FAR Questions

30 | THE FINANCIAL REPORTING ENVIRONMENT
Module 1
QUICK REVISION QUESTIONS 1
1 What is the main aim of accounting?
A To produce a trial balance
B To record every financial transaction individually
C To maintain ledger accounts for every asset and liability
D To provide financial information to users of such information
2 Which of the following groups of users would primarily be interested in a company's annual
published financial statements?
A Shareholders and suppliers
B Management and employees
C Shareholders and providers of finance
D General public, environmental pressure groups
3 Are the following statements correct or incorrect?

 The shareholder is only interested in a statement of financial prospects, that is, an indication of
future progress.
 The supplier of goods on credit is only interested in a statement of financial position, that is, an
indication of the current state of affairs.
Shareholder Supplier
A Correct Correct
B Correct Incorrect
C Incorrect Correct
D Incorrect Incorrect
4 Which of the following statements concerning the International Accounting Standards Board (IASB)
is correct?
I. It develops and ultimately issues International Financial Reporting Standards (IFRSs).
II. The IASB is accountable to the IFRS Foundation.
A I only
B II only
C Both I and II
D Neither I nor II
5 Which of the following statements is correct?

A The IASB appoints the Trustees of the IFRS Foundation.
B The IFRS Foundation develops and issues Interpretations.
C The IFRS Interpretations Committee oversees the work of the IFRS Foundation.
D The IFRS Advisory Council assists and advises the IASB in the process of developing IFRSs.
6 Which of these statements are correct?

I. The IASB has the objective of enforcing IFRS.
II. The IASB is responsible for developing and issuing IFRS.
A I only
B II only
C Both I and II
D Neither I nor II
FINANCIAL ACCOUNTING AND REPORTING | 31
7 Which committee of the IASB provides guidance on the application of IFRS?

A IFRS Foundation
B IFRS Advisory Council
C IFRS Interpretations Committee
D International Accounting Standards Committee
8 What is the correct definition of GAAP?
MODULE 1
A National accounting standards and company law
B National accounting standards, stock exchange rules and company law
C International accounting standards, company law and stock exchange rules
D National accounting standards, international accounting standards, stock exchange rules and
company law
9 Which of the following is an advantage of a company that prepares a set of financial statements
under the regulatory framework?
A Lower costs of producing financial information
B Higher quality financial information is produced
C More financial information available for competitors
D Less disclosure of a company's activities in financial statements
10 What is the correct order for the process of issuing a new IFRS by the IASB?
A Discussion Paper, Standard
B Exposure Draft, Discussion Paper, Review
C Exposure Draft, Discussion Paper, Standard
D Discussion Paper, Exposure Draft, Standard
1 A conceptual framework is:

A the proforma financial statements.
B a list of key terms used by the IASB.
C a theoretical expression of accounting standards.
D a statement of theoretical principles which form the frame of reference for financial reporting.
2 Which of the following is an advantage of a conceptual framework?

A A framework encourages standardised accounting practice.
B The framework does not simplify the preparation and implementation of standards.
C There are a variety of users, so not all will be satisfied with the content of the framework.
D There are a variety of accounting situations which mean flexibility in the accounting approach is
needed.
3 What is the name of the IASB's conceptual framework?

A Statement of Principles for Financial Reporting
B The Conceptual Framework for Financial Reporting
C The Conceptual Framework for the Disclosure of Financial Statements
D The Conceptual Framework for the Presentation of Financial Statements to Users
4 What is the fundamental reason that financial statements are produced, according to the IASB's
Conceptual Framework?
A To provide information to tax authorities
B To satisfy the requirements of external users
C To provide information for internal management
D To report on a company's performance to its national government
5 Which of the following is not a use of financial statements prepared by a company?

A Reliable method of valuing the entity
B Decisions to buy, hold or sell equity investments
C Assessment of the security of amounts lent to the entity
D Assessment of management stewardship and accountability
6 According to the Conceptual Framework, who are the most important users of general purpose
financial reports?
A Investors and lenders
B Investors and employees
C Lenders and management
D Investors and the government
7 If an accountant comes across a transaction that is not covered by a specific IFRS accounting
standard, where should they initially look for guidance on accounting for that item?
A Listing authority regulations
B The requirements of IFRSs dealing with similar and related issues
C Company law
D Conceptual Framework
8 Which of the following constitute a change of accounting policy according to IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors?
A A change in depreciation method
B A change in the basis of valuing inventory
C Adopting an accounting policy for a new type of transaction not previously dealt with
D A revision to the carrying amount of a building carried at its revalued amount
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9 Which of the following items would not qualify for treatment as a change in accounting estimate,
according to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
A Provision for obsolescence of inventory
B Correction necessitated by a material error
C A change in the useful life of a non-current asset
D A change in a previous provision for tax
10 Applying the rules of IAS 8, which of the following would qualify as a change in accounting policy?
A Revising the depreciation method for a class of asset from straight line to reducing balance.
B Revising the valuation of inventory to first in first out from average cost.
C Amending the cut-off point for recognising an allowance for doubtful debts from receivables
greater than 90 days old to receivables greater than 100 days old.
D Amending the provision for warranties so it is calculated on 5 per cent of sales rather than 10
per cent of sales.
11 Under some circumstances, IAS 8 requires companies to adjust the financial statements of prior
periods and re-state the balance on opening equity.
Which of the following cases would such treatment be in accordance with IAS 8?
A A material decrease in the valuation of the opening inventory resulting from a change in
legislation affecting the saleability of the company's products. This legislation was retrospective
and was suddenly announced after the financial statements for the previous year had been
agreed.
B The discovery of a significant fraud carried out during the year in an overseas subsidiary
resulting in a write-down in the valuation of its assets at the period end.
C The company has material under-provision for corporation tax arising from the use of incorrect
data by the tax advisors acting for the company.
D A deterioration in sales performance has led to the directors restating their general
irrecoverable debt provision.
1 Which of the following is an advantage of a principles based system of accounting standard

setting?
A It always provides the answers.
B It discourages creative accounting.
C It results in greater comparability of financial statements.
D It needs to be supported by illustrative examples and interpretations.
2 Which of the following statements is incorrect?

A Application of IFRS is presumed to result in financial statements that achieve a fair presentation.
B Under IFRS, all published financial statements are required to present fairly the financial
position and financial performance of an entity.
C Application of IFRS whilst preparing a set of financial statements should ensure that they are
completely accurate.
D Application of IFRS is presumed to result in financial statements that are more comparable.
3 Which of the following statements represents a disadvantage of the use of accounting standards?
A Standards are a less rigid alternative to legislation.
B Standards may tend towards rigidity in applying the rules.
C Standards oblige companies to disclose their accounting policies.
D Standards reduce variations in methods used to produce accounts.
4 Which of the following statements about going concern assumption is true?

A The going concern basis should only be used if an entity can prove that it has the resources
necessary to continue trading.
B If an entity has any doubts over its ability to continue to trade, a basis other than going concern
should be used.
C The going concern basis should be used if the entity is expected to continue in operation for
the foreseeable future.
D The going concern basis should be used if the entity is expected to continue in operation for
the next twelve months, but is looking to liquidate after that period.
5 There are four enhancing qualitative characteristics of useful financial information. What are those
characteristics?
A Going concern, accruals, completeness, verifiability
B Comparability, timeliness, verifiability, understandability
C Substance over form, neutrality, going concern, accruals
D Comparability, understandability, completeness, neutrality
6 Which of these comments is correct, according to the IASB's Conceptual Framework for Financial
Reporting?
A Materiality means that only items having a physical existence may be recognised as assets.
B A faithful representation of financial information can never include amounts based on estimates.
C Financial information prepared using accrual accounting provides a better basis for assessing an
entity's performance than information based only on cash flows.
D To show faithful representation items should be complete, up to date and free from error.
7 What is the accounting concept called that requires income and expenses to be matched in the
period in which they occur, rather than when the cash is received or paid?
A Accruals
B Neutrality
C Materiality
D Faithful representation
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8 How many IFRS have been published by the IASB (excluding the IFRS for SMEs)?
A 17
B 29
C 41
D 43
9 Which of the following is a benefit of harmonisation?

A Ability of investors to compare cross border financial statements
B Increased training of staff to deal with new accounting standards
C Amendment of tax systems in different countries to align with accounting requirements
D Different countries have different legal systems for accounting which need to be amended
10 With which accounting body has the IASB carried out a joint project to develop several common
accounting standards?
A The OECD
B The Standards Advisory Council
C The Financial Accounting Standards Board
D The Australian Accounting Standards Board
1 What is the following statement a definition of?

'A present economic resource controlled by the entity as a result of past events.'
A Asset
B Equity
C Liability
D Expense
2 Which of the following is the correct definition of a liability?

A The residual interest in the assets of the entity after deducting all its liabilities
B A present obligation arising from past events from which future economic benefits are expected
to flow from the entity
C A resource controlled by an entity as a result of past events and from which future economic
benefits are expected to flow to the entity
D A present obligation of the entity to transfer an economic resource as a result of past events
3 What are the criteria for recognition of items in the financial statements according to the IASB's
Conceptual Framework?
I. Must meet the definition of an element of the financial statements
II. Must be measured reliably
III. Probable that there will be an inflow or outflow of future economic benefits and there is a past
transaction
IV Must provide relevant information and a faithful representation of the transactions of the entity.
A IV only
B I and IV only
C II and III only
D I, II, III, and IV
4 What items are recognised in the statement of profit or loss and other comprehensive income?
I. Equity
II. Assets
III. Income
IV. Liabilities
V. Expenses
A III only
B I and V only
C III and V only
D I, II, III, IV and V
5 Which of the following is an example of a current asset?

A Retained earnings
B Manufacturing licences
C Property, plant and equipment
D Motor vehicles held for sale as part of a trade
6 Which of the following items are non-current assets?

I. Land
II. Inventory
III. Bank loan
IV. Machinery
A I only
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B I and IV only
C I, III and IV only
D II, III and IV only
7 How is a bank overdraft classified in the statement of financial position?

A Current asset
B Current liability
C Non-current asset
D Non-current liability
8 How should the balance of accounts payable be reported in the financial statements?
A As an expense
B As a current asset
C As a current liability
D As a non-current asset
9 Which of the following is an example of a liability?

A Loan payable
B Inventory
C Receivables
D Plant and machinery
120 | THE ACCOUNTING THEORY
Module 2
1 Which statement is correct of the historical cost convention?

A It records only past transactions.
B It fails to take account of changing price levels over time.
C It has been replaced in accounting records by a system of current cost accounting.
D It values all assets at their cost to the business, without any adjustment for depreciation.
2 Under what basis are assets usually valued?

A Historical cost
B Fair value
C Current cost
D Fulfilment value
3 In times of rising prices, what effect does the use of the historical cost concept have on a
company's asset values and profit?
A Asset values and profit both overstated
B Asset values and profit both understated
C Asset values understated and profit overstated
D Asset values overstated and profit understated
4 Korbin Co. buys a machine for $50 000, paying $2 000 delivery charge. It will generate income of
$8 000 per annum for seven years. At the end of seven years it will be scrapped, Korbin will pay a
scrapping fee of $1 000 but will receive $4 000 for the scrap metal. What is its value in use?
A $50 000
B $52 000
C $59 000
D $60 000
5 Ladybird Co. purchased machine four years ago for $12 000, two years ago they paid for an
upgraded component which cost $2 000, the machine is expected to have a useful life of six years.
The machine can be purchased today for $14 000 and the upgrade component for $2 500. What is
the current cost of the machine?
A $4667
B $5000
C $5500
D $5917

A Positive accounting theory is not based on actual accounting practice.
B Normative accounting theory attempts to predict actual accounting practice.
C The use of a conceptual framework is an example of positive accounting theory.
D The development of alternatives to historic cost is an example of normative accounting theory.
7 What does the following statement describe?

'The point of reference by which profit is measured; it is a prerequisite for distinguishing between
an entity's return on capital and its return of capital.'
A Fair value
B Historical cost
C Capital maintenance
D Current cost accounting
8 Consider the following statements:

I. Specific price inflation is based on the average rate of inflation.
II. General price inflation measures price changes for a particular group of assets.
Which statements are correct?
A I only
B II only
C Both I and II
D Neither I nor II
9 Which of the following statements about current purchasing power accounting (CPP) are correct?
I. It measures profit as the increase in nominal money capital over the period.
II. It measures profit as the difference between income and expenses after allowing for the effect
of inflation.
III. It measures profit as the difference between income and expenses after ensuring that physical
capital has been maintained.
A II only
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B III only
C I and II only
D I and III only
10 Which of the following is not used as a measure of deprival value?
A Fair value
B Economic value
C Replacement cost
D Net realisable value
11 Historical cost accounting remains in use because of its practical advantages.
Which of the following is not an advantage of historical cost accounting?
A Amounts of transactions are reliable and can be verified
B Amounts in the statement of financial position can be matched to amounts in the statement of
cash flows
C It avoids the overstatement of profit which can arise during periods of inflation
D It provides fewer opportunities for creative accounting than systems of current value accounting
12 Overstatement of profits can arise during periods of inflation. This then leads to a number of other
consequences. Which of the following is not a likely consequence of overstatement of profits?
A Higher wage demands from employees
B Higher tax bills
C Reduced dividends to shareholders
D Overstated EPS
13 Suter Co. acquired an item of plant on 1 January 20X2 at a cost of $500 000. It has a useful life of
five years (straight-line depreciation) and an estimated residual value of 10 per cent of its historical
cost or current cost as appropriate. As at 31 December 20X4, the manufacturer of the plant still
makes the same item of plant and its current price is $600 000.
What is the correct carrying amount to be shown in the statement of financial position of Suter Co.
as at 31 December 20X4 under historical cost and current cost?
Historical cost Current cost
$ $
A 320 000 600 000
B 320 000 384 000
C 300 000 600 000
D 300 000 384 000
14 The 'physical capital maintenance' concept states that profit is the increase in the physical
productive capacity of the business over the period.
What type of accounting is this concept is applied in?
A Current cost accounting
B Historical cost accounting
C Current value accounting
D Current purchasing power accounting
1 What does the following statement define?

