied by the prescribed fee.

Question 34Tax Practices

An employee with basic salary of Rs 500,000 receives a medical allowance of Rs 80,000, no part of which is supported by actual treatment bills. The exempt amount of the allowance is:

  1. Rs 80,000
  2. Nil
  3. Rs 30,000
  4. Rs 50,000 Correct answer.

Explanation

Clause 139 of Part I of the Second Schedule exempts medical allowance to the extent of 10 percent of basic salary where hospitalisation bills are not involved. Ten percent of Rs 500,000 is Rs 50,000, and the remaining Rs 30,000 is taxable salary.

Question 35Tax Practices

An employer's contribution to a recognised provident fund on behalf of an employee is exempt from tax to the extent of:

  1. one-tenth of salary Correct answer.
  2. the whole amount contributed, however large
  3. one-fifth of salary
  4. one-twentieth of salary

Explanation

Employer contribution to a recognised provident fund is exempt only up to one-tenth of the employee's salary; any excess over that limit is included in the employee's salary for the year.

Question 36Tax Practices

A business loss of a taxpayer for a tax year may be set off against:

  1. salary income of the same year only
  2. income under any head, including salary
  3. income from property only
  4. income under any head other than salary Correct answer.

Explanation

Section 56 permits a business loss to be set off against income under any head except salary, reflecting the personal nature of salary. Any unabsorbed balance is then carried forward under section 57.

Question 37Tax Practices

An unabsorbed business loss of an individual may be carried forward and set off against future business income for:

  1. ten tax years
  2. six tax years Correct answer.
  3. an unlimited number of years
  4. three tax years

Explanation

Section 57 allows an unabsorbed business loss to be carried forward to the following six tax years and set off against business income of those years.

Question 38Tax Practices

Profit received by an individual on a bank deposit is chargeable to tax under the head:

  1. Capital gains
  2. Income from other sources Correct answer.
  3. Income from business
  4. Income from property

Explanation

Profit on debt that does not arise from a business, from the letting of property or from the disposal of a capital asset is charged under income from other sources.

Question 39Tax Practices

A building used in a business and costing Rs 2,000,000 is allowed annual depreciation at the rate of:

  1. 10 percent of written down value Correct answer.
  2. 15 percent of cost
  3. 25 percent of written down value
  4. 5 percent of cost

Explanation

The Third Schedule prescribes a depreciation rate of 10 percent of written down value for buildings in use for business purposes. Depreciation is computed on the reducing balance, not on original cost.

Question 40Tax Practices

Pre-commencement expenditure of a business is allowed as a deduction:

  1. in full in the year it is incurred
  2. in five equal installments over five years Correct answer.
  3. in ten equal installments over ten years
  4. in two equal installments over two years

Explanation

Section 25 allows pre-commencement expenditure to be amortised in five equal installments, that is 20 percent of the expenditure in each of five successive tax years beginning with the year in which the business commences.

Question 41Tax Practices

Donations made by an individual to an approved charitable institution are admissible as a deduction up to:

  1. thirty percent of taxable income Correct answer.
  2. an unlimited amount, subject only to proof
  3. ten percent of taxable income
  4. twenty percent of turnover

Explanation

Section 61 permits a deduction for donations to approved institutions up to 30 percent of taxable income for individuals and associations of persons, subject to conditions such as payment through banking channels and the institution's approval status.

Question 42Tax Practices

A registered person may adjust input tax paid on purchases against output tax only where the goods were:

  1. acquired from a registered person against a valid tax invoice Correct answer.
  2. bought at the lowest available market price
  3. stored in a warehouse approved by the department
  4. paid for in cash at the time of purchase

Explanation

Input tax is adjustable only if the goods were acquired from a registered supplier against a tax invoice containing the prescribed particulars, including the supplier's registration number, and are used in making taxable supplies.

Question 43Tax Practices

Supplies of goods exported from Pakistan are:

  1. zero-rated, with input tax on such supplies refundable Correct answer.
  2. exempt, with no adjustment of related input tax
  3. charged to sales tax at the normal rate
  4. standard-rated at a reduced rate

Explanation

Exports are zero-rated under the Sales Tax Act, 1990, meaning the rate is nil but the supplies remain taxable supplies. Input tax attributable to zero-rated supplies can therefore be adjusted or claimed as a refund.

Question 44Tax Practices

Tax deducted by an employer from an employee's salary during a tax year is:

  1. a final tax that ends the employee's liability
  2. adjustable against the tax payable on the employee's annual return Correct answer.
  3. refundable only to the employer who deducted it
  4. not adjustable and must be borne as a cost by the employee

Explanation

Deduction of tax from salary is a mode of collection at source, not a final discharge. The amount withheld is credited against the tax computed on the employee's return, and any excess is refunded.

Question 45Tax Practices

A company is resident in Pakistan for a tax year if:

  1. it merely maintains a branch office in Pakistan
  2. it is incorporated under the laws of Pakistan Correct answer.
  3. its shares are held mainly by Pakistani nationals
  4. it derives most of its profit from Pakistan

Explanation

Section 83 treats a company as resident in Pakistan if it is incorporated under Pakistani law, or if its management and control is wholly situated in Pakistan at any time during the year. Place of incorporation alone is a sufficient test.

Question 46Tax Practices

A non-resident person is chargeable to Pakistan income tax on:

  1. foreign-source income remitted into Pakistan
  2. only Pakistan-source income Correct answer.
  3. worldwide income in the same manner as a resident
  4. income from every source except salary

Explanation

Taxability under section 11 depends on residence: a resident is taxed on worldwide income, whereas a non-resident is taxed only on income that is Pakistan-source under the relevant source rules.

Question 47Tax Practices

A non-resident consultant performs services outside Pakistan for a Pakistani company, which pays him from Pakistan. His remuneration is:

  1. Pakistan-source because payment is made in Pakistan
  2. taxable in Pakistan at half the normal rates
  3. not Pakistan-source, as the services were rendered abroad Correct answer.
  4. Pakistan-source because the payer is located in Pakistan

Explanation

Under the salary source rule, remuneration is Pakistan-source only where the services are rendered in Pakistan. Services performed wholly outside Pakistan by a non-resident are therefore not chargeable, even though the payer and the place of payment are in Pakistan.

Question 48Tax Practices

A loss from a speculation business for a tax year may be set off only against:

  1. income under any head of income
  2. income from any other speculation business Correct answer.
  3. income from property and other sources
  4. salary income of the same year

Explanation

Speculation losses are ring-fenced: they can be set off only against income from other speculation businesses and, if unabsorbed, carried forward for six tax years against similar income. They cannot be set off against other heads.

Question 49Tax Practices

In the current tax year an employee receives arrears of salary relating to earlier years. The arrears are taxable:

  1. in the earlier years, by revising those returns
  2. in the current tax year, when received Correct answer.
  3. half in the current year and half in the earlier years
  4. only if the employer separately deducts tax on them

Explanation

Salary is chargeable to tax on a receipt basis, so arrears are taxed in the tax year in which they are actually received, irrespective of the period to which they relate. The employee may claim relief under the relevant provisions if the bunching inflates his tax, but the year of taxation is the year of receipt.

Question 50Tax Practices

A vehicle is used 70 percent for business and 30 percent for private purposes, and its depreciation for the year is Rs 500,000. The admissible deduction is:

  1. Rs 500,000
  2. Rs 350,000 Correct answer.
  3. Rs 150,000
  4. Nil

Explanation

Only depreciation attributable to business use is deductible, because the private-use portion is not incurred wholly and exclusively for the business. Seventy percent of Rs 500,000 is Rs 350,000.