ACCA FA EXAM QUESTIONS WITH COMPLETE SOLUTIONS, Exams of Fashion Business Basics

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ACCA FA EXAM QUESTIONS WITH COMPLETE

SOLUTIONS

Sole Trader - Correct answer this is the simplest form of business entity where a business is owned and operated by one individual. With this form of entity there is no distinction in law between and owner and the business. Partnership - Correct answer this is similar to a sole trader in that the owners of the partnership share all the profits and have unlimited liability for the losses and debts of the business. The key distinction is that there are at least two owners. Limited Liability Company - Correct answer this type of business entity differs from sole traders and partnerships. Limited liability companies are established as separate legal entities which make them distinct from their owners. The framework - Correct answer presents the main ideas, concepts and principles upon which all IFRS Standards, and therefore financial statements, are based. SPL elements - Correct answer Income Expenses SFP elements - Correct answer Assets Liabilities Capital Asset - Correct answer A present economic resource controlled by the entity as a result of past events Liability - Correct answer A present obligation of the entity to transfer an economic resource as a result of past events Capital/Equity - Correct answer The residual interest in the assets of the entity after deducting all its liabilities Income - Correct answer Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims Expense - Correct answer Decreases in assets, or increases in liabilities, that result in a decrease in equity, other than those relating to distributions to holders of equity claims Fundamental Qualitative Characteristics - Correct answer 1. Relevance

2. Faithful Representation Enhancing Qualitative Characteristics - Correct answer 1. Comparability

2. Verifiability
3. Timeliness
4. Understandability Materiality - Correct answer If an item's omission or misstatement is likely to change the perception or understanding of the user of that information. Substance over form - Correct answer The economic substance of transactions must be accounted for, and not just their strict legal form. Going Concern - Correct answer financial statements are presented on the basis that the entity will continue to trade for the foreseeable future. The business entity - Correct answer financial information is recorded and reported separately from the owner's personal financial information The accruals basis of accounting - Correct answer Transactions are recorded when revenues are earned and when expenses are incurred. This pays no regard to timing of cash receipts and payments. Prudence - Correct answer The exercise of caution when making judgements under conditions of uncertainty. Consistency - Correct answer use of the same accounting principles and methods from year to year. IFRS Foundation - Correct answer Body with overall responsibility for development, publication and promotion of IFRS Standards IASB - Correct answer Develops and publishes IFRS Standards. IFRS IC - Correct answer Assists on queries relating to IFRS Standards. IFRS AC - Correct answer Advises the IASB. Quotation - Correct answer To establish price from various suppliers. Purchase Order - Correct answer Sent to suppliers as a request for supply. Sales Order - Correct answer Cross checked with order placed with customer. Sent to stores/warehouse to process the order. Goods Dispatched Note - Correct answer Provided by supplier. Checked with goods received and purchase order.

Goods Received Note - Correct answer Produced by business receiving the goods as proof of receipt. Matched with delivery note. Statement - Correct answer Issued by the supplier. checked with other documents to ensure amount owing is correct. Invoice - Correct answer Issued by supplier of goods as a request for payment. Credit Note - Correct answer Issued by supplier. Checked with documents regarding goods returned. Debit Note - Correct answer Issued by the business receiving the goods. Cross checked to credit note issued by supplier. Remittance Advice - Correct answer Sent to supplier as notification of payment. Receipt - Correct answer Issued by seller indicating that payment was received. Book of prime entry - Correct answer The place where a transaction is initially recorded in the accounting records of the business. It is a list of similar transactions in date/sequential order which is periodically totalled. Totals are then posted to general or nominal ledger. Imprest System - Correct answer A way to account for petty cash by maintaining a constant balance in the petty cash account. At any time, cash plus petty cash vouchers must total the amount allocated to the petty cash fund. The journal - Correct answer A book of prime entry used to record transactions not recorded in any other book of prime entry. General/nominal ledger - Correct answer The overall system or set of individual ledger accounts maintained by a business entity to record transactions. Accounting Equation - Correct answer Assets = Equity + Liabilities Ledger account - Correct answer A record of the transactions relating to a particular item e.g cash, sales revenue, or receivables. Receivables - Correct answer Amounts due from individuals and companies that are expected to be collected in cash. Payables - Correct answer Amounts owed to vendors for merchandise or services purchased on credit. Trial Balance - Correct answer A list of all ledger balances brought down at a particular date or point in time. Prepared regularly to check for errors in the ledger accounts.

