F2 F2 Advanced Financial Reporting Questions and Answers

Which of the following reduce the usefulness of ratio analysis when comparing entities that operate in the same industry? Select ALL that apply.

Which THREE of the following  would determine the functional currency of an overseas subsidiary in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates?

On 1 January 20X4 EF grants each of its 125 employees 500 share options on the condition that they remain in employment for 3 years. During the year to 31 December 20X4 10 employees left and It is expected that a further 25 will leave before the end of the vesting period.

The fair value of each share option is $30 on 1 January 20X4 and $45 on 31 December 20X4.

What is the journal entry in respect of these share options in EF ' s financial statements for the year ended 31 December 20X4?

GH owned 70% of the equity share capital of XY at 1 January 20X6.  GH acquired a further 20% of XY ' s equity share capital on 31 December 20X6 for $430,000.  Non controlling interest was measured at $600,000 immediately prior to the 20% acquisition.  

Which of the following amounts will GH debit to non controlling interest when the 20% acquisition is adjusted for in its consolidated financial statements at 31 December 20X6?

FGH plans to issue a large number of shares to the public via an IPO.

It is considering either an offer for sale at a fixed price or an offer for sale by tender.

Which of the following would be an advantage to FGH of using the offer for sale by tender compared to the fixed price offer?

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?

A local council is one year into a two year project to renovate local parks. The project is on track to be completed within the set time-scale, however it has proved more costly than initially expected.

The project is on track to be completed within its two year period. Contracts for the labour and materials needed to renovate the parks were agreed at the start of the project and no changes have arisen. Despite the fact

that the council has yet to fully settle these contracts, costs are set to be as budgeted.

Why would this example not be recognised as a provision?

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

On 30 November 20X9 OPQ acquires a financial asset that is classified as Available for Sale.

Which of the following describes the value of the financial asset on the date of acquisition?

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:

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?

On 1 January 20X7 GH purchased plant and equipment at a cost of $400,000.  The temporary differences in respect of this plant and equipment at 31 December 20X7 and 20X8 have been calculated as follows:

Assume that there are no other temporary differences in the periods and that the corporate income tax rate is 25%. GH is expected to have significant taxable profits in the future.

Which of the following is the correct impact in GH ' s statement of financial position at 31 December 20X8 in respect of deferred tax?

The IAS definitions of financial instruments dictate their classification between debt and equity. Which of of the following factors might this classification impact?

Select ALL that apply.

XY puchased 2% of the equity shares of FG on 1 October 20X3.

XY paid $25,000 for the shares as well as a transaction cost of 2.5% of the purchase price.

The shares are being held for short term trading and XY intend to sell them in December 20X3.

At the year end of 31 October 20X3, the shares in FG could be sold for $28,000.

What is the journal entry to record the subsequent measurement for this investment at 31 October 20X3?

Which THREE of the following statements are true in relation to financial assets designated as fair value through profit or loss under IAS 39 Financial Instruments: Recognition and Measurement?

Which of the following actions should XY ' s management take in order to reduce its investment in working capital?

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.

? %

HJ is currently in dispute with an employee, who is claiming $400,000 in a legal case against them.

HJ ' s legal advisors have stated that it is probable that they will lose the case and will have to pay the amount claimed.

Also, HJ are claiming $250,000 from a supplier of defective goods and the legal advisors have stated that it is probable that HJ will be successful in this claim.

What is the correct accounting treatment for these two items in HJ ' s financial statements?

Which of the following statements are incorrect regarding identifiable assets? Select ALL that apply.

An accountant acting under their Code of Ethics would do which THREE of the following?

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?

AB and CD are separate entities that prepare financial statements to 31 May using international accounting standards. AB and CD provide technical support services to the financial services industry and operate in the same country. The financial statements are identical except for the following:

• AB purchased all operating equipment, paying $100,000, using a 5 year bank loan. The useful life of the equipment was 5 years.

• CD signed an operating lease agreement for all operating equipment for 5 years paying $20,000 per year.

Both entities charge all expenses relating to the equipment to cost of sales.

From the information provided, which of the following ratios would be reliably comparable for AB and CD? 

PQ and WX are similar sized entities and operate in the same industry within Country X . Both operate from a single warehouse and have similar levels of non current asset resources.

The following ratios have been calculated at 31 October 20X8:

If considered individually, which of the following would limit the usefulness of these ratios in assessing the comparative financial performances of PQ and WX? 

The directors of AB want to reduce the entity ' s gearing ratio in the year to 31 December 20X9.  

Which of the following independent actions could the directors take during 20X9 to achieve this?

LM acquired 80% of the equity shares of ST when ST ' s retained earnings were $50 million.  The fair value of the net assets of ST included a contingent liability with a fair value of $100 million at the date of acquisition and a fair value of $40 million at 31 December 20X6. No other fair value adjustments were required at the date of acquisition.

LM and ST had retained earnings of $200 million and $80 million respectively at 31 December 20X6. 

The consolidated retained earnings of LM at 31 December 20X6 were:

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

Which TWO of the following are true for an entity raising equity finance using a rights issue rather than a placing of equity shares to new investors?

Information from the financial statements of RST for the year ended 30 April 20X9 is as follows:

At 30 April 20X9 the ordinary shares are trading at $4.75.

What is the price earnings (P/E) ratio for RST at 30 April 20X9?

F has profit before interest and tax of $400,000 for the year to 30 June 20X4.

Extracts from F ' s statement of financial position at 30 June 20X4 are as follows:

Calculate the gearing (debt:equity) ratio at 30 June 20X4.

Give your answer to the nearest whole percentage.

 ?  %

UV has raised $100,000 through the issue of two irredeemable financial instruments:

•  6% debentures with a current market value of $101.50 per $100 nominal value; and

•  8% preference shares with a current share price of $2.20 each.

The corporate income tax rate is 20% 

What is the post tax cost of debt for each of these instruments?

A )

YZ issued $100,000 6% convertible bonds at par on 1 January 20X5. The bondholders have the option to convert into equity shares in 3 years ' time or redeem at par for cash on the same date.

Interest is paid annually in arrears and bonds issued by similar entities without conversion rights pay interest at 8%.

What is the value of equity to be recognised in YZ ' s statement of financial position as at 31 December 20X5?

Give your answer to the nearest whole $.

$?

ST acquired 80% of the equity shares of AB on 1 January 20X7. AB acquired 60% of the equity shares of UV on 1 January 20X8. Profit for the year ended 31 December 20X9 for AB is $160,000 and for UV is $100,000.

Calculate the non-controlling interest figure to be included within ST ' s consolidated statement of profit or loss for the year ended 31 December 20X9.

Give your answer to the nearest whole number in $000s.

$  ?  

Which of the following is a related party according to the definition of a related party in IAS24 Related Party Disclosures?

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:

Which of the following statements are true regarding consolidated cash flows after the acquisition of a subsidiary?

Select ALL that apply.

LK acquired 100% of the equity shares of TU on 1 January 20X4. LK disposed of 60% of TU for £2,400,000 on 30 September 20X4. The sale proceeds reflected the fair value of TU ' s shares on that date.

The remaining 40% shareholding gave LK the ability to exercise significant influence over the activities of TU. TU reported profit of $1,800,000 for the year ended 31 December 20X4 and this accrued evenly throughout the year.

Calculate the investment in associate that will be presented in LK ' s consolidated statement of financial position as at 31 December 20X4.

Give your answer to the nearest whole $ ' 000.

 $     000

The following information relates to DEF for the year ended 31 December 20X7:

• Property, plant and equipment has a carrying value of $3,500,000 and a tax written down value of $2,500,000.

• There are unused tax losses to carry forward of $1,250,000. These tax losses have arisen due to poor trading conditions which are not expected to improve in the foreseeable future.

• The corporate income tax rate is 25%.

In accordance with IAS 12 Income Taxes, the financial statements of DEF for the year ended 31 December 20X7 would recognise deferred tax balances of:

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.

? %

Which of the following statements are INCORRECT with regards to impairment of financial instruments; Select ALL that apply.

The consolidated statement of profit or loss for VW for the year ended 30 September 20X7 includes the following:

What is VW ' s interest cover for the year ended 30 September 20X7?

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?

Which TWO of the following are true in relation to IAS21 The Effects of Changes in Foreign Exchange Rates when consolidating an overseas subsidiary?

CD granted 1,000 share options to its 100 employees on 1 January 20X8.To be eligible, employees must remain employed for 3 years from the grant date. In the year to 31 December 20X8, 15 staff left and a further 25 were expected to leave over the following two years.

The fair value of each option at 1 January 20X8 was $10 and at 31 December 20X8 was $15.

Which THREE of the following are true in respect of recording these share options in the year ended 31 December 20X8?

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?

Which TWO of the following statements about bonds and their issue are true?

MNO has calculated its return on capital employed ratio for 20X4 and 20X5 as 41% and 56% respectively.

Taking each statement in isolation, which would explain the movement in the ratio between the 2 years?

Information from the financial statements of an entity for the year to 31 December 20X5:

 The gearing ratio calculated as debt/equity and interest cover are:

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?

MS Group ' s total profit for period on their consolidated income statement is £31,000. This includes adjusting for their share of joint venture JV2. Calculate the share of joint venture MS Group received based on the

following information.

MS operating profit £41,000

Dividend from JV2 £5,000

Finance cost £3,000

Tax £11,000

An entity has declared a dividend of $0.12 a share. The cum dividend market price of one equity share is $1.40.

Assuming a dividend growth rate of 7% a year, what is the entity ' s cost of equity?

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?

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?

AB acquired a financial investment on 1 January 20X9, incurring $5,000 related agency fees.  AB initially classified the investment as held for trading, in accordance with IAS 32 Financial Instruments: Presentation.

Which of the following statements reflects the accounting treatment that AB adopted in respect of this investment when it prepared its financial statements to 31 December 20X9?

RS has issued an instrument with a nominal value of $1 million, at a discount of 2.5%, and a coupon rate of 6%. The terms of the issue are that the instrument must either be redeemed at par, at the option of the holder, in three years ' time, or alternatively converted into equity shares in RS.

The characteristics of this instrument taken as a whole indicates that it would be classifed as which of the following?

Entity A entered into a 3 year operating lease on 1 April 20X3.  The rentals are £5,000 a year payable in advance with an additional payment of $1,800 payable on 1 April 20X3. 

The rental expense to be included in the statement of profit or loss for the year ended 31 December 20X3 will be:

Which THREE of the following statements are true in relation to financial assets designated as fair value through profit or loss under IAS 39 Financial Instruments: Recognition and Measurement?

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:

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?

XY has a weighted average cost of capital (WACC) of 10% based on its gearing level (measured as debt/debt+equity) of 40%.  It is considering a signficant new project. 

In which of the following situations would it be appropriate to appraise this project using XY ' s existing WACC of 10%?

LM acquired an asset under a 5-year non-cancellable operating lease agreement on 1 January 20X8. Under the terms of the agreement, LM paid nothing for the first year and then made four payments of $50,000 in each subsequent year.  LM adopted the provisions of IAS 17 Leases when accounting for this agreement.

Which of the following is correct in respect of this operating lease in LM ' s financial statements for the year to 31 December 20X8?

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?

Which TWO of the following would be the primary disadvantages of producing the disclosures required in IFRS12 Disclosure of Interests in Other Entities?

LM acquired 15% of the equity share capital of ST on 1 January 20X6 for $18 million.  LM acquired a further 50% of the equity share capital of ST for $50 million on 1 January 20X7 when the fair value of ST ' s net assets was $82 million.  The original 15% investment in ST had a fair value of $20 million at 1 January 20X7.  The non controlling interest in ST was measured at its fair value of $30 million at the date control in ST was acquired.  

Calculate the goodwill arising on the acquisition of ST that LM included in its consolidated financial statements at 31 December 20X7.

Give your answer to the nearest $ million.

$ ?  million

AB acquired a financial investment on 1 January 20X9, incurring $5,000 related agency fees.  AB initially classified the investment as held for trading, in accordance with IAS 32 Financial Instruments: Presentation.

Which of the following statements reflects the accounting treatment that AB adopted in respect of this investment when it prepared its financial statements to 31 December 20X9?

Operating segments are separately reportable where they exceed 15% of revenue / profits / assets. These must in total cover 80% of total revenue. Is this statement true or false?

What is meant by the term " a placing of ordinary shares " ?

The following information is extracted from the financial statements of RS for the year ended 30 June 20X7:

RS has no other liability balances and has no associate investments.

Calculate return on capital employed for RS at 30 June 20X7.

Give your answer to the nearest whole %.

 ?  %

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?

The basic earning per share computed by a company for year ended 31st March 20X7 is £2 per share. The company had certain convertible debentures outstanding as on 31st March 20X7. The conversion of

debentures to equity shares would result in the earnings per share to be £2.2. Which of the following should the company disclose?

Which of the following statements is true in respect of ST ' s gross profit margin based on the information given?

Following a wedding in October 20X0 ten people contracted food poisoning from eating food cooked by the wedding caterer PQ. At 31 December 20X0 PQ was advised by its legal advisors that a liability was possible but not probable and the incident was disclosed as a contingent liability at that date.

As the result of developments in the case, which is still not settled, PQ was advised that it is now probable, as at 31 December 20X1, that they will be found liable and will therefore have to pay damages of unknown value.

Which of the following would indicate that in the financial statements of PQ for the year ended 31 December 20X1 this should still be recognised as a contingent liability rather than a provision?

Information from the financial statements of an entity for the year to 31 December 20X5:

 The gearing ratio calculated as debt/equity and interest cover are:

AB acquired its one subsidiary, CD, on 1 January 20X1.  At this date the fair value of CD ' s property, plant and equipment was found to be $40 million higher than its carrying value.  The relevant items had a remaining estimated useful life of 10 years from the date of acquisition.

At 31 December 20X4 AB and CD presented property, plant and equipment of $100 million and $50 million respectively in their individual financial statements.

The value of property, plant and equipment presented in AB ' s consolidated statement of financial position at 31 December 20X4 is:

Which of the following, in accordance with IFRS 2 Share-based Payments, are only applicable to the accounting treatment of cash settled rather than equity settled share-based payment schemes?

Select ALL that apply.

Which of the following would limit the effectiveness of analysis performed on the operating profit margins of two separate entities with the same total revenue over a12 month period?

The dividend yield of ST has fallen in the year to 31 May 20X5, compared to the previous year.

The share price on 31 May 20X4 was $4.50 and on 31 May 20X5 was $4.00.  There were no issues of share capital during the year.

Which of the following should explain the reduction in the dividend yield for the year to 31 May 20X5 compared to the previous year?

JK has calculated its inventory holding period:

Which THREE of the following would have contributed to the above movement in inventory holding period?