Financial Accounting & Reporting
(1) 2017 (FIN117)
Assumed knowledge
Quiz
15 December 2016 • fin117_AssumedKnowldge_v2
Chartered Accountants Program
Financial Accounting & Reporting
Assumed knowledge
Quiz
This quiz references the International Accounting Standards and Conceptual Framework.
You can use International, Australian or New Zealand Accounting Standards and Conceptual
Framework.
The International Accounting Standards and Conceptual Framework can be accessed from the
IFRS website (www.ifrs.org). You will need to register to access the content on the website but it
is free to do so.
1. According to the Conceptual Framework for Financial Reporting (Conceptual Framework) the
following would all be considered to be an asset except for:
a. An amount owing from a client for work already completed.
b. A computer that will be purchased when new software is released.
c. A five-year finance lease of a computer server that began during the current financial
year.
d. Amount paid in advance for stationery that will be delivered monthly over the next
year.
2. Which of the following would be classified as a non-current liability according to IAS 1
Presentation of Financial Statements (IAS 1)?
a. A 5 year corporate bond issued by an entity that it will trade in the bond market.
b. The proportion of a finance lease on a motor vehicle that is not due to be settled in
12 months.
c. A trade payable expected to be settled in two years, which is in the entity’s normal
operating cycle.
d. Advances owing to employees for travel already completed, and will be paid in the next
monthly pay cycle.
3. According to the Conceptual Framework which of the following would be classified as a
liability?
a. The costs that would be incurred by a band for a performance that may occur if a
fundraiser is organised next year.
b. The future payments an entity has agreed to make if a contract for a new computer
service agreement is signed after year end.
c. The unpaid portion of for entertainment costs for which there is no present obligation.
d. The obligations at year-end to pay for airline tickets, which have been booked but not
yet paid for, and that, cannot be changed or cancelled.
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Financial Accounting & Reporting
Chartered Accountants Program
4. According to the Conceptual Framework which of the following is correct in relation to
income?
a. Income is only matched against expenses when the expenses are paid.
b. Income must be earned during the ordinary course of business.
c. Income does not include contributions from equity participants.
d. Income is always in the form of inflows or enhancements of assets.
5. There is an amount of $50,000 of prepaid expenses on Company A’s statement of financial
position as at 31 December 20X2. Company A has received a tax deduction during the year
ended 31 December 20X2 for these expenses.
The tax rate is 30%.
The result will be:
a. A deferred tax asset of $15,000.
b. A deferred tax asset of $50,000.
c. There will be no deferred tax asset or liability.
d. A deferred tax liability of $15,000.
6. You are an investor analysing the general purpose financial reports of a company in order to
decide whether to buy shares in the company. According to the Conceptual Framework the
fundamental qualitative characteristics of useful information include:
a. Comparability and relevance.
b. Relevance and faithful representation.
c. Faithful representation and timeliness.
d. Comparability, verifiability, timeliness and understandability.
7. You are asked to prepare a complete set of financial statements which comply with IAS 1.
In addition to a statement of financial position, a statement of profit or loss and other
comprehensive income and a statement of changes in equity, you will prepare:
(i) A statement of cash flows.
(ii) Notes including a summary of significant accounting policies.
(iii)A sustainability report.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii) and (iii).
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Assumed knowledge quiz
Chartered Accountants Program
Financial Accounting & Reporting
8. According to IAS 1, a statement of profit or loss and other comprehensive income:
a. Can be presented as either a single statement of profit or loss and other comprehensive
income or as two separate statements.
b. Must be presented in two statements – a separate income statement and a second
statement beginning with profit or loss and displaying components of other
comprehensive income.
c. Must be presented as a single statement of comprehensive income.
d. Is not required to display each component of other comprehensive income.
9. Before the end of the financial year which ended on 31 December 20X2, Company XYZ
breached a long-term loan agreement it had with the bank, and the liability became payable
on demand.
As at 31 December 20X2, the bank was in negotiation to provide Company XYZ a grace
period until 30 June 20X4 to rectify the breach of the long-term loan agreement. It was
likely that the negotiation would be successful. On 31 January 20X3, before the financial
statements of Company XYZ were finalised for the year ending 31 December 20X2, an
agreement was met giving Company XYZ a grace period until 30 June 20X4.
In the financial statements for the year ended 31 December 20X2, how would the liability be
recorded?
a. As a current liability because at reporting date the liability was payable on demand.
b. As a non-current liability because at reporting date it was likely a grace period of at least
12 months would be granted.
c. As a non-current liability because by the time the financial statements were finalised
a grace period of at least 12 months was granted.
d. As a contingent liability because it was contingent on an agreement being made with the
bank.
10. The following information relates to Company B for the financial year ended 30 June 20X2:
Cost of sales
$100,000
Opening inventory on hand
$15,000
Closing inventory on hand
$20,000
Opening trade payables
$25,000
Closing trade payables
$33,000
How much cash was paid to suppliers in the financial year ended 30 June 20X2?
a.$92,000.
b.$97,000.
c.$103,000.
d.$105,000.