Training Account - Correct answer Sales - Cost of Sales = Gross Profit, records the trading activities of the business and is at the top of SPL Sundry income - Correct answer Bank interest, rent receivable, income from investments, on the SPL Carriage inwards - Correct answer Transport costs of bringing goods/materials into the firm and added to purchases on SPL Carriage outwards - Correct answer cost of transporting goods from the firm to its customers and added to expenses on SPL Corporate Governance - Correct answer The system by which an organisation is directed and controlled, at its most senior levels, in order to achieve its objectives and meet the necessary standards of accountability and probity. Historic Cost - Correct answer The cost of an asset when it was first purchased. In times of rising prices this tends to understate asset values and overstate profits. Memorandum ledger - Correct answer Ledgers for each receivable customer or payable supplier. Trade Discount - Correct answer A reduction in the list price granted to customers. Removed at point of sale before any other discount. Settlement Discount - Correct answer a reduction in the amount repayable by a credit customer in return for early repayment. Added to invoice amount depending on customers likeliness to receive it. Discount received - Correct answer Discount offered by a supplier (income) Discount allowed - Correct answer Discount offered to customers (income reducer) Sales tax - Correct answer A tax imposed by the government on the supply of good and services. Added at point of sale and collected by seller to pass to tax authority. Sales tax non-registered entities - Correct answer Not registered for sales tax and therefor not able to charge sales tax on their products or reclaim sales tax on purchases. Accounts gross purchases. Output tax - Correct answer Additional amount added to sales of goods and services to customers. Input tax - Correct answer Additional amount added to purchases of goods and services from a supplier.

Net selling price - Correct answer Tax exclusive. List price. 100% Gross selling price - Correct answer Tax inclusive. Cash paid. 100% + tax% Sale with sales tax - Correct answer Dr cash/ payables Gross(100%+tax%) Cr revenue Net(100%) Cr sales tax(tax%) Purchase with sales tax - Correct answer Dr purchases Net(100%) Dr sales tax(tax%) Cr cash/receivables Gross(100%+tax%) Cost of sales - Correct answer Opening inventory + purchases - closing inventory Gross Profit - Correct answer Sales revenue - cost of sales Closing inventory - Correct answer Any inventory held at the end of an accounting period will be carried in to next period where it will be matched to revenue in that period. Current asset in SFP. Opening inventory - Correct answer Any inventory brought forward in to current accounting period. Must be matched to revenue in the current accounting period. Expense in P+L. IAS 2 - Inventories - Correct answer Inventory shall be measured at the lower of cost and net realisable value Inventory cost - Correct answer All expenditure incurred to bring the product or service to its present location or condition. Eg. Cost of purchase, material costs, import duties, carriage inwards, cost of conversion. Net realisable value (NRV) - Correct answer Revenue expected to be earned in the future when the goods are sold, less any further costs to sell. IAS 1 Presentation of Financial Statements - Correct answer Entities must disclose the accounting policies adopted in preparing the financial statements. Unit cost - Correct answer Items of inventory that are not interchangeable should be valued at their individual cost of purchase. FIFO - Correct answer The first items of inventory received are assumed to be the first ones sold.