'A contract under which one or more persons engage another person to perform some service on
their behalf.'
A Accountability
B Agency theory
C Principal theory
D Substance over form
2 Fiduciary duty is:

A the directors running a company on behalf of the shareholders.
B the need for directors to prepare financial statements that show a true and fair view.
C the need for directors to disclose their personal shareholding in a company they manage.
D the need for directors to act in the best interests of the company and not out of self-interest.
3 Which of the following are examples of agency costs?

I. Directors' salaries
II. External audit fees
III. Finance department salaries
A I only
B II only
C I and II only
D I, II and III
4 According to IAS 1 Presentation of Financial Statements, which of the following are mandatory
disclosures in the annual financial report?
I. Risk review
II. Accounting policies
III. Environmental report
IV. Statement of profit or loss
A IV only
B II and IV only
C I, II and IV only
D I, II, III and IV
5 ABC Co. is a large company, listed on the ASX. Which of the following items is it required to
prepare as part of its annual financial report?
I. A Chairman's Statement
II. A corporate governance report
A I only
B II only
C Both I and II
D Neither I nor II
6 Which of the following must be disclosed in a non-listed company's annual report?

A Accounting policies
B Environmental report
C Management commentary
D Corporate governance statement
7 Who is responsible for the preparation of the financial statements?
A The external auditors.
B The finance director.
C The board of directors.
D The internal audit department.
8 Which of the following statements is/are correct?
I. Paying management fixed levels of pay, helps to alleviate the agency problem
II. Incentive schemes for managers such as profit related pay can lead to creative accounting
A I only
B II only
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C Both I and II
D Neither I nor II
9 If an auditor is unable to gather the evidence needed on their audit due to a fire destroying most
of a company’s accounting records, what type of audit opinion should they give?
A Unqualified
B Modified
C Disclaimer
D Adverse
I. A management commentary should provide management's view of the entity's performance,
position and progress
II. A management commentary should focus on the comparison of the current year’s results with
previous periods
A I only
B II only
C Both I and II
D Neither I nor II
11 Which of the following does not form part of a company’s main financial statements?
A Statement of cash flows
B Directors' report
C Notes to the accounts
D Statement of financial position
QUICK REVISION QUESTIONS
1 Which of the following are examples of current assets?

I. Prepayments
II. Cash equivalents
III. Manufacturing licences
IV. Income received in advance
V. Property, plant and equipment
A IV only
B I and II only
C I, II and III only
D I, II, III, IV and V
2 Which of the following must be disclosed in the statement of profit or loss and other
comprehensive income?
I. Tax expense
II. Analysis of expenses
III. Net profit or loss for the period
A I and II only
B I and III only
C II and III only
D I, II and III
3 Which of the following must be disclosed separately on the face of the statement of financial
MODULE 3
position??
A Accruals and prepayments
B Revaluation surplus
C Deferred tax liabilities and deferred tax assets
D Bank overdraft
4 In the current financial year, Natamo has raised a loan for $3 million. The loan is repayable in 10
equal half yearly instalments. The first instalment is due six months after the loan was raised.
The loan will be reported in Natamo's next financial statements:
A As capital.
B As a current liability.
C As a non-current liability.
D As both a current and a non-current liability.
5 When reporting profit for a period, companies are required to ensure that income and expenses
are correctly classified.
Which of the following expenses will not be included in the calculation of profit before tax?
A Interest payable
B Reorganisation costs
C Depreciation expense
D Profits attributable to non-controlling interests
6 The draft statement of profit or loss and other comprehensive income of Thermin for the year
ended 30 November 20X4 shows a profit before tax of $325 800. This includes:
1. A restructuring charge of $85 000; and
186 | FINANCIAL STATEMENTS
2. An adjustment of $42 000 to reduce the value of opening inventory. An error at the previous
year end had led to the inventory being over-valued.
What is the correct profit before tax for the year ended 30 November 20X4?
A $283 800
B $325 800
C $367 800
D $452 800
7 In the last financial year Cuchabee issued an invoice for $28 900 for the sale of inventory which had
cost $27 600.
What was the effect of this transaction on the company's assets, liabilities and capital and reserves?
Assets Liabilities Capital and reserves
A Increased Reduced Increased
B Increased Unchanged Increased
C Reduced Unchanged Reduced
D Unchanged Reduced Increased
8 Which of the following is reported as other comprehensive income?
A A dividend
B The proceeds of a share issue
C The profit on sale of a property
D A surplus on revaluation of a property
9 Which of the following is true concerning the statement of changes in equity?
A It reports all realised profits and losses only
B It does not include revaluation surpluses
C It includes other comprehensive income
D All of the above
10 D Co's transactions and results for the period to 31 December 20X9 are shown below:
$m
Profit for the period 29

Surplus on property 1 revaluation 14
Deficit on property 2 revaluation (7)
Issue of share capital 1
Property 2 had previously been revalued upwards by $10m.
What amount would appear in the statement of changes in equity as total comprehensive
income for the period?
A $30m
B $36m
C $37m
D $43m
11 Which of the following items could appear in a company's statement of cash flows?
I. Dividends received
II. Proposed dividend
III. Proceeds from issue of shares
IV. Irrecoverable debts written-off
V. Surplus on revaluation of non-current assets
A I and III only
B II and IV only
C I, II and IV only
D I, III and V only
12 Part of the process of preparing a company's statement of cash flows is the calculation of cash flow
from operating activities.
Which of the following statements about that calculation (using the indirect method) are correct?
I. Increase in payables should be added to operating profits.
II. Increase in inventory should be deducted from operating profits.
III. Depreciation charges should be added to profit before tax.
IV. Loss on sale of operating non-current assets should be deducted from profit before tax.
A I, II and III only
B I, II and IV only
C I, III and IV only
D II, III and IV only
13 In the course of preparing a company's statement of cash flows, the following figures are to be
included in the calculation of net cash from operating activities.
$
Depreciation charges 980 000
Profit on sale of non-current assets 40 000
Increase in inventories 130 000
Decrease in receivables 100 000
Increase in payables 80 000
What will the net effect of these items be in the statement of cash flows?
$
A Addition to operating profit 890 000
B Subtraction from operating profit 890 000
C Addition to operating profit 990 000
D Addition to operating profit 1 070 000
14 Part of a company's draft statement of operating cash flows is shown below:
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$'000
Operating profit 8 640
Depreciation charges (2 160)
Proceeds from sale of non-current assets 360
Increase in inventory (330)
Increase in accounts payable 440
The following criticisms of the above extract have been made:

I. Increase in inventory should have been added, not deducted.
II. Depreciation charges should have been added, not deducted.
III. Increase in accounts payable should have been deducted, not added.
IV. Proceeds from sale of non-current assets should not appear in this part of the statement of cash
flows.
Which of these criticisms are valid?
A I and III only
B I and IV only
C II and III only
D II and IV only
15 A company has the following information about property, plant and equipment:
20X7 20X6
$'000 $'000
Cost 750 600
Accumulated depreciation 250 150
Carrying amount 500 450
Plant with a carrying amount of $75 000 (original cost $90 000) was sold for $30 000 during the year.
188 | FINANCIAL STATEMENTS
What is the cash flow from investing activities for the year?
A $95 000 inflow
B $210 000 inflow
C $95 000 outflow
D $210 000 outflow
16 A company provides the following extract from its statement of financial position:
20X7 20X6
$'000 $'000
Share capital 2 500 1 000
Loans 750 1 000
What is the cash flow from financing activities for the year?
A $1 250 000 inflow
B $1 750 000 inflow
C $1 250 000 outflow
D $1 750 000 outflow
17 In the year ended 31 December 20X4 a company sold some plant which had cost $100 000 for
$20 000. At the time of sale the carrying amount of the plant was $18 000.
Which of the following correctly states the treatment of the transaction in the company's statement
of cash flows?
Proceeds of sale Profit on sale
A Cash inflow under Added to profit in calculating cash
financing activities flow from operating activities
B Cash inflow under Added to profit in calculating cash
investing activities flow from operating activities
C Cash inflow under Deducted from profit in calculating
financing activities cash flow from operating activities
D Cash inflow under Deducted from profit in calculating
investing activities cash flow from operating activities
18 A company's statements of financial position at 31 December 20X4 and 20X5 included the
following items:
Statements of financial
position at
31.12.X5 31.12.X4
$'000 $'000
Taxation payable 840 760
Retained earnings 1 660 1 470
The company paid no interest or interim dividends during these years, and the tax liability of
$760 000 in the 20X4 statement of financial position was the amount paid in 20X5. Using this
information, what is the company's operating profit for 20X5 for inclusion in its statement of cash
flows?
A $190 000
B $950 000
C $1 030 000
D $1 660 000
19 The statements of financial position of R, a limited liability company, at 31 December 20X3 and
20X4 included these figures:
31 December
20X3 20X4
Property, plant and equipment: $m $m
Cost 40 50
Accumulated depreciation (10) (14)
30 36
The statement of profit or loss and other comprehensive income for the year ended 31 December
20X4 showed the following figures:
Depreciation charge for year $6m
Loss on sale of property, plant and equipment $1m
The company purchased new property, plant and equipment costing $16m during the year.
What figure should appear in the company's statement of cash flows for 20X4 for receipts from the
sale of property, plant and equipment?
A $3m
B $4m
C $5m
D The figure cannot be calculated from the information provided.
20 At 1 October 20X4, BK had the following balance:

Accrued interest payable $12 000 credit
During the year ended 30 September 20X5, BK charged interest payable of $41 000 to its
statement of profit or loss and other comprehensive income. The closing balance on accrued
interest payable account at 30 September 20X5 was $15 000 credit.
How much interest paid should BK show in its statement of cash flows for the year ended
30 September 20X5?
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A $38 000
B $41 000
C $44 000
D $53 000
21 What is the role of the external auditor in the audit of a set of financial statements?
A To provide management with a set of financial statements
B To provide absolute assurance that the financial statements are correct
C To provide recommendations to the entity's management on improving controls
D To provide reasonable assurance on the truth and fairness of the financial statements
22 Which of the following might appear as a separate item in the 'other comprehensive income'
section of the statement of profit or loss and other comprehensive income?
A A gain on revaluation of a property.
B A large write-off of inventory in the period.
C A profit on disposal of the company's head office building.
D Disclosure of a large contingent liability resulting from a legal suit.
23 Which of the following is not a function of an internal audit team?

A Review and monitor internal control systems.
B Express an opinion on the financial statements.
C Review operational economy, efficiency and effectiveness.
D Review compliance with laws and regulations.
1 XY Co. has development expenditure of $500 000. Its policy is to amortise development
expenditure at 2 per cent per annum. Accumulated amortisation brought forward is $20 000.
What is the amount shown in the statement of financial position at the year end for development
expenditure?
A $470 000
B $480 000
C $490 000
D $500 000
2 Which of the following statements about research and development expenditure are correct
according to IAS 38 Intangible Assets?
I. If certain conditions are met, an entity may decide to capitalise development expenditure.
II. Capitalised development expenditure must be amortised over a period not exceeding five years.
III. Research expenditure, other than capital expenditure on research facilities, must be written off
as incurred.
IV. Capitalised development expenditure must be classified in the statement of financial position
under intangible non-current assets.
A I and II only
B II and IV only
C III and IV only
D I, III and IV only
3 Which of the following should be capitalised as development expenditure?
A A Co. has incurred $140 000 investigating whether a newly identified plant has medicinal
properties, and found that it does.
B B Co. has found that a particular chemical compound may be useful in combating flu. A number
of large pharmaceutical companies are providing financial backing for B Co.
C C Co. has produced a prototype of a new product however trials in its use have revealed a
number of flaws. C Co. is currently working on overcoming these flaws with little success.
D D Co. has spent $90 000 making a new fabric resistant to the sun's rays for use in children's
clothing. Several large manufacturers are interested in the fabric which will be ready for
production in the coming year.
4 In the current year High Co. has developed a new heat retaining fabric from which clothing suitable
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for high altitudes will be made. The project meets the IAS 38 criteria for capitalisation and by
30 June 20X8, $210 000 had been capitalised.
The fabric is expected to generate revenue for 10 years from the date on which commercial
production commenced on 1 November 20X7, although in the first year only half of the revenue of
subsequent years is anticipated. What amount is charged to profit or loss in respect of the fabric in
the year ended 30 June 20X8?
A $7368
B $11 053
C $14 000
D $21 000
220 | APPLICATION OF SPECIFIC ACCOUNTING STANDARDS
5 Cranford Co. has incurred $40 000 researching chemical compounds in the year ended 30 June
20X8. It has also spent $90 000 developing a new product. The product's development was
completed on 28 February but management has decided to delay commercial production until
July 20X8. The product is expected to have a useful life of five years. The development project
meets the IAS 38 capitalisation criteria. How should these costs be treated in the year ended
30 June 20X8?
A $130 000 should be written off to profit or loss
B $46 000 should be written off to profit or loss and $84 000 recognised as an intangible asset
C $40 000 should be written off to profit or loss and $90 000 recognised as an intangible asset
D $100 000 should be written off to profit or loss and $30 000 recognised as an intangible asset
6 Which of the following four statements is correct?
A Capitalised development expenditure must be amortised over a period not exceeding five
years.
B Capitalised development costs are classified in the statement of financial position as non-
current assets.
C Amortisation of capitalised development expenditure will appear as an item in a company's
statement of changes in equity.
D If all the conditions specified in IAS 38 Intangible Assets are met, the directors can choose
whether to capitalise the development expenditure or not.
7 Which of the following are IAS 38 criteria which must be met in order to capitalise an intangible
non-current asset?
I. The asset must be capable of separate disposal.
II. The asset must be within the control of the entity.
III. It is probable that future economic benefits will flow to the entity as a result of the asset.
A I and II only
B I and III only
C II and III only
D I, II and III
8 Which of the following is correct?
A An intangible asset must be amortised.
B Market share may be recognised as an intangible asset.
C Intangible assets with an indefinite useful life must be reviewed for impairment annually.
D Internally generated goodwill can be recognised in the financial statements by reference to the
amount of purchased goodwill of a similar company.
9 Choc Co. acquires a chocolate bar brand from a competitor for $900 000 on 1 August 20X9. The
brand is considered by Choc Co. to have a useful life of 25 years, and in order to maintain its
market position, Choc Co. have, since acquisition, spent $100 000 on a marketing campaign. What
intangible asset is recognised in Choc Co.'s statement of financial position at 31 December 20X9?
A $864 000
B $885 000
C $964 000
D $985 000
10 Clever Co. has incurred the following costs in the course of the year ended 30 June 20X9:
 $400 000 training selected staff members to be 'World Class Knowledge Holders' (an internal
qualification which is believed to result in increased sales).
 $100 000 acquiring patents.
 $200 000 advertising new products. The advertising is expected to result in a doubling of sales
in the coming year.
What amount should Clever Co. capitalise as an intangible asset in respect of these items in the
year ended 30 June 20X9?
A $100 000
B $300 000
C $500 000
D $600 000
11 Which of the following represents the correct treatment of a revaluation surplus arising on a
property and an impairment loss on an asset which has not previously been revalued?
Revaluation surplus Impairment loss
A Profit or loss Profit or loss
B Other comprehensive income Profit or loss
C Profit or loss Other comprehensive income
D Other comprehensive income Other comprehensive income
12 At 1 May 20X4 the revaluation surplus of Bloxden was $1 257 000. This was in respect of the
company's head office.
During the year to 30 April 20X5 the value of the head office increased by a further $82 000. In the
same period, the company's factory suffered an impairment of $90 000.
What is the value of the revaluation surplus at 30 April 20X5?
A $1 167 000
B $1 249 000
C $1 257 000
D $1 339 000
13 Which of the following statements about IAS 36 Impairment of Assets are correct?
I. Non-current assets must undergo an annual impairment test.
II. If individual assets cannot be tested for impairment, it may be necessary to test a group of
assets as a unit.
III. An impairment loss must be recognised immediately in profit or loss, except that all or part of a
loss on a revalued asset should be charged against any related revaluation surplus.
A I and II only
MODULE 4
B I and III only