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Financial Accounting & Reporting
Chartered Accountants Program
11. ABC Limited (ABC) applies the revaluation model to account for buildings. Which of the
following statements is incorrect regarding the accounting requirements for the entity’s
buildings under IAS 16?
a. Revaluations are required to be undertaken every year to ensure that the carrying
amount of the buildings does not differ materially from their fair value.
b. All buildings are required to be revalued simultaneously. It is not possible for ABC to
revalue selected buildings only.
c. A revaluation decrement in relation to an individual building is required to be
recognised in profit or loss unless there is a balance in ABC’s revaluation surplus
account in relation to the building in which case the revaluation decrement will be offset
against the revaluation surplus.
d. All revaluation increments in relation to individual buildings are required to be
recognised in ABC’s revaluation surplus unless they reverse a previous revaluation
decrement for the individual asset.
12. Is it possible for a company preparing a general purpose financial report to deviate from
complying with the IFRS requirements (or their national equivalents)?
a. No. Companies preparing a general purpose financial report must comply with IFRS,
Interpretations and Framework (or their national equivalents) at all times.
b. Yes. Companies preparing a general purpose financial report can deviate from IFRS,
Interpretations and Framework (or their national equivalents) by disclosing the
accounting policies used.
c. Yes. Companies preparing a general purpose financial report can deviate from IFRS,
Interpretations and Framework (or their national equivalents) when compliance would
be significantly misleading.
d. Yes. Companies preparing a general purpose financial report can deviate from IFRS,
Interpretations and Framework (or their national equivalents) when there are no
applicable standards.
13. Each of the following items relate to the company for which you are preparing general
purpose financial reports. Which item does not specifically require separate disclosure
under IAS 1?
a. Level of rounding used in presenting the financial statements.
b. Whether the statements are for the company alone, or whether they are for a group.
c. The comparative information in respect of the previous period for all amounts unless
another Standard requires otherwise.
d. Management has determined that the company is a going concern.
14. Under IAS 8, changes in accounting policies are:
a. Permitted if it will result in more relevant and reliable information.
b. Permitted if it relates to a transaction that had not previously been entered into.
c. Required on transactions that are material, when the entity had entered into similar
transactions which were immaterial.
d. Required whenever a new accounting standard is initially applied.
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Financial Accounting & Reporting
15. When preparing the financial statements for the year ended 30 June 20X3, you realise that
there was a material error in the salaries recorded in the year ended 30 June 20X2. As a
result, when preparing the financial statements for the year ended 30 June 20X3 you must:
a. Adjust the salaries in the current year financial statements, with a disclosure of the error
in the notes.
b. Present the error as a separate item in the current year financial statements.
c. Adjust the salaries in the prior period financial statements displayed for comparative
purposes in the current year financial statements.
d. Adjust the opening retained earnings with no change to comparative amounts.
16. Which of the following conditions must be satisfied before revenue from the sale of goods
can be recognised in accordance with IAS 18?
(i) Revenue can be measured reliably.
(ii) Costs can be measured reliably.
(iii)No risks of ownership have been retained.
(iv)Continuing managerial involvement has been surrendered.
(v) The benefits of the transactions are certain.
a. (i), (ii) and (iii).
b. (i), (ii) and (iv).
c. (i), (iv) and (v).
d. (ii), (iv) and (v).
17. An investment company receives both dividend and royalty revenue and intends to
recognise the dividend and royalty revenue when it is received.
Does this comply with the requirements of IAS 18?
a. Yes. Both dividend and royalty revenue should only be recognised when they are
received.
b. Yes. Dividend revenue should be recognised when received. Royalty revenue can be
recognised on either a cash or accruals basis.
c. No. Both dividend and royalty revenue should only be recognised on an accruals basis.
d. No. Dividend revenue should be recognised when the investment company has the
right to receive payment. Royalty revenue should be recognised on an accruals basis.
18. A computer company sells computer monitors for $10,000 to a customer on 31 December
20X2.
The terms of the sale agreement state that payment is due on 31 December 20X3.
The company has an imputed rate of interest of 7%.
Under IAS 18 how much revenue should the company recognise in profit or loss for the year
ended 31 December 20X2?
a.$0.
b.$9,346.
c.$10,000.
d.$10,700.
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Financial Accounting & Reporting
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19. On 1 July 20X2, a cleaning company entered into an agreement with a business, whereby
it will clean the business premises on a weekly basis. The cleaning will commence on
1 August 20X2.
The business paid upfront on 5 July 20X2 in order to secure a cheap price.
The cleaning company should recognise the revenue under IAS 18:
a. On 1 July 20X2, when the contract is signed.
b. On 5 July 20X2, when the payment has been received.
c. On 1 August 20X2, when the work under the contract commences.
d. As the work associated with the contract is completed.
20. In your local area, it has become popular for companies to exchange goods and services
with each other. In accordance with IAS 18, businesses should recognise revenue from the
barter of these services:
a. When the goods and services exchanged are of dissimilar nature to the goods received.
b. Whenever goods and services are exchanged.
c. When the goods and services exchanged are only more, not less than the value of the
goods received.
d. When the goods and services exchanged are of similar value as the goods received.
21. A company has purchased a new piece of specialised machinery for its warehouse. The
amount on the invoice was $49,000, after a trade discount of $3,000. The company estimates
that it will cost the present value of the costs to dismantle the machinery at the end of its
useful life to be $4,000.
