F1: Financial Reporting

• Topic 01

  Regulatory Environment

  54 questions
• Topic 02

  Financial Statements

  56 questions
• Topic 03

  Management of Working Capital and Cash

  54 questions
• Topic 04

  Fundamentals of Business Taxation

  59 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A company has average inventory of £120,000, annual cost of goods sold of £1,460,000, average receivables of £80,000, and annual sales of £1,825,000. What is the operating cycle (in days)?

   • A
     40 days
   • B
     50 days
   • C
     46 days
     Correct answer
   • D
     30 days
   Explanation

   Operating cycle = Inventory days + Receivable days. Inventory days = (£120,000 / £1,460,000) × 365 = 30 days. Receivable days = (£80,000 / £1,825,000) × 365 = 16 days. Operating cycle = 30 + 16 = 46 days.

2. Which of the following costs should be capitalised as part of property, plant and equipment (PP&E) under IAS 16?

   • A
     Marketing costs to promote products made by the asset
   • B
     General operating expenses of the business
   • C
     Installation costs directly attributable to bringing the asset into working condition
     Correct answer
   • D
     Administrative overhead costs unrelated to the asset
   Explanation

   Under IAS 16, only costs directly attributable to bringing the asset to its working condition should be capitalised as part of PP&E. This includes:

   • Purchase price (less any trade discounts)
   • Import duties and non-refundable taxes
   • Installation and assembly costs
   • Site preparation costs
   • Delivery and handling costs
   • Professional fees directly related to the acquisition

   Costs that should be expensed include:

   • Ongoing repairs and maintenance (expense as incurred)
   • Administrative and general overhead (not directly attributable)
   • Staff training (operating expense)
   • Marketing and promotion (selling expense)
   • Operating losses during initial start-up

3. An entity is testing equipment for impairment. The equipment could be sold for £70,000 less £5,000 disposal costs. The present value of expected future cash flows from using the equipment is £80,000. What is the recoverable amount?

   • A
     £75,000
   • B
     £150,000
   • C
     £65,000
   • D
     £80,000
     Correct answer
   Explanation

   Recoverable amount is the higher of fair value less costs to sell (£70,000 - £5,000 = £65,000) and value in use (£80,000). Therefore, recoverable amount = £80,000. This is the amount compared to carrying amount to determine if impairment exists.