Financial Reporting
Exam Solutions
Course Introduction
Financial Reporting focuses on the principles, standards, and procedures used to communicate the financial performance and position of organizations to external stakeholders. The course covers the preparation and interpretation of financial statements in accordance with international and national accounting standards, including the balance sheet, income statement, cash flow statement, and statement of changes in equity. Students will examine the regulatory environment surrounding financial reporting, the use of accounting information for decision-making, and issues related to transparency, ethics, and fair presentation. By the end of the course, students will have a solid understanding of how to analyze and interpret financial data and will be equipped with the foundational skills required for further study or careers in accounting, finance, and related fields.
Recommended Textbook
Accounting Understanding and Practice 4th Edition by Danny Leiwy
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19 Chapters
492 Verified Questions
492 Flashcards
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Page 2
Chapter 1: The Statement of Financial Position Balance
Sheetand What It Tells Us
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Sample Questions
Q1) An example of a long-term asset is:
A) Cash
B) Inventory
C) Fixtures and fittings
D) Prepayments
Answer: C
Q2) The statement of financial position of Rosie Ltd.includes the following entries: inventory £25,000,trade receivables £12,000,cash £11,000 and current liabilities £25,000 (made up of trade payables £16,000,short-term borrowing £800 and £8,200 current tax payable).Calculate the current ratio.
A) 0.9: 1
B) 1:1
C) 0.4:1
D) 1.9:1
Answer: D
Q3) What a company owns is known as assets and what a company owes is known as expenses.
A)True
B)False
Answer: False
Page 3
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Chapter 2: The Income Statement Profit and Loss Account
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Sample Questions
Q1) A company buys in a unit at a cost of £2 per unit.The selling price is £3 per unit.Which of the following statements is correct?
A) Mark up is 67%; Margin is 150%.
B) Mark up is 150%; Margin is 67%
C) Mark-up is 50%; Margin is 33%
D) Mark-up is 33%; Margin is 50%
Answer: C
Q2) If opening stock is £3,000,purchases for the year £15,000 and the cost of goods sold is £14,000,what is the value of closing stock?
A) £2,000
B) £4,000
C) £3,000
D) £5,000
Answer: B
Q3) Expenses are the amount paid out in cash during an accounting period
A)True
B)False
Answer: False
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Chapter 3: The Development of Financial Reporting
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Sample Questions
Q1) Which fundamental accounting concept stipulates that revenue and costs are recognized as they are earned or incurred?
A) Consistency
B) Comparability
C) Accruals
D) Prudence
Answer: C
Q2) Companies are allowed to pay dividends out of capital
A)True
B)False
Answer: False
Q3) Which of the following statements is false?
A) Goodwill is an intangible asset
B) Goodwill is the excess of the price paid for the business, acquired over the net fair value of identifiable assets
C) According to IFRS 3, internally generated goodwill must be shown as an asset on the statement of financial position
D) Goodwill is recognized only where it is the result of a transaction
Answer: C
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Page 5
Chapter 4: Ratios and Interpretation: a Straightforward Introduction
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Sample Questions
Q1) Financial strength/solvency ratios include:
A) Return on shareholders funds, asset turnover and gross profit ratio
B) Stock turnover ratio, debtor ratio and creditor ratio
C) Price earnings ratio, dividend cover and dividend yield
D) Current ratio, quick ratio and capital gearing ratio
Q2) Which of the following rations considers the relationship between profit,equity and long-term borrowing?
A) Quick ratio
B) Current ratio
C) Capital gearing ratio
D) ROCE
Q3) The gearing ratio relates long-term borrowing to equity
A)True
B)False
Q4) Non-current liabilities are used in the calculation of the current ratio
A)True
B)False
Q5) One way of assessing if debt is too high is to compare it with equity
A)True
B)False
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Chapter 5: How the Stock Market Assesses Company Performance
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Sample Questions
Q1) Total profits divided by number of ordinary shares is known as:
A) Dividend cover
B) Price/earnings ratio
C) Earnings per share
D) Dividend yield
Q2) Current share price divided by earnings per share is known as:
A) Price/earnings ratio
B) Dividend yield
C) Dividend cover
D) Market capitalization
Q3) A balanced portfolio can eliminate unsystematic risk
A)True
B)False
Q4) Dividend per share expressed as a % of current share price is known as:
A) Dividend cover
B) Price/earnings ratio
C) Dividend yield
D) Earnings per share
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Chapter 6: Cash Flow Statements: Understanding and Preparation
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Sample Questions
Q1) Which of the following statements is false?
A) Not all payments of cash are expenses
B) Some payments are not charged against profits
C) Some receipts do not add to cash
D) All revenues are receipts of cash
Q2) The statement of financial position and income statement are based on the accruals concept
A)True
B)False
Q3) Which of the following statements is false?