C II and III only
D I, II and III
14 A cash-generating unit comprises the following:

$m
Building 20
Plant and equipment 10
Goodwill 5
Current assets 10
45
Following a downturn in the market, an impairment review has been undertaken and the
recoverable amount of the cash-generating unit is estimated to be $25m.
What is the carrying amount of the building after adjusting for the impairment loss?
A $10m
B $11m
C $12.5m
D $20m
15 On 1 January 20X5 Plane Co. acquired 60 per cent of the equity share capital of Sycamore Co.
Goodwill of $100 000 arose on the acquisition.
Sycamore Co.'s performance for the years ended 31 December 20X5 and 31 December 20X6
slightly exceeded budget. However, in the year ended 31 December 20X7 it made substantial
losses that had not been forecast.
The goodwill arising on the acquisition of Sycamore Co. should be reviewed for impairment:
A in 20X5
B in 20X7
C annually
D in 20X5 and in 20X7
16 Man Co. bought a property on 1 April 20X5 costing $700 000 and commenced depreciation over a
50-year period. On 1 April 20X7, the property was revalued to $960 000 and depreciation
continued over the remaining useful life. Man Co. makes an annual reserve transfer in respect of
excess depreciation. On 31 March 20X8, as the result of fire damage, the property was found to be
impaired with a recoverable amount of $600 000.
Which of the following is correct for the year ended 31 March 20X8?
A An impairment loss of $340 000 arises, $288 000 is debited to the revaluation surplus and
$64 000 to profit or loss
B An impairment loss of $340 000 arises, $282 000 is debited to the revaluation surplus and
C An impairment loss of $340 800 arises, $282 800 is debited to the revaluation surplus and
D An impairment loss of $340 800 arises, $288 000 is debited to the revaluation surplus and
17 Skipton Co. bought land 11 years ago in 20W8 at a cost of $300 000. In 20X3 the land was revalued
to $350 000 and in 20X6 it was revalued again to $400 000. At the end of 20X9 the land had a value
in use of $270 000 and the fair value less costs of disposal was $285 000.
How is the resulting impairment loss recorded?
A $50 000 as other comprehensive income and $65 000 in profit or loss
B $50 000 as other comprehensive income and $80 000 in profit or loss
C $100 000 as other comprehensive income and $15 000 in profit or loss
D $100 000 as other comprehensive income and $30 000 in profit or loss
18 Pannal Co. recorded an impairment of its goodwill five years ago, reducing the carrying amount by
half. The management of Pannal now believes that the value of goodwill has increased again to
75 per cent of its original value. Which of the following is correct?
A The reversal of the impairment loss cannot be recognised.
B The reversal of the impairment loss should be recognised in profit or loss.
C The reversal of the impairment loss should be recognised in other comprehensive income.
D The reversal of the impairment loss is recognised in either other comprehensive income or
profit or loss depending on how the initial impairment was recognised.
19 Denton Co. acquired a piece of machinery on 1 July 20X7 for $80 000 and commenced
depreciation on a straight-line basis over 10 years. At 31 December 20X8, the machine was tested
for impairment as a result of a downturn in the market. It was found to have a value in use of
$66 000 and the fair value less costs of disposal was $60 000.
What was the depreciation charge on the machine in the year ended 31 December 20X9 assuming
that there was no change in useful life?
A $7059
B $7529
C $7765
D $8000
I. An intangible asset with an indefinite useful life must be tested for impairment at the end of
each reporting period.
II. A head office building which is shared by a number of cash-generating units is always tested for
impairment on an individual basis.
A I only
B II only
C Both statements
D Neither statement
MODULE 4
1 On 31 March 20X7, DT received an order from a new customer, XX, for products with a sales value
of $900 000. XX enclosed a deposit with the order of $90 000.
On 31 March 20X7, DT had not completed credit referencing of XX and had not despatched any
goods. DT is considering the following possible entries for this transaction in its financial
statements for the year ended 31 March 20X7.
I. Recognise a liability for $90 000
II. Include $90 000 in revenue for the year
III. Include $900 000 in revenue for the year
IV. Recognise a trade receivable for $810 000
V. Do not include anything in revenue for the year
According to IFRS 15 Revenue from Contracts with Customers, how should DT record this
transaction in its financial statements for the year ended 31 March 20X7?
A I and II only
B I and V only
C III and IV only
D IV and V only
2 London Co. sells air conditioning systems, providing one year's free servicing with every system
sold. The servicing could be purchased separately for $500. How should London Co. account for
the $4000 sales price of each system?
A $4000 should be recognised as revenue spread over the first year after sale.
B $4000 should be recognised as revenue when each system is delivered to the customer.
C $3560 should be recognised as revenue when each system is delivered to the customer and
$440 should be spread over the first year of sale.
D $4000 should be recognised as revenue when each system is delivered to the customer and
$500 recognised as revenue over the first year after sale.
3 Which of the following statements regarding revenue recognition are correct?
I. Revenue should ignore any settlement discounts.
II. Tuition fees received by a college are recognised as income on the day the tuition commences.
III. Revenue from the sale of goods on a sale or return basis is recognised when the goods are sold
to a third party.
A I only
MODULE 4
B III only
C II and III only
D I, II and III
4 Leo Co. is liable to corporate income tax at a rate of 30 per cent. The following information is
relevant:
Y/e 30 November 20X7
Profit before tax $490 000
Taxable profits $502 000
Tax paid in 20X8 in respect of year $149 000
Y/e 30 November 20X8
Profit before tax $523 000
Taxable profits $582 000
Tax paid in 20X9 in respect of year $170 000
What is the tax charge in the statement of profit or loss and other comprehensive income for the
year ended 30 November 20X8?
A $158 900
B $170 000
C $173 000
D $174 600
5 At 30 September 20X2 the statement of financial position of CBN Co. included a liability for
deferred tax of $128 500. At 30 September 20X3 the non-current assets had a carrying amount of
$2 650 000 and a tax written down value of $1 872 000. The tax rate is 20 per cent.
What is the balance on the deferred tax account at 30 September 20X3?
A $27 100
B $128 500
C $155 600
D $778 000
6 A company in its first year of trading has significantly higher capital allowances (tax depreciation)
than the accounting depreciation charged to profit or loss on the same assets. What would be the
effect of recognising a liability for deferred taxation in respect of these assets?
Profit after tax Net assets
A Increase Increase
B Decrease Increase
C Increase Decrease
D Decrease Decrease
7 At 30 November 20X4 the carrying amount of the non-current assets of Reynard Co. was
$3 570 000 and the tax written down value was $2 450 000. The liability for deferred tax brought
forward was $250 000.
The tax rate is 22 per cent.
What should be reported in the statement of profit or loss and other comprehensive income in
respect of deferred tax?
A A credit of $3600
B A charge of $3600
C A credit of $246 400
D A charge of $246 400
8 At 30 April 20X6, the carrying amount of the non-current assets of Bahno Co. was $80 000 greater
than the tax written down value, and the balance brought forward on the deferred tax account was
$24 800. The company accountant calculated that the income tax charge on the reported profit for
the year to 30 April 20X6 would be $53 960, based on the tax rate of 24 per cent.
What is the total charge for taxation in the statement of profit or loss and other comprehensive
income for the year to 30 April 20X6?
A $48 360
B $59 560
C $73 160
D $78 760
9 Which of the following statements about deferred taxation is correct?
A Deferred tax is an amount of tax certain to be payable at a future date.
B Deferred taxation is an accounting item used to apply the accruals concept to taxation charges
in the accounts.
C Deferred taxation is an accounting item used to apply the consistency concept to taxation
charges in the accounts.
D Deferred tax liabilities are shown in the statement of financial position of a company as part of
the taxation current liability.
10 Kelt Co. makes a tax-adjusted loss in its 20X8 financial year of $320 000. $120 000 of these losses
are carried back to relieve against the profits of 20X7 and $15 000 are used in the current year to
relieve other income. The remainder are carried forward. In 20X9 Kelt Co. is expected to make
significant profits as a result of the launch of a new product. Kelt Co.'s tax rate is 25 per cent.
What is the deferred tax implication, if any, in 20X8 of the loss made?
A A deferred tax asset of $46 250
B A deferred tax asset of $50 000
C A deferred tax liability of $46 250
D A deferred tax liability of $50 000
11 Which of the following statements are correct?
I. A deferred tax liability is the result of a deductible temporary difference.
II. The tax base of an asset is the future amount which is deductible from profits.
III. A revaluation will result in the recognition of a deferred tax movement in profit or loss.
IV. Where the carrying amount of an asset exceeds its tax base there will be a taxable temporary
difference.
A I and IV only
B II and III only
MODULE 4
C II and IV only
D I, II, III and IV
12 Parker Co. has non-current assets with an original cost of $580 000. As at 31 January 20X9,
accumulated depreciation provided on these assets amounts to $80 000 and tax allowances given
amount to $130 000. On this date, Parker recognised a $100 000 revaluation surplus in respect of a
factory included within the above. The original cost of the factory was $190 000, accumulated
depreciation to date was $20 000 and tax allowances $30 000. Parker's tax rate is 20 per cent and
the deferred tax liability brought forward in respect of accelerated capital allowances was $9000.
How are movements in deferred tax recognised in the statement of profit or loss and other
comprehensive income?
In profit or loss As other comprehensive income
A $1000 charge $20 000 charge
B $1000 credit $22 000 charge
C $8000 credit $22 000 charge
D $10 000 charge $20 000 charge
13 Extracts from the financial statements of Rasputin Co. are as follows:

Tax charge to profits $47 500
Company income tax liability for the year $56 000
Deferred tax liability at start of year $34 000
Deferred tax liability at end of year $28 000
Rasputin has always paid its tax due on time. What is the under or over-provision relating to the
previous year?
A $2500 over-provision
B $2500 under-provision
C $14 500 over-provision
D $14 500 under-provision
1 Which of the following statements, in respect of foreign currency translation, are correct according
to IAS 21 The Effects of Changes in Foreign Exchange Rates?
I. The functional currency of an entity is selected by management
II. The presentation currency of an entity is selected by management
III. The functional currency of an entity is identified by reference to the circumstances of the
business
IV. The presentation currency of an entity is identified by reference to the circumstances of the
business
A I and II only
B I and IV only
C II and III only
D III and IV only
2 BLX Co. holds several investments in subsidiaries. One of these, CMY Co., is located abroad.
CMY Co. prepares its financial statements in its local currency, the crown.
Several years ago, when the exchange rate was 5 crowns = $1, CMY Co. purchased land at a cost
of 170 000 crowns. On 1 June 20X5, when the exchange rate was 6.5 crowns = $1 the land was
revalued at a fair value of 600 000 crowns. The exchange rate at the group's year end,
31 December 20X5, was 7 crowns = $1.
In accordance with the requirements of IAS 21 The Effects of Changes in Foreign Exchange Rates,
at what value in $ should the land be recognised in BLX Co.'s group financial statements at
31 December 20X5?
A $85 714
B $90 440
C $100 154
D $120 000
3 Street Co. purchased goods for €450 000 from an overseas supplier on 30 November 20X6.
Street Co. paid for the goods on 31 January 20X7. They were not sold to third parties until
February 20X7.
Exchange rates were:
€=$1
30 November 20X6 1.5
31 December 20X6 1.45
31 January 20X7 1.55
What is the exchange difference that should be reported in profit or loss for the year ended
31 December 20X6 and at what amount should the goods be included in inventory in the
statement of financial position at that date?
Exchange difference Inventory
A $22 500 loss $652 500
B $22 500 loss $675 500
C $22 500 gain $675 500
D $22 500 gain $697 500
4 Parent Co. has three overseas subsidiaries:

1. A Co. is 80 per cent owned. A Co. does not normally enter into transactions with Parent Co.,
other than to pay dividends. It operates as a fairly autonomous entity on a day to day basis
although Parent Co. controls its long-term strategy.
2. B Co. is 100 per cent owned and has been set up in order to assemble machines from materials
provided by Parent Co. These are then transferred to Parent Co., which sells them to third
parties.
3. C Co. is 75 per cent owned and is located in France. It manufactures and sells its own range of
products locally. It negotiates its own day to day financing needs with French banks.
Which of the subsidiaries are likely to have a different functional currency from Parent Co.?
A A Co. and B Co.
B A Co. and C Co.
C B Co. and C Co.
D All three subsidiaries
5 Archway Co. has an overseas subsidiary in Sweden. This subsidiary is 75 per cent owned and
operates semi-independently of its parent. The exchange gain arising from the translation of the
subsidiary's financial statements for the year ended 30 June 20X4 was $20 000.
On 1 June 20X4 Archway Co. purchased raw materials from a European supplier for €250 000. It
paid for the materials on 31 July 20X4. Relevant exchange rates were:
€=$1
1 June 20X4 1.6
30 June 20X4 1.61
31 July 20X4 1.63
In respect of these items, what is the exchange gain that should be included in the consolidated
statement of profit or loss for the year ended 30 June 20X4?
A $2500 loss
B $7500 loss
C $12 500 gain
D $17 500 gain
6 When a parent has a subsidiary that is a foreign operation, which rates of exchange should be used
to translate the items below into the parent's local currency?
Non-current assets Receivables Non-current liabilities
A Closing rate Closing rate Closing rate
B Historic rate Closing rate Closing rate
C Historic rate Historic rate Closing rate MODULE 4
D Historic rate Historic rate Historic rate
7 Bay Co. has a foreign subsidiary Sea Co., acquired on 1 January 20X7, which uses the Yoyo as its
functional currency. Details of Sea Co. are given below:
Net assets of Sea Co. at 1 Jan 20X7 Yoyo 340 000
Net assets of Sea Co. at 1 Jan 20X8 Yoyo 410 000
Net assets of Sea Co. at 31 Dec 20X8 Yoyo 500 000
Sea Co. has paid no dividends since acquisition. It translates all income and expense items using
the average rate for the period.
Relevant exchange rates are:
1 January 20X7 2.1 Yoyo: $1
1 January 20X8 2.0 Yoyo: $1
31 December 20X8 1.8 Yoyo: $1
Average rate 1 Jan X7–31 Dec X8 1.95 Yoyo: $1
Average rate 1 Jan X8–31 Dec X8 1.9 Yoyo: $1
What exchange difference is included in Bay Co.'s consolidated reserves for the year ended
31 December 20X8?
A $25 410 loss
B $25 410 gain
C $36 386 loss
D $36 386 gain
8 Rain Org is a subsidiary of the Weather Group. Its functional currency is the Zyco, and the
presentation currency of the group is the $. The abbreviated statement of financial position of
Rain Org at 31 December 20X9 is as follows:
Zyco
Non-current assets 420 000
Current assets 210 000
Total assets 630 000
Share capital 100 000

Reserves 350 000
Current liabilities 180 000
Equity and liabilities 630 000
Relevant exchange rates are as follows:

3 Zyco: $1 on 31 December 20X9
2.1 Zyco: $1 on date of acquisition of non-current assets
2 Zyco: $1 on date Rain Org acquired by Weather Group
What are the translated reserves of Rain Org at 31 December 20X9?
A $100 000
B $116 667
C $160 000
D $175 000
9 Aardvark Co. bought goods from Hippo Co. for Milanian Pounds (MP) 230 000 on 31 October 20X8.
At that date the exchange rate was MP 2.3: $1. Aardvark paid MP 130 000 of the balance on
30 November in accordance with Hippo's terms. On that date the exchange rate was MP 2.1: $1.
Aardvark's year end is 31 December 20X8 and on that date the exchange rate was MP 1.8: $1.
The balance was settled by Aardvark at the end of January 20X9 when the exchange rate was
MP 2: $1.
What exchange difference is recorded in Aardvark's profit or loss for the year ended 31 December
20X8?
A $5383 loss
B $12 078 gain
C $17 461 loss
D $17 461 gain
10 Which of the following is correct?
A Monetary items include all types of current assets.
B Non-monetary items denominated in a foreign currency are never retranslated in an entity's
statement of financial position.
C Unrealised exchange differences on the retranslation of monetary items in an entity's individual
accounts are recognised in profit or loss.
D An exchange difference arising on the retranslation of a foreign currency loan is recognised in
other comprehensive income in an individual entity's financial statements.
MODULE 4
1. Murray leased a car on 1 January 20X4 with two payments due on 31 December 20X4 and
31 December 20X5 of $14 160 each. The present value of the lease payments is $24 000 and the
interest rate implicit in the lease is 12 per cent.
What is the lease liability that will be shown as a current liability as at 31 December 20X4?
A $11 021
B $12 000
C $12 720
D $14 160
2. Which of the following situations would require a right-of-use asset to be recognised under
IFRS 16?
I. A lease for a term of 10 years
II. A lease for a term of six months
III. A lease for an asset that has a low value when new
A I only
B II only
C II and III only
D All of the situations
3. Mutley leased an item of equipment on 1 January 20X4 under a lease for a term of five years with
an initial deposit of $200 000 and five annual rentals of $600 000 due at the end of the year. The
present value of the future cash flows is $2 500 000 and the interest rate implicit in the lease is
10 per cent.
What is the finance charge that will be recognised in profit or loss for the year ended 31 December
20X4?
A $190 000
B $250 000
C $270 000
D $300 000
4. Using the information from question 3:
What is the lease liability that will be shown as a current liability as at 31 December 20X4?
A $215 000
B $385 000
C $451 000
D $600 000
5. Sammy enters into a five year lease for an asset with a useful life of six years. Sammy pays an initial
deposit of $10 000 and the present value of the future cash flows is $65 000. The ownership of the
asset will transfer over to Sammy at the end of the lease.
What is the carrying value of the asset at the end of the first year?
A $52 000
B $54 167
C $60 000
D $62 500
292 | BUSINESS COMBINATIONS
1 During the last three years Harvert Co. has held 400 000 ordinary shares in Jamee Co. The issued
share capital of Jamee Co. is one million shares totalling $500 000. The finance director of Harvert
Co. is a director of Jamee Co.
How should the investment in Jamee Co. be treated in the consolidated financial statements of
Harvert Co.?
A As a subsidiary
B As an associate
C As a current asset investment
D As a non-current asset investment
2 A owns 51 per cent of the voting shares in B and 100 per cent of the voting shares in D. B owns
25 per cent of the voting shares in C and has board representation in that company.
All holdings have been held for a number of years.
Which of the following statements is correct?
A B, C and D are subsidiaries of A
B B and D are subsidiaries of A while C is a subsidiary of B
C B and D are subsidiaries of A while C is an associate of B
D D is a subsidiary of A while B and C are investments of A
3 Which of the following is a valid reason for excluding a 75 per cent owned company from
consolidation under current International Financial Reporting Standards?
A The company operates in a hyperinflationary environment.
B A formally documented decision has been made by the directors to wind down the activities of
the company.
C The activities of the company are dissimilar from those of the rest of the group so that it would
be confusing to include it in the consolidation.
D The company operates in a country where the government has recently passed a law to obtain
the power to govern the financial and operating policies of all entities.
4 Which of the following provide evidence of a parent-subsidiary relationship?

I. The parent has representation on the board of directors.
II. The parent has power to direct the operating activities of the entity by statute.
III. The parent has the power to remove a majority of members of the board of directors.
IV. The parent has power over more than 50 per cent of the voting rights through agreement with
other investors.
A IV only
B I and IV only
C II, III and IV only
D I, II, III and IV
5 During the last financial year, Orius Co. acquired 44 per cent of the issued share capital of
Eerus Co. Under the terms of the acquisition, the finance director of Orius was appointed to the
board of directors of Eerus.
Which of the following correctly describes how Orius should account for its interest in Eerus in the
consolidated financial statements?
A As a subsidiary, using equity accounting
B As an associate, using equity accounting
C As a subsidiary, using consolidation accounting
D As an associate, using consolidation accounting
6 Which of the following provides evidence of a situation where the investee should be accounted
for using the equity method?
A A shareholding of 18 per cent in the investee
B Provision of operational personnel by the parent to the investee
C Provision of essential technical information by the parent to the investee
D The parent has the power to govern the financial policies of the investee by agreement
7 Where a subsidiary does not prepare accounts to the same date as the parent company, which of
the following is correct?
A Additional financial statements must be prepared to the group reporting date by the subsidiary.
B The subsidiary's accounts may be used for the consolidation provided that the gap between the
reporting dates is three months or less.
C The subsidiary's accounts may be used for the consolidation provided that they are prepared to
a date within three months after the end of the group reporting period.
D The subsidiary's accounts may be used for the consolidation provided that they are prepared to
a date within three months before the end of the group reporting period.
8 Which of the following statements are correct?

I. Intra-group transactions must be eliminated on consolidation.
II. Where a group comprises a parent company and an investee over which the parent has
significant influence, consolidated accounts must be prepared.
III. A holding of 10 per cent of ordinary voting shares in another company must be accounted for in
accordance with IAS 28 Investments in Associates and Joint Ventures.
IV. Where a subsidiary does not adopt the same accounting policies as its parent company,
adjustments must be made to bring its accounting policies into line prior to consolidation.
A I and II only
B I and IV only
C III and IV only
D I, II, III and IV
MODULE 5
1 Major Co, which makes up its accounts to 31 December, has an 80 per cent owned subsidiary
Minor Co. Minor Co. sells goods to Major Co. at a mark-up on cost of 33.3 per cent. At
31 December 20X8, Major had $12 000 of such goods in its inventory and at 31 December 20X9
had $15 000 of such goods in its inventory.
What is the amount by which the consolidated profit attributable to Major Co.'s shareholders
should be adjusted in respect of the above?
Ignore taxation.
A $600 debit
B $750 credit
C $800 credit
D $1000 debit
The following information is relevant for questions 2 to 4

On 1 January 20X0 Alpha purchased 80 000 of the 100 000 ordinary shares in Beta for $180 000. At that
date Beta's retained earnings amounted to $90 000 and the fair values of Beta's assets at acquisition
were equal to their book values.
Three years later, on 31 December 20X2, the statements of financial position of the two companies
were:
Alpha Beta
$ $
Sundry net assets 230 000 260 000
Shares in Beta 180 000 –
410 000 260 000
Share capital
Ordinary shares 200 000 100 000
Retained earnings 210 000 160 000
410 000 260 000
The share capital of Beta has remained unchanged since 1 January 20X0. The non-controlling interest
is measured at full fair value and goodwill attributable to the non-controlling interest at acquisition
was $4000. There was no impairment of goodwill.
2 What amount should appear in the group's consolidated statement of financial position at
31 December 20X2 for goodwill?
A $14 000
B $25 000
C $28 000
D $32 000
31 December 20X2 for non-controlling interest?
A $32 000
B $48 000
C $52 000
D $56 000
31 December 20X2 for retained earnings?
A $245 000
B $266 000
C $338 000
D $370 000
5 Strachey owns 75 per cent of the share capital in Bell. At 31 July 20X2, the inventory of Strachey
was valued at $420 000 and included goods costing $60 000 that it had purchased from Bell at cost
plus 20 per cent.
At 31 July 20X2, inventories were valued at $445 000 in the consolidated statement of financial
position of the Strachey group.
At 31 July 20X2, what is the inventory figure in the statement of financial position of Bell?
A $13 000
B $15 000
C $35 000
D $37 000
6 The summarised statements of financial position of Falcon and Kestrel at 31 December 20X8 were
as follows:
Falcon Kestrel
$m $m
Net assets (at fair values) 68 25
Share capital 10 10
Reserves 58 15
68 25
On 1 January 20X8 Falcon purchased 80 per cent of the equity share capital of Kestrel for
$24 million. The fair value of the net assets of Kestrel was $20 million at that date. The goodwill
arising on consolidation was impaired by 100 per cent. Non controlling interests are measured at
the proportion of fair value of net assets acquired.
Calculate the amount of consolidated reserves to be included in the statement of financial position
at 31 December 20X8.
A $54m
B $62m
C $65m
D $70m
7 Harrow acquired 270 000 ordinary shares in Slough on 1 January 20X9 at a cost of $400 000. At that
date, Slough had 300 000 ordinary $1 shares in issue and its reserves were $50 000. Non-controlling
interests are measured at the proportionate share of the net assets acquired.
The amount of goodwill arising on consolidation is:
A $50 000
B $80 000
C $85 000
D $130 000
MODULE 5
8 STV owns 75 per cent of the ordinary share capital of its subsidiary TUW. At the group's year end,
28 February 20X7, STV's payables include $3600 in respect of inventories sold to it by TUW.
TUW's receivables include $6700 in respect of inventories sold to STV. Two days before the year
end STV sent a payment of $3100 to TUW that was not recorded by the latter until two days after
the year end.
The in-transit item should be dealt with as follows in the consolidated statement of financial
position at 28 February 20X7:
A $2325 to be included as cash in transit
B $3100 to be included as cash in transit
C $3100 to be included as inventories in transit
D $3100 to be added to consolidated payables
9 Ploughshare acquired 80 per cent of the equity share capital of Sword on 30 September 20X1. On
31 December 20X1, the share capital and reserves of Sword were:
$'000
Ordinary shares 300
Retained earnings at 1 January 20X1 80
Retained profit for the year ended 31 December 20X1 40
420
The profits of Sword have accrued evenly throughout 20X1. Goodwill arising on the acquisition was
$20 000. Non-controlling interests are measured at the proportionate share of the net assets
acquired.
What was the cost of the investment in Sword?
A $324 000
B $332 000
C $348 000
D $356 000
10 XY owns 75 per cent of the issued equity share capital of PQ. At the year end, XY held inventories
valued at $160 000 and PQ held inventories valued at $90 000. The inventories held by XY included
$20 000 of goods purchased from PQ at a profit margin of 30 per cent. There was also inventories
in transit between the two companies; this amounted to a further $10 000 at selling price.
At what value should inventories appear in the consolidated statement of financial position?
A $228 500
B $251 000
C $254 000
D $266 000
1 At the beginning of the year a subsidiary transfers a non-current asset to the parent for $500 000.
At that date, its carrying amount was $400 000 and it had four years of useful life left. What
adjustment is made to total consolidated profit before tax for the year in respect of the transfer?
A $25 000 credit
B $75 000 debit
C $100 000 credit
D $100 000 debit
2 AB acquired a 60 per cent holding in CD many years ago. At 31 December 20X3 AB held inventory
with a book value of $30 000 purchased from CD at cost plus 20 per cent.
The effect on the consolidated statement of profit or loss for the year is:
Profit attributable to parent Profit attributable to non-controlling interest
A Reduced by $5000 No effect
B Reduced by $6000 No effect
C Reduced by $3000 Reduced by $2000
D Reduced by $3600 Reduced by $2400
The following information is relevant for questions 3 and 4

