ACCA Financial Accounting 2 — Questions and Answers
Question 1: Under IAS 2 Inventories, which cost formula is NOT permitted for measuring inventory?
- First-In First-Out (FIFO)
- Weighted Average Cost
- Last-In First-Out (LIFO) (Correct answer)
- Specific identification
Correct answer: Last-In First-Out (LIFO)
IAS 2 prohibits the LIFO cost formula; only FIFO, weighted average, and specific identification are allowed.
Question 2: A company receives a government grant of $50,000 related to the purchase of equipment costing $200,000. Under the deferred income approach in IAS 20, how should the grant be recognized?
- As a lump sum credit to profit or loss immediately
- Deducted from the cost of the asset
- Released to income over the useful life of the asset (Correct answer)
- Recorded as a liability until conditions are met, then released to income
Correct answer: Released to income over the useful life of the asset
Under the deferred income approach, the grant is initially recorded as deferred income and released to profit or loss over the asset's useful life.
Question 3: Which of the following best describes 'accruals' in financial accounting?
- Cash received in advance for future services
- Expenses incurred but not yet paid or recorded (Correct answer)
- Reduction in the value of a non-current asset
- Amounts owed by customers for goods already delivered
Correct answer: Expenses incurred but not yet paid or recorded
Accruals are expenses that have been incurred in the current period but have not yet been paid or recorded by the period end.
Question 4: Under IAS 10 Events After the Reporting Period, which event is classified as an ADJUSTING event?
- Announcement of a major restructuring after the year end
- Discovery of a fraud that existed at the reporting date (Correct answer)
- Destruction of a factory by fire after the reporting date
- Issue of new share capital after the reporting date
Correct answer: Discovery of a fraud that existed at the reporting date
A fraud that existed at the reporting date provides evidence of conditions that existed then, making it an adjusting event under IAS 10.
Question 5: When preparing a bank reconciliation, a lodgment recorded in the cash book but not yet shown on the bank statement is called:
- An unpresented cheque
- An outstanding deposit (timing difference) (Correct answer)
- A bank error
- A dishonoured cheque
Correct answer: An outstanding deposit (timing difference)
A deposit recorded by the company but not yet processed by the bank is an outstanding deposit, representing a timing difference in the reconciliation.
Question 6: In a partnership, the appropriation account is used to:
- Record the partnership's operating expenses
- Distribute profits and losses among partners according to the agreement (Correct answer)
- Calculate the total capital contributed by partners
- Show all cash movements between the partners
Correct answer: Distribute profits and losses among partners according to the agreement
The appropriation account allocates net profit or loss to partners via salaries, interest on capital, and profit-sharing ratios per the partnership agreement.
Question 7: Which accounting concept requires that financial statements should be free from material errors and bias, and faithfully represent what they purport to represent?
- Prudence
- Faithful representation (Correct answer)
- Materiality
- Going concern
Correct answer: Faithful representation
Faithful representation is a fundamental qualitative characteristic under the IASB Conceptual Framework, requiring information to be complete, neutral, and free from error.
ACCA Financial Accounting 2
Under IAS 2 Inventories, which cost formula is NOT permitted for measuring inventory?