A) Not all revenues are receipts of cash
B) Some receipts of cash do not add to profits
C) Not all expenses are payments of cash
D) All payments of cash are expenses
Q4) An increase in working capital would appear on the cash flow statement as a:
A) Financing activity
B) Operating activity
C) Investing activity
D) Debt activity
8
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Chapter 7: Advanced Interpretation of Company and Group Accounts
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Q1) In a group or consolidated balance sheet,the retained earnings figure for the group is the sum of the retained earnings for the parent company and all of the retained earnings for each subsidiary
A)True
B)False
Q2) High levels of debt in a company is always a cause for concern
A)True
B)False
Q3) Which of the following is not included in the calculation of a Z-Score?
A) Working capital
B) Cash Flow
C) Market value of equity
D) Sales
Q4) According to Altman (1983)the amount of working capital in relation to total assets is an important component in predicting the failure of a company,while measures of return on capital employed (ROCE)can not help predict failure
A)True
B)False
Page 9
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Chapter 8: Current Issues in Financial Reporting
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Sample Questions
Q1) Which of the following statements is true regarding the treatment for research and development (R & D)expenditure as stipulated in IAS 38?
A) Research expenditure should be written off as it occurs
B) Development expenditure should be recognized as an internally generated intangible asset
C) Development expenditure can be carried forward on the balance sheet if certain criteria can be demonstrated (such as, the project is technically feasible and that when it is completed can be used or sold)
D) All of the above
Q2) Which of the following statements is correct?
A) Some social and environmental reports are simply "glossy" public relations exercises
B) Social and environmental reporting practice varies enormously
C) Social and environmental reporting is at an early stage in its development
D) All of the above statements are correct
Q3) A company can reduce its reported salary expense by paying some employees with share options instead of money
A)True
B)False
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10
Chapter 9: Bookkeeping to Trial Balance
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Sample Questions
Q1) At the end of a financial year,businesses often have "prepayments" which are amounts paid in advance,and "Accruals" which are amounts owing.For example,the business may have prepaid a month's rent.It may also have used some utilities that it has not yet paid for.The accounting treatment is as follows:
A) Adjust the relevant accounts in the Income Statement. Prepayment is a current asset. An Accrual is a current liability, both of which are shown on the Statement of Financial Position.
B) Do nothing. The money will eventually catch up with the accrued transactions, and the prepaid items will be used in the next financial year.
C) Adjust only the accrued amounts - show the additional utilities on the Income Statement and show an Accrual as a current liability on the Statement of Financial Position. Prepayments should be ignored
D) Adjust only the prepaid amounts - reduce the rent on the income statement and show the prepayment as a current asset on the Statement of Financial Position. Accruals should be ignored
Q2) In general,a sales account has a credit balance
A)True
B)False
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Page 11
Chapter 10: Trial Balance to Final Accounts
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Sample Questions
Q1) If it is known that a debtor cannot pay because of bankruptcy,the amount to be written off is shown as:
A) A credit on the income statement, as a negative expense, and as a debit on the balance sheet
B) A credit on the income statement and as a debit on the statement of financial position by increasing the amount shown for receivables
C) A debit on the income statement and as a credit on the statement of financial position by reducing the amount shown for receivables
D) None of the above statements are correct
Q2) On a trail balance,almost all debit items are either assets to be shown on the balance sheet or expenses to be shown on the income statement
A)True
B)False
Q3) Closing inventory appears twice in the final accounts,as a debit on the balance sheet and a credit on the income statement
A)True
B)False
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Chapter 11: Financing a Business
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Sample Questions
Q1) A "rights issue" refers to the issue of shares which give the owners of these shares additional voting rights at the Annual General Meeting
A)True
B)False
Q2) Retained earnings do not contribute towards financing an increase in net assets
A)True
B)False
Q3) High Voltage plc has 1 million ordinary shares with a nominal value of 50 pence and a market value of £4.00 each.The company makes a rights issue,offering existing shareholders one share for every 5 they already hold at a price of £3.50.After the rights issue,what is the theoretical value of the shares?
A) £3.50
B) £3.92
C) £4.70
D) £3.96
Q4) A company can reduce its share capital by buying back some of its own shares
A)True
B)False
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Chapter 12: Management of Working Capital
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Q1) Which of the following is a limitation of Economic Order Quantity?
A) It is weak in assessing the appropriate order quantity
B) It fails to consider inventory holding costs
C) It does not take quantity discounts into account
D) It fails to consider ordering costs
Q2) The definition of "Working Capital" is:
A) Non-Current Assets - Non-Current Liabilities
B) Bank + Cash
C) Non-Current Assets + Current Assets - Current Liabilities
D) Current Assets - Current Liabilities
Q3) Working capital may be defined as:
A) Current assets + current liabilities = working capital
B) Long-term funds + non-current assets = working capital
C) Current assets + non-current assets = working capital
D) Long-term funds - non-current assets = working capital
Q4) Which of the following is not an approach to dealing with liquidity problems?
A) Pay suppliers by check
B) Pay suppliers by bank transfer
C) Sell off surplus assets
D) Sell off inventory at low price
Page 14
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Chapter 13: Introduction to Management Accounting
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Sample Questions
Q1) Knowing the cost of producing a product helps determine the price to be charged for it
A)True
B)False
Q2) In a manufacturing account an inventory adjustment is made to direct materials in respect of how much was purchased (as opposed to how much was consumed)
A)True
B)False
Q3) Prime Cost is part of the production cost,also called the manufacturing cost or factory cost.