Hardy has a 90 per cent subsidiary, Lawrence. During the year ended 31 December 20X2 Lawrence
sold goods to Hardy for $25 000, which was cost plus 25 per cent. At 31 December 20X2 $10 000 of
these goods remained unsold.
3 In the consolidated statement of profit or loss for the year ended 31 December 20X2, revenue will
be reduced by:
A $18 750
B $20 000
C $22 500
D $25 000
4 In the consolidated statement of profit or loss for the year ended 31 December 20X2, gross profit
will be reduced by:
A $1800
B $2000
C $2250
D $2500
5 Parent owned 80 per cent of the issued equity share capital of Subsidiary. For the year ended
31 December 20X6 Subsidiary reported a profit before tax of $55 million. During 20X6 Subsidiary
sold goods to Parent for $15 million at cost plus 20 per cent. At the year end half these goods are
still held by Parent.
In the consolidated statement of profit or loss for the year ended 31 December 20X6 the
non-controlling interest is:
A $8 million
B $10.7 million
C $10.75 million
D $11 million
6 Where the purchase price of an acquisition is less than the aggregate fair value of the net assets
acquired, which of the following accounting treatments of the difference is required by IFRS 3
Business Combinations?
A Immediate recognition as a gain in profit or loss
B Recognition in profit over its estimated useful life
C Immediate recognition as a gain in the statement of changes in equity
D Deduction from goodwill in the consolidated statement of financial position
7 GPT regularly sells goods to its subsidiary in which it owns 60 per cent of the ordinary share capital.
During the group's financial year ended 31 August 20X7, GPT sold goods to its subsidiary valued at
$100 000 (selling price) upon which it makes a margin of 20 per cent. By the group's year end all of
the goods had been sold to parties outside the group.
What is the correct consolidation adjustment in respect of these sales for the year ended 31 August
20X7?
A No adjustment required
B Dr. Revenue $60 000; Cr. Cost of sales $60 000
C Dr. Revenue $80 000; Cr. Cost of sales $80 000
D Dr. Revenue $100 000; Cr. Cost of sales $100 000
8 Lay Co. acquired 90 per cent of the ordinary shares in Hay Co. on 1 August 20X8 at a cost of
$450 000. On that date the net assets of Hay Co. amounted to $460 000. In the year ended
30 June 20X9, Lay Co. reported a profit of $189 000 and Hay Co. of $60 000. Trading conditions
indicated that the goodwill in Hay Co. may be impaired and a review found that it was indeed
impaired by 50 per cent. It is Lay Co. group policy to measure the non-controlling interest as a
percentage of net assets. What is the profit for the year ended 30 June 20X9 before allocation to
the group owners and the non-controlling interest?
A $208 000
B $213 000
C $226 000
D $231 000
9 Radio Co. acquired 85 per cent of the ordinary shares in Stereo Co. a number of years ago giving
rise to $14 000 of goodwill calculated using the full fair value method. The following is relevant to
the year ended 31 December 20X8:
– Radio Co. has reported a profit of $90 000.
– Stereo Co. has reported a profit of $40 000.
– Intercompany sales were made by Radio to Stereo amounting to $20 000 at cost plus 10 per
cent. Half of the goods remain in inventory at the year end.
– Goodwill is impaired by $6000.
What is the non-controlling interest in profit for the year?
A $4191
B $5091
C $5100
D $6000
MODULE 5
1 Which of the following statements regarding group accounting is/are correct?

I. Only the group's share of the assets of a subsidiary is reflected in the consolidated statement of
financial position.
II. An investment in an associate is initially reflected in the consolidated statement of financial
position at its cost.
III. The value of share capital in a consolidated statement of financial position will include the share
capital of both the investor and the investee.
A I only
B II only
C III only
D None of the statements
2 Consul owns the following equity shareholdings in other entities:

Admiral 25 per cent
Sultan 20 per cent
Warrior 30 per cent
Consul has a seat on the board of each entity.
Consul is the largest shareholding in Admiral (no other shareholdings are larger than 10 per cent).
Another entity owns 25 per cent of the share capital in Sultan and also has a seat on its board. No
other individual or entity owns more than 5 per cent of the equity share capital of Sultan.
Another entity holds 70 per cent of Warrior's equity and has a seat on its board. This entity ignores
Consul's opinions most of the time.
Which entities are associates of Consul?
A Admiral only
B Admiral and Sultan only
C Admiral and Warrior only
D Admiral, Sultan and Warrior
3 Outlook has one subsidiary. On 1 January 20X7 Outlook purchased 30 per cent of the share capital
of View for $12 million. The summarised statement of financial position of View at 31 December
20X7 was as follows:
$m
Net assets (at book value) 30
Share capital 10
Retained earnings at 1 January 20X7 15
Profit for the year ended 31 December 20X7 5
30
At 1 January 20X7 the fair value of the net assets of View was $5 million greater than their book
value. The difference relates to land which is still owned by View at 31 December 20X7.
Using the equity method, at what value is the investment in View shown in the consolidated
statement of financial position of the Outlook group at 31 December 20X7?
A $9.0m
MODULE 5
B $10.5m
C $12.0m
D $13.5m
4 Savoy owns 80 per cent of Spring and 30 per cent of White. Spring also owns 15 per cent of White.
Extracts from the statements of comprehensive income for the year ended 31 December 20X7:
Savoy Spring White
$'000 $'000 $'000
Gross profit 700 550 500
What is group gross profit for the year ended 31 December 20X7?
A $1 250 000
B $1 365 000
C $1 460 000
D $1 475 000
5 The following statements refer to a situation where an investing company (K) seeks to exert control
or influence over another company (L). Assume that K is required to prepare consolidated accounts
because of other investments.
I. If K controls the operating and financial policies of L, then L cannot be an associate of K.
II. If K owns more than 20 per cent, but less than 50 per cent of the share capital in L, then L is
bound to be an associate of K.
III. If L is an associate of K, then any amounts payable by L to K are not eliminated when preparing
the consolidated statement of financial position of K.
Which of the statements are correct?
A I only
B I and II only
C I and III only
D II and III only
6 As well as a 90 per cent investment in T, S held 25 per cent of the shares of U, and exerts a
significant influence over it. U sells goods to S. During the year ending 31 March 20X4, U sells
goods to S for $100 000. The cost of the goods to U is $80 000. At the year end, S's inventories
include $16 000 of goods purchased from U.
What adjustment is required in respect of unrealised profit in the consolidated statement of
financial position?
A $Nil
B $800
C $1000
D $3200
7 GPX's financial statements included an investment in associate at $6 600 000 in its consolidated
statement of financial position at 30 September 20X5. At 30 September 20X6, the investment in
associate had increased to $6 750 000. GPX's pre-tax share of profit in the associate was $420 000,
with a related tax charge of $180 000. The net amount of $240 000 was included in the consolidated
statement of profit or loss for the year ended 30 September 20X6.
There were no impairments to the investment in associate, or acquisitions or disposals of shares
during the financial year.
What dividend is paid to GPX by the associate in the year ended 30 September 20X6?
A $90 000
B $240 000
C $390 000
D $420 000
8 Tami Co. has investments in a number of subsidiary companies and on 1 August 20X8 acquired a
30 per cent interest in Tiny Co. The investment cost $400 000. In the year ended 31 March 20X9,
Tiny Co. reported a profit after tax of $66 000. What amounts are reported in the group financial
statements in respect of Tiny Co.?
Statement of financial position Statement of profit or loss
A $400 000 $13 200
B $400 000 $19 800
C $413 200 $13 200
D $419 800 $19 800
9 Dune Group bought a 20 per cent investment in Sand Co. a number of years ago for $420 000.
Since acquisition Sand Co. has made $530 000 retained profits, $180 000 of which are made in the
year ended 31 December 20X8. At this date, an impairment review was carried out on Sand Co.
and Dune's investment was found to be impaired by 5 per cent.
What amount is reported as income from the associate in the consolidated statement of profit or
loss?
A $9700
B $15 000
C $30 740
D $36 000
10 AB owns a controlling interest in another entity, CD, and exerts significant influence over EF, an
entity in which it holds 30 per cent of the ordinary share capital.
During the financial year ended 30 April 20X5, EF sold goods to AB valued at $80 000. The cost of
the goods to EF was $60 000. 25 per cent of the goods remained in AB's inventory at 30 April 20X5.
At the period end, AB held $90 000 inventory, CD held $38 000 and EF held $65 000.
What inventory figure is reported in the consolidated statement of financial position?
A $126 500
B $128 000
C $191 500
D $193 000
MODULE 5
392 | ANALYSIS OF FINANCIAL STATEMENTS
QUICK REVISION QUESTIONS
1 An entity wishes to increase its return on investment (ROI). Which of the following courses of action
will help to achieve this in the short term?
A Increase sales
B Issue ordinary shares
C Revalue land and buildings
D Increase the level of dividends paid to equity shareholders
2 The following information relates to M at 31 December 20X3:

$'000
Trade receivables 80
Current asset investments (cash on deposit) 10
Trade payables 75
Bank overdraft 100
The entity has decided to take the following steps to reduce the overdraft.
1. Inventory with a book value of $8000 will be sold at a loss of $2000.
2. Customers will be offered a cash discount of 10 per cent for immediate payment. Customers
owing amounts with a total book value of $20 000 are expected to take advantage of this offer.
In return, the entity's bankers have agreed to make a loan of $40 000, which will be used
immediately to purchase new machinery. The loan will be repayable in five equal instalments, the
first of which falls due on 31 December 20X4.
Assuming that all the above transactions take place on 31 December 20X3, what is the revised
quick (acid test) ratio on that date?
A 0.39:1
B 0.44:1
C 0.46:1
D 0.51:1
3 Z has a current ratio of 1.5, a quick ratio of 0.4 and a positive cash balance. If it purchases inventory
on credit, what is the effect on these ratios?
Current ratio Quick ratio
A Increase Increase
B Decrease Increase
C Increase Decrease
D Decrease Decrease
4 KL has the following capital and reserves at 31 December 20X9:

$'000
Ordinary shares 300
8% irredeemable preference shares 100
Retained earnings 150
550
KL also had $200 000 10 per cent loan notes on issue throughout the year. Retained profit for the
year was $20 000 after paying the preferred dividend and an ordinary dividend of $7500.
What was the return on equity for the year ended 31 December 20X9?
A 5.0 per cent
B 6.1 per cent
C 6.7 per cent
D 9.2 per cent
5 The accounting ratios of ABC are very similar to the average ratios for the industry in which it
operates. ABC has an average operating profit margin of 24 per cent and an average asset
turnover of 0.9.
This entity is likely to be:
A an architect.
MODULE 6
B a food retailer.
C a manufacturer.
D an insurance broker.
6 An entity has the following capital structure.

$'000
Ordinary shares 100 000
10% Redeemable preference shares 50 000
Retained earnings 80 000
230 000
12% loan notes 100 000
330 000
What is the gearing ratio?

A 30.3 per cent
B 43.5 per cent
C 45.5 per cent
D 83.3 per cent
7 X's asset turnover is very low compared with that of its main competitor.
What could be the reason for this?
A X has a smaller proportion of productive assets than its competitor.
B X has recruited a number of additional production staff during the year.
C X embarked on a major program of capital investment towards the end of the previous year.
D X carries its non-current assets at historic cost, while its competitor carries them at current value.
8 The following information relates to an entity.

$'000
Credit sales for the year ended 31 December 20X6 5600
Credit purchases for the year ended 31 December 20X6 4500
Trade receivables at 31 December 20X6 690
Trade payables at 31 December 20X6 250
The entity's cash cycle has been calculated at 105 days.
How much inventory did the entity hold at 31 December 20X6 (to the nearest thousand dollars)?
A $493 000
B $614 000
C $986 000
D $1 227 000
9 Information from the statement of financial position of MNO has been expressed as percentages
of total assets less current liabilities:
%
Land and property 78
Other non-current assets 19
Inventories and work in progress –
Trade receivables 459
Cash/short-term investments 89
645
Bank overdraft (5)
Trade payables (540)
Total assets less current liabilities 100
In which of the following industries could MNO be operating?
A Retailing
B House building
C Manufacturing
D Insurance broking
10 ST, UV and WX are listed entities operating in the same business sector. At 31 October 20X6, their
P/E ratios were reported as follows:
ST 16.2
UV 12.7
WX 8.4
Which of the following statements about these P/E ratios is correct?
The P/E ratios suggest that
A ST has the highest earnings per share of the three entities.
B ST is regarded by the market as the riskiest of the three entities.
C UV represents the safest investment because its P/E lies approximately midway between the
other two.
D WX's share price may be relatively lower than that of ST and UV because of an adverse effect
such as a profit warning.
11 GG Co has the following balances in its financial statements:

$
Receivables 158 000
Inventories 20 000
Short-term investments 18 000
Trade payables 61 000
Bank overdraft 64 000
Income tax payable 10 000
Deposits received in advance 5 000
What is the quick ratio of GG Co given the information in the table?
A 1.13:1
B 1.26:1
C 1.35:1
D 1.40:1
12 A reduction in which of the following items will result in an increase in the length of a company’s
cash cycle?
A Receivables collection period
B Inventory holding period
C Payables payment period
D Time taken to produce goods
13 In the year to 31 December 20X9 BK Co pays an interim equity dividend of 3.4c per share and
declares a final equity dividend of 11.1c. It has 5 million $1 shares in issue and the ex div share price
is $3.50.
What is the dividend yield?
A 4%
MODULE 6
B 24%
C 3.2%
D 4.1%
14 SS Co has an asset turnover of 2.0 and an operating profit margin of 10%. It is launching a new
product which is expected to generate additional sales of $1.6 million and additional profit of
$120,000. It will require additional assets of $500,000.
Assuming there are no other changes to current operations, how will the new product affect
operating profit margin and return on investment (ROI)?
Operating profit margin Return on investment (ROI)
A Increase Increase
B Decrease Increase
C Increase Decrease
D Decrease Decrease
15 TH Co carries its property at revalued amount. Property values have fallen during the current
period and an impairment loss has been recognised on the property, however its carrying amount
is still higher than its depreciated historical cost.
Assuming there are no other changes to current operations, how will the impairment affect the
return on investment (ROI) and gearing ratios of TH?
Return on investment (ROI) Gearing
A Increase Increase
B Decrease Increase
C Increase Decrease
D Decrease Decrease
16 Which of the following is a possible reason why a company's inventory holding period increases
from one year to the next?
A An increase in demand for its products
B A reduction in selling prices
C Obsolete inventory lines
D Seasonal fluctuations in orders
17 Which of the following measures will not reduce the level of a company’s gearing?
A Renegotiating a loan to secure a lower interest rate
B Treating a lease as a short-term rental agreement
C Repaying a loan just before the year end and taking it out again at the beginning of the next
year
D 'Selling' an asset under a sale and leaseback agreement
18 JF Co's return on capital employed has deteriorated as compared to the previous year.
Which of the following choices is not a possible reason for this decline?
A The company revalued its properties which resulted in a significant increase in the carrying
value as compared to three years ago.
B Towards the end of the current year JF made major investments in plant and machinery
financed by interest-bearing borrowing.
C JF issued $1 million 10% loan notes to redeem $1 million redeemable preference shares at par.
D Asset turnover has reduced as compared to the previous year.
19 Analysis of the statement of financial position of DC Co. reveals the following ratios:
Current ratio 2:1
Revenue: current assets 5:1
Acid-test ratio 1.5:1
If revenue for the year was $30 million, what is the value of inventory that will appear in the
statement of financial position?
A $1.5m
B $3.0m
C $4.5m
D $10.5m
20 What would be the immediate effect on an entity's P/E ratio and dividend yield of an
announcement which caused a substantial rise in the share price?
P/E ratio Dividend yield
A Increase Increase
B Decrease Increase
C Increase Decrease
D Decrease Decrease
21 Which of the following ratios would be the least appropriate to calculate for a supermarket?
A Gross margin
B Receivable days
C Payable days
D Return on investment
22 RT Co. has an operating profit margin of 8% in 20X9 compared with 5% in 20X8.
Which of the following might explain this increase?
A RT Co. increased its sales during the year, by offering better discounts to its customers.
B RT Co. moved to an out-of-town office location where rent and employment costs were lower
than they were in 20X8.
C Year end market research focused on public awareness of the company's product range
indicates that the brands contained in closing inventory are more likely to sell this year than last.
D RT Co. restructured its long-term finance during 20X9, managing to reduce its finance cost.
23 Which of the following ratios would best assess the efficiency of a manufacturing company?
A P/E ratio
B Gearing
C Non-current asset turnover
D Current ratio
24 Which ratio does the following statement relate to?
'This ratio is a measure of the market's confidence in the future of an entity.'
A Dividend yield
B Earnings per share
C Return on capital employed
D P/E ratio
25 Which of the following is not a valid limitation of ratio analysis of published financial statements?
A Published financial statements contain estimates such as depreciation.
B There are no prior year figures to compare to current year figures.
C Accounting policies may vary between companies, making comparisons difficult.
D The nature and character of a business may change over time, making strictly numerical
comparisons misleading.
405
REVISION QUESTIONS
MODULE 1
1 Which of the following are correct?

I. The term 'reporting entity' may be used to describe a group of companies.
II. The principal function of financial statements is to provide information to parties external to a
business.
III. The main purpose of financial reporting is to provide information aimed at running a business
more efficiently.
A I and II only
B I and III only
C II and III only
D I, II and III
2 Which of the following groups of users of accounts is interested primarily in the liquidity of a
company?
A Suppliers
B The government
C The management
D The tax authorities
3 Consider the following two statements:
I. The IASB operates a rules-based system of setting accounting standards.
II. The US FASB operates a principles-based system of setting accounting standards.
Which of these statements are correct?
A I only
B II only
C Both I and II
D Neither I nor II
4 Which bodies does the IFRS Foundation oversee?
A IASB and the Monitoring Board
B IASB and IFRS Interpretations Committee only
C IFRS Interpretations Committee and IFRS Advisory Council
D IFRS Advisory Council, IASB and IFRS Interpretations Committee
5 Which of the following is not a role of the IFRS Advisory Council?
A To consult on all major IASB projects
B To issue International Financial Reporting Standards
C To advise on the prioritisation of the work of the IASB
D To comment on the implications of the work of the IASB on users of financial statements
6 Consider the following two statements:
I. The Australian Accounting Standards Board (AASB) has adopted the content of IFRS with some
minor changes.
II. Both Australian companies' legislation and IFRS allow an entity to depart from the requirements
of an IFRS in exceptional circumstances.
Which of these statements are correct?
A I only
B II only
C Both I and II
D Neither I nor II
408 | REVISION QUESTIONS
7 According to the Conceptual Framework for Financial Reporting, information about an entity's
financial performance helps users to understand:
I. the entity's needs for additional finance.
II. the entity's financing and investing activities.
III. the efficiency and effectiveness of management.
IV. the return that the entity has produced on its economic resources.
A IV only
B III and IV only
C I and III only
D I and II only
8 Which of the following is not a chapter in the IASB's Conceptual Framework?
A Financial statements and the reporting entity
B Concepts and conventions
C The elements of financial statements
D Recognition and derecognition
I. The IASB's Conceptual Framework underpins the preparation of financial statements; when an
IFRS conflicts with the framework, the framework guidance should be followed.
II. One of the purposes of the IASB's Conceptual Framework is to assist the IASB to develop IFRS
that are based on consistent concepts.
Which of the statements is correct?
A I only
B II only
C Both I and II
D Neither I nor II
10 What is shown by an entity's economic resources and the claims against it?
A Its operations
B Its financial position
C Its ownership interest
D Its financial performance
11 Why is information about a reporting entity's net cash flows helpful to users?
A It helps them to predict future cash flows.
B It helps them to assess the stewardship of management.
C It helps them to understand the claims against the entity.
D It helps them to understand the entity's financial performance.
I. An entity can only change an accounting policy if this is required by an accounting standard.
II. A change in accounting policy is always applied prospectively, so that the effect of the change
is recognised in the current period.
A I only
B II only
C I and II
D Neither I nor II
13 The underlying assumption in preparing and using general purpose financial reports is:
A accruals.
B materiality.
C going concern.
D substance over form.

I. Accounting standards are not retrospective.
II. Accounting standards are applied to all items in the financial statements.
A I only
B II only
C Both I and II
D Neither I nor II
15 The two fundamental qualitative characteristics of useful financial information are:
A relevance and verifiability.
B verifiability and timeliness.
C faithful representation and relevance.
D faithful representation and timeliness.
16 Which of the following qualities are required to achieve a faithful representation of economic
phenomena?
I. Error free
II. Neutrality
III. Verifiability
IV. Comparability
V. Completeness
B I, II and V only
C I, III and V only
D II, IV and V only
I. Departure from an IFRS is allowed only where approved by the IASB.
II. In the case of a true and fair override the financial impact of the departure from IFRS should be
disclosed.
A I only
B II only
C I and II
D Neither I nor II
18 Which of the following is the correct definition of equity?
A The residual interest in the assets of the entity after deducting all its liabilities
B A present obligation arising from past events from which future economic benefits are expected
to flow to the entity
C A resource controlled by an entity as a result of past events and from which future economic
benefits are expected to flow to the entity
D A present obligation arising from past events, the settlement of which is expected to result in an
outflow of resources embodying economic benefits
I. A provision is a liability for which the amount is an reliable estimate.
II. A provision should not be recognised in the financial statements.
A I only
B II only
C Both I and II
D Neither I nor II

I. Gains from revaluation of non-current assets are recognised in profit or loss.
II. Gains from the sale of non-current assets are not recognised in profit or loss.
A I only
B II only
C Both statements
D Neither statement
21 Which of the following, taken together, would make up the working capital of a business?
A inventory, equity, cash at bank, receivables
B receivables, bank loan, payables, inventory
C payables, receivables, inventory, cash at bank
D inventory, bank loan, cash at bank, prepayments
22 Which of the following would appear in the statement of financial position as a current liability?
A Sales tax owing
B Employee wages paid
C Prepayments of expenses
D Revaluation surplus on a non-current asset
23 Which of the following should be recognised as an asset in the statement of financial position
according to the definition of an asset and recognition criteria provided in the Conceptual
Framework?
A A football player acquired on a contract for a transfer fee
B An amount spent on investigating the healing powers of an Amazonian plant
C An amount spent on training staff which is expected to result in increased productivity
D An amount spent on advertising that is expected to result in increased sales for the next three
years
MODULE 2
1 What type of cost does the following definition describe?

'Assets are carried at the present value of cash flows from the continuing use and from its disposal
at the end of its useful life of the asset.'
A Current cost
B Fair value
C Historical cost
D Value in use
2 What is one of the main advantages of using historical cost as a measurement basis?
A It is objective.
B It is subjective.
C It is a reasonable estimate.
D It can use a formula for calculation.
3 Which of the following does this definition describe?
'The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date'.
A Fair value
B Current value
C Residual value
D Economic value
I. The use of a conceptual framework and accounting standards based on that framework would
be an example of positive accounting theory.
II. An attempt to predict accounting behaviour by observing what actually happens and applying
this to particular situations is an example of normative accounting theory.
A I only
B II only
C Both I and II
D Neither I nor II
5 Which type of capital maintenance concept is described by the following statement?
'Capital is looked at as the capacity to maintain a level of assets'.
A Equity capital maintenance
B Financial capital maintenance
C Operating capital maintenance
D Proprietary capital maintenance
I. In a time of rising prices, borrowers benefit.
II. Under current purchasing power (CPP) accounting, monetary items are restated to take into
account the effect of general price inflation.
Are these statements correct or incorrect?
Statement I Statement II
A Correct Correct
B Incorrect Correct
C Correct Incorrect
D Incorrect Incorrect

I. A management buy-in occurs when existing managers purchase the business.
II. In a share option scheme, employees are given a number of share options, each of which gives
the holder the right after a certain date to subscribe for shares in the company at a fixed price.
A I only
B II only
C Both I and II
D Neither I nor II
8 The preparation of the financial statements is the responsibility of:
A the finance director.
B the external auditors.
C the board of directors.
D the internal audit department.
Which of the following statements are correct?
I. The auditor's report must be disclosed in a set of financial statements.
II. The auditors' report confirms that the financial statements are correct.
A I only
B II only
C Both I and II
D Neither I nor II
10 Which of the following is a non-mandatory disclosure in a listed company's annual report?
A Statement of cash flows
B Statement of financial position
C Social and environment report
D Corporate governance disclosures
11 Which of the following is not an advantage of voluntary disclosures by companies?
A It can be focused on future strategies and objectives
B Provision of additional information to other companies in the same business
C Provides investors with further yardsticks to judge the performance of management
D Gives shareholders a better idea of the environment within which the company is operating and
how it is responding to that environment
12 Which of the following statements about the directors' report are correct?
I. It includes details of the individual directors on the board.
II. It includes a review of the entity's operations during the period.
III. It shows the members of the board who sit on the various committees, such as audit,
remuneration and nomination committees.
A I and II only
B I and III only
C II and III only
D I, II and III
MODULE 3
1 Where in a company's financial statements are dividends paid found?

