Questions and Answers of International Financial Management

(a) Explain the term "holding gain" in relation to inventories.(b) On the first day of an accounting period, a company acquired inventories at a cost of £60,000. Two-thirds of these inventories were
On 1 January 2016, C Ltd lent £200,000 to D Ltd at an annual interest rate of 8%. No interest was paid until 31 December 2017, when the loan was repaid in full together with two years' interest
(a) Distinguish between nominal financial capital maintenance, general purchasing power maintenance and physical capital maintenance.(b) A company began trading on 1 August with capital of £400,000,
Explain the effect (if any) of each of the following transactions on an entity's profit or loss and on its cash flows:(a) The purchase of new equipment which is then depreciated over its useful
(a) Distinguish between the direct method and the indirect method of calculating the amount of cash generated from an entity's operations.(b) List the main steps in the accounting work required if
Explain each of the following terms which are defined in international standard IAS7:(a) Cash.(b) Cash equivalents.(c) Operating activities. (d) Investing activities.(e) Financing activities.
The draft statement of comprehensive income of Harrington, a public company, for the year to 31 March 2018 shows an income tax expense of £55,000. The draft statement of financial position shows a
Consider each of the following assets and liabilities which appear in a company's statement of financial position at 30 April 2018:(a) A motor lorry which cost £100,000 is shown at its written
Explain the concept of the "tax base" of an asset or liability. Explain how this concept helps to identify situations in which deferred tax adjustments are required.
(a) Distinguish between current tax and deferred tax.(b) Distinguish between permanent differences and temporary differences.(c) Explain how temporary differences between accounting profits and
Otlay Ltd prepares accounts to 31 July each year. The company's financial statements for the year to 31 July 2017 showed a liability for current tax of £120,000. This was an estimate of the current
Northerley plc prepares accounts to 31 December each year and has operated a defined benefit pension scheme for many years. At 31 December 2016, the present value of the defined benefit obligation
(a) With regard to defined benefit pension plans, explain each of the following terms:(i) Defined benefit obligation.(ii) Current service cost.(iii) Interest cost. (iv) Actuarial gains and
(a) Distinguish between defined contribution pension plans and defined benefit pension plans.(b) A company's agreed contributions to a defined contribution plan for 2017 are £350,000. Of this sum,
A company has 10,000 employees. Each employee is entitled to twenty days of paid holiday per calendar year. Up to five days of this entitlement may be carried forward and taken in the following year
A company enters into a contract to build a house for a customer and determines that this is a single performance obligation. The customer pays a non-refundable 5% deposit at contract inception. The
Laidlow plc is a construction contractor which prepares financial statements to 31 May each year. The following information relates to a contract with a customer which began during the year to 31
A customer buys three DVDs from a mail order company. These DVDs could have been bought separately and are regarded as distinct. The prices normally charged for the DVDs (if bought separately) are
A company sells goods to a customer for £12,500. The contract stipulates that the customer will pay £2,500 when the goods are delivered (and the customer obtains control of them) and will then pay
A company is contracted to build an asset for a customer. The contract price is £5m but the contract stipulates that the company will receive an incentive payment of a further £1m if the asset is
Triangle, a public listed company, is in the process of preparing its draft financial statements for the year to 31 March 2018. The following matters have been brought to your attention:(i) On 1
A company prepares financial statements to 31 December each year. The following events occurred after 31 December 2017 but before the financial statements for the year to 31 December 2017 were
The annual accounting date of Lawston plc is 31 May. The following matters need to be dealt with before the financial statements for the year to 31 May 2018 can be finalised:(a) The company is
Kenston Ltd prepares financial statements to 30 April each year. At 30 April 2018, the company is being sued by a customer who claims to have been harmed by one of the company's products. The case
At the end of an accounting period, a company has each of the following:(a) A present obligation which will probably require an outflow of resources.(b) A present obligation which will probably not
(a) Explain how the amount of a provision should be measured.(b) A company needs to make a provision for the cost of repairing a faulty product supplied to a customer some weeks previously. The
Hullman Ltd prepares financial statements to 31 March each year. Consider each of the following situations and determine in each case whether or not a provision should be recognised in the company's
On 1 May 2017, a company which prepares financial statements to 30 April each year issues £750,000 of 3% loan stock at a discount of 5%. Issue costs are £13,175. Interest is payable on 30 April
(a) Explain the terms "credit risk", "liquidity risk" and "market risk" which are used in international standard IFRS7.(b) Outline the main disclosures required by IFRS7 in relation to each of these
(a) International standard IFRS9 (which must be applied in accounting periods that begin on or after 1 January 2018) classifies financial assets into three categories.Identify and explain each of
(a) Explain what is meant by a "compound" financial instrument. Also explain the required accounting treatment of such an instrument.(b) On 1 April 2016, a company issues a £500,000 4% convertible
(a) Define the terms "financial instrument", "financial asset", "financial liability" and "equity instrument".(b) Explain the way in which international standard IAS32 distinguishes between financial
A company which makes only one type of product incurs fixed production overheads of £240,000 during the year to 31 March 2018. Normal production capacity is 80,000 units per annum. Calculate the
Kellerstone Ltd buys used machines which it reconditions and sells on to customers. The company's inventory at the end of its most recent accounting period included the following machines: Selling
(a) Identify the circumstances in which a cost formula may be used to establish the cost of inventories. (b) A company's inventories at 30 April 2018 include 11,000kg of a chemical which is used in
(a) Explain the term "inventories" as defined by international standard IAS2.(b) List the costs which should be included when measuring the cost of inventories and identify any costs which should be
On 1 January 2019, Crimmock Ltd (which prepares accounts to 31 December) enters into a four-year lease of office machinery. The company is required to make four lease payments of £30,000 and these
Lees Ltd leases an assembly machine on a finance lease. The lease requires Lees Ltd to make five rental payments of £18,000 annually in advance. The fair value of the assembly machine is £75,000
On 1 July 2015, Helvelyn Ltd (which applies IAS17) entered into a finance lease to acquire a machine. The cash price of the machine would have been £132,000. The lease agreement specified that the
Endale Ltd (which applies IAS17) prepares accounts to 31 March each year. On 1 April 2016, the company acquired an asset by means of a finance lease. The fair value of the asset on this date was
On 1 January 2016, Lessee Ltd (which applies IAS17) leases a machine from Lessor plc. The lease term is three years and lease payments of £1,000 per month are required. The machine has a useful life
IAS17 Leases distinguishes between finance leases and operating leases and prescribes the accounting treatment for each type of lease.Conston Ltd (which applies IAS17) is the lessee of the following
Yeng and Sons Ltd prepares financial statements to 31 May each year. On 25 January 2018, the company classifies a disposal group as held for sale. This disposal group is eventually sold in August
Varnay Ltd is a manufacturing company which prepares annual financial statements to 31 December. In November 2017, the company announced a plan to close down one of its manufacturing operations and
(a) Explain what is meant by a "discontinued operation".(b) Explain why IFRS5 requires the results of discontinued operations to be presented separately in the financial statements.
Wilbern Ltd prepares financial statements to 30 June each year. On 1 March 2017, the company classifies a non-current asset as held for sale. The asset is eventually sold in July 2017.
(a) Explain what is meant by a non-current asset "held for sale" and list the criteria which must be satisfied in order for an asset to be classified as held for sale.(b) Explain why it is not
IAS36 Impairment of Assets was issued in June 1998 and subsequently revised in March 2004 and January 2008. Its main objective is to prescribe the procedures that should ensure that an entity's
(a) Define the term "cash-generating unit" (CGU).(b) Explain the circumstances in which a CGU should be tested for impairment.
An asset (which has never been revalued) has a carrying amount of £100,000. The asset is being depreciated on the straight-line basis, with a remaining useful life of three years and a residual
(a) Define the term "impairment loss".(b) List the main indications which would suggest that an asset might be impaired.(c) Identify the two types of asset which must always be tested for impairment,
(a) Distinguish between research and development within the context of IAS38 Intangible Assets.(b) State, with reasons, how the following expenditure would be dealt with in the financial statements
On 1 January 2018, A Ltd bought all of the assets and liabilities of B Ltd for a price of ?500,000. B Ltd then went into liquidation. The statements of financial position of the two companies just
(a) Define the term "goodwill" and distinguish between internally generated goodwill and goodwill acquired in a business combination.(b) Identify the main features of goodwill which distinguish it
Distinguish between the cost model and the revaluation model for the measurement of intangible assets subsequent to their initial recognition.
A company has purchased the following intangible assets in separate transactions:(a) A patent which expires after ten years; the company expects to make use of this patent for six years and then
(a) Distinguish between research expenditure and development expenditure.(b) Explain the accounting treatment required by IAS38 in relation to each of these types of expenditure.(c) During the year
(a) Define the term "intangible asset" and explain the main features of this definition.(b) Explain how an intangible asset should be measured at its initial recognition if it is acquired in a
Elite Leisure is a private limited liability company that operates a single cruise ship. The ship was acquired on 1 October 2009. Details of the cost of the ship's components and their
(a) Define the term "investment property" and explain the two models permitted by international standard IAS40 for the measurement of investment property after its initial recognition.(b) How do
(a) In relation to property, plant and equipment, define the terms "depreciation", "depreciable amount", "useful life" and "residual value".(b) On 1 July 2017, a company which prepares financial
(a) Distinguish between the cost model and the revaluation model for the measurement of property, plant and equipment subsequent to its initial recognition.(b) If the revaluation model is used,
(a) Define the term "property, plant and equipment".(b) When should an item of property, plant and equipment be recognised as an asset and when should it be derecognised?(c) Which of the following
(a) Explain what is meant by a "material prior period error" and explain how such an error should be corrected.(b) List the disclosures required when a material prior period error is corrected.