Prime Cost includes:
A) All costs associated with the production of a product, or the running of a factory
B) Direct material costs only
C) All material costs and all labour costs
D) Direct materials and direct labour costs
Q4) A small or new business can cope without management accounting
A)True
B)False
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Chapter 14: Investment Appraisal
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Q1) Which of the following is correct?
A) The costs associated with feasibility studies should not be included in an investment appraisal
B) The cash flows from fixed overheads are usually excluded from an investment appraisal
C) HM Revenue and Customs allows profits to be reduced for tax purposes through capital allowances for depreciation
D) All of the above statements are correct
Q2) Which of the following is not used as an investment appraisal technique?
A) IRR
B) ARR
C) NPV
D) Capital gearing
Q3) A company with a 12% cost of capital will consider pursuing a project which yields a 10% return per annum because it will increase the value of the company
A)True
B)False
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Page 16
Chapter 15: Budgetary Planning and Control
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Q1) Which approach to producing a budget,associated with the public sector,requires the identification of programmes and the allocation of resources to each programme?
A) Planning, programming budgeting system (PPBS)
B) Zero-based budgeting (ZBB)
C) Incremental budget
D) Performance budget
Q2) XYZ company had budget sales of £120,000,direct materials of £40,000 and direct labour of £30,000.Actual sales where 25% up on budget.Calculate the flexed budget figures for XYZ company.
A) Sales £120,000, direct materials £40,000 and direct labour £30,000
B) Sales £120,000, direct materials £50,000 and direct labour £37,500
C) Sales £150,000, direct materials £50,000 and direct labour £37,500
D) Sales £150,000, direct materials £40,000 and direct labour £30,000
Q3) Which of the following is not an advantage associated with a budget control system?
A) Ensures competition for resources within an organization
B) Ensures the objectives of an organization are defined
C) Facilitates the delegation of responsibility
D) Improves communication and coordination
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Page 17
Chapter 16: Absorption Costing
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Sample Questions
Q1) Production overheads include the costs of operating a production facility that can be charged directly to individual products or customers
A)True
B)False
Q2) Which of the following statements is false?
A) One approach charging direct materials to a job is to use a standard price, regardless of the cost of different purchases made
B) One approach to charging direct materials to a job is to use replacement cost
C) Replacement cost is equal to the cost initially paid for stock
D) The average price could be used in charging direct materials to a job
Q3) Possible methods of charging production overheads to different products include charging a percentage of direct material costs and price per mile.
A)True
B)False
Q4) The amount of overheads charged to jobs during the year is likely to be different from the amounts actually incurred
A)True
B)False
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18
Chapter 17: Marginal Costing and Decision-Making
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Sample Questions
Q1) The "Break Even" point for a manufacturing company is defined as:
A) The point where the company incurs the same amount of fixed and variable expenses
B) The point where gross profit and net profit are the same
C) The volume of sales where a company makes neither a profit nor a loss
D) The volume of sales that generate the same fixed costs as revenue
Q2) In measuring the previous relationship between costs,detailed mathematical accuracy is more important than "realistic assumptions"
A)True
B)False
Q3) The KMuir company is planning to sell a new product which they will sell for £55 each.Fixed costs are £35,000 per annum; variable costs are £35 per unit.How much do they need to sell to break-even?
A) 125 units
B) 637 units
C) 1,000 units
D) 1,750 units
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Chapter 18: Standard Costing and Variance Analysis
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Q1) Which of the following would lead to a labour usage variance?
A) More materials have been used than standard
B) More labour hours have been worked than standard
C) The price of materials was higher than standard
D) Direct labour rate was higher than standard
Q2) Direct labour efficiency variance can be expresses as:
A) Standard hours x (actual rate - standard rate)
B) Standard rate x (actual hours - standard hours)
C) Standard rate x (actual hours + standard hours)
D) Actual rate x (actual hours - standard hours)
Q3) The sales margin volume variance measures the effect of a change in sales price
A)True
B)False
Q4) Which of the following statements is INCORRECT?
A) Variances are often inter-related and must never be considered in isolation
B) Standards are difficult to set
C) A favourable sales variance is always good news
D) Variances are useful for monthly reporting to various managers across the business
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Page 20
Chapter 19: Incomplete Records
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Sample Questions
Q1) Assets = Liabilities - Capital
A)True
B)False
Q2) The assets and liabilities of Bon & Co.at 31st Dec were as follows:
\[\begin{array} { l c }
\text { Inventory } & 14,450 \\
\text { Trade receivables } & 2,300 \\
\text { Trade payables } & 3,000 \\
\text { Accruals } & 200 \\
\text { Prepayments } & 250 \\
\text { Bank balance } & £ 1,250
\end{array}\]
What is the capital at 31st December?
A) £15,050
B) £18,250
C) £3,200
D) £14,450
Q3) Debits are increases to assets and expenses
A)True
B)False
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