CIMA F1 Financial statements: practice questions with answers

Question 1

Under IAS 1 Presentation of Financial Statements, which of the following items is presented in other comprehensive income for the year?

1. A A gain on the disposal of an item of plant
2. B Dividends paid to the company's equity shareholders
3. C The correction of a material prior period error in last year's depreciation
4. D A surplus arising on the revaluation of the company's head office building

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Answer: D. Other comprehensive income contains items of income and expense that other standards require or permit to be excluded from profit or loss. For F1, the key example is a revaluation gain on property, plant and equipment (IAS 16), which goes to OCI and then to the revaluation surplus. Disposal gains go to profit or loss; dividends and prior period adjustments are shown in the statement of changes in equity.

Question 2

Under IAS 7 Statement of Cash Flows, which of the following cash flows should be classified as an investing activity?

1. A Cash paid to acquire a patent from another company
2. B Payment of the principal portion of lease liabilities
3. C Cash received from issuing new equity shares
4. D Cash paid to suppliers for raw materials

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Answer: A. IAS 7: operating activities are the principal revenue-producing activities (receipts from customers, payments to suppliers and employees). Investing activities are the acquisition and disposal of long-term assets, including intangibles such as patents. Financing activities change the size and composition of equity and borrowings (share issues, loan and lease principal repayments).

Question 3

Under the IASB's Conceptual Framework for Financial Reporting, which of the following statements about materiality is correct?

1. A Materiality is an entity-specific aspect of relevance, so an item may be material because of its nature even if its amount is small
2. B The Conceptual Framework sets a uniform quantitative threshold, such as 5% of profit before tax, below which items are immaterial
3. C Information cannot be material if it is disclosed somewhere in the notes, even if it is obscured by large amounts of immaterial detail
4. D Materiality is an enhancing qualitative characteristic, alongside comparability, verifiability, timeliness and understandability

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Answer: A. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that primary users make on the basis of the financial statements. Materiality is an entity-specific aspect of relevance, based on the nature or magnitude (or both) of the items concerned in the context of the entity's own report. The Framework therefore does not specify a uniform threshold, and an item such as a related-party transaction or an illegal payment can be material because of its nature alone.

Question 4

At 31 December 20X6 Easton Co has a disposal group that is correctly classified as held for sale under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The disposal group's assets are $1,250,000 and the liabilities directly associated with them are $310,000. How should these be presented in Easton Co's statement of financial position at 31 December 20X6?

1. A Assets of $1,250,000 presented separately from other assets, and liabilities of $310,000 presented separately from other liabilities
2. B Assets of $1,250,000 presented within non-current assets until the sale is completed, because they were originally acquired for long-term use
3. C The assets kept within property, plant and equipment and the liabilities within their usual headings, with the plan to sell disclosed in a note
4. D A single net amount of $940,000 presented as a current asset held for sale

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Answer: A. IFRS 5 requires non-current assets (and the assets of a disposal group) classified as held for sale to be presented separately from other assets in the statement of financial position, normally as a separate line within current assets. The liabilities of a disposal group held for sale are presented separately from other liabilities. The assets and liabilities must not be offset and presented as a single amount.

Question 5

Which of the following statements about the revaluation model in IAS 16 Property, Plant and Equipment is correct?

1. A If one item of property, plant and equipment is revalued, the entire class of assets to which it belongs must be revalued
2. B Every revalued asset must be revalued at the end of each reporting period, whether or not its fair value is likely to have changed
3. C A company may revalue only those buildings whose fair value is higher than their carrying amount and keep the rest at cost
4. D When a revalued asset is sold, the related revaluation surplus is reclassified to profit or loss and included in the gain on disposal

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Answer: A. Under the IAS 16 revaluation model: assets are carried at fair value at the date of revaluation less subsequent depreciation and impairment; revaluations must be made with sufficient regularity that the carrying amount does not differ materially from fair value (annually only for assets whose fair value changes significantly); if an item is revalued, the entire class to which it belongs is revalued, to avoid selective revaluation and a mix of costs and values from different dates; and on disposal the revaluation surplus may be transferred directly to retained earnings, not through profit or loss.

Question 6

Which of the following statements about the optional recognition exemptions available to a lessee under IFRS 16 Leases is correct?

1. A A lease with a term of 12 months that contains an option for the lessee to purchase the asset qualifies as a short-term lease
2. B A lessee that applies the low-value exemption to one lease must apply it to all leases of the same class of underlying asset
3. C A lease of a car can qualify for the low-value exemption if the car's value is immaterial to a large lessee
4. D Whether an underlying asset is of low value is assessed on the value of the asset when new, regardless of the age of the asset leased or the size of the lessee

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Answer: D. IFRS 16 allows a lessee not to recognise a right-of-use asset and lease liability for (1) short-term leases (a lease term of 12 months or less at commencement, with no purchase option), chosen by class of underlying asset; and (2) leases of low-value assets, chosen lease by lease. The low-value assessment is made on an absolute basis, by reference to the value of the asset when new, regardless of its actual age or of how material it is to the lessee; examples are tablets, personal computers, telephones and small items of office furniture. Payments under these leases are expensed, normally on a straight-line basis.