According to IAS 16 what is the cost of the machinery to the company?
a.$49,000.
b.$52,000.
c.$53,000.
d.$54,000.
22. A company purchased an asset for $100,000 on 1 January 20X0 and commenced
depreciating the asset over an estimated useful life of 10 years. On 1 January 20X4,
the company reviewed the estimated useful life, and revised its estimate such that the
remaining useful life was four years (a total of eight years).
How much depreciation would be charged on the asset for the year ended 31 December
20X4?
a.$10,000.
b.$12,500.
c.$15,000.
d.$25,000.
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Financial Accounting & Reporting
23. Apart from the first-in first-out (FIFO) method of assigning the cost of inventory, does IAS 2
allow for any other method of assigning the cost of inventory?
a. No. IAS 2 only allows for the FIFO method.
b. Yes. IAS 2 also allows both the last-in first-out (LIFO) method and the weighted average
cost method.
c. Yes. IAS 2 also allows the LIFO method.
d. Yes. IAS 2 also allows the weighted average cost method.
24. The following information applies to the finished goods inventory held by ABC Limited:
Expected selling price
$1,000
Expected selling costs
$50
Costs to manufacture
$600
According to IAS 2, what is the net realisable value of the inventory?
a.$350.
b.$400.
c.$950.
d.$1,000.
25. Four of the six directors of Company Small are directors of Company Big.
Company Big owns 45% of Company Small, and is the largest shareholder.
There are many other shareholders in Company Small, none of whom own more than 2%
of Company Small. None of these other shareholders know each other.
Is Company Big likely to control Company Small in accordance with IFRS 10 Consolidated
Financial Statements (IFRS 10)?
a. No, because Company Big only owns 45% of Company Small.
b. No, because Company Big only controls the makeup of the board and not necessarily
the way the directors will vote.
c. Yes, only because Company Big is the largest shareholder.
d. Yes, because Company Big is the largest shareholder, and the other shares are widely
dispersed.
26. Kangaroo Company acquired 60% of equity of Joey Company on 1 July 20X2.The individual
income statements of the two companies for the year ended 30 June 20X3 contained:
Kangaroo Company
$
Joey Company
$
Revenue
100,000
40,000
Cost of sales
(30,000 )
(25,000)
Gross profit
70,000
15,000
During the year ended 30 June 20X3, $8,000 of Kangaroo’s revenue earned was due to the
sale of inventory with a cost of $2,400 to Joey. At 30 June 20X3, none of this inventory was
still on hand.
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What is the consolidated revenue for the Kangaroo group for the year ended 30 June 20X3?
a.$119,200.
b.$124,000.
c.$132,000.
d.$140,000.
27. Company M acquired 80% of Company N’s ordinary share capital on 1 January 20X2.
As at 31 December 20X2, extracts from the individual statements of financial position
showed:
Company M
$
Company N
$
Revenue
20,000
15,000
Cost of sales
30,000
17,000
As at 31 December 20X2, included in Company M’s receivables balance is an amount due
from Company N of $2,500.
What should be shown as the consolidated figure for receivables and payables at
31 December 20X2?
Receivables Payables
a. $32,000$43,600
b. $32,500$44,500
c. $32,500$47,000
d. $35,000$47,000
28. A parent company acquired 100% of a subsidiary. The consideration paid by the parent company is
less than the fair value of the identifiable net assets of the subsidiary that it acquired. How should
the parent company recognise this difference on acquisition in accordance with IFRS 3 Business
Combinations (IFRS 3)?
a. There will be no difference, as the fair value of the net assets would be decreased to
equal the consideration.
b. As negative goodwill on the balance sheet statement of financial position.
c. If the situation remains the same after a reassessment of the fair value of the identifiable
net assets, it must be recognised in profit or loss.
d. Immediately recognised in the statement of profit or loss and other comprehensive
income.
29. How should goodwill with an indefinite useful life be measured subsequent to acquisition?
a. The goodwill should be assessed for impairment annually.
b. The goodwill should be amortised in a way to reflect the pattern of benefits.
c. The goodwill should be amortised over a straight line basis, over a 20-year period.
d. The goodwill will remain at the initial measurement on the statement of financial
position.
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Financial Accounting & Reporting
30. According to IAS 1 how may a company present:
(i) Amount of dividends recognised as distributions; and
(ii) Related amount of dividend per share during the reporting period?
a. Only the amount of dividends recognised as distributions may be presented on the
statement of changes in equity.
b. Both amounts may be presented on either the statement of changes in equity or in the
notes to the financial statements.
c. Both amounts may be presented only on the statement of changes in equity.
d. Both amounts may be presented only in the notes to the financial statements.
31. Rev Limited disposes of a revalued asset during the year ended 30 June 20X2. In accordance
with IAS 16 how should the revaluation surplus relating to that asset be treated on disposal
of the asset?
a. It must be left in equity as a revaluation surplus.
b. It must be transferred directly to retained earnings.
c. It must be left in equity, but can be recorded as a general reserve.
d. It may be either transferred directly to retained earnings or left in equity as a revaluation
surplus.