Periodic AVCO - Correct answer Calculated only at the end of the accounting period by totalling cost of inventory purchased over units of inventory purchased to obtain an average unit cost which can be applied to remaining inventory. Continuous AVCO - Correct answer An updated average cost per unit of inventory is recalculated after every purchase of new inventory. Sales are then accounted for at the latest average cost per unit. Overvalued inventory - Correct answer Assets overstated on SFP Profit overstated on SPL Undervalued inventory - Correct answer Assets understated in SFP Profit understated in SPL Non-current assets - Correct answer Used for more than one accounting period. Not acquired for resale Tangible or intangible Used to generate income directly or indirectly for the entity Not liquid. Intangible non-current assets - Correct answer Goodwill, development costs, licenses, patents. Tangible non-current assets - Correct answer Land, buildings, motor vehicles, machinery, equipment Capital expenditure - Correct answer Expenditure on: The acquisition of non-current assets Increasing non-current assets earning capacity Long term benefits Revenue expenditure - Correct answer Expenditure on: Current assets Admin costs Maintenance Current accounting period and used to generate revenue on the business. Purchase of non-current assets - Correct answer Dr non-current asset account Cr cash/payables account IAS 16 Property, Plant and Equipment - Correct answer The cost of a non-current asset is any amount incurred to acquire the asset and bring it into working condition.

IAS 16 Depreciation - Correct answer The systematic allocation of the depreciable amount of an asset over its useful life. Straight-line method - Correct answer Allocates an equal amount of depreciation to each year of the asset's useful life. (Original cost - estimated residual value) / estimated useful life Reducing balance method - Correct answer A method of depreciation that reduces the value of a fixed asset by the same percentage each year throughout its useful life. X% x Carrying Amount Carrying amount - Correct answer The cost left to account for on a non-current asset. Original cost - accumulated depreciation Accumulated Depreciation - Correct answer the total amount of depreciation expense that has been recorded since the purchase of an asset. Accounting for depreciation - Correct answer Full years depreciation in year of purchase and none in year of disposal or monthly/pro-rate charge. Annual Depreciation - Correct answer Dr depreciation expense account (SPL) Cr accumulated depreciation (SFP) Changing Depreciation Estimates - Correct answer Update estimate of residual value or useful life and only account for depreciation based on these estimates going forward. Non-current asset register - Correct answer A list of all non-current assets owned by the entity including locations, types, descriptions, and costs of all non-current assets. Not part of the accounting system, part of internal controls. Disposal of a non-current asset - Correct answer Either abandoned or cost. Profit or loss is calculated. Proceeds - carrying amount Disposing a non-current asset - Correct answer Dr disposal account Cr non-current asset (carrying amount) Dr accumulated depreciation (acc dep'n) Cr disposal account Dr cash/receivables (proceeds) Cr disposal account

B/f = profit or loss Part exchange agreement - Correct answer When an old asset is provided in part settlement of the amount due on the purchase of a new asset. Part exchange allowance - Correct answer Cost of asset - cash paid for asset Disposing a non-current asset using part exchange - Correct answer Dr disposal account Cr non-current asset (carrying amount) Dr accumulated depreciation (acc dep'n) Cr disposal account Dr non-current assets (PEA) Cr disposal account Dr non-current assets (amount payable) Cr cash/payables B/f = profit or loss IAS 16 Revaluation - Correct answer If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. Revaluing a non-current asset - Correct answer Dr non-current asset cost (revaluation - original cost) Dr accumulated depreciation (acc dep'n) Cr revaluation surplus (revaluation - carrying amount) Recalculate depreciation and apply. IAS 38 Intangible Assets - Correct answer An identifiable non-monetary asset without physical substance Identifiable asset - Correct answer Separable Arises from contractual or other legal rights intagible assets - Correct answer Purchased or internally generated. Purchased ones are capitalised where internally generated are not recognised in the financial statements.

Recognising intangible assets - Correct answer It should meet the definition of an intangible asset The cost can be reliably measured It is probable that future economic benefits will be received by the entity from it. IAS 38 Research - Correct answer Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding IAS 38 Development - Correct answer The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use Development costs - Correct answer Separate project Expenditure identifiable and reliably measured Commercially viable Technically feasible Overall profitable Resources available to complete IAS 38 Amortisation - Correct answer The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life Impairment review - Correct answer An intangible asset with an indefinite useful life (or a useful life that cannot be reliable estimated) should not be amortised. Instead it will be subject to an annual review to ensure the carrying amount in the SFP does not exceed its recoverable amount. Disclosure Requirements for capitalised development costs - Correct answer The amