Financial Reporting (F1) Free Practice Test

Question 1

In most developed countries employers deduct the tax from employees' pay each month and then pay the tax to the tax authorities on behalf of the employee on a monthly basis.
Which THREE of the following are advantages of this system to the employee?

A. Most of the administration costs are borne by the employees.

B. There is less chance of interest and penalties being levied on the employee by the tax authorities.

C. The payment of tax is easier as the tax is deducted before the net salary is paid to the employee.

D. The tax is collected earlier than systems that assess earnings at the end of the year.

E. The responsibility for the tax calculations rests with the employer and therefore there is less chance of mistakes being made.

Correct Answer: B,C,E

Question 2

Which of the following would NOT be assessed for tax under a Pay-As-You-Earn system?

A. The wealth of an employee.

B. Benefits in kind received by an employee.

C. Profit-sharing payments received by an employee.

D. Commissions received by an employee.

Correct Answer: A

Question 3

EFG purchased an asset on 1 January 20X5 for $24,000. On that date its useful life was 5 years and residual value was expected to be nil. EFG calculates depreciation on a pro-rata basis.
The asset is reclassified as held for sale on 1 October 20X8 and is unsold on 31 December 20X8.
It is expected that the asset will be sold for S6;300 and that selling costs will be S500.
What is the amount that this asset will be included at in EFG's statement of financial position at 31 December 20X8?
Give your answer to the nearest $.

Correct Answer:

$5,800

Question 4

T T T is an online retailer. It has 1,000 units of Product X in inventory at the year end. The following information relates to Product X:

What is the amount that should be included in the cost of TTT's inventory of Product X?

A. $20,000

B. $25,350

C. $20,450

D. $22,150

Correct Answer: C

Question 5

YZ has $40,000 of plant and machinery which was acquired on 1 June 20X1.Tax depreciation rates on plant and machinery are 25% reducing balance. All plant and machinery was sold for $24,000 on 1 June 20X3.
Calculate the tax balancing allowance or charge on disposal for the year ended 31 May 20X3 and state the effect on the taxable profit.

A. A balancing allowance of $1,500 increases taxable profit.

B. A balancing charge of $1,500 reduces taxable profit.

C. A balancing charge of $1,500 increases taxable profit.

D. A balancing allowance of $1,500 reduces taxable profit.

Correct Answer: C

Question 6

OP holds an investment property purchased on 1 January 20X3 for $700,000 with a useful economic life of 25 years.
At 31 December 20X5 the fair value of the investment property was $750,000 with a revised useful economic life of 25 years from that date.
OP has been carrying the investment property using the cost model until 31 December 20X5.
The directors wish to change their valuation method to fair value in accordance with IAS 40 Investment Property.
Which of the following is the correct treatment of the revaluation gain and the value of the property in the statement of financial position at 31 December 20X5?

A. A gain of $134,000 taken to other comprehensive income and $750,000 is shown on the statement of financial position.

B. A gain of $106,000 taken to other comprehensive income and $720,000 is shown on the statement of financial position.

C. A gain of $134,000 taken to the statement of profit or loss and $750,000 shown on the statement of financial position.

D. A gain of $106,000 taken to the statement of profit or loss and $720,000 shown on the statement of financial position.

Correct Answer: C

Question 7

In accordance with the Conceptual Framework for Financial Reporting, which of the following describes the historical cost measurement basis for an asset?

A. The present value of future cash flows generated from the asset.

B. The amount paid when the asset was purchased.

C. The amount that would be received on the sale of the asset.

D. The cost to acquire an equivalent asset at the measurement date.

Correct Answer: B

Question 8

LM is preparing its cash forecast for the next three months.
Which of the following items should be left out of its calculations?

A. Rental payment on a leased vehicle.

B. Tax payment due, that relates to last year's profits.

C. Receipt of a new bank loan raised for the purpose of purchasing new machinery.

D. Expected loss on the disposal of a piece of land.

Correct Answer: D

Question 9

EF has been offering its customers a 60 day credit period, but now wants to improve its cash flow.
EF is proposing to offer a 2% discount for payment in 15 days.
Assume a 365 day year and an invoice value of $100.
Which of the following is the effective annual interest rate EF will incur for this action?

A. 35.4%

B. 17.8%

C. 13.1%

D. 63.4%

Correct Answer: B

Question 10

DE purchased an asset on 1 January 20X1 for $60,000 with a useful economic life of six years and a residual value of $3,000.
DE uses straight line depreciation for this asset.
On 31 December 20X3 the asset has a value in use of $ $28,000 and a fair value of $26,000.
Which of the following values should be used for the asset in DE's statement of financial position as at 31 December 20X3?

A. $28,000

B. $30,000

C. $26,000

D. $31,500

Correct Answer: A

Question 11

For an entity to be exempt from preparing consolidated financial statements it must meet certain criteria specified in IFRS 10 Consolidated Financial Statements.
Which of the following conditions would give exemption from preparing consolidated financial statements?

A. The parent's securities are publicly traded.

B. The parent is in the process of issuing securities in a public securities market.

C. All of the parent's subsidiaries are in one country.

D. The parent is a wholly owned subsidiary of another entity.

Correct Answer: D

Question 12

LM received notification on 10 November 20X4 from one of its customers stating they had ceased trading as they had gone into liquidation. The balance outstanding at 31 October 20X4 was $150,000.
In accordance with IAS 10 Events after the Reporting Date this event will be treated as:

Correct Answer:

Question 13

Correct Answer:

Question 14

Entity RH has an recognised a taxable profit of $1.Smillion for 20X1'. In Entity RH's resident country.
Country M, depreciation charges and entertaining expenses are disallowed expenses. Below is some information on Entitry RH's outgoings for the period:
Depreciation charged on PPE: $450,000
Political donations: $155,000
Staff parties: $3,200
Cost of updating assets: $10,000
Other expenses: $83,500
In Country M, there is a standard corporation tax of 12% charged on all corporation profits. What is Entity RH's total tax liability for this period?

A. $252,984

B. $254,184

C. $125,616

D. $234,384

Correct Answer: D

Question 15

The development of an international financial reporting standard generally goes through a number of stages.
Which of the following is NOT a stage of development?

A. Producing an exposure draft for public comment

B. Establishing an advisory committee

C. Establishing an interpretations committee

D. Developing and publishing a discussion paper

Correct Answer: C

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CIMA Financial Reporting (F1) Free Practice Test