32. The purpose of the statement of changes in equity for the period is to provide users of the
financial reports with information regarding:
a. Changes to each component of an entity’s equity during a period.
b. The total equity of an entity at the end of the period.
c. The return on investment for shareholders of the entity for the period.
d. The assets, liabilities and equity at the end of the period.
33. Company D records non-current assets at cost.
On 1 August 20X2, one of the non-current assets was classified as ‘held for sale’ as per
IFRS 5.
On 1 August 20X2, the asset had a carrying amount of $50,000, a fair value of $25,000 and
costs to sell at $4,000.
On 15 August 20X2, the asset was sold for net proceeds of $19,000.
In accordance with IFRS 5, what should be included as an impairment loss in the statement
of profit or loss and other comprehensive income for the year ended 31 December 20X2?
a.Nil.
b.$25,000.
c.$29,000.
d.$31,000.
Assumed knowledge quiz
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Financial Accounting & Reporting
Chartered Accountants Program
Answers and feedback
This quiz references the International Accounting Standards and Conceptual Framework.
You can use International, Australian or New Zealand Accounting Standards and Conceptual
Framework.
The International Accounting Standards and Conceptual Framework can be accessed from the
IFRS website (www.ifrs.org). You will need to register to access the content on the website but it
is free to do so.
Question 1
Correct Answer
(b) is correct. There have been no past events that indicate that the computer has been
purchased. At this stage there is only an intention to purchase to the computer.
The Conceptual Framework defines an asset as a resource controlled by the entity as a
result of past events and from which future economic benefits are expected to flow to the
entity. Feedback
(a) is incorrect. It meets the Conceptual Framework’s definition of an asset as the amount
receivable is controlled by the entity as a result of work already provided and the amount
received is expected to flow to the entity.
(c) is incorrect. It meets the Conceptual Framework’s definition of an asset as the computer
server is controlled by the entity despite that fact that there is no legal ownership.
(d) is incorrect. It meets the Conceptual Framework’s definition of an asset as the amount
has already been paid and it is expected that stationary will be received during the year.
For further
information
For further information, you should refer to the Conceptual Framework paras 4.4(a) and
4.8 – 4.14.
Question 2
Correct Answer
(b) is correct. It is the only option that does not satisfy the definition of a current liability,
and as such it would be classified as a non-current liability. According to IAS 1 para. 69,
a liability is classified as current when it satisfies any of the following criteria:
• it is expected to be settled in the entity’s normal operating cycle (i.e. may be more than
12 months)
• it is held primarily for the purpose of being traded
• it is due to be settled within 12 months after the reporting date
• the entity does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting date.
Feedback
(a) is incorrect. It is a liability held primarily for the purpose of being traded, and as such
would be would be classified as current in accordance with the requirements of IAS 1.
(c) is incorrect. It is a liability expected to be settled in the entity’s normal operating cycle,
and as such would be would be classified as current in accordance with the requirements
of IAS 1.
(d) is incorrect. It is a liability expected to be settled within 12 months, and as such would
be would be classified as current in accordance with the requirements of IAS 1.
For further
information
Page 10
For further information, you should refer to IAS 1 paras 69–76.
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Question 3
Correct Answer
(d) is correct. The obligations described meet the Conceptual Framework definition of a
liability which is ‘a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits’.
Feedback
(a) is incorrect. It does not meet the Conceptual Framework’s definition of a liability as there
is no past event, and there is no present obligation.
(b) is incorrect. It does not meet the Conceptual Framework’s definition of a liability as the
service agreement has not yet been signed.
(c) is incorrect. It does not meet the Conceptual Framework’s definition of a liability as there
is no present obligation to pay for the entertainment.
For further
information
For further information, you should refer to the Conceptual Framework paras 4.4(b) and
4.15–4.19.
Question 4
Correct Answer
(c) is correct. According to the Conceptual Framework, income does not include
contributions from equity participants.
Feedback
(a) is incorrect. The Conceptual Framework allows for an accruals system of measuring
income, whereby income would be matched against expenses when they are incurred and
result directly and jointly from the same transactions or other events.
(b) is incorrect. The Conceptual Framework defines income to include both revenue and
gains. Gains may or may not be earned during the ordinary course of business.
(d) is incorrect. The Conceptual Framework defines that income is either in the form of an
increase in assets or a decrease in liabilities.
For further
information
For further information, you should refer to the Conceptual Framework para. 4.25, 4.29–32
and 4.50.
Question 5
Correct Answer
(d) is correct. The tax base of the asset (the prepaid expense) is $0. The carrying amount for
accounting purposes is $50,000 with the difference being a taxable temporary difference.
A deferred tax liability is recognised for taxable temporary differences, calculated as the
temporary difference multiplied by the tax rate, that is, $50,000 × 30%.
Feedback
(a), (b) and (c) are incorrect. The tax base of the asset (the prepaid expense) is $0. The
carrying amount for accounting purposes is $50,000 with the difference being a taxable
temporary difference. A deferred tax liability is recognised for taxable temporary
differences, calculated as the temporary difference multiplied by the tax rate, that is,
$50,000 × 30%.
For further
information
For further information, you should refer to IAS 12 paras 5 and 15.
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Question 6
Correct Answer
(b) is correct. According to the Conceptual Framework (para. QC5), relevance and
faithful representation are the fundamental qualitative characteristics of useful financial
information. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and
understandable.
