FA: Financial statements

Answer: B. Gross profit = £650,000 − £390,000 = £260,000. Operating profit = £260,000 − £52,000 − £78,000 = £130,000. Profit before tax = £130,000 − £12,000 = £118,000. Profit after tax = £118,000 − £25,600 = £92,400. Option A is profit before tax. Option C is operating profit. Option D deducts tax from operating profit (ignoring finance costs).

Answer: C. OCI captures gains and losses that are not recognised in profit or loss — they go directly to equity. Under IAS 16 (or IFRS 18), revaluation gains on PPE are recognised in OCI (accumulated in revaluation surplus). Gains on disposal of PPE (A) pass through profit or loss. Revenue (B) and finance income (D) are both income statement items.

Answer: D. Current liabilities are obligations expected to be settled within 12 months of the reporting date. A bank overdraft repayable on demand could be called at any time — it is a current liability. A 5-year loan with 4 years remaining (A) is a non-current liability. Deferred tax (B) is non-current — it reverses over future periods beyond 12 months typically. Revaluation surplus (C) is equity, not a liability.

Answer: A. Cash generated from operations = Operating profit + Depreciation (non-cash) ± Working capital changes. = £180,000 + £35,000 − £12,000 (inventory increase uses cash) + £8,000 (receivables decrease releases cash) + £15,000 (payables increase conserves cash) = £226,000. Depreciation is added back (non-cash expense). Working capital: inventory up = cash out; receivables down = cash in; payables up = cash in. Option B ignores working capital changes. Option C omits one adjustment. Option D is just operating profit.

Answer: B. The actual cash received — the £30,000 sale proceeds — is the cash inflow, and proceeds from disposing of non-current assets are classified under investing activities. The carrying amount of the machine is £80,000 − £55,000 = £25,000, so the profit on disposal is £30,000 − £25,000 = £5,000. That £5,000 profit is non-cash: under the indirect method it is deducted from profit in the operating activities section so it isn't double-counted, but it is never itself shown as a cash inflow. Option A shows the correct £5,000 profit figure but in the wrong place — it is a reconciling adjustment in operating activities, not a cash inflow. Option C uses the gross cost rather than the cash actually received. Option D puts the right figure (£30,000) in the wrong section — proceeds on disposal always belong in investing activities.

Answer: C. Financing activities relate to changes in the size and composition of equity and borrowings — how the entity funds itself. Repaying a bank loan reduces a financing liability → financing activity. Paying suppliers (A) is an operating activity (trade payables are working capital). Purchasing machinery (B) is an investing activity (acquisition of non-current asset). Interest received (D) is an investing activity under IAS 7 (or could be operating — entities have a choice, but financing is not an option).

Answer: D. Notes form an integral part of the financial statements — they provide the basis of preparation, accounting policies, and detailed disclosures required by specific IFRS that supplement (not replace) the primary statements. They cannot override the primary statements (A) — if there is a contradiction, the primary statement is authoritative. Notes present historical disclosures (B — forecasts are not required financial statement notes). AGM minutes (C) are governance documents, not part of the financial statements.

Answer: D. Cash generated from operations = £95,000 + £18,000 depreciation − £7,000 inventory increase − £4,000 payables decrease − £9,000 receivables increase = £93,000. Less tax paid £22,000 = £71,000 net cash from operating activities. Investing: purchase of PPE −£35,000. Financing: share issue +£50,000 − dividends paid £15,000 = +£35,000. Net increase in cash = £71,000 − £35,000 + £35,000 = £71,000. Option A (£86,000) omits the dividends paid. Option C (£93,000) is cash generated from operations, before tax, investing and financing flows. Option B (£53,000) contains other errors.

Answer: B. An increase in receivables means the company has recognised more revenue than it has collected in cash — cash generated from operations is reduced. In the indirect method, we adjust operating profit for working capital changes: increase in receivables = less cash received than revenue suggests → deduct. Conversely, a decrease in receivables means more cash was collected than revenue → add. This is one of the examiner's highlighted weak areas in cash flow preparation.

Answer: C. IFRS 18 introduces three mandatory categories in the income statement: operating, investing, and financing. Income and expenses from investments in associates (under the equity method) are classified in the investing category — they arise from the entity's investment activities rather than its main trading operations. This is a new requirement distinguishing IFRS 18 from the previous IAS 1 flexibility. They are not operating (A), not financing (B), and they do go through the income statement not OCI (D).

Answer: C. IAS 7 explicitly permits dividends paid to be classified as either financing activities (treating them as a cost of obtaining equity finance) or operating activities (helping users assess whether dividends can be paid from operating cash flows), as long as the chosen treatment is applied consistently from year to year. Option C captures this permitted choice and is the most complete answer. Option A is not factually wrong — financing activities is the more common UK presentation — but on its own it states only one of the two permitted treatments as if it were the only option, so it is incomplete. Option B is the same issue from the other direction. Option D is incorrect: a return on investment refers to dividends received from investments held by the entity, not dividends the entity pays to its own shareholders.

Answer: C. TERP calculation: Before rights: 4 shares at £2.40 = £9.60. Rights issue: 1 share at £1.80 = £1.80. Total value = £9.60 + £1.80 = £11.40 for 5 shares. TERP = £11.40 ÷ 5 = £2.28. The rights adjustment factor = £2.40 ÷ £2.28 = 1.053. For EPS calculation, the pre-rights shares would be multiplied by this factor to create a comparable weighted average. Option A (£2.10) uses wrong base. Option B is the rights price. Option D is the pre-rights price.

Answer: C. IFRS 8 applies to listed entities and those in the process of listing — entities whose shares or bonds are traded on public markets. Segment disclosure is required because aggregated group accounts can mask the different risk and return profiles of distinct business activities. It does not apply to all IFRS preparers (A). There is no employee (B) or revenue threshold (D) — the trigger is public accountability through traded instruments.

Answer: C. PPE movement: Opening £320,000 + Additions − Disposals at cost − Depreciation = Closing £390,000. Disposal: fully depreciated asset removed at cost = £30,000 (no NBV impact on P&L since NBV = £0). So: £320,000 + Additions − £30,000 − £45,000 = £390,000. Additions = £390,000 − £320,000 + £30,000 + £45,000 = £145,000. This is the cash paid for PPE = investing outflow. Option A (£115,000) omits the disposed asset. Option B (£70,000) only accounts for the net change in the balance. Option D (£100,000) omits the depreciation charge.

Answer: C. IAS 7 permits interest paid to be classified as either operating activities (it affects the determination of net profit, so showing it in operating helps assess the cash cost of operations) or financing activities (interest is the cost of financing). Entities must apply their chosen policy consistently and disclose it. This is an examiner-tested nuance — the standard is unusual in allowing classification choice. Investing activities (A) is not a permitted classification for interest paid. Options B and D each exclude one of the two permitted classifications.

Answer: B. A net debt reconciliation (showing movement from opening to closing net debt, analysing cash and non-cash changes) is recommended by IAS 7 but not strictly mandatory for all preparers. It helps users track how borrowings have changed. It supplements, not replaces, the financing section (C). It is useful information but IAS 7 encourages rather than mandates it for all entities (A). Net debt is one measure of financial position, but cash flow and profitability are equally important (D).

Answer: B. The statement of changes in equity shows movements in all equity components: profit for the year (increases retained earnings), OCI items like revaluation gains (affect revaluation surplus), dividends (reduce retained earnings), share issues (increase share capital/premium), and transfers between reserves. Cash received from trade customers is an operating cash flow — it affects the cash balance and receivables on the SFP but is not an equity movement. It does not appear in the SOCE.