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  • Exam Name: Advanced Financial Reporting
  • Last Update: Mar 27, 2024
  • Questions and Answers: 248
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F2 Advanced Financial Reporting Questions and Answers

Question # 6

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

A.

Major customer

B.

Provider of finance

C.

Managing Director

D.

Major supplier

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Question # 7

FG and RS operate in the same retail sector within the same country and are of a similar size. The following ratios have been calculated based on the financial statements for the year ended 30 September 20X4:

  F2 question answer

Which of the following factors would limit the usefulness of these ratios as a basis for assessing the comparative performances of FG and RS?

A.

RS has a higher level of borrowings and associated finance costs.

B.

RS sold a piece of land for a sum much greater than its carrying value.

C.

RS operates at the low margin end of the market whilst FG operates at the high margin end.

D.

FG has a higher level of deferred tax liabilities than RS.

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Question # 8

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?

A.

Provide for the $400,000 potential outflow and disclose the $250,000 potential inflow.

B.

Provide for the $400,000 potential outflow and recognise the $250,000 potential inflow.

C.

Disclose the $400,000 potential outflow and disclose the $250,000 potential inflow.

D.

Disclose the $400,000 potential outflow and recognise the $250,000 potential inflow.

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Question # 9

Which TWO of the following are relevant ethical considerations when selecting an accounting policy?

A.

It shows faithful representation of the financial statements.

B.

It shows a favourable view of performance.

C.

It is in accordance with International Financial Reporting Standards.

D.

It is straightforward to implement.

E.

It maximises shareholder wealth.

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Question # 10

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

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Question # 11

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:

   

A.

$4,200

B.

$5,000

C.

$6,800

D.

$5,600

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Question # 12

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?

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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:

  F2 question answer

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:

A.

A$75,758.

B.

A$66,667.

C.

A$150,000.

D.

A$132,000.

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Question # 14

Which of the following examples of contracts will use cost of sales as the balancing figure when calculating profit or loss?

Select ALL that apply.

A.

Contract A has a total value of£50m, costs to date of£42m and expected costs to completion of£15m. The project's % stage of completion is 74% using the cost method.

B.

Contract A has a total value of£55m, costs to date of£33m and expected costs to completion of£18m.

C.

Contract A has a total value of£75m, costs to date of£61m and expected costs to completion of£20m. The contracts % stage of completion was calculated by dividing its value to date of£45m by£75m.

D.

Contract A has a total value of£60m, costs to date of£42m and expected costs to completion of£15m. The project's % stage of completion is 80% using the value method.

E.

Contract A has a total value of£85m, costs to date of£69m and expected costs to completion of£22m. The contracts % stage of completion was calculated by dividing its costs incurred to date of£69m by £75m.

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Question # 15

KL acquired 75% of the equity share capital of MN on 1 January 20X8. The group's policy is to value non-controlling interest at fair value at the date of acquisition. MN acquired 60% of the equity share capital of PQ on 1 January 20X9 for $360 million.

At 1 January 20X9 the fair value of the non-controlling interest in PQ was $220 million and the fair value of the net assets of PQ at 1 January 20X9 were $320 million.

Calculate the goodwill arising on the acquisition of PQ at 1 January 20X9.

Give your answer to the nearest million.

$  ?   million

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Question # 16

At 31 October 20X1 RS has in issue 10% debentures 20X8 with a carrying value of $350,000.

Extracts from its statement of profit or loss for the year ending 31 October 20X7 are as follows:

  F2 question answer

What is the interest cover for RS for the ended 31 October 20X7?

A.

9.0 times

B.

11.1 times

C.

10.0 times

D.

8.0 times

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Question # 17

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:

A.

$164 million

B.

$176 million

C.

$272 million

D.

$284 million

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Question # 18

When producing the consolidated statement of profit or loss and other comprehensive income, which TWO of the following will be disclosed as attributable to the equity holders of the parent company and the non-controlling interests?

A.

Profit before tax

B.

Profit after tax

C.

Other comprehensive income

D.

Total comprehensive income

E.

Operating profit

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Question # 19

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.

Shares in another entity held for short term trading purposes fall within this category.

B.

Transaction costs in relation to these assets are expensed to profit or loss on acquisition.

C.

Transaction costs in relation to these assets are added to the initial cost of the asset on acquisition.

D.

The gain or loss on the subsequent measurement of these assets is recorded within other comprehensive income.

E.

