FA: Preparing accounts

Answer: D. IFRS 18 (effective for periods beginning on or after 1 January 2027, early adoption permitted) introduces mandatory categories — operating, investing, and financing — for the income statement, with a required operating profit subtotal. This replaces the more flexible IAS 1 presentation and improves comparability. It does not allow free ordering (A). The statement of profit or loss remains a required statement (B). Income and expenses are not presented net of tax (C).

Answer: A. Under IFRS, the conventional presentation is non-current assets first (least liquid — property, equipment, intangibles), followed by current assets (more liquid — inventory, receivables, cash). This is ordered by decreasing liquidity. Some formats (notably used in the UK) present current assets first — both are acceptable under IFRS 18. The examiner expects students to know the standard IFRS presentation format. Assets are always presented separately from liabilities (D is wrong).

Answer: B. Depreciation is a non-cash charge that allocates the cost of a tangible asset over its useful life. It reduces the asset's carrying amount on the SFP (through accumulated depreciation) and is an expense in the income statement, reducing profit. It does not involve cash (A) — cash was paid when the asset was acquired. It reduces profit and thus equity — it is not merely a reserve transfer (C). It always affects the income statement (D is wrong).

Answer: C. Cost of sales = Opening inventory + Purchases − Closing inventory = £32,000 + £290,000 − £28,000 = £294,000. Gross profit = Revenue − Cost of sales = £480,000 − £294,000 = £186,000. Distribution and administrative costs (£45,000 + £38,000 = £83,000) are deducted below gross profit to give operating profit of £103,000. Option A is operating profit, not gross profit. Option B (£141,000) adds back only the administrative costs. Option D uses the wrong cost of sales.

Answer: D. Total assets = plant carrying amount (£200,000 − £75,000 = £125,000) + inventory £42,000 + receivables £38,000 + cash £15,000 = £220,000. Total liabilities = trade payables £29,000 + bank loan £60,000 = £89,000 — both the current payables and the non-current loan count as liabilities. Equity is the balancing figure: £220,000 − £89,000 = £131,000 (made up of share capital £80,000 plus retained earnings of £51,000, which are not separately stated but are implied by the balancing requirement). Option A wrongly treats equity as share capital alone, ignoring retained earnings. Option B omits trade payables from liabilities (counting only the loan) and also gets equity wrong. Option C is a £1,000 transposition of the correct equity figure. Remember: Assets = Equity + Liabilities, so equity always balances the equation once liabilities are correctly totalled.

Answer: A. Year 1: 25% × £90,000 = £22,500. Carrying amount = £90,000 − £22,500 = £67,500. The asset was purchased on 1 January and the year ends 31 December — a full year's depreciation applies. Option B forgets to deduct depreciation from carrying amount. Option C applies 25% to an incorrect base. Option D uses 20% rate.

Answer: B. Income statement rent = Cash paid − Prepayment + Accrual = £24,000 − £2,000 + £3,000 = £25,000. The prepayment (£2,000) relates to the next period — excluded from this year. The accrual (£3,000) relates to this period — included even though not yet paid. Option A uses cash paid without adjustment. Option C deducts both (wrong). Option D adds both (wrong).

Answer: C. The extended trial balance (ETB) is a working paper that adds adjustment columns to the trial balance, allowing year-end adjustments to be processed before the financial statements are prepared. Typical adjustments: depreciation charges, accruals, prepayments, inventory write-downs, allowance for receivables. The adjusted balances are then extended into income statement or SFP columns. It is not for comparatives (A), consolidations (B), or solely tax (D).

Answer: D. Profit = Closing net assets − Opening net assets − Capital introduced + Drawings = £58,000 − £45,000 − £8,000 + £12,000 = £17,000. Logic: the net asset increase of £13,000 is explained by profit minus drawings plus capital introduced. Without capital introduced or drawings, profit = £13,000 (option A). Adding drawings back (owner took money out, reducing net assets): +£12,000. Deducting new capital (owner put money in, increasing net assets): −£8,000. Profit = £13,000 + £12,000 − £8,000 = £17,000.