Feedback
(a), (c) and (d) are incorrect. The usefulness of financial information is enhanced if it
is comparable, verifiable, timely and understandable. According to the Conceptual
Framework, the only fundamental qualities are relevance and faithful representation.
For further
information
For further information, you should refer to the Conceptual Framework paras QC5–QC16.
Question 7
Correct Answer
(c) is correct. Only (i) and (ii) are correct. According to IAS 1 para.10, a complete set of
financial statements includes, amongst other statements, a statement of cash flows and
notes comprising a summary of significant accounting.
(iii) is not correct. A sustainability report is not required by IAS 1 as part of the financial
statements.
Feedback
(a), (b), and (d) are not correct. Only (i) and (ii) are correct. According to IAS 1, a complete set
of financial statements includes, amongst other statements, a statement of cash flows and
notes comprising a summary of significant accounting.
(iii) is not correct. A sustainability report is not required by IAS 1 as part of the financial
statements.
For further
information
For further information, you should refer to IAS 1 para. 10.
Question 8
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Correct Answer
(a) is correct. According to IAS 1 para. 10A, the statement of profit or loss and other
comprehensive income can be presented as either a single statement or as two separate
statements. Either one of the separate statements, or the combined statement, must
disclose the components of other comprehensive income.
Feedback
(b), (c) and (d) are incorrect. According to IAS 1 para. 10A, the statement of profit or loss
and other comprehensive income can be presented as either a single statement or as two
separate statements. Either one of the separate statements, or the combined statement,
must disclose the components of other comprehensive income.
For further
information
For further information, you should refer to IAS 1 para. 10A.
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Question 9
Correct Answer
(a) is correct. According to IAS 1 para.74, if a liability becomes payable on demand because
an entity has breached a long-term loan agreement before reporting date, the liability is
current, even if the lender agrees after the reporting date and before finalising the financial
statements. The liability is classified as non-current if at the reporting date, the lender
provides a period of grace of at least 12 months after the end of the reporting period,
within which the entity can rectify the breach and during which the lender cannot demand
immediate repayment.
Feedback
(b), (c) and (d) are incorrect. According to IAS 1 para. 74, if a liability becomes payable on
demand because an entity has breached a long-term loan agreement before reporting
date, the liability is current, even if the lender agrees after the reporting date and before
the finalising the financial statements. The liability is classified as non-current if at the
reporting date, the lender provides a period of grace of at least 12 months after the end of
the reporting period, within which the entity can rectify the breach and during which the
lender cannot demand immediate repayment.
For further
information
For further information, you should refer to IAS 1 paras 72–76.
Question 10
Correct Answer
(b) is correct ($100,000 + $5,000 – $8,000). This equates to the cost of sales plus the
movement in inventory on hand less the increase in trade payables.
Feedback
(a) is incorrect. This equates to the cost of sales less the movement in trade payables, and
excludes the movements in stock.
(c) is incorrect. This equates to the cost of sales less the movement in inventory plus the
increase in trade payables.
(d) is incorrect. This equates to cost of sales plus the movement in inventory, and excludes
the movement in creditors..
For further
information
For further information you should refer to IAS 7.
Question 11
Correct Answer
(a) is correct. IAS 16 para. 31 requires that revaluations be made with sufficient regularity
to ensure that the carrying amount of the land and buildings does not differ materially
from their fair value. There is no requirement in IAS 16 for the revaluation to be made on an
annual basis.
Feedback
(b) is incorrect. IAS 16 para. 36 requires the whole class of assets be revalued. So, selective
revaluation within a class of assets is not permitted by IAS 16.
(c) is incorrect. IAS 16 para. 40 allows a revaluation decrement to be offset against a
revaluation surplus that has been previously recorded in relation to that specific asset.
(d) is incorrect. IAS 16 para. 39 requires revaluation increments to be recognised in a
revaluation surplus account unless the increment represents the reversal of a previous
decrement, in which case the increment will be recognised in profit or loss.
For further
information
For further information you should refer to IAS 16 para. 31–42.
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Question 12
Correct Answer
(c) Is correct. IAS 1 para. 19 acknowledges that, in extremely rare circumstances,
management may conclude that compliance with an IFRS requirement would be so
misleading that it would conflict with the objective of financial statements set out in
the Conceptual Framework. In such a case, the entity is required to depart from the IFRS
requirement, with detailed disclosure of the nature, reasons, and impact of the departure.
Feedback
(a) Is incorrect. IAS 1 para. 19 acknowledges that, in extremely rare circumstances,
management may conclude that compliance with an IFRS requirement would be so
misleading that it would conflict with the objective of financial statements set out in
the Conceptual Framework. In such a case, the entity is required to depart from the IFRS
requirement, with detailed disclosure of the nature, reasons, and impact of the departure.
(b) Is incorrect. According to IAS 1 para. 18 inappropriate accounting policies are not
rectified either by disclosure of the accounting policies used or by notes or explanatory
material.
(d) Is incorrect. According to IAS 8 para. 10 in the absence of a Standard or an
Interpretation, management must refer to, and consider, the requirements and guidance
in IASB Standards and Interpretations dealing with similar and related issues; and the
definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the Framework.
For further
information
For further information you should refer to IAS 1 para 15–24 and IAS 8 paras 10–12.
Question 13
Correct Answer
(d) is correct. IAS 1 para. 25 requires a series of disclosures where management concludes
that the entity is not a going concern and the financial statements should not be prepared
on a going concern basis.
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(a) is incorrect. IAS 1 para. 51(e) requires a disclosure for the level of rounding and precision.
(b) Is incorrect. IAS 1 para. 51(b) requires a disclosure as to whether the financial statements
are for a group or an individual entity.
(c) Is incorrect. IAS 1 paras 10(ea) and 38 require that comparative information shall
be disclosed in respect of the previous period for all amounts reported in the financial
statements, both on the face of the financial statements and in the notes, unless another
Standard requires otherwise.
For further
information
For further information, you should refer to the IAS 1 para. 10(ea), 25, 38–38A and 51.
Question 14
Correct Answer
(a) is correct. According to IAS 8 para.14, an entity is permitted to change an accounting
policy when it results in the financial statements providing reliable and more relevant
information.
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(b) is incorrect. According to IAS 8 para. 16(a), a change in policy does not arise when an
entity merely enters into a new type of transaction.
(c) is incorrect. According to IAS 8 para. 16(b), a change in accounting policy does not arise
when previous similar transactions were considered to be immaterial.
(d) Is incorrect. According to IAS 8 para. 19, a change in accounting policy may occur
on initial application of a new Accounting Standard, depending on the transitional
requirements.
For further
information
Page 14
For further information you should refer to IAS 8 paras 14–27.
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Financial Accounting & Reporting
Question 15
Correct Answer
(c) is correct. IAS 8 para. 42 requires that the company must correct all material prior period
errors retrospectively in the first set of financial statements authorised for issue after their
discovery by restating the comparative amounts for the prior period(s) presented in which
the error occurred.
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(a), (b) and (d) are incorrect. IAS 8 para. 42 requires that the company must correct all
material prior period errors retrospectively in the first set of financial statements authorised
for issue after their discovery by restating the comparative amounts for the prior period(s)
presented in which the error occurred.
For further
information
For further information you should refer to IAS 8 paras 41–48.
Question 16
Correct Answer
(b) is correct. (i), (ii) and (iv) are correct. All of these conditions comply with IAS 18
paragraphs 14(a) – (e), which outlines the conditions that must be met in order for revenue
from the sale of goods to be recognised.
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(i) is correct. Revenue is to be recognised when the amount of revenue can be reliably
measured (IAS 18 para. 14(c)).
(ii) is correct. Revenue is to be recognised when the costs incurred or to be incurred in
respect of the transaction can be reliably measured (IAS 18 para. 14(e)).
(iii) is incorrect. Revenue is to be recognised when significant risks and rewards have been
transferred. Not all risks are required to be transferred (IAS 18 para. 14(a)).
(iv) is correct. Revenue is recognised where the entity does not retain either the continuing
managerial involvement normally associated with ownership or effective control over the
goods (IAS 18 para. 14(b)).
(v) is incorrect. Revenue is to be recognised when it is probable that the economic benefits
associated will flow to the entity. They do not need to be certain (IAS 18 para. 14(d))
For further
information
For further information you should refer to IAS 18 paras 14–19.
Question 17
Correct Answer
(d) is correct. According to IAS 18 paras 30(b) and (c), royalties are recognised on an
accruals basis in accordance with the substance of the relevant agreement and dividends
are recognised when the shareholder’s right to receive payment is established.
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(a), (b) and (c) are incorrect. According to IAS 18 paras 30(b) and (c), royalties are recognised
on an accruals basis in accordance with the substance of the relevant agreement and
dividends are recognised when the shareholder’s right to receive payment is established.
For further
information
For further information you should refer to IAS 18 paras 29–34.
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Question 18
Correct Answer
(b) is correct. According to IAS 18 para. 9, revenue should be measured at the fair value
of the consideration received or receivable. Where consideration is deferred, it should
be discounted to present value. Discounting a value of $10,000 to present value at 7%
is $9,346.
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(a), (c) and (d) are incorrect. Since a sale agreement is in place, revenue should be
recognised. According to IAS 18 para. 9, revenue should be measured at the fair value
of the consideration received or receivable. Where consideration is deferred, it should
be discounted to present value. Discounting a value of $10,000 to present value at 7%
is $9,346.
For further
information
For further information you should refer to IAS 18 paras 9–12.
Question 19
Correct Answer
(d) is correct. Where a transaction involves the rendering of services, IAS 18 para. 20
requires the revenue to be recognised by reference to the stage of completion. The amount
should be deferred and recognised over the period of the contract.
Incorrect
feedback for any
other response,
including no
response is
selected.
(a) is incorrect. The revenue should not be recognised when the contract is signed. Where
a transaction involves the rendering of services, IAS 18 para. 20 requires the revenue to be
recognised by reference to the stage of completion. The amount should be deferred and
recognised over the period of the contract.
(b) Is incorrect. The revenue should not be recognised when the payment is received.
(c) Is incorrect. The revenue should not be recognised when the work commences.
For further
information
For further information you should refer to IAS 18 paras 20–28.