 The gain or loss on the subsequent measurement of these assets is recorded within profit for the year.

F.

Once the asset has been subsequently measured to fair value an impairment review is undertaken. 

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Question # 20

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

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Question # 21

UV entered into a five year non-cancellable operating lease for an asset two years ago. Lease payments are settled annually in arrears.

At the year end, UV no longer requires this leased asset as they have decided to discontinue the product line that it was used for.

At this date UV had made two out of the five lease payments.

Which of the following statements about the unavoidable lease payments is true in accordance with IAS 37 Provisions, Contingent Liabilities and Assets?

A.

A provision should be recognised for the unavoidable lease payments with a corresponding charge to profit or loss.

B.

A provision should be recognised for the unavoidable lease payments with a corresponding charge to other comprehensive income.

C.

The amount of the unavoidable lease payments should be disclosed in the financial statements with no corresponding accounting entry.

D.

The amount of the unavoidable lease payments should be ignored in the financial statements.

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Question # 22

Which of the following principles are the basic principles followed by the consolidated income statement?

Select ALL that apply.

A.

Include all of the parent's income and expenses plus all of the subsidiaries' income and expenses

B.

Ignore investment income from subsidiary to parent (e.g. dividend payments or loan interest)

C.

After profit for the period, show the profit split between amounts attributable to the parent's shareholders and other shareholders

D.

Include all of the parent's income and expenses minus all of the subsidiaries' income and expenses

E.

Include investment income from subsidiary to parent (e.g. dividend payments or loan interest)

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Question # 23

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?

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.

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Question # 24

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?

A.

One

B.

Two

C.

Three

D.

Four

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Question # 25

EF have just paid a dividend of 20 cents a share and the current share price is $3.75. EF regularly reinvests 40% of its profit for the year and generates a return on reinvested funds of 12%.

The cost of equity for EF using the dividend valuation model is:

A.

10.4%

B.

12.9%

C.

10.7%

D.

13.2%

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Question # 26

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?

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.

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Question # 27

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

A.

Major customer

B.

Provider of finance

C.

Managing Director

D.

Major supplier

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Question # 28

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

A.

Held to maturity instruments and available for sale assets are both measured at amortised cost and are therefore impacted by impairment.

B.

If a loss is suspected following an impairment review, a financial asset is written down to its fair value.

C.

If a contract relating to a financial instrument is breached then this might be an indication of impairment.

D.

In the result of an impairment loss, the carrying amount of the asset is directly reduced, or reduced through an allowance account.

E.

The impairment loss on held to maturity instruments is the difference between the assets carrying amount and the present value of its future cashflows.

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Question # 29

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.

Shares in another entity held for short term trading purposes fall within this category.

B.

Transaction costs in relation to these assets are expensed to profit or loss on acquisition.

C.

Transaction costs in relation to these assets are added to the initial cost of the asset on acquisition.

D.

The gain or loss on the subsequent measurement of these assets is recorded within other comprehensive income.

E.

 The gain or loss on the subsequent measurement of these assets is recorded within profit for the year.

F.

Once the asset has been subsequently measured to fair value an impairment review is undertaken. 

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Question # 30

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?

A.

Credit of $350,000

B.

Debit of $400,000

C.

Debit of $350,000

D.

Credit of $50,000

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Question # 31

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:

A.

$958,400

B.

$1,065,600

C.

$1,012,000

D.

$961,400

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Question # 32

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:

F2 question answer

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 33

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?

A.

66.7 cents

B.

58.8 cents

C.

50.0 cents

D.

55.6 cents

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Question # 34

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?

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.

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Question # 35

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?

A.

66.7 cents

B.

58.8 cents

C.

50.0 cents

D.

55.6 cents

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Question # 36

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?

A.

In 20X5 the average interest rate on borrowing decreased compared to 20X4.

B.

In 20X4 an onerous contract was provided for and this provision did not change in 20X5.

C.

In 20X5 the increase in value of MNO's head office was reflected in the financial statements.

D.

In 20X4 an unused building was sold at a price in excess of its carrying value.

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Question # 37

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?

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Question # 38

MN had the following profit figures for the year ended 30 November 20X6:

MN's statement of financial position at 30 November 20X6 included the following:

F2 question answer

Calculate return on capital employed for MN for the year ended 30 November 20X6.

Give your answer to one decimal place.

 ?  %

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Question # 39

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:

F2 question answer

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?

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.

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Question # 40

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.

F2 question answer

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