ACCA AK Financial Accounting (FA) Financial Statements 2

Question 1

Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised when:

Accepted Answer

A present obligation exists, an outflow of resources is probable, and a reliable estimate can be made

Answer

IAS 37 requires three conditions for provision recognition: (1) a present obligation from a past event, (2) it is probable that an outflow of economic benefits will be required, and (3) a reliable estimate of the obligation can be made. All three must be met.

Question 2

In a statement of cash flows prepared under IAS 7, where is 'interest paid' classified under the indirect method?

Accepted Answer

It may be classified as either an operating or a financing activity

Answer

IAS 7 allows flexibility in classifying interest paid. It may be classified as an operating activity (as it enters into the determination of profit) or as a financing activity (as it is a cost of obtaining financial resources). The entity must apply its chosen classification consistently.

Question 3

A company has trade receivables of £60,000 and estimates that 5% will be irrecoverable. The existing allowance for receivables is £2,000. What adjustment is needed?

Accepted Answer

Increase the allowance by £1,000

Answer

Required allowance = £60,000 × 5% = £3,000. Existing allowance = £2,000. Increase needed = £3,000 − £2,000 = £1,000. The irrecoverable debts expense in the income statement increases by £1,000.

Question 4

Under IAS 10 Events After the Reporting Period, which of the following is an adjusting event?

Accepted Answer

The settlement after the reporting date of a court case that confirms an obligation existed at the reporting date

Answer

An adjusting event provides evidence of conditions that existed at the reporting date. Settlement of a court case confirms a liability that existed at year end, so the financial statements should be adjusted. The other events are non-adjusting — they relate to conditions arising after the reporting date.

Question 5

The closing inventory of a business is overstated by £4,000. What effect does this have on the financial statements?

Accepted Answer

Profit is overstated by £4,000 and assets are overstated by £4,000

Answer

Closing inventory appears in two places: as a current asset on the statement of financial position and as a deduction from cost of sales. If overstated, cost of sales is too low (increasing profit) and the asset is too high. Both profit and net assets are overstated by £4,000.

ACCA Applied Knowledge Practice Test

ACCA Applied Knowledge Practice Test

ACCA AK Financial Accounting (FA) Financial Statements 2