Question 20
Correct Answer
(a) is correct. According to IAS 18 para. 12, revenue is generated when there is an exchange
of goods and services that are dissimilar in nature and value.
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(b) is incorrect. According to IAS 18 para. 12, revenue is not generated when the exchange
of goods or services are of a similar nature and value.
(c) Is incorrect. According to IAS 18 para. 12, the type of goods and services exchanged
must be evaluated.
(d) Is incorrect. According to IAS 18 para. 12, the type of goods and services exchanged
must be evaluated.
For further
information
Page 16
For further information you should refer to IAS 18 para. 12.
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Question 21
Correct Answer
(c) is correct. According to IAS 16 para. 16, the cost of the machinery is its purchase price of
$52,000 less trade discounts and rebates, which would be $3,000 from the trade discount,
plus the initial estimate of $4,000 of costs of dismantling the machinery.
Feedback
(a), (b) and (d) are incorrect. According to IAS 16 para. 16, the cost of the machinery is its
purchase price of $52,000 less trade discounts and rebates, which would be $3,000 from
the trade discount, plus the initial estimate of $4,000 of costs of dismantling the machinery.
For further
information
For further information you should refer to IAS 16 paras 15–20.
Question 22
Correct Answer
(c) is correct. The asset would have been depreciated at a rate of $10,000 a year for four
years from 1 January 20X0 to 1 January 20X4. On 1 January 20X4, the carrying amount of
the asset is $60,000. IAS 16 para. 51 requires the useful life of the asset to be reviewed each
financial year, and if expectations change, this should be reflected. As such, the carrying
amount of $60,000 should be depreciated over the remaining life of four years, which
equates to $15,000 per annum.
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(a) is incorrect. This assumes that there is no change to the rate of depreciation, despite a
revision of the asset’s remaining useful life. The asset would have been depreciated at a
rate of $10,000 a year for four years from 1 January 20X0 to 1 January 20X4. On 1 January
20X4, the carrying amount of the asset is $60,000. IAS 16 para. 51 requires the useful life
of the asset to be reviewed each financial year, and if expectations change, this should
be reflected. As such, the carrying amount of $60,000 should be depreciated over the
remaining life of four years, which equates to $15,000 per annum.
(b) is incorrect. This assumes that the initial cost of $100,000 is depreciated over the revised
life of eight years.
(d) is incorrect. This depreciates the original cost of $100,000 over the remaining life of four
years.
For further
information
For further information you should refer to IAS 16 para. 51.
Question 23
Correct Answer
(d) is correct. For inventory that is interchangeable, IAS 2 para. 25 allows the use of FIFO or
weighted average cost method to assign inventory costs.
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(a), (b) and (c) are incorrect. For inventory that is interchangeable, IAS 2 para. 25 allows the
use of FIFO or weighted average cost method to assign inventory costs.
For further
information
For further information you should refer to IAS 2 paras 23–27.
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Chartered Accountants Program
Question 24
Correct Answer
(c) is correct ($950). According to IAS 2, the net realisable is the estimated selling price
($1,000) in the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale ($50).
Feedback
(a) is incorrect. This is the expected selling price less the estimated costs necessary to make
the sale less the costs incurred to manufacture the inventory. According to IAS 2 para. 6,
the net realisable is the estimated selling price ($1,000) in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale
($50).
(b) is incorrect. This is the expected selling price less the costs incurred to manufacture the
inventory.
(d) is incorrect. This is the expected selling costs.
For further
information
For further information you should refer to IAS 2 para. 6.
Question 25
Correct Answer
(d) is correct. IFRS 10 recognises there can be ‘de-facto’ control when the investor holds
less than 50% of the shares in the investee and there are many other shareholders, none of
whom have arrangements to consult each other or make collective decisions.
Feedback
(a) is not correct. Control of an investee can occur even when the investor owns less than
50% of the shares. IFRS 10 allows for ‘de-facto’ control even when the investor holds less
than 50% of the shares in the investee.
(b) is not correct. Control of the board is be an indication of control.
(c) is not correct. Being the largest shareholder does not prove control, when the largest
shareholder holds less than 50% of the shares. IFRS 10 allows for ‘de-facto’ control when
the investor holds less than 50% of the shares in the investee and there are many other
shareholders, none of whom have arrangements to consult each other or make collective
decisions.
For further
information
For further information you should refer to IFRS 10 paras 5–8 and Application example 4.
Question 26
Correct Answer
(c) is correct. It is calculated as $100,000 + $40,000 – $8,000. It adds the full amount of the
revenue and eliminates the entire amount of the inter-entity sale in accordance with the
requirements of IFRS 10 para. 21 and Application Guidance paras B86 and B88.
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(a) is incorrect. It is calculated as $100,000 + (40,000 × 0.6) – ($8,000 × 0.6). This is not
correct as it adds the revenue and cancels the intra-group sale, it only adds 60% of the
revenue and cancels 60% of the intra-group sale, where the total amount should have
been added and subtracted in accordance with the requirements of IFRS 10 para. 21 and
Application Guidance paras B86 and B88.
