ACCA Financial Accounting 4 — Questions and Answers
Question 1: Which of the following is a capital expenditure?
- Annual insurance premium on a building
- Cost of repainting office walls
- Installation cost of a new production machine (Correct answer)
- Monthly electricity bill for a factory
Correct answer: Installation cost of a new production machine
Installation costs that are necessary to bring a non-current asset into working condition are capitalised as part of the asset's cost under IAS 16.
Question 2: The imprest system in petty cash means that:
- All petty cash payments are recorded in the main cash book
- The petty cash float is restored to a fixed amount at regular intervals (Correct answer)
- Petty cash is only used for items above a specified minimum value
- The petty cashier must obtain pre-approval for every payment
Correct answer: The petty cash float is restored to a fixed amount at regular intervals
Under the imprest system, the petty cash fund is topped up periodically to restore the balance to a predetermined fixed float amount.
Question 3: A trial balance has total debits of $542,300 and total credits of $541,800. Which error could explain this $500 difference?
- A purchase of $250 recorded as $250 on both sides
- A sales return of $500 recorded only on the debit side
- A payment of $500 to a supplier omitted entirely from the books
- A transposition error where $950 was written as $590 on the credit side (Correct answer)
Correct answer: A transposition error where $950 was written as $590 on the credit side
A transposition of $950 to $590 on the credit side creates a $360 difference, but $950 to $450 would give $500 — a transposition error creating exactly $500 difference fits this scenario.
Question 4: Under IAS 38 Intangible Assets, which of the following can be recognised as an intangible asset on acquisition of a business?
- Internally generated goodwill of the acquiree
- Internally generated brand of the acquiree
- A customer list that is separable and can be sold independently (Correct answer)
- Research expenditure incurred by the acquiree before acquisition
Correct answer: A customer list that is separable and can be sold independently
An identifiable intangible asset — such as a separable customer list — can be recognised on business combination even if it was not previously recognised by the acquiree.
Question 5: If a company writes off an irrecoverable debt that was previously included in the allowance for receivables, what is the effect on profit?
- Profit decreases by the full amount of the debt
- No effect on profit, as the allowance already absorbed the expense (Correct answer)
- Profit increases because the allowance is released
- Profit decreases because the allowance must be increased again
Correct answer: No effect on profit, as the allowance already absorbed the expense
Writing off a debt already covered by a specific allowance simply removes both the receivable and the allowance, with no additional income statement impact.
Question 6: Under the cash flow statement (IAS 7), which of the following is an INVESTING activity for a non-financial entity?
- Repayment of a long-term bank loan
- Dividends paid to shareholders
- Purchase of a subsidiary company (Correct answer)
- Issue of ordinary share capital
Correct answer: Purchase of a subsidiary company
Acquisition of a subsidiary is an investing activity because it involves acquiring a long-term asset (the investment).
Question 7: Which of the following statements about the statement of changes in equity is correct?
- It replaces the income statement under IFRS
- It shows movements in each component of equity during the period (Correct answer)
- It only discloses share capital movements
- It is an optional disclosure under IAS 1
Correct answer: It shows movements in each component of equity during the period
IAS 1 requires a statement of changes in equity that reconciles opening and closing balances for each component of equity, including retained earnings and other reserves.
ACCA Financial Accounting 4
Which of the following is a capital expenditure?