Advanced Financial Reporting (F2) Free Practice Test

Question 1

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. $30,000

B. $230,000

C. $210,000

D. $40,000

Correct Answer: B

Question 2

The following information has been extracted from the financial records of DEF for the year ended 31 December 20X2.

What is the operating cycle of DEF at 31 December 20X1?
Assume there are 365 days in the year.
All workings should be rounded to whole days.
Give your answer in whole days.
? days.

Correct Answer:

80, 81

Question 3

ST granted 1,000 share appreciation rights (SARs) to its 100 employees on 1 December 20X7. To be eligible, employees must remain employed for 3 years from the grant date. In the year to 30 November
20X8, 10 staff left and a further 20 were expected to leave over the following two years. The fair value of each SAR was $12 at 1 December 20X7 and $15 at 30 November 20X8.
What is the accounting entry to record this transaction for the year to 30 November 20X8?

A. Dr Staff costs $350,000, Cr Non-current liabilities $350,000

B. Dr Staff costs $350,000, Cr Equity $350,000

C. Dr Staff costs $280,000, Cr Equity $280,000

D. Dr Staff costs $280,000, Cr Non-current liabilities $280,000

Correct Answer: A

Question 4

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. 55.6 cents

B. 50.0 cents

C. 66.7 cents

D. 58.8 cents

Correct Answer: A

Question 5

XY acquired 75% of the equity shares of LM on 31 December 20X3. LM acquired 60% of the equity shares of JK on 31 December 20X4 for $950,000. XY measured the non controlling interest in JK at the date of acquisition using the proportionate share of the fair value of the net assets acquired.
The fair value of JK's net assets was $850,000 at 31 December 20X4.
What is the value of goodwill that XY will include in its consolidated statement of financial position at 31 December 30X4 in respect of JK as a result of gaining indirect control?

A. $330,000

B. $202,500

C. $567,500

D. $440,000

Correct Answer: A

Question 6

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. 12.9%

B. 13.2%

C. 10.4%

D. 10.7%

Correct Answer: C

Question 7

The financial statements of ST at 31 December 20X9 include the following balances in respect of shares classed as equity:

The profit after tax for the year ended 31 December 20X9 is $200,000.
What is ST's basic EPS for the year to 31 December 20X9?

A. 10.0 cents

B. 8.8 cents

C. 17.5 cents

D. 20.0 cents

Correct Answer: B

Question 8

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.
? %

Correct Answer:

12.7, 12.67, 12.6

Question 9

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?

A. 16.2%

B. 8.6%

C. 9.4%

D. 17.0%

Correct Answer: D

Question 10

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?

A. Fair value at 1 January 20X8 will be used to value the options.

B. The calculation of the charge for the year will be adjusted for actual and estimated leavers.

C. Fair value at 31 December 20X8 will be used to value the options.

D. The credit entry will be to non-current liabilities.

E. The credit entry will be to equity.

F. The calculation of the charge for the year will be adjusted for actual leavers only.

Correct Answer: A,B,E

Question 11

CD has 200,000 equity shares with a current market value of $2.50 each. The annual dividend of $0.50 a share is about to be paid.
CD also has redeemable debt with a nominal value of $100,000.
This is currently trading at $90 for each $100 of nominal value.
The cost of equity is 20% and the post tax cost of debt is 6%.
What is CD's weighted average cost of capital?
Give your answer in % to one decimal place. ? %

Correct Answer:

17.4, 17.42, 17.43, 17.40

Question 12

JK has calculated its inventory holding period:

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

A. A substantial contract is due to be dispatched early in April 20X8.

B. JK is enforcing stringent inventory control techniques following management instructions.

C. In January 20X8 a major competitor entered the market in which JK operates.

D. JK's main supplier offered a significant one-off discount for purchases made in March 20X8.

E. It has been difficult to obtain one of JK's main components due to import issues with its overseas supplier.

F. JK suffered industrial action by its production staff in the period December 20X7 to February 20X8.

Correct Answer: A,C,D

Question 13

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?

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

B. 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.

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

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

Correct Answer: D

Question 14

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%?

A. The project is in a different industry to XY's current operations and funded entirely by equity.

B. The project is an extension of XY's current operations and is funded 40% by debt and 60% by equity.

C. The project is an extension of XY's current operations and is funded by equal amounts of debt and equity.

D. The project is in a different industry to XY's current operations and is funded by equal amounts of debt and equity.

Correct Answer: B

Question 15

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

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

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

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

Correct Answer: B

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CIMA Advanced Financial Reporting (F2) Free Practice Test