Answer: A. Closing cash = Opening + Receipts − Payments − Expenses − Drawings = £1,200 + £84,000 − £61,000 − £14,500 − £6,000 = £3,700. Calculation: £1,200 + £84,000 = £85,200. £85,200 − £61,000 = £24,200. £24,200 − £14,500 = £9,700. £9,700 − £6,000 = £3,700. Option B forgets to deduct drawings. Option C uses wrong subtraction. Option D is a miscalculation.

Answer: A. The adjusted cash book balance equals the corrected bank position once timing differences are removed: £12,400 + £3,200 outstanding deposits − £1,800 outstanding cheques = £13,800. The £250 bank charges do not feature in this calculation — they explain the difference between the cash book's own (unadjusted) balance and this £13,800 adjusted figure, but we are given the bank statement balance, not the cash book's starting balance, so no further adjustment is needed here. Option B (£12,150 = £12,400 − £250) wrongly deducts the bank charges from the bank statement. Option C (£12,400) makes no adjustment at all. Option D (£11,000) reverses the signs — deducting the outstanding deposits and adding back the outstanding cheques. Remember: only timing differences (items the business already knows about but the bank hasn't processed) adjust the bank statement figure; items the bank knows about first (charges, standing orders) adjust the cash book.

Answer: C. The bank reconciliation starts with the bank statement balance and adjusts for items in the cash book not yet on the bank statement. An unpresented cheque has been deducted in the cash book (reducing the cash book balance) but not yet deducted by the bank. To reconcile: bank balance + unpresented cheques = cash book balance. £8,500 + £700 = £9,200 ✓. The examiner highlights that students confuse which balance gets adjusted. Outstanding deposits are added to the bank balance; unpresented cheques are added to the bank balance (not deducted) in the reconciliation.

Answer: D. Sales ledger control: Opening £41,000 (Dr) + Credit sales £96,000 (Dr) − Cash receipts £88,000 (Cr) − Discounts allowed £2,500 (Cr) − Bad debt written off £1,800 (Cr) = £41,000 + £96,000 − £88,000 − £2,500 − £1,800 = £44,700. This is a debit balance (asset — amounts owed by customers). Options A, B and C contain errors in deducting the cash receipts, discounts allowed and irrecoverable debt.

Answer: A. Net pay = Gross wages minus PAYE income tax and employee NI contributions. The employer withholds these deductions from employees' pay and pays them to HMRC. The employee receives only the net amount. The employer's NI and pension contributions are additional costs above gross wages — not included in the employees' net pay calculation. This is a fundamental payroll concept tested regularly.

Answer: B. Profit available for sharing = £80,000 − Salaries (£15,000) − Interest on capital (£4,000 + £2,500) = £80,000 − £21,500 = £58,500. A's share of residual = 60% × £58,500 = £35,100. Total credited to A's current account = Salary £15,000 + Interest £4,000 + Share £35,100 = £54,100. The question asks for the profit-sharing element only = £35,100. Option A is 60% of total profit before appropriations. Option C is the residual profit (before split). Option D is 40% of total profit.

Answer: A. Two steps are needed. First, update the cash book for items the bank already knew about but the cash book did not: deduct the bank charges (£900) and add the standing order receipt (£1,800). Adjusted cash book = £14,200 − £900 + £1,800 = £15,100. Second, prove this figure from the bank side using only timing differences (items the cash book already knew about but the bank hasn't processed yet): £12,700 + £4,200 outstanding deposits − £1,800 unpresented cheques = £15,100. Both routes agree at £15,100, confirming the reconciliation is complete. Option B ignores the bank charges and standing order, which genuinely belong in the cash book. Option C takes the unadjusted bank figure and makes no adjustments at all. Option D (£13,300 = £14,200 − £900) adjusts for the bank charges only, forgetting the standing order receipt. The rule: items the bank knows first adjust the cash book; items the cash book knows first adjust the bank statement total.

