Financial Accounting (FA) Financial Statements Flashcards

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

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

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.

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

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

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.

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?

Answer: Increase the allowance by £1,000

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.

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

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

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.

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

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

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.

Which of the following items would appear in Other Comprehensive Income (OCI) rather than profit or loss?

Answer: A revaluation surplus on property under the revaluation model of IAS 16

Under IAS 16, when an asset is revalued upwards for the first time, the revaluation surplus is recognised in other comprehensive income and accumulated in equity under a revaluation surplus reserve. It does not pass through profit or loss.