AAT L4 Financial Statements of Limited Companies — Questions and Answers
Question 1: Under FRS 102, which of the following is NOT a component of a complete set of financial statements for a limited company?
- Statement of financial position
- Statement of comprehensive income
- Statement of cash flows
- Tax computation schedule (Correct answer)
Correct answer: Tax computation schedule
FRS 102 requires a statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes. A tax computation schedule is prepared for HMRC but is not part of the financial statements.
Question 2: A limited company has issued 500,000 ordinary shares of £1 each at £1.40 per share. What amount should be credited to the share premium account?
- £500,000
- £200,000 (Correct answer)
- £700,000
- £100,000
Correct answer: £200,000
The share premium is the excess over nominal value. 500,000 shares x (£1.40 - £1.00) = 500,000 x £0.40 = £200,000. The nominal value of £500,000 is credited to the share capital account.
Question 3: Under the Companies Act 2006, which of the following reserves is distributable to shareholders as dividends?
- Share premium account
- Capital redemption reserve
- Retained earnings (Correct answer)
- Revaluation reserve (unrealised gains)
Correct answer: Retained earnings
Retained earnings (revenue reserves) are distributable profits under the Companies Act 2006. Share premium, capital redemption reserve, and unrealised revaluation gains are all non-distributable capital reserves.
Question 4: When consolidating a subsidiary's financial statements, goodwill arising on acquisition is calculated as:
- Fair value of consideration paid minus the subsidiary's net book value of assets
- Fair value of consideration paid minus the fair value of the subsidiary's identifiable net assets (Correct answer)
- The subsidiary's total assets minus total liabilities
- Market capitalisation minus share capital
Correct answer: Fair value of consideration paid minus the fair value of the subsidiary's identifiable net assets
Under FRS 102 Section 19, goodwill on acquisition equals the cost of the business combination (consideration paid) less the acquirer's share of the fair value of identifiable net assets acquired. Net book values are adjusted to fair values for this calculation.
Question 5: A company revalues its property from £300,000 to £450,000. The original cost was £400,000 with accumulated depreciation of £100,000. What is the revaluation gain recognised in other comprehensive income?
- £50,000
- £150,000 (Correct answer)
- £100,000
- £450,000
Correct answer: £150,000
The carrying amount before revaluation was £400,000 - £100,000 = £300,000. The revaluation surplus is £450,000 - £300,000 = £150,000. This gain is recognised in other comprehensive income and credited to the revaluation reserve.
Question 6: Which of the following statements about a statement of cash flows under FRS 102 Section 7 is correct?
- Dividends paid must always be classified as financing activities
- Interest received must always be classified as investing activities
- Tax paid is classified as a separate category and is not allocated to operating, investing, or financing
- Depreciation charges are added back to profit in the operating activities section under the indirect method (Correct answer)
Correct answer: Depreciation charges are added back to profit in the operating activities section under the indirect method
Under the indirect method, depreciation is a non-cash charge that reduced profit but did not involve a cash outflow. It is therefore added back to operating profit when reconciling to cash generated from operations. FRS 102 allows flexibility in classifying interest and dividends.
AAT L4 Financial Statements of Limited Companies
Under FRS 102, which of the following is NOT a component of a complete set of financial statements for a limited company?