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ACCA FR: Financial Reporting Practice Questions
45 original practice questions for ACCA Financial Reporting (FR), written for this site with full explanations. They are original questions in the style of the syllabus - not taken from any official exam. Use them to test coverage, then confirm details against ACCA's official materials.
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According to the IASB Conceptual Framework, the objective of general purpose financial reporting is to provide financial information that is useful to:
Correct answer: A. The Conceptual Framework identifies existing and potential investors, lenders and other creditors as the primary users, because they provide resources but cannot demand tailored information. Tax authorities and employees may use the statements but are not the primary audience, and management has access to internal information so does not need to rely on general purpose reports. -
Which pair are the two fundamental qualitative characteristics of useful financial information?
Correct answer: C. Relevance and faithful representation are the fundamental characteristics: information must matter to decisions and depict what it claims to depict. Comparability and timeliness are enhancing characteristics, not fundamental ones. Prudence is an aspect of neutrality, consistency supports comparability, materiality is an entity-specific aspect of relevance, and going concern is an underlying assumption rather than a qualitative characteristic. -
For information to be a faithful representation, it should be:
Correct answer: B. A faithful representation is complete, neutral and free from error. Verifiability, timeliness and understandability are enhancing characteristics that improve useful information but do not define faithful representation. Optimism and conservatism are both forms of bias, which conflict with neutrality, and conciseness and consistency are not part of the definition. -
Under the Conceptual Framework, an asset is best described as:
Correct answer: D. The Framework defines an asset as a present economic resource controlled by the entity as a result of past events, where a resource is a right with the potential to produce economic benefits. Payment in cash is not required (assets can be donated or acquired on credit), physical form is not required (intangibles are assets), and there is no twelve-month profit test - the potential for benefits does not need to be certain or near-term. -
A key reason why accounting standards are needed is that they:
Correct answer: B. Standards limit the choice of treatments for similar transactions, which makes statements more comparable and harder to manipulate. They cannot guarantee the absence of fraud, they still require significant judgement from preparers and auditors, and because standards allow some policy choices and estimates, identical reported figures in all circumstances are not achievable. -
Under the financial concept of capital maintenance, a profit is earned only if:
Correct answer: A. Financial capital maintenance measures profit as the increase in net assets over the period, ignoring transactions with owners such as share issues and dividends. Cash movements are not the test, because profit is measured on an accruals basis. An increase in physical productive capacity is the test under physical capital maintenance, a different concept, and revenue growth alone says nothing about profit. -
Under the core principle for revenue from contracts with customers, revenue is recognised when:
Correct answer: D. Revenue is recognised when, or as, the entity satisfies a performance obligation by transferring control of the good or service to the customer. Signing the contract only creates rights and obligations, and invoicing and cash receipt are administrative and financing events whose timing can differ substantially from the transfer of control. -
A contract has a total transaction price of $180,000 and two distinct performance obligations with standalone selling prices of $80,000 (installation) and $120,000 (equipment). How much of the transaction price is allocated to the installation obligation?
Correct answer: C. The price is allocated in proportion to standalone selling prices: $180,000 x (80,000 / 200,000) = $72,000. $80,000 is the unadjusted standalone price and ignores the overall discount, $90,000 splits the price equally with no basis, and $108,000 is the amount allocated to the equipment obligation ($180,000 x 120/200), not the installation. -
Which of the following is included in the initial cost of an item of property, plant and equipment?
Correct answer: C. Initial cost comprises the purchase price plus directly attributable costs, such as site preparation, delivery and installation, needed to bring the asset to working condition in its intended location. Staff training, general administrative overheads and initial operating losses are not directly attributable to getting the asset ready for use, so they are expensed as incurred. -
A machine cost $90,000, has an expected residual value of $10,000 and a useful life of 8 years. Using the straight-line method, the annual depreciation charge is:
Correct answer: D. Straight-line depreciation spreads the depreciable amount (cost minus residual value) over the useful life: (90,000 - 10,000) / 8 = $10,000 per year. $11,250 ignores the residual value (90,000 / 8), $12,500 adds the residual value instead of deducting it ((90,000 + 10,000) / 8), and $8,750 deducts the residual value twice ((90,000 - 20,000) / 8). -
A property with a carrying amount of $400,000 is revalued to $460,000. There is no previous revaluation history. The $60,000 increase is:
Correct answer: A. A first-time revaluation increase is recognised in other comprehensive income and held in a revaluation surplus in equity; it is not realised profit. Taking it to profit or loss would overstate performance, it is part of equity rather than a liability, and prior-year depreciation is never adjusted retrospectively for a revaluation. -
An asset was previously revalued upwards, creating a revaluation surplus of $50,000 that is still in equity. The asset's value now falls by $70,000. How is the fall treated?
Correct answer: B. A revaluation decrease first reverses any existing surplus for that same asset through other comprehensive income ($50,000 here), and only the excess ($20,000) is charged to profit or loss. Charging the full amount to profit or loss ignores the existing surplus, adjusting retained earnings directly is not permitted for revaluations, and ignoring the fall would overstate assets. -
How should expenditure on the research phase of an internal project be treated?
Correct answer: D. Research expenditure is always expensed, because at the research stage the entity cannot demonstrate that a future economic benefit is probable. Appointing a project team or expecting profits does not change this - capitalisation only becomes possible in the development phase when strict criteria (such as technical feasibility and intention to complete) are all met. Suspense accounts are not an acceptable treatment. -
A company has spent heavily building the reputation of its own brand name over many years. In its own financial statements, this internally generated brand is:
Correct answer: B. Internally generated brands (and similar items such as mastheads and customer lists) are not recognised, because expenditure on them cannot be separated from the cost of developing the business as a whole, so no reliable cost exists. Accumulated advertising spend is not a measurement of the brand asset, and neither directors' estimates nor independent valuations overcome the recognition prohibition in the entity's own statements. A brand can be recognised only when acquired, typically in a business combination. -
An asset has a carrying amount of $500,000, a fair value less costs of disposal of $420,000 and a value in use of $460,000. The impairment loss is:
Correct answer: C. Recoverable amount is the higher of fair value less costs of disposal ($420,000) and value in use ($460,000), so it is $460,000. The impairment loss is carrying amount minus recoverable amount: 500,000 - 460,000 = $40,000. $80,000 wrongly uses the lower figure (fair value less costs of disposal), $0 assumes no impairment even though carrying amount exceeds recoverable amount, and $460,000 is the recoverable amount itself, not the loss. -
Under the single lessee accounting model, a lessee generally accounts for a lease by:
Correct answer: A. Lessees bring most leases on balance sheet as a right-of-use asset and a lease liability; the recognised exemptions are short-term leases (twelve months or less) and leases of low-value assets, which can be expensed on a straight-line basis. Expensing all leases describes only the exemptions, legal ownership transfer is not the test (control of use is), and recognising a liability without the matching asset would misstate the position. -
A lease liability stands at $40,000 at the start of the year. The interest rate implicit in the lease is 8% and a payment of $10,000 is made at the end of the year. The closing lease liability is:
Correct answer: A. Interest of 40,000 x 8% = $3,200 accrues during the year, so the closing liability is 40,000 + 3,200 - 10,000 = $33,200. $30,000 deducts the payment but ignores interest, $43,200 adds interest but ignores the payment, and $36,800 wrongly deducts the interest instead of adding it (40,000 - 3,200). -
A provision is recognised when:
Correct answer: D. All three conditions must hold: a present obligation (legal or constructive) arising from a past event, a probable outflow, and a reliable estimate. A board decision about future repairs creates no obligation to an external party and can be avoided, future operating losses relate to future events so no provision is allowed, and a possible obligation confirmed only by uncertain future events is a contingent liability, which is disclosed rather than provided for. -
A customer is suing a company. Lawyers assess the chance of the company having to pay as possible, but not probable. The correct treatment is to:
Correct answer: B. A possible (but not probable) outflow is a contingent liability: it is disclosed in the notes, with no amount recognised in the statements, unless the chance of payment is remote, in which case even disclosure is unnecessary. A provision requires a probable outflow, recognising the full claim treats an uncertain outcome as certain, and doing nothing in all circumstances would omit required disclosure. -
A retailer sells goods with a one-year warranty. Past experience shows 70% of goods need no repair, 20% need minor repairs costing a total of $50,000, and 10% need major repairs costing a total of $200,000. Using expected values, the warranty provision is:
Correct answer: C. The expected value weights each outcome by its probability: (70% x 0) + (20% x 50,000) + (10% x 200,000) = 0 + 10,000 + 20,000 = $30,000. $10,000 counts only the minor-repair layer, $20,000 counts only the major-repair layer, and $250,000 adds the full repair costs with no probability weighting. -
Which of the following is reported in other comprehensive income rather than in profit or loss?
Correct answer: C. Revaluation surpluses on property, plant and equipment are recognised in other comprehensive income and accumulated in equity. Gains on disposal of assets, interest received and impairment losses on receivables are all items of income or expense that belong in profit or loss for the year. -
A liability is classified as current in the statement of financial position when:
Correct answer: A. Classification depends on the entity's rights at the reporting date: without a right to defer settlement for at least twelve months, the liability is current. The identity of the lender and the type of interest rate are irrelevant to classification, and management intention to repay early does not by itself make a long-term liability current - the test is the rights that exist, not intentions. -
Inventories are measured in the financial statements at:
Correct answer: D. Inventories are carried at the lower of cost and net realisable value, so that no inventory is carried above the amount expected to be recovered from sale. Always using cost would overstate damaged or obsolete lines, replacement cost is not the measurement basis for inventories, and selling price less a normal margin is only an estimation technique in limited retail situations, not the general rule. -
An item of inventory cost $80 to produce. It can be sold for $95, but only after rectification work and selling costs totalling $20. The item is measured at:
Correct answer: B. Net realisable value is 95 - 20 = $75, which is below the $80 cost, so the item is written down to $75. Carrying it at $80 ignores the write-down required when net realisable value falls below cost, $95 is the gross selling price before deducting further costs, and $20 is the cost to complete and sell, not a measurement of the inventory. -
Which of the following appears in the statement of changes in equity?
Correct answer: B. The statement of changes in equity reports transactions with owners in their capacity as owners, and dividends are exactly that. Interest paid is an expense in profit or loss, sale proceeds of a warehouse affect profit or loss (via the disposal gain or loss) and the cash flow statement, and depreciation is an operating expense - none of these are owner transactions. -
In the statement of cash flows, cash paid to purchase a new factory machine is classified as:
Correct answer: D. Purchases of property, plant and equipment are investing activities, because they represent expenditure on resources intended to generate future income. Operating activities cover the main revenue-producing activities, financing activities cover changes in equity and borrowings, and a cash purchase is clearly not a non-cash transaction. -
Using the indirect method, an entity reports profit before tax of $100,000, depreciation of $20,000, an increase in trade receivables of $15,000 and a decrease in inventories of $5,000. Cash generated from operations is:
Correct answer: A. Start with profit before tax, add back non-cash depreciation, deduct the increase in receivables (sales not yet collected) and add the decrease in inventories (cash released): 100,000 + 20,000 - 15,000 + 5,000 = $110,000. $90,000 reverses the signs of the working capital movements, $140,000 wrongly adds every adjustment, and $100,000 ignores the adjustments entirely. -
Which of the following, occurring after the reporting date but before the financial statements are authorised for issue, is an adjusting event?
Correct answer: C. Adjusting events provide evidence of conditions that existed at the reporting date; settling a court case that was in progress at the year end confirms the year-end obligation, so the statements are adjusted. The fire, the share issue and the fall in investment values all reflect conditions that arose after the year end, so they are non-adjusting events, disclosed if material but not adjusted. -
A parent must consolidate an investee when it:
Correct answer: D. Control, which triggers consolidation, has three elements: power over the investee, exposure or rights to variable returns, and the ability to use that power to affect the returns. A small shareholding, a board seat or lender status can exist without control - a board seat or large loan may indicate significant influence, which leads to equity accounting rather than consolidation. -
A parent acquires 80% of a subsidiary for consideration of $800,000. The non-controlling interest is measured at its fair value of $200,000 and the fair value of the subsidiary's identifiable net assets is $750,000. Goodwill at acquisition is:
Correct answer: C. Goodwill is consideration plus non-controlling interest minus the fair value of identifiable net assets: 800,000 + 200,000 - 750,000 = $250,000. $50,000 omits the non-controlling interest (800,000 - 750,000), $1,000,000 is consideration plus non-controlling interest with no deduction of net assets, and $400,000 deducts only the parent's 80% share of net assets (1,000,000 - 600,000) instead of the full amount. -
A parent owns 80% of a subsidiary whose identifiable net assets have a fair value of $500,000 at acquisition. Using the proportionate share method, the non-controlling interest at acquisition is measured at:
Correct answer: A. Under the proportionate method, the non-controlling interest is its share of the fair value of identifiable net assets: 20% x 500,000 = $100,000. $400,000 is the parent's 80% share, $500,000 is the total net assets rather than the non-controlling portion, and $125,000 applies an incorrect 25% ownership fraction. -
At the year end, a subsidiary owes its parent $40,000 for goods purchased. In the consolidated statement of financial position, this balance is:
Correct answer: B. The group is a single economic entity, so amounts it owes to itself are eliminated in full: the parent's receivable and the subsidiary's payable both disappear on consolidation. Showing both would double-count within the group, elimination is never restricted to the parent's share even when there is a non-controlling interest, and the balance is a trading amount, not a loan. -
A parent sold goods to its subsidiary for $120,000 at a mark-up of one third on cost. Half of the goods remain in the subsidiary's inventory at the year end. The unrealised profit to eliminate on consolidation is:
Correct answer: B. With a mark-up of one third on cost, cost is 120,000 x 3/4 = $90,000 and the profit on the sale is $30,000. Only the profit still sitting in inventory is unrealised: 30,000 x 1/2 = $15,000. $30,000 ignores that half the goods were sold on to outsiders, $20,000 wrongly treats one third as a margin on the selling price (120,000 x 1/3 x 1/2), and $40,000 is the full margin-on-price figure without the half adjustment. -
A parent's revenue is $900,000 and its subsidiary's revenue is $400,000. During the year the parent sold goods to the subsidiary for $100,000. Consolidated revenue is:
Correct answer: C. Consolidated revenue adds the two companies' revenue and removes intra-group sales in full: 900,000 + 400,000 - 100,000 = $1,200,000. $1,300,000 fails to eliminate the intra-group sale, $900,000 is the parent alone, and $1,100,000 deducts $200,000, double-counting the elimination. -
A parent acquired a subsidiary on 1 October. Both companies have a 31 December year end, and the subsidiary's revenue for the full year was $480,000, accruing evenly. Consolidated revenue includes subsidiary revenue of:
Correct answer: D. A subsidiary's results are consolidated only from the date control is obtained. From 1 October to 31 December is three months, so 480,000 x 3/12 = $120,000 is included. $480,000 consolidates the full year including the pre-acquisition period, $360,000 is the nine months before acquisition (the part that must be excluded), and $240,000 assumes a six-month period. -
An investor holds 30% of the voting shares of another company and can appoint one of its directors, giving significant influence but not control. The investment is accounted for in the consolidated financial statements:
Correct answer: A. Significant influence (typically indicated by a 20% to 50% voting holding) makes the investee an associate, accounted for using the equity method: one line carrying the cost plus the investor's share of post-acquisition profits. Full consolidation requires control, cost with no adjustment ignores the investor's share of results and any impairment, and adding 30% of each line describes proportionate consolidation, which is not the treatment for associates. -
A 75%-owned subsidiary reports profit after tax of $80,000. This includes $8,000 of unrealised profit on goods the subsidiary sold to its parent that remain in the parent's inventory. The profit attributable to the non-controlling interest is:
Correct answer: C. Because the subsidiary was the seller, the unrealised profit is deducted from the subsidiary's profit before allocating: (80,000 - 8,000) x 25% = $18,000. $20,000 ignores the adjustment (80,000 x 25%), $22,000 adds the unrealised profit instead of deducting it, and $2,000 is 25% of the adjustment alone rather than of the adjusted profit. -
A company has current assets of $600,000 and current liabilities of $400,000. Its current ratio is:
Correct answer: B. The current ratio is current assets divided by current liabilities: 600,000 / 400,000 = 1.5:1. 0.67:1 inverts the ratio (liabilities over assets), and 2.0:1 and 1.2:1 do not follow from the figures given. -
Revenue is $800,000 and cost of sales is $600,000. The gross profit margin is:
Correct answer: D. Gross profit is 800,000 - 600,000 = $200,000, and the margin is measured on revenue: 200,000 / 800,000 = 25%. 75% is cost of sales as a percentage of revenue, 33.3% is the mark-up (gross profit over cost of sales, not revenue), and 20% does not follow from the figures. -
Profit before interest and tax is $150,000, equity is $800,000 and long-term borrowings are $200,000. Return on capital employed is:
Correct answer: A. Capital employed is equity plus long-term borrowings: 800,000 + 200,000 = $1,000,000, so ROCE = 150,000 / 1,000,000 = 15%. 18.75% divides by equity only (150,000 / 800,000), which is closer to a return on equity calculated with the wrong profit figure, 12.5% assumes a larger capital base than the figures support, and 10% does not follow from the data. -
Inventory at the year end is $90,000 and cost of sales for the year is $730,000. Inventory holding days are approximately:
Correct answer: A. Inventory days = inventory / cost of sales x 365 = 90,000 / 730,000 x 365 = 45 days. 8 days confuses days with inventory turnover (730 / 90 is about 8.1 times per year), 23 days would require roughly half the actual inventory level, and 90 days simply repeats the inventory figure. -
Which of the following transactions would increase a company's gearing (debt to equity) ratio?
Correct answer: D. A new long-term loan increases debt while equity is unchanged, so gearing rises. Issuing shares increases equity and reduces gearing, an upward revaluation increases equity (via the revaluation surplus) and also reduces gearing, and paying a trade supplier from cash affects working capital, not long-term debt or equity. -
Current assets are $600,000, including inventory of $150,000. Current liabilities are $300,000. The quick (acid test) ratio is:
Correct answer: B. The quick ratio excludes inventory, the least liquid current asset: (600,000 - 150,000) / 300,000 = 450,000 / 300,000 = 1.5:1. 2.0:1 is the current ratio (inventory included), 0.5:1 uses inventory alone over current liabilities, and 1.0:1 does not follow from the figures. -
A company's gross profit margin rose this year, but its operating profit margin fell. Which explanation is consistent with both movements?
Correct answer: C. Operating profit is gross profit minus operating expenses, so if the gross margin improved while the operating margin fell, operating costs such as administrative and selling expenses must have grown disproportionately. Cost of sales growing faster than revenue would have reduced the gross margin, contradicting the facts, while tax and finance costs are both deducted after operating profit, so they affect net profit, not the operating margin. -
Which of the following is a genuine limitation of ratio analysis when comparing two companies?
Correct answer: D. Ratios are only as comparable as the underlying figures: differences in accounting policies (for example, revaluation versus cost), estimates and reporting dates can distort comparisons even between similar businesses. Ratios deliberately remove scale, so different sizes are not a problem; they are based on historical financial statements, so they do not automatically capture future plans; and they can be computed for any entity with financial statements, listed or not.
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