A The statement of financial position
B The statement of changes in equity
C The statement of profit or loss and other comprehensive income
D The statement of profit or loss and the statement of changes in equity
2 Classify the following amounts as current or non-current:
I. A bank overdraft expected to be in place for two years
II. Shares bought in another company for the purpose of resale in the near future
III. A receivable arising from a credit sale made to a customer with payment terms of 24 months
Current Non-current
A I II and III
B II I and III
C I and III II
D I, II and III None
3 Which of the following must be shown in the main financial statements of a typical manufacturing
company rather than in the notes to the financial statements?
A A classification of expenses
B The number of shares in issue
C The classes of property, plant and equipment
D The classification of assets as current and non-current
4 Which of the following items is not required to be shown in a separate line in the statement of
changes in equity?
A Revaluation of a property.
B A prior period adjustment resulting from a change in accounting policy.
C A share issue in the year.
D Dividends paid to ordinary shareholders.
5 A statement of cash flows prepared in accordance with the indirect method reconciles profit before
tax to cash generated from operations. Which of the following includes only items which should be
added to profit before tax in the reconciliation?
A Depreciation charge, investment income and increase in inventories
B Increase in payables, loss on disposal of non-current assets and depreciation
C Decrease in receivables, finance cost and profit on disposal of non-current assets
D Decrease in payables, depreciation charge and loss on disposal of non-current assets
6 A company made a profit for the year of $12 990 after accounting for depreciation of $1300. During
the year, non-current assets were purchased for $6500, receivables increased by $560, inventories
decreased by $1100 and payables increased by $230.
The increase in cash and bank balances during the year was
A $530
B $4420
C $7020
D $8560
7 A business had non-current assets with a carrying amount of $90 000 at the start of the financial
year. During the year the business sold machinery that had cost $12 000 and been depreciated to a
carrying amount of $3400. The carrying amount of non-current assets at the end of the year was
$91 500. How much cash has been used to purchase non-current assets?
A $1900
B $4900
C $10 500
D $13 500
8 A business' bank balance increased by $960 000 during its last financial year. In this period, it:
 issued shares raising $1 400 000
 repaid a loan of $230 000
 purchased current asset investments of $800 000
 charged depreciation of $190 000
Working capital increased by $120 000 during the year.
The business' profit for the year was:
A $280 000
B $520 000
C $660 000
D $1 400 000
9 Extracts from a company's statement of financial position showed balances as follows:
20X9 20X8
$ $
Share capital 94 000 77 000
During 20X9 debentures of $70 000 were issued, a dividend of $12 000 was received and interest of
$4000 was paid.
What is the net cash flow from financing activities?
A $17 000 inflow
B $87 000 inflow
C $95 000 inflow
D $99 000 inflow
10 What type of assurance is provided by the external auditor's report on an entity's financial
statements?
A Limited
B Absolute
C Negative
D Reasonable
MODULE 4
1 Which of the following conditions must be met, in order to capitalise development costs according
to IAS 38?
I. completion of the asset is technically feasible
II. resources are available to complete the project
III. there is a contract to sell or written commitment to use the item under development
A I only
B I and II only
C II and III only
D I, II and III
2 Which of the following statements about intangible assets is correct?
A Goodwill can never be revalued.
B An intangible asset must be separable.
C Development costs may be capitalised if the criteria laid down in IAS 38 are met.
D An intangible asset may be revalued where a fair value can be established through use of an
expert valuer.
3 An entity purchases a specialised machine on 1 January 20X8 for $400 000 together with
production rights to manufacture a patented component, for $20 000. These production rights are
worthless without the specialised machine, and the machine may not be used without the
production rights.
Which of the following statements is correct?
A $420 000 is capitalised as an intangible asset.
B $420 000 is capitalised as a tangible non-current asset.
C $400 000 is capitalised as a tangible non-current asset and $20 000 as an intangible asset.
D $400 000 is capitalised as a tangible non-current asset and $20 000 is expensed in the period.
4 An entity purchases the brand name of a product on 1 November 20X8 for $375 000. The
management feel that the brand has an indefinite useful life and have therefore not charged any
amortisation in the year ended 31 October 20X9.
Which of the following is correct?
A Amortisation should be charged based on an assumed maximum useful life of 20 years.
B Amortisation should be charged based on an assumed maximum useful life of 50 years.
C There is no requirement to charge amortisation, however the brand must be tested for
impairment when indications of an impairment arise.
D There is no requirement to charge amortisation, however the brand must be tested for
impairment each year and in addition, whenever there are indications of an impairment.
5 The following is relevant to ABC Co. in the year ended 31 December 20X9:
 $28 000 was spent investigating the properties of a new type of plastic.
 $340 000 was capitalised relating to the development of a new product which went into
commercial production on 1 October 20X9. Sales of the product are expected to remain
constant for the first four years of its production and then halve for a further two years.
What amounts should be recognised in the financial statements of ABC Co. in the year ended
31 December 20X9?
Statement of profit or loss and
other comprehensive income Statement of financial position
A $17 000 $351 000
B $28 000 $340 000
C $36 500 $331 500
D $45 000 $323 000
6 At the current year end, Claxon Co. has undertaken impairment tests on two machines. The
following information is relevant:
Machine 1 Machine 2
Cost $450 000 $250 000
Useful life 10 years 15 years
Age 4 years 270 3 years 200
Fair value $300 000 $230 000
285
Costs of disposal $15 000 $35 000 195
Value in use $260 000 260 $198 000 198
At what carrying amount should machinery be recognised in the accounts of Claxon Co?
A $455 000
B $468 000
C $470 000
D $498 000
7 Taunton Co. owns a property which was revalued to $900 000 at the start of the current accounting
year. At that time the property had a remaining useful life of 25 years. As a result of market
conditions, an impairment test is carried out at the end of the year and the property is found to
have a value in use of $860 000 and a fair value of $870 000. Costs of disposal would amount to
5 per cent of fair value.
What impairment loss, if any, must be recorded in the year?
A $nil
B $4000
C $37 500
D $40 000
I. An impairment loss relating to goodwill cannot be reversed.
II. Corporate assets must always be allocated to individual CGUs.
III. An impairment loss relating to a CGU is allocated to goodwill in the first instance.
A I only
B II and III only
C I, II and III
D none of them
9 Anton Co. has identified a cash generating unit made up of the following assets:
Carrying
amount
$
Property 200 000
Machinery 50 000
Goodwill 25 000
Receivables 15 000
Inventory 10 000
An impairment loss of $55 000 has been identified. What is the carrying amount of the machinery
after this loss has been accounted for?
A $39 000
B $42 727
C $43 333
D $44 000
10 Rawlin Co. purchased a depreciable asset a number of years ago at a cost of $200 000. On
1 January 20X8, when it had 20 years of its useful life remaining, the asset was revalued to $600 000,
with a revaluation surplus of $480 000 recognised as other comprehensive income. At 31 December
20X9, the value in use of the asset is $535 000 and its fair value less costs of disposal is $532 000.
What impairment loss must be recognised and where?
Loss Recognised in
A $5 000 Profit or loss
B $5 000 Other comprehensive income
C $35 000 Other comprehensive income
D $65 000 Other comprehensive income
11 Which of the following are conditions that permit revenue to be recognised over a period of time?
I. The customer has paid in advance.
II. The customer simultaneously receives and consumes the benefits as the performance takes
place.
III. The entity's performance creates or enhances an asset that the customer controls as the asset is
created or enhanced.
A I only
B I and II only
C II and III only
D I, II and III
12 Details of two of Lord Company's transactions in the month of May are as follows:
I. It has sold goods to another customer on credit. The goods have not yet been delivered.
II. It has sold an item of machinery to a customer; the machinery has been delivered and Lord
Company will undertake specialist installation in two months' time.
For which transactions should revenue be recognised in May?
A I only
B II only
C Both I and II
D Neither I nor II
13 Bubble Co. made sales on credit during May 20X7 of $450 000 for goods that were all delivered
during May. Sales tax is charged at 5 per cent. They offer all customers a settlement discount of
5 per cent and on average 40 per cent of customers will take up the discount.
What is Bubble Co. revenue for May 20X7?
A $441 000
B $450 000
C $463 050
D $472 500
14 Ray Co. reported the following amounts in its statement of financial position at 31 December 20X8:
Liability for company taxes $43 800
Liability for deferred tax $79 320
The 20X8 tax liability was eventually settled at $42 120. 43800-42120=1680
At the 20X9 year end, there is a liability for current tax of $52 300 and the total liability for deferred
tax is to decrease to $69 780. The decrease in deferred tax liability relates to items recognised
within profit or loss.
What is Ray Co.'s tax charge for 20X9?
A $41 080
B $44 440
C $60 160
D $63 520
15 The following information is relevant to Drive Co.'s non-current assets at 31 October 20X8 and
20X9:
20X9 20X8
Cost $765 400 $697 600
Accumulated depreciation 526260 $239 140 $202 300 495300
Accumulated capital allowances 417600 $347 800 $278 000 419600
108660*0.2=21732 75700*0.2=15140
Drive Co. pays corporate income tax at a rate of 20 per cent.
What is Drive Co.'s deferred tax liability at 31 October 20X9, and deferred tax charge for the year
ended 31 October 20X9?
Tax liability Tax charge
$ $
A 15 140 15 140
B 21 732 6 592
C 21 732 21 732
D 108 660 32 960
16 Which of the following statements about IAS 12 is/are correct?
I. Deferred tax liabilities may be classified as current liabilities.
II. Tax losses are an example of a taxable temporary difference.
III. Deferred tax relating to the revaluation of a property is reported as other comprehensive
income.
A III only
B I and II only
C I and III only
D II and III only
17 Wiley Co. has made tax trading losses for two years, totalling $87 600. $23 000 of these were used
to relieve other taxable income in accordance with tax law. At the 31 December 20X9 year end,
Wiley Co. signs a large contract with a new customer which indicates that it will return to
profitability. Wiley Co.'s tax rate is 20 per cent. What is the deferred tax implication of the losses?
A A deductible temporary difference of $64 600 arises and a deferred tax asset of $12 920 is
recognised at 31 December 20X9
B A taxable temporary difference of $64 600 arises and a deferred tax liability of $12 920 is
C A taxable temporary difference of $87 600 arises and a deferred tax liability of $17 520 is
D A deductible temporary difference of $87 600 arises and a deferred tax asset of $17 520 is
18 The trial balance of Vine Co. at 31 December 20X8 shows a credit balance on the tax payable
account of $450. The estimated current tax liability of $28 760 has not yet been accrued.
What amounts are reported in the financial statements in respect of current tax for the year?
Tax liability Tax charge
$ $
A 28 310 28 310
B 28 760 28 310
C 28 760 29 210
D 29 210 29 210
19 Radley Co. purchased raw materials on credit from a foreign supplier for 375 000 Goldings, halfway
through the year ended 31 December 20X9. Half of the goods were paid for on 30 November 20X9
and the remaining half on 31 January 20Y0.
30 June 20X9 4.3 G: $1 375/4.3=87.2
30 November 20X9 4.6 G: $1 187.5/4.6=40.76 187.5/4.3=43.5 GAIN=2.7K
31 December 20X9 4.5 G: $1 187.5/4.5=41.67 GAIN=1.83
31 January 20Y0 5 G: $1
What exchange difference is recognised in Radley Co.'s profit or loss in the year ended
31 December 20X9?
A $2844 loss
B $2844 gain
C $4782 loss
D $4782 gain
20 The abbreviated functional currency statement of financial position at 30 November 20X9 of Pedro
Co., a subsidiary of Aus Co., bought at the start of the year is as follows:
Euro
Assets 700 560 000 *0.8=448
Share capital 133.3. 100 000 *0.75=75
Retained earnings b/f 220 000
Profit for the year 70 000 *0.77=53.9
Liabilities 212.5 170 000 *0.8=136
560 000
Pedro Co. was incorporated on 1 January 20X5.
30 November 20X9 $1: euro 0.8
1 December 20X8 $1: euro 0.75
1 January 20X5 $1: euro 0.95
Average for y/e 30 November 20X9 $1: euro 0.77
To the nearest $000 what are the translated retained earnings (including exchange differences) of
Pedro Co. at 30 November 20X9?
A $354 000
B $362 000
C $366 000
D $382 000
21 Flurry Co. prepares its financial statements in its functional currency, the Durham, translating to
dollars in order to report to its parent company.
The following information is relevant:
Net assets (D) Exchange rate
1 January 20X9 650 000 4.3D/$
31 December 20X9 780 000 4D/$
The retained profits for the year were D115 000 and the average exchange rate was 4.2D/$.
What exchange difference arises on translation of the financial statements?
A $11 337 loss
B $11 337 gain
C $12 706 loss
D $12 706 gain
22 Drayton Co. purchased a new non-current asset on 1 January 20X9 costing HK$ 1 450 000, agreeing
18 months' extended credit with the supplier.
The exchange rate on 1 January 20X9 was 6.75HK$:$1. At 31 December 20X9, the exchange rate
had moved to 7.2HK$:$1.
How are the asset and payable presented in the statement of financial position at 31 December
20X9?
Asset Payable
A $201 389 $201 389
B $201 389 $214 815
C $214 815 $201 389
D $214 815 $214 815
23 Which of the following statements is or are correct?
I. Exchange differences are always reported in profit or loss.
II. The currency that mainly influences sales prices set by an entity is likely to be the functional
currency.
III. A revalued 'foreign' asset is translated at the exchange rate in force on the date of the
revaluation.
A I and II only
B I and III only
C II and III only
D I, II and III
24 On 1 January 20X5 Cornwall Company entered into a three-year lease for new computer
equipment. A non-refundable set-up costs of $2000 was paid on this date. The first lease payment
of $8000 will be made on 1 January 20X6, in arrears with two further payments of $8000 being paid
on 1 January 20X7 and 20X8 also in arrears.
Cornwall Company elected to treat the lease as a low value lease.
What expense will be shown in the profit or loss for the year ended 31 December 20X5?
A $2000
B $6000
C $8667
D $8000
25 On 1 January 20X5 Kent Company enters into a three year lease for an asset, paying an initial
deposit of $18 000. The present value of the future cash flows is $150 000. The asset they are
leasing has a useful life of five years and Kent Company will not obtain ownership at the end of the
lease.
What is the depreciation expense for the right of use asset for the year ended 31 December 20X5?
A $33 600
B $44 000
C $50 000
D $56 000
MODULE 5
1 Raleigh Co. holds the following investments:

 30 per cent of the voting shares in Well Co. The remaining 70 per cent are held by a third,
unrelated, company, Slim Co., which refuses to communicate with Raleigh Co.
 18 per cent of the voting shares in Vic Co. One of Raleigh's Directors also sits on the Board of
Vic Co. and takes an active part in formulating strategy.
How should the investments be accounted for?
Well Co. Vic Co.
A Associate Associate
B Investment Associate
C Associate Investment
D Investment Investment
2 Dry Co. holds 20 per cent of the voting shares in Wet Co. and has agreed with the other
shareholders that it will direct the operating activities of that company. Dry Co. also holds 40 per
cent of the voting shares in Cloud Co., participating in the policy making process of that company,
and 25 per cent of the voting shares in Drizzle Co.
How should these investments be treated in the Dry Co. group accounts?
Wet Co. Cloud Co. Drizzle Co.
A Consolidated Consolidated Held at cost
B Equity accounted Equity accounted Held at cost
C Consolidated Equity accounted Equity accounted
D Equity accounted Consolidated Equity accounted
3 Which of the following conditions must be met in order for a parent to avoid presenting
consolidated financial statements?
I. All subsidiaries operate under severe long-term restrictions.
II. Its securities are not publicly traded and it is not in the process of issuing securities in public
securities markets.
III. The ultimate or intermediate parent publishes consolidated financial statements that comply
with International Financial Reporting Standards.
IV. The parent is itself a wholly-owned subsidiary or it is a partially-owned subsidiary of another
entity and its other owners do not object to the parent not presenting consolidated financial
statements.

B I, III and IV only
C II, III and IV only
D I, II, III and IV
4 Which of the following statements about consolidated financial statements is correct?
A IAS 28 states that investments should be held in the investor's individual accounts using the
equity method.
B IFRS 10 allows subsidiaries to be excluded from consolidation if their activities are dissimilar
from those of the parent.
C Where a subsidiary uses different accounting policies from its parent company, this must be
disclosed in the group accounts.
D An investor cannot control another company if it does not have the ability to use its power over
the investee to affect the amount of the investor's returns.
5 Which of the following provides evidence of the existence of significant influence?

