AAT L4 Financial Statements (Companies) 4 — Questions and Answers
Question 1: A company revalues a property upward by £200,000. The revaluation surplus is recorded in:
- Profit or loss (income statement)
- Other comprehensive income and the revaluation reserve in equity (Correct answer)
- Share premium account
- Retained earnings
Correct answer: Other comprehensive income and the revaluation reserve in equity
Under FRS 102 and IAS 16, an upward revaluation of property is recognised in other comprehensive income and accumulated in the revaluation reserve within equity; it does not pass through profit or loss.
Question 2: In the statement of cash flows, the issue of new share capital is classified as:
- Operating activity
- Investing activity
- Financing activity (Correct answer)
- Not required to be shown
Correct answer: Financing activity
Proceeds from issuing new share capital are a financing activity in the statement of cash flows, as they represent obtaining finance from equity shareholders.
Question 3: Under IAS 1 / FRS 102, current liabilities include:
- All liabilities of the entity
- Liabilities expected to be settled within 12 months or within the entity's normal operating cycle (Correct answer)
- Long-term loans payable after 12 months
- Only trade payables and accruals
Correct answer: Liabilities expected to be settled within 12 months or within the entity's normal operating cycle
Current liabilities are those expected to be settled within 12 months of the balance sheet date, or within the entity's normal operating cycle — including trade payables, accruals, tax liabilities, and short-term borrowings.
Question 4: The direct method of presenting operating cash flows in a statement of cash flows shows:
- Profit adjusted for non-cash items
- Actual cash receipts from customers and actual cash payments to suppliers and employees (Correct answer)
- Net cash from operations only
- Cash flows after deducting interest and tax
Correct answer: Actual cash receipts from customers and actual cash payments to suppliers and employees
The direct method presents gross cash inflows (e.g., receipts from customers) and gross cash outflows (e.g., payments to suppliers, employees, tax authorities) under operating activities — providing more detailed information than the indirect method.
Question 5: Under FRS 102, the threshold test for a 'small' company covers turnover, gross assets, and employees. The turnover limit is:
- £1 million
- £5 million
- £10.2 million (Correct answer)
- £25 million
Correct answer: £10.2 million
Under the Companies Act 2006 (as amended), small company thresholds require two of: turnover ≤ £10.2m, gross assets ≤ £5.1m, employees ≤ 50. FRS 102 Section 1A applies to small entities.
Question 6: In a consolidated income statement, the profit attributable to the non-controlling interest is:
- Excluded from the consolidated profit figure
- Shown as a separate allocation after profit for the year (Correct answer)
- Included in the parent company's retained earnings
- Added back to the parent's share of profit
Correct answer: Shown as a separate allocation after profit for the year
The consolidated income statement shows total group profit, then allocates it between: profit attributable to owners of the parent (the parent's share) and profit attributable to NCI (the minority's share).
AAT L4 Financial Statements (Companies) 4
A company revalues a property upward by £200,000.
The revaluation surplus is recorded in: