# CIMA F2 Advanced Financial Reporting Exam Practice Test

Demo: 40 questions
Total 248 questions

## Advanced Financial Reporting Questions and Answers

Question 1

Mr D, a CIMA qualified accountant, is working on the preparation of a long term profit forecast required by the local stock market prior to a new share issue of equity shares. At the most recent board meeting the directors requested that the forecast be inflated. In Mr D's view this would grossly overestimate the forecast profit. The board intends to publish the revised inflated forecast.

Which THREE of the following are the ethical options available to Mr D in this situation?

#### Options:

A.

Consider resignation of his post as accountant.

B.

Adjust the figures in line with the board's request as this is a forecast and not the financial statements.

C.

Discuss the situation with his line manager.

D.

Consider reporting the situation to the appropriate authorities.

E.

Delegate the work to a subordinate.

F.

Submit the original forecast without the board's approval.

Question 2

Information extracted from JK's statement of financial position for the year ended 31 May 20X5 is as follows:

Calculate the gearing ratio (Debt/Equity measured as a percentage) at 31 May 20X5.

Give your answer to one decimal place.

? %

#### Options:

Question 3

As at 31 October 20X7 TU's financial statements show the entity having profit after tax of \$600,000 and 900,000 \$1 ordinary shares in issue. There have been no issues of shares during the year. At 31 October 20X7 TU have 300,000 share options in issue, which allow the holders to purchase ordinary shares at \$2 a share in 3 years' time. The average price of the ordinary shares throughout the year was \$5 a share.

What is the diluted earnings per share for the year ended 31 October 20X7?

#### Options:

A.

66.7 cents

B.

58.8 cents

C.

50.0 cents

D.

55.6 cents

Question 4

The capital structure of ST is summarised in the table below:

What is the weighted average cost of capital of ST?

Give your answer as a percentage to one decimal place.

? %

#### Options:

Question 5

RST sells computer equipment and prepares its financial statements to 31 December.

On 30 September 20X5 RST sold computer software along with a two year maintenance package to a customer. The customer is given the right to return the goods within six months and claim a full refund if they are not satisfied with the computer software. The risk of return is considered to be insignificant for RST.

How should the revenue from this transaction and the right of return be recognised in the financial statements for the year ended 31 December 20X5?

#### Options:

A.

Recognise 100% of the revenue from both the sale of goods and the maintenance contract and create a provision for the anticipated level of returns.

B.

Do not recognise any revenue from the sale of goods or the maintenance contract and do not create a provision for the anticipated level of returns.

C.

Recognise 12.5% of the revenue from both the sale of goods and the maintenance contract and do not create a provision for the anticipated level of returns.

D.

Recognise 100% of the revenue from the sale of goods,12.5% of the revenue from the maintenance contract and create a provision for the anticipated level of returns.

Question 6

GH acquired 3,000,000 of the 12,000,000 equity shares of JK. All shares carried equal voting rights and no other single shareholder of JK held more than 10% of the equity shares. GH has the power to participate in the financial and operating policy decisions but not control them.

Based on the information provided above, how would GH's investment in JK be accounted for in its consolidated financial statements?

#### Options:

A.

Associate

B.

Joint venture

C.

Joint arrangement

D.

Financial asset

Question 7

JJ's current share price is \$1.80, with a dividend of \$0.20 a share just about to be paid.

Dividends have increased at an average annual growth rate of 4.5% and this is expected to continue into the future.

What is JJ's cost of equity?

#### Options:

A.

17.6%

B.

16.1%

C.

12.5%

D.

11.1%

Question 8

GH granted 100 share options to each of its 1,000 employees on 1 January 20X8.  The fair value of each option was \$7 on 1 January 20X8 and had risen to \$8 at 31 December 20X8.

Which of the following statements represents the treatment that GH adopted to account for the related expense of these share options in its financial statements for the year ended 31 December 20X8, in accordance with IFRS 2 Share-based Payments?

#### Options:

A.

The expense was measured using the fair value of \$7 and the credit entry was to equity.

B.

The expense was measured using the fair value of \$7 and the credit entry was to liabilities.

C.

The expense was measured using the fair value of \$8 and the credit entry was to equity.

D.

The expense was measured using the fair value of \$8 and the credit entry was to liabilities.

Question 9

LM is a car dealer that is supplied inventory by car manufacturer SQ. Trading between LM and SQ is subject to a contractual agreement. This agreement states the following:

• Legal title of the cars remains with SQ until they are sold by LM to a third party.

• Upon notification of sale to a third party by LM, SQ raises an invoice at the price agreed at the original date of delivery to LM.

• LM has the right to return any car at any time without incurring a penalty.

• LM is responsible for insuring all of the cars on its property.

When considering how these cars should be accounted for, which THREE of the following statements are true?

#### Options:

A.

The most significant risks attached to the cars are held by LM.

B.

The most significant risks attached to the cars are held by SQ.

C.

SQ should recognise the cars as inventory in their financial statements.

D.

LM should recognise the cars as inventory in their financial statements.

E.

SQ should recognise revenue when the cars are delivered to LM.

F.

When LM sells a car to a third party, SQ should recognise the revenue associated with that sale.

Question 10

AB owned 80% of the equity share capital of FG at 1 January 20X6.  AB disposed of 10% of FG's equity share capital on 31 December 20X6 for \$400,000.  The non controlling interest was measured at \$700,000 immediately prior to the disposal.

Which of the following represents the adjustment that AB made to non controlling interest in respect of the disposal when it prepared its consolidated financial statements at 31 December 20X6?

#### Options:

A.

Credit of \$350,000

B.

Debit of \$400,000

C.

Debit of \$350,000

D.

Credit of \$50,000

Question 11

AB acquired its subsidiary on 1 January 20X7 when the fair value of net assets was the same as book value with the exception of property, plant and equipment that had a fair value \$500,000 higher than carrying value.

These assets were assessed to have a remaining useful life of 5 years from the date of acquisition.

What is the net consolidation adjustment to the property, plant and equipment balance at 31 December 20X9?

Give your answer to the nearest whole number (in '\$000s).

\$?

#### Options:

Question 12

As at 31 October 20X7 TU's financial statements show the entity having profit after tax of \$600,000 and 900,000 \$1 ordinary shares in issue. There have been no issues of shares during the year. At 31 October 20X7 TU have 300,000 share options in issue, which allow the holders to purchase ordinary shares at \$2 a share in 3 years' time. The average price of the ordinary shares throughout the year was \$5 a share.

What is the diluted earnings per share for the year ended 31 October 20X7?

#### Options:

A.

66.7 cents

B.

58.8 cents

C.

50.0 cents

D.

55.6 cents

Question 13

A group presents its financial statements in A\$.

The goodwill of its only foreign subsidiary was measured at B\$100,000 at acquisition. There have been no impairments to this goodwill.

Exchange rates (where A\$/B\$ is the number of B\$'s to each A\$) are as follows:

The value of goodwill to be included in the group's statement of financial position in respect of its foreign subsidiary for the year ended 31 December 20X4 is:

#### Options:

A.

A\$75,758.

B.

A\$66,667.

C.

A\$150,000.

D.

A\$132,000.

Question 14

VW acquired 240,000 of the 300,000 \$1 equity shares of EF for \$1,440,000 on 1 January 20X2. Goodwill arising from the acquisition, using the proportionate method for measuring non controlling interest, was \$540,000. On 1 January 20X3 VW disposed of 30,000 of the equity shares in EF for \$200,000 cash when the net assets of EF were £1,200,000. Goodwill arising on the acquisition of EF had not suffered any impairment.

Prepare the accounting adjustment that will be processed by VW to reflect the disposal of shares in EF when it prepares its consoldiated financial statements.

#### Options:

Question 15

In recent years EBITDA has been adopted by large entities as a key measure of performance. The following figures have been extracted from the financial statements of UV for the year ended 30 November 20X9:

What is EBITDA for UV for the year ended 30 November 20X9?

Give your answer to the nearest \$'000.

#### Options:

Question 16

Ratios have been produced below for EF for the year to 31 March:

Which TWO of the following could explain the movement in both gearing and ROCE?

#### Options:

A.

A rights issue on 31 March 20X3.

B.

A debt issue on 31 March 20X3.

C.

A revaluation upwards on the head office property on 1 April 20X2.

D.

A bonus issue of shares on 1 April 20X2.

E.

A bank loan to purchase new machinery on 31 March 20X3.

Question 17

The tax benefit on a company's asset is £180,000 and the useful life on that asset is five years. The company creates a deferred tax provision to spread this benefit over the asset's useful life.

What entry is needed to reduce this deferred tax provision in the company's year two accounts?

#### Options:

A.

DR Deferred tax liability (SOFP) £36,000

B.

CR Deferred tax liability (SOFP) £36,000

C.

DR Corporation tax (income statement) £36,000

D.

CR Corporation tax (income statement) £36,000

E.

DR Deferred tax liability (SOFP) £144,000

F.

CR Deferred tax liability (SOFP) £144,000

G.

DR Corporation tax (income statement) £144,000

Question 18

BC are currently seeking to establish an accounting policy for a particular type of transaction.

There are four alternative ways in which this transaction can be treated. Each treatment will have a different outcome on the financial statements as follows:

• Treatment one means that the financial statements will be easier to prepare.

• Treatment two will give a fair representation of the transaction in the financial statements.

• Treatment three will maximise the profit figure presented in the financial statements.

• Treatment four means that the financial statements will be more easily understood by shareholders.

Which accounting treatment should BC adopt?

#### Options:

A.

One

B.

Two

C.

Three

D.

Four

Question 19

AB acquired 10% of the equity share capital of XY on 1 January 20X7 for \$180,000 when the fair value of XY's net assets was \$190,000.  On 1 January 20X9 AB purchased a further 50% of the equity share capital for \$550,000 when the fair value of XY's net assets was \$820,000.

The original 10% investment had a fair value of \$200,000 at the date control of XY was gained.  The non controlling interest in XY was measured at its fair value of \$300,000 at 1 January 20X9.

Which of the following represents the correct value of goodwill arising on the acquisition of XY that would have been included by AB when it prepared its consolidated financial statements at 31 December 20X9?

#### Options:

A.

\$230,000

B.

\$30,000

C.

\$210,000

D.

\$40,000

Question 20

ST has in issue unquoted 7% debentures which were issued at par and are redeemable in 1 year's time.  These debentures cannot be traded. The yield to maturity on these debentures has been calculated at 5%.

Which of the following would explain why the yield to maturity is lower than the coupon?

#### Options:

A.

ST will benefit from the tax relief on the interest payment.

B.

The debentures will be redeemed at a discount to their par value.

C.

The debentures will be redeemed at their par value.

D.

The market value of the debentures must be higher than their par value.

Question 21

AB sold the majority of its operating equipment to LM for cash on 30 December 20X9 and then immediately leased it back under an operating lease.

AB used the cash proceeds from the sale to reduce its long term borrowings significantly.  No early repayment charge was levied by the lender.

Which of the following statements is true in respect of AB's ratios calculated at 31 December 20X9?

#### Options:

A.

AB's return on capital employed would be lower as a result of this sale being recorded.

B.

AB's current ratio would be lower as a result of this sale being recorded.

C.

AB's non-current asset turnover would be lower as a result of this sale being recorded.

D.

AB's gearing ratio would be lower as a result of this sale being recorded.

Question 22

When accounting for a finance lease under IAS 17 Leases, which TWO of the following are recognised in the statement of profit or loss?

#### Options:

A.

Finance cost element of the lease payments

B.

Depreciation of the leased asset

C.

Lease payments paid

D.

Lease payments payable

E.

Capital repayment element of the lease payments

Question 23

JK is seeking to raise finance for a project and the directors would prefer to take out a fixed rate bank loan repayable over the next 5 years.  The project will increase the profit of JK even after taking into account the additional interest costs.

Which of the following statements about the use of a bank loan in this situation is true?

#### Options:

A.

In the long term servicing a bank loan is more expensive than servicing equity shares due to the higher risk for the lender.

B.

The interest on a bank loan is deducted from profit before dividends can be declared to equity shareholders each year.

C.

Because the assets of a business belong to the equity shareholders, a bank loan should NOT be secured on the assets of the business.

D.

A bank loan has high issue costs compared to an issue of equity shares because it takes longer to arrange.

Question 24

LM is preparing its consolidated financial statements for the year ended 30 April 20X5. During the year LM acquired 30% of the equity shares of AB giving it significant influence over AB.

LM conducted ratio analysis comparing the financial performance of the group for 30 April 20X4 and 20X5.

Which of the following ratios would not be comparable as a result of the acquisition of AB?

#### Options:

A.

Operating profit margin.

B.

Return on capital employed.

C.

Earnings per share.

D.

Interest cover.

Question 25

Which of the following are limitations of financial statement figures for ratio analysis? Select the ALL that apply.

#### Options:

A.

Only provides historic data

B.

Only provides financial information

C.

Limited information to identify trends over time

D.

Provide only summarised information

E.

Contains complicated information that needs to be summarised

F.

Only provides forecast data

Question 26

ST has sold its main office property, which had a carrying value of \$360,000, to AB, a property management entity.

The property was sold for \$400,000 which is equal to its fair value and was immediately leased back under an operating lease agreement.

Which of the following journals will record this transaction?

#### Options:

Question 27

RS is a listed entity that has no subsidiaries although its Finance Director is also a director of TU, an unconnected entity.

It is preparing its financial statements to 30 September 20X6.

Which of the following substantial transactions must be disclosed in these financial statements in accordance with IAS 24 Related Party Disclosures?

#### Options:

A.

Pension payments made on behalf of the Managing Director of RS.

B.

Purchase of production materials from TU at a discounted price to the current market value.

C.

Sale of finished goods to TU at normal selling price.

D.

Performance related bonus payments made to the office staff for the year.

Question 28

Which of the following is the correct calculation for basic earnings per share in accordance with IAS 33 Earnings Per Share?

#### Options:

Question 29

PQ is a retail business. In recent years they have improved their financial performance and increased their revenue. The following ratios have been calculated for the years ended 31 December 20X4 and 20X3:

Which of the following explanations of PQ's financial performance is consistent with these ratios?

#### Options:

A.

In 20X4 PQ reduced the unit selling price resulting in an increase in volumes sold and an increase in overall revenue.

B.

PQ changed suppliers early in 20X4 because the new supplier agreed to supply the same goods at a cheaper price.

C.

In 20X4 taxation legislation was amended which reduced the rate of corporate income tax by 3.5%.

D.

In 20X4 PQ sold a retail outlet resulting in a significant gain on disposal which has been deducted from administrative expenses.

Question 30

AB and EF are located in the same country and prepare their financial statements to 31 October in accordance with International Accounting Standards. EF supplies AB with a component that is vital to AB's product range. AB is considering acquiring a controlling interest in EF by 31 December 20X4 in order to guarantee future supply. The Board of EF has indicated that such an approach would be postively considered. AB would use its control to make AB the sole customer of EF.

The Finance Director of AB has been granted access to EF's management accounts and has conducted some initial analysis from the financial press. The results togther with comparisons for AB for the year to 31 October 20X4 are presented below:

AB and EF are forecasting revenues of S1,500,000 and \$700,000 respectively for the year ended 31 October 20X5.

AB's Finance Director met with one of the directors of EF to discuss the potential impact of the acquisition.

Which of the director's statements below is correct?

#### Options:

A.

The P/E ratio of EF will increase to 12 after acquisition in line with that of AB.

B.

The gross profit margin of EF will increase if AB's bargaining power is used to negotiate lower material costs for the whole group.

C.

Redundancy costs arising from reorganisation following acquisition will be provided for by charging EF's profit for the year ended 31 October 20X4.

D.

Dividend yield for both entities will be identical after the acquisition.

Question 31

AB and FG incorporated on 1 January 20X1 in the same country and had similar investment in net assets. Both entities are financed entirely by equity.   In the year to 31 December 20X1 both entities generated the same volume of sales.

Which of the following, taken individually, would explain why AB's return on capital employed ratio was lower than that of FG?

#### Options:

A.

AB revalued its non current assets upwards on 31 December 20X1; FG's non current assets were stated at historic cost.

B.

FG issued bonds on 31 December 20X1; AB remains ungeared.

C.

AB paid a lower dividend to its shareholders than FG in the year.

D.

AB's deferred tax provision at the year end is higher than that of FG.

Question 32

EFG is preparing its financial statements to 31 March 20X8. During the year ended 31 March 20X7, EFG purchased a piece of land for \$1 million which is used as the staff car park.  EFG has a policy of revaluing land, in accordance with International Accounting Standards, and at 31 March 20X8, accounted for a substantial increase in its value.

Revenue and operating profit has remained constant over the 2 years.

When comparing EFG's financial statements for the year ended 31 March 20X7 with those of 20X8, which THREE of the following would be expected?

#### Options:

A.

Increase in profit before tax.

B.

Increase in other comprehensive income.

C.

Increase in return on capital employed.

D.

Decrease in return on capital employed.

E.

Increase in net asset turnover.

F.

Decrease in net asset turnover.

Question 33

Which of the following is NOT an example of an unconsolidated structured entity as defined in IFRS12 Disclosure of Interests in Other Entities?

#### Options:

A.

A post-employment benefit plan

B.

A securitisation vehicle

C.

An asset-backed financing scheme

D.

An investment fund

Question 34

MNO is listed on its local stock exchange.  It has a high level of gearing compared to the industry average as a result of rapid expansion funded by debt.  The directors of MNO would like to reduce the level of gearing by raising equity to fund the next expansion project.  The directors are considering whether to use a placing of new shares or a rights issue.

Which of the following statements is true?

#### Options:

A.

A rights issue would not need to be underwritten because the risk of the shares not being taken up is small compared to a placing.

B.

The administration costs associated with a placing are usually more expensive than a rights issue because less investors are involved.

C.

A placing will increase the proportion of the total number of MNO's shares held by large investors.

D.

The directors must use a placing before offering the rights issue to existing shareholders.

Question 35

AAA is the only director of entity CD. AAA is also a director of entity GH. CD owns 30% of the equity of MN and 60% of the equity of OP.

Identify which of the following are related parties of CD by placing the appropriate response against one.

#### Options:

Question 36

GH issued a 6% debenture for \$1,000,000 on 1 January 20X4.  A broker fee of \$50,000 was payable in respect of this issue.  The effective interest rate associated with this debt instrument is 7.2%.

The carrying value of the debenture at 31 December 20X4 is:

#### Options:

A.

\$958,400

B.

\$1,065,600

C.

\$1,012,000

D.

\$961,400

Question 37

On 1 January 20X8 XY, a listed entity, had 10,000,000 ordinary shares in issue each with a par value of 50 cents. On 1 July 20X8 XY raised \$6,000,000 by issuing ordinary shares at a price of £1.50 each which was the full market price.

Place the correct figure into the box below to show the number that XY will use as its weighted average number of ordinary shares in the calculation of earnings per share for the year to 31 December 20X8.

#### Options:

Question 38

XY purchased \$100,000 of quoted 8% bonds in the current year which it intends to hold until redemption.

Which of the following identifies the correct classification and subsequent measurement basis for this financial instrument?

#### Options:

A.

A loans and receivables financial asset subsequently measured at fair value with gains and losses in reserves.

B.

A held to maturity financial asset subsequently measured at amortised cost.

C.

A loans and receivables financial asset subsequently measured at amortised cost.

D.

A held to maturity financial asset subsequently measured at fair value with gains and losses in reserves.

Question 39

Which THREE of the following actions should improve the cash position of an entity?

#### Options:

A.

Substituting a bonus issue for the final dividend.

B.

Selling non current assets and leasing them back under operating leases.

C.

Implementing an efficient inventory ordering system.

D.

Revaluing all non-current assets.

E.

Revising the depreciation policy of non-current assets.

F.

Offering extended credit terms to existing customers.

Question 40

GH's financial statements show the following:

What is the value of the dividend received from the associate to be included in GH's consolidated statement of cash flows for the year?

Give your answer to the nearest \$000.

\$ ? 000

#### Options:

Demo: 40 questions
Total 248 questions