A Material transactions between investor and investee
B Power to govern the financial and operating policies of the entity
C Agreement with other shareholders of the entity to vote on their behalf
D Power to appoint or remove a majority of members of the board of directors
6 Train Co. owns 80 per cent of Car Co. Extracts from the companies' statements of financial position
are as follows:
Train Co. Car Co.
$'000 $'000
Receivables 91 67
Cash 23 –
Payables 87 53
Overdraft – 9
Included within the receivables of Car Co. is $7000 due from Train Co. Included within the payables
of Train Co. is $5600 due to Car Co. The difference is due to cash in transit.
What are the consolidated receivables and cash balances?
Receivables Cash
A $151 000 $23 000
B $151 000 $24 400
C $152 400 $23 000
D $152 400 $24 400
7 West Co. acquired 90 per cent of the 100 000 shares in East Co. on 1 January 20X7 for $480 000
when the reserves of that company amounted to $320 000. On that date the fair value of the
non-controlling interest was valued at $45 000. Included in East Co.'s statement of financial
position was land with a book value of $60 000. The fair value was $30 000 higher than this.
West Co. group measures the non-controlling interest at fair value.
What goodwill arose on the acquisition of East Co.?
A $75 000
B $102 000
C $105 000
D $135 000
8 North Co. acquired 80 per cent of South Co. on 1 February 20X8 for consideration totalling
$560 000. At this date the fair value of a 20 per cent holding in South Co. was $130 000, and the net
assets of South Co. were $620 000. In the year ended 31 January 20X9, South Co. reported profits
of $75 000. North Co. group measures the non-controlling interest using the proportion of net
assets method. What is the non-controlling interest to be reported in the consolidated statement
of financial position at 31 January 20X9?
A $137 750
B $139 000
C $143 750
D $145 000
9 Axis Co. transferred an asset to its 75 per cent subsidiary Yves Co. on 31 October 20X9 for $25 000.
The asset cost $32 000 on 1 November 20X7 and was depreciated monthly by Axis Co. at 20 per
cent per annum on cost. Yves Co. did not amend the original useful life on the transfer and
continued to depreciate the asset over its remaining life. At 31 December 20X9, extracts from the
two companies' accounts were as follows:
Axis Co. $ Yves Co. $
Non-current assets 165 000 180 000
What is the consolidated figure for non-current assets?
A $339 200
B $339 522
C $343 522
D $345 000
10 Try Co. bought 80 per cent of the ordinary shares in Ply Co. when the retained earnings of that
company were $400 000. Goodwill arising on acquisition amounted to $68 000, and 25 per cent of
this amount was written off in the year ended 31 October 20X9.
During the year ended 31 October 20X9, Try Co. sold $50 000 goods to Ply Co., achieving a 20 per
cent mark up. At the year end, Ply Co. retained half of these in inventory.
The two companies' retained earnings (prior to any adjustments during the year) at 31 October
20X9 were as follows:
Try Co. $680 900
Ply Co. $532 000
What are group retained earnings at 31 October 20X9?
A $553 300
B $765 333
C $782 333
D $1 085 333
11 P Co. acquired 80 per cent of the ordinary share capital in S Co. on 31 August 20X9. Extracts from
the two companies' statements of profit or loss for the year ended 31 October 20X9 were as
follows:
P Co. S Co.
$'000 $'000
Revenue 2 900 1 800
Cost of sales 1 500 900
During the year, P Co. made sales of $10 000 to S Co. each month, realising a mark up of 25 per
cent. At the end of the year S Co. had none of these goods in inventory.
What is the group gross profit for the year ended 31 October 20X9?
A $1 546 000
B $1 550 000
C $1 625 000
D $2 300 000
12 Ed Co. has owned 100 per cent of the shares in Clem Co. for five years. These were bought for
$450 000 when the net assets of Clem Co. were $415 000. In the year of acquisition, Clem Co. was
impaired by $5000 due to a drop in profitability. Clem Co. has again suffered a loss of profits in the
year ended 31 December 20X9, and accordingly goodwill is to be impaired by 20 per cent of book
value. Extracts from the two companies' statements of profit or loss are as follows:
Ed Co. Clem Co.
$ $
Cost of sales 320 000 126 000
Administrative expenses 100 000 36 000
What are the amounts to be reported for group cost of sales and administrative expenses?
Cost of sales Administrative
expenses
$ $
A 439 000 136 000
B 440 000 136 000
C 446 000 129 000
D 446 000 142 000
13 Black Co. sold an item of machinery to Red Co., its subsidiary on 31 December 20X8 for $340 000.
The machine had cost Black Co. $400 000 and had a carrying amount of $320 000 on the date of
the transfer, based on annual depreciation at 10 per cent on the straight line basis. The remaining
useful life of the asset remains unchanged. Companies in the Black Co. Group depreciate any asset
held on the last day of the accounting period for a full year. Depreciation is charged to cost of
sales.
What adjustment is required to the Black Co. cost of sales in respect of this transfer in the year
ended 31 December 20X9?
A A decrease of $22 500
B A decrease of $2500
C An increase of $2500
D An increase of $17 500
14 Green Co. sold an item of plant to Brown Co., its subsidiary on 31 October 20X9 for $200 000. The
machine had cost Green Co. $300 000 and had a carrying amount of $220 000 on the date of the
transfer, based on a useful life of 15 years on the straight line basis. The remaining useful life of the
asset remains unchanged. Green Co. depreciates assets on a monthly basis.
What adjustment is required to Green Co.'s profit in respect of this transfer in the year ended
31 December 20X9?
A $18 182 to add back to profit
B $19 697 to add back to profit
C $20 303 to add back to profit
D $20 303 to deduct from profit
15 Which of the following statements about the consolidated statement of profit or loss are correct?
I. Dividend income in the parent company's statement of profit or loss is never carried across to
the consolidated statement of profit or loss.
II. The non-controlling interest in profit is presented separately from group profits in the
consolidated statement of profit or loss to leave profit allocated to the owners of the parent
company.
A I only
B II only
C Both I and II
D Neither I nor II
16 Roulston Co. holds a 75 per cent investment in Hudson Co. and a 35 per cent investment in
White Co. During the year ended 30 November 20X9, Roulston Co. sold goods to Hudson Co. for
$400 000 and White Co. sold goods to Roulston Co. for $210 000. The companies' revenue as
reported in their individual financial statements was as follows:
$'000
Roulston Co. 1490
Hudson Co. 430
White Co. 1200
What is the consolidated revenue figure?
A $1 383 500
B $1 520 000
C $2 510 000
D $2 583 000
17 Dray Co. holds a 90 per cent investment in Ray Co. and a 25 per cent investment in Lay Co. Extracts
from their statements of profit or loss are as follows:
Dray Co. Ray Co. Lay Co.
$ $ $
Revenue 136 500 127 800 67 000
Cost of sales 86 500 73 400 24 000
During the year Dray Co. sold $40 000 goods to Ray Co. and $10 000 to Lay Co. at a 25 per cent
mark up. In each case all of these goods remained in inventory at the year end.
What is the consolidated cost of sales figure?
A $109 900
B $111 900
C $127 900
D $128 400
18 Blue Co. has a number of subsidiaries as well as a 45 per cent investment in Pink Co. bought for
$190 000 some years ago. Since acquisition, Pink Co. has made $450 000 profits and suffered no
impairment. During the year ended 31 October 20X9, Pink Co. sold $30 000 goods to Blue Co. at a
20 per cent margin. Half of these goods remained in Blue Co.'s warehouse at the year end.
What is the investment in associate shown in the Blue Co. Group statement of financial position at
31 October 20X9?
A $386 500
B $389 500
C $391 150
D $392 500
19 Which of the following statements about equity accounting and associates is correct?
A The tax charge relating to an associate must be separately disclosed in the consolidated
statement of profit or loss.
B Any impairment of an associate is charged to administrative expenses in the consolidated
statement of profit or loss.
C There is no requirement for an associate to be consolidated or equity accounted using the
same accounting policies as those adopted by the group.
D Where an associate is loss making, the investor should discontinue including its share of losses
when the investor's share of losses of the associate equals or exceeds its interest in the
associate.
20 Arm Co. Group bought 16 per cent of the voting shares in Leg Co. on 1 January 20X9 for $160 000,
and on the same date started trading with Leg Co. such that 80 per cent of Leg Co.'s sales were
made to Arm Co. In the year ended 31 December 20X9, Leg Co. made $98 000 profits, 80 per cent
of these relating to sales to Arm Co. None of the goods purchased from Leg Co. remained in the
inventory of Arm Co. at the year end.
How is the investment in Leg Co. shown in Arm Co.'s group statement of financial position at
31 December 20X9?
A A trade investment of $160 000
B An investment in associate of $156 080
C An investment in associate of $175 680
D An investment in associate of $179 600
MODULE 6
1 Which of the following ratios provide a measure of profitability?

I. Interest cover
II. Dividend cover
III. Return on equity
IV. Gross profit margin
A I and IV only
B III and IV only
C I, II and IV only
D I, II, III and IV
2 Booth Co. has increased its return on investment (ROI) since last year. Assuming all other factors
remain the same, which of the following is the best explanation for this?
A Lower interest cover than last year
B A lower profit margin than last year
C A higher current ratio than last year
D A higher asset turnover than last year
3 Which of the following will cause a company's gearing ratio to increase?
A The payment of a dividend
B A decrease in rental expenses
C A decrease in the allowance for receivables
D The upward revaluation of a non-current asset
4 Allister Co. reports the following amounts in its statement of financial position:
20X9 20X8
$ $
Inventory 13 500 14 200
Receivables ? 12 840
Prepayments 1 280 1 880
Cash 348 –
Payables 10 760 17 200
Overdraft – 1 200
Deferred tax 3 700 4 200
Assuming that Allister Co. maintained its quick ratio at the same level in 20X9, what was the
receivables figure in that year?
A $1770
B $6980
C $7771
D $11 822
5 Extracts from Hunt Co.'s financial statements in the year ended 31 December 20X9 were as follows:
STATEMENT OF PROFIT OR LOSS $
Gross profit 3 216 400
Earnings before interest and tax 2 468 400
Profit before tax 2 094 400
Profit after tax 1 870 000
Earnings per share 7.48c
Hunt Co. made no issues of shares during the year.
What was the number of Hunt Co. shares in issue throughout the year to the nearest million?
A 25 million
B 28 million
C 33 million
D 43 million
A The interpretation of an entity's financial statements using ratios is only useful for potential
investors.
B Ratios based on historical data always predict the future performance of an entity.
C The analysis of financial statements using ratios provides useful information when compared
with previous performance or industry averages.
D An entity's management will not assess an entity's performance using financial ratios.
7 The following are extracts from BL's financial statements:
$'000
Profit before interest and tax 10,200
Finance costs (1,600)
Income tax expense (3,300)
Profit for the year 5,300
Share capital 20,000

Reserves 15,600
Net assets 35,600
Non-current loan payable 6,900
42,500
What is BL's return on investment (to the nearest %)?
A 24%
B 12%
C 29%
D 15%
8 What effect on ratios would an upwards revaluation of property, plant and equipment be likely to
lead to?
A Gearing ratio will increase.
B The current ratio will decrease.
C Net profit margin will decrease.
D Interest cover will increase.
9 A Bank has provided a long-term loan to NV Co.
Which of the following pairs of ratios is most likely to provide the bank with relevant information?
A Asset turnover and expenses to sales
B Gearing and interest cover
C Return on capital employed and gross profit margin
D Return on shareholders' equity and earnings per share
10 GF Co is a global mobile phone manufacturer. Recent result for its trade in The Middle East are as
follows:
20X7 20X6
Revenue $8 736 000 $5 582 000
Operating profit margin 10.5% 11.5%
Which of the following is the most likely explanation for the movement in the operating profit
margin in the Middle East?
A GF won a new contract with the largest network provider and retailer in the Middle East on the
basis of a bulk buy discount.
B There has been an increase in demand for mobile phones in the Middle East.
C GF has only just begun selling phones in the Middle East.
D There has been an increase in popularity in high-end smartphones in the Middle East.

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30 | THE FINANCIAL REPORTING ENVIRONMENT

3 Are the following statements correct or incorrect?

5 Which of the following statements is correct?

6 Which of these statements are correct?

7 Which committee of the IASB provides guidance on the application of IFRS?

8 What is the correct definition of GAAP?

QUICK REVISION QUESTIONS 2

1 A conceptual framework is:

2 Which of the following is an advantage of a conceptual framework?

3 What is the name of the IASB's conceptual framework?

5 Which of the following is not a use of financial statements prepared by a company?

QUICK REVISION QUESTIONS 3

1 Which of the following is an advantage of a principles based system of accounting standard

2 Which of the following statements is incorrect?

4 Which of the following statements about going concern assumption is true?

9 Which of the following is a benefit of harmonisation?

QUICK REVISION QUESTIONS 4

1 What is the following statement a definition of?

2 Which of the following is the correct definition of a liability?

5 Which of the following is an example of a current asset?

6 Which of the following items are non-current assets?

7 How is a bank overdraft classified in the statement of financial position?

9 Which of the following is an example of a liability?

1 Which statement is correct of the historical cost convention?

2 Under what basis are assets usually valued?

6 Which of the following statements is correct?

7 What does the following statement describe?

8 Consider the following statements:

QUICK REVISION QUESTIONS 2

1 What does the following statement define?

2 Fiduciary duty is:

3 Which of the following are examples of agency costs?

6 Which of the following must be disclosed in a non-listed company's annual report?

QUICK REVISION QUESTIONS

1 Which of the following are examples of current assets?

Profit for the period 29

14 Part of a company's draft statement of operating cash flows is shown below:

The following criticisms of the above extract have been made:

20 At 1 October 20X4, BK had the following balance:

23 Which of the following is not a function of an internal audit team?

QUICK REVISION QUESTIONS 1

B I and III only

14 A cash-generating unit comprises the following:

QUICK REVISION QUESTIONS 2

13 Extracts from the financial statements of Rasputin Co. are as follows:

QUICK REVISION QUESTIONS 3

4 Parent Co. has three overseas subsidiaries:

Total assets 630 000

Share capital 100 000

Current liabilities 180 000

Equity and liabilities 630 000

Relevant exchange rates are as follows:

QUICK REVISION QUESTIONS 4

QUICK REVISION QUESTIONS 1

4 Which of the following provide evidence of a parent-subsidiary relationship?

8 Which of the following statements are correct?

QUICK REVISION QUESTIONS 2

The following information is relevant for questions 2 to 4

QUICK REVISION QUESTIONS 3

The following information is relevant for questions 3 and 4