(b) is incorrect. It is calculated as $100,000 + (40,000 × 0.6). This is not correct as it adds
60% of the revenue. The total amount of revenue should have been added, and the $8,000
intra‑group sale should have been eliminated in accordance with the requirements of
IFRS 10 para. 21 and Application Guidance paras B86 and B88.
(d) is incorrect. It is calculated as $100,000 + $40,000. It does not eliminate the $8,000
intra‑group sale.
For further
information
Page 18
For further information you should refer to IFRS 10 para. 21 and Application Guidance
paras B86 and B88.
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Chartered Accountants Program
Financial Accounting & Reporting
Question 27
Correct Answer
(b) is correct. It adds the entire balance of the parent and the subsidiary and eliminates
the intra-group balance from both the receivable and the payable in accordance with the
requirements of IFRS 10 para. 21 and Application Guidance para. B86.
Feedback
(a) is incorrect. It adds the entire balance of the parent and only 80% of the subsidiary.
It also excludes the intra-group balance.
(c) is incorrect. It only eliminates the intra-group balance from the receivables, but not from
the payables.
(d) is incorrect. It does not eliminate the intra-group balances.
For further
information
For further information you should refer to IFRS 10 para. 21 and Application Guidance
paras B86.
Question 28
Correct Answer
(c) is correct. In the situation where there is a bargain purchase (i.e. where the consideration
is greater than the fair value of the identifiable net assets), the fair value of the assets must
be first reassessed. If it is still a bargain purchase then according to IFRS 3 para. 36, it must
be recognised in the profit and loss.
Feedback
(a), (b) and (d) are incorrect. In the situation where there is a bargain purchase (i.e. where
the consideration is greater than the fair value of the identifiable net assets), the fair value
of the assets must be first reassessed. If it is still a bargain purchase then according to IFRS 3
para. 36, it must be recognised in the profit and loss.
For further
information
For further information you should refer to IFRS 3 paras 32 and 34–36.
Question 29
Correct Answer
(a) is correct. Goodwill is carried at goodwill at the amount recognised at the acquisition
date less any accumulated impairment losses (IFRS 3 Application Guidance para. B63). The
asset should be assessed for impairment annually in accordance with IAS 36 para. 90.
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(b) (c) and (d) are incorrect. Goodwill is carried at goodwill at the amount recognised at
the acquisition date less any accumulated impairment losses (IFRS 3 Application Guidance
para. B63).The asset should be assessed for impairment annually in accordance with IAS 36
para. 90.
For further
information
For further information you should refer to IFRS 3 para. 54 and Application Guidance B63
and IAS 36 para. 90
Question 30
Correct Answer
(b) is correct. According to IAS 1 para. 107, the amount of dividends recognised as a
distribution and the related amount of dividend per share may be presented on the face of
the statement of changes in equity, or they may be presented in the notes.
Feedback
(a), (c) and (d) are incorrect. According to IAS 1 para. 107, the amount of dividends
recognised as a distribution and the related amount of dividend per share may be
presented on the face of the statement of changes in equity, or they may be presented in
the notes.
For further
information
For further information you should refer to IAS 1 para. 107.
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Financial Accounting & Reporting
Chartered Accountants Program
Question 31
Correct Answer
(d) is correct. As noted in IAS 16 para. 41 when a revalued asset is disposed of, any
revaluation surplus may be transferred directly to retained earnings, or it may be left in
equity under the heading revaluation surplus. The amount is not recognised in profit or loss
as the gain or loss on disposal of a fixed asset is determined as the difference between the
net disposal proceeds, if any, and the carrying value of the asset (IAS 16 para. 71).
Feedback
(a), (b) and (c) are incorrect. As noted in IAS 16 para. 41 when a revalued asset is disposed
of, any revaluation surplus may be transferred directly to retained earnings, or it may be left
in equity under the heading revaluation surplus. The amount is not recognised in profit or
loss as the gain or loss on disposal of a fixed asset is determined as the difference between
the net disposal proceeds, if any, and the carrying value of the asset (IAS 16 para. 71).
For further
information
For further information you should refer to IAS 16 paras 41 and 71.
Question 32
Correct Answer
(a) is correct. According to IAS 1 para. 79, the information required to be included in the
statement of changes in equity includes reconciliations between the carrying amounts at
the beginning and the end of the period for each component of equity
Feedback
(b), (c) and (d) are incorrect. According to IAS 1 para. 79, the information required to be
included in the statement of changes in equity includes reconciliations between the
carrying amounts at the beginning and the end of the period for each component of
equity.
For further
information
For further information you should refer to IAS 1 para. 79.
Question 33
Correct Answer
(c) is correct. This calculates the impairment loss as the carrying amount less the fair value
less costs to sell. According to IFRS 5 para. 15, non-current assets held for sale are measured
at the lower of their carrying amount and fair value less costs to sell.
Feedback
(a) is incorrect. It assumes no impairment loss as the non-current asset was sold during
the course of the year. According to IFRS 5 para. 15, non-current assets held for sale are
measured at the lower of their carrying amount and fair value less costs to sell.
(b) is incorrect. This calculates the impairment loss as the carrying amount less the fair
value.
(d) is incorrect. This calculates the impairment loss as the carrying amount less net
proceeds from sale.
For further
information
Page 20
For further information you should refer to IFRS 5 para. 15.
Assumed knowledge quiz