Answer: C. The payment covers July to June (12 months). At 31 December, 6 months have elapsed (July–December) and 6 months remain (January–June next year). Prepayment = £18,000 × 6/12 = £9,000. This is shown as a current asset in the SFP. Income statement charge = £9,000 (6 months' rent for the current period). Option A charges the full payment. Option B suggests 4 months remaining. Option D suggests 8 months remaining.

Answer: C. Annual interest = £200,000 × 6% = £12,000, paid in two instalments of £6,000 (31 March and 30 September). After the 30 September payment, interest continues to accrue but is not paid again until the following 31 March. At the 31 December year end, three months have accrued and remain unpaid — October, November and December. Accrual = 3/12 × £12,000 = £3,000. Option A (£6,000) is one full instalment — a half-year's interest, not the three months actually outstanding. Option B (£12,000) charges a full year, ignoring the two payments already made during the year. Option D (£9,000) treats nine months as outstanding, as if accruing from the 31 March payment date instead of the most recent one. The accrual always covers only the period from the last payment date to the year end.

Answer: B. Cost of sales = Opening inventory + Purchases + Carriage inwards − Returns outwards − Closing inventory = £25,000 + £180,000 + £3,500 − £6,000 − £31,000 = £171,500. Carriage inwards (delivery cost on purchases) is included in cost of goods. Returns outwards (goods returned to supplier) reduce purchases. Carriage outwards (delivery to customers) is a selling cost, not included here. Option A omits returns outwards. Option C omits carriage inwards. Option D omits closing inventory adjustment.

Answer: B. Closing retained earnings = Opening + Profit − Dividends paid − Dividends declared = £145,000 + £62,000 − £18,000 − £10,000 = £179,000. Both paid and declared dividends reduce retained earnings once declared (as the obligation exists at declaration). Option A ignores declared dividends. Option C ignores both dividend figures. Option D deducts only the declared amount.

Answer: C. A suspense account is a temporary holding account for items that cannot be posted correctly immediately. Any remaining balance at year end means there are unresolved items — errors not yet corrected or missing information. Publishing financial statements with suspense balances would produce inaccurate results. The account is cleared by investigation and correct posting, not automatically (A) or transferred to equity (B). It does not appear in published financial statements (D).

Answer: C. Income statement charge for irrecoverable debts and allowance movement: Bad debt written off: £800 (debit to IS). Increase in allowance: £4,500 − £3,200 = £1,300 (debit to IS). But the write-off reduces the gross receivables balance, so the allowance calculation may be based on post-write-off receivables. Total IS charge = £800 + £1,300 = £2,100. Option A is only the allowance increase. Option B is the closing allowance only. Option D is only the write-off.

Answer: D. A sole trader does not have share capital — equity consists of the capital account: opening capital + profit for the year − drawings (amounts taken out by the owner). Share capital and share premium (A) are for limited companies. Dividends and loan interest (B) are not capital account items. Assets and liabilities (C) are SFP items, not equity components.

Answer: D. Expense = Opening accrual (reverse) + Cash paid + Closing accrual = −£1,400 + £16,800 + £1,900 = £17,300. The opening accrual was already charged last year, so reversing it removes it from this year. The closing accrual adds this year's uninvoiced cost. Formula: Expense = Cash paid − Opening accrual + Closing accrual. £16,800 − £1,400 + £1,900 = £17,300. Option A uses cash only. Option B adds rather than netting. Option C deducts the wrong way.

Answer: C. Original annual depreciation = £60,000 ÷ 10 = £6,000. After 4 years: carrying amount = £60,000 − (4 × £6,000) = £36,000. Revised depreciation = Remaining carrying amount ÷ Revised remaining life = £36,000 ÷ 4 = £9,000. Under IAS 16, changes in depreciation estimates are applied prospectively — no restatement of prior years. Option A is the original charge. Option B uses total 8 years from the start. Option D charges the full carrying amount in one year.