List the disclosures which must be made if an accounting policy is changed.
(a) Explain how an entity should select its accounting policy in relation to an item if there is no applicable international standard or IFRIC Interpretation.(b) In what circumstances may an entity
(a) Distinguish between accounting policies and accounting estimates.(b) Explain how a change in an accounting policy should be accounted for.(c) Explain how a change in an accounting estimate should
The following trial balance has been extracted from the books of Walrus plc as at 31 March 2018: The following information is also available: 1. The company's non-depreciable land was valued at
List the main types of information which should be provided in the notes which accompany and form an integral part of the financial statements.
You have been asked to help prepare the financial statements of Tanhosier Ltd for the year ended 31 March 2018. A trial balance as at 31 March 2018 is shown below. The following further information
Explain the purpose of a statement of changes in equity and list the main items that should be shown in this statement.
(a) Distinguish between current assets and non-current assets.(b) Distinguish between current liabilities and non-current liabilities.(c) Explain why these distinctions are useful.
International standard IAS1 lists seven "general features" relating to the presentation of financial statements. These are:(a) Fair presentation and compliance with international standards(b)
The qualitative characteristics of relevance, faithful representation and comparability which are identified in the IASB Conceptual Framework are some of the attributes that make financial
The Conceptual Framework states that an entity's choices of measurement bases and capital maintenance concept determine the accounting model used in the preparation of the financial statements.(a)
Define each of the five elements of financial statements. Also explain the circumstances in which an element should be recognised in the financial statements.
Identify the main classes of information that should be presented in general purpose financial reports.
(a) State the objective of general purpose financial reporting.(b) Identify the primary users of general purpose financial reports and any other parties who might find these reports useful.
Explain what is meant by a "conceptual framework" for financial reporting and list the main purposes of the IASB Conceptual Framework for Financial Reporting.
The term "regulatory framework" refers to the body of rules and regulations which apply to the financial statements of limited companies. This framework includes company law, accounting standards
A company adopts international standards for the first time when preparing its financial statements for the year to 30 June 2018. These financial statements show comparative figures for the
Explain the purpose of accounting standards (whether national or international) and identify the advantages that stem from the standardisation of accounting practice. Are there any disadvantages?
Outline the structure of an international standard (IFRS Standard or IAS Standard).
Outline the structure and functions of:(a) The IFRS Foundation.(b) The International Accounting Standards Board (IASB).(c) The IFRS Advisory Council.(d) The IFRS Interpretations Committee.
Explain the term "generally accepted accounting practice" (GAAP). Is there just one GAAP which is accepted worldwide? If not, why not?
Explain the term "regulatory framework" as it applies to financial reporting. Why is this framework needed?
What is chartism?
What are the rules that determine the residency requirements on the balance of payments?
Pick 3 currencies, and go to www.oanda.com to get their current bilateral exchange rates. Is there an arbitrage opportunity?
The main role of the International Accounting Standards Board (IASB) is to devise and publish International Financial Reporting Standards (IFRS Standards) and revised versions of International
Brenda is considering an investment in the ordinary shares of either Baker plc or Grant plc. Both companies operate in the same sector of industry and both prepare accounts to 30 September each year.
1. When and how did Danone expand into the Chinese market? What problems did Danone Group encounter while operating in China?2. How was the Danone and Wahaha JV formed? What was its structure? Why
Floothair plc is a large international airline company with three operating segments:International airline businessDomestic airline businessNon-airline business.The company reports segment
On 1 January 2016, G plc issued £2 million of 7% convertible loan stock. The holders of this stock may choose to convert the stock to ordinary shares on 1 January 2020, 2021 or 2022. The number of
The profits attributable to the ordinary shareholders of F plc are as follows:
Western Trading plc is a company which uses a variety of component parts in its manufacturing operations. One of the company's suppliers has recently gone out of business and therefore Western is now
Related party relationships are a common feature of commercial life. The objective of IAS24 Related Party Disclosures is to ensure that financial statements contain the necessary disclosures to make
On 1 October 2017 Pumice acquired the following non-current investments:(i) 80% of the equity share capital of Silverton at a cost of £13.6 million.(ii) 50% of Silverton's 10% loan notes at
The financial statements of JJ Ltd and KK Ltd for the year to 30 June 2018 are shown below:Statements of comprehensive income for the year to 30 June 2018.Statements of financial position as at 30
The following are the statements of financial position of two companies at 31 October 2018, the end of their most recent financial years:The following additional information is available:1). On 1

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