Answer: A. Bonus issue: 1 for 4 × 400,000 shares = 100,000 new shares. Nominal value of new shares = 100,000 × £0.50 = £50,000. Journal: Dr Share premium £50,000, Cr Share capital £50,000. After: Share capital = £200,000 + £50,000 = £250,000. Share premium = £150,000 − £50,000 = £100,000. The bonus issue transfers from share premium to share capital — no cash received. Option B uses all the share premium. Option C doesn't change share capital. Option D doesn't reduce the premium.

Answer: A. Profit-reducing adjustments: Depreciation −£14,000 (expense). Accrued expenses −£3,500 (expense). Prepaid income −£2,000 (income recognised in error for next period — reduces income). Irrecoverable debt −£1,200 (expense). Total reduction = £14,000 + £3,500 + £2,000 + £1,200 = £20,700. All four items reduce profit. Option C (£18,700) omits the prepaid income adjustment. Option B (£16,500) does not correspond to any correct combination of the adjustments. Option D includes only depreciation.

Answer: D. Under the deferred income approach (IAS 20), the grant is initially recognised as deferred income and then released to the income statement on a systematic basis over the asset's life — matching the pattern in which the depreciation expense is recognised. Annual release = £60,000 ÷ 5 = £12,000 per year. This offsets the depreciation expense and reflects the benefit of the grant over the asset's life. Option A recognises all in year 1 (no matching). Option B uses the asset's depreciable amount. Option C is not a grant accounting approach.

Answer: D. Closing = Opening + Profit − Dividends → Opening = Closing − Profit + Dividends = £187,000 − £54,000 + £22,000 = £155,000. Option A (£209,000) adds back the dividends but ignores the profit. Option C (£241,000) adds the profit instead of deducting it. Option B (£163,000) contains an arithmetic error.

Answer: B. In the consolidated cash flow statement, the acquisition is shown net: the cash paid for the subsidiary (£250,000) minus the cash and cash equivalents held by the acquired subsidiary (£30,000) = net outflow of £220,000 under investing activities. This avoids double-counting the subsidiary's cash. The gross outflow (A) does not net off the acquired cash. Acquisitions are financing-linked but the cash flow appears in investing (C). It is a cash transaction in the consolidated accounts (D is wrong).

Answer: B. Post-revaluation depreciation = £180,000 ÷ 12 = £15,000 per year. Pre-revaluation depreciation would have been £120,000 ÷ 12 = £10,000. Additional depreciation due to revaluation = £15,000 − £10,000 = £5,000. IAS 16 permits an annual transfer of this additional depreciation (£5,000) from revaluation surplus to retained earnings — realising the revaluation incrementally as the asset is used. This is optional but common. Option A uses pre-revaluation rate. Option C has wrong transfer amount. Option D incorrectly states no transfer is permitted.

Answer: A. Receipts and payments accounts record actual cash flows — no accruals, prepayments, or depreciation. They are simple but do not show the true economic performance. Income and expenditure accounts apply the accruals concept — recognising income when earned and expenses when incurred — producing a surplus or deficit that reflects the period's economic activity. Size is not the determining factor (B). Both produce a surplus/deficit (C — 'profit or loss' is commercial terminology; not-for-profits use 'surplus/deficit'). They produce different results due to timing differences (D is wrong).

Answer: D. Under the accruals concept and IAS 19, employee benefits earned in the period must be recognised as a liability and expense in the period they are earned. The employees have already provided the services in the current year — the bonus is an obligation at year end. It must be accrued: Dr Staff costs £45,000, Cr Accruals £45,000. Option A treats the liability as if matched by an asset (incorrect — no future benefit to the business). Option B applies cash accounting. Option C delays recognition inappropriately.

Answer: C. Under IAS 40, when an investment property transfers to owner-occupied PPE, it is reclassified at its current fair value at the date of transfer. The fair value at transfer (£2,200,000) becomes the deemed cost for PPE purposes. The movement from carrying amount to fair value is treated as a revaluation — the gain (£200,000) goes to revaluation surplus (OCI), not to profit or loss. This is the deemed cost revaluation on reclassification. Option A ignores fair value uplift. Option B incorrectly routes the gain through P&L. Option D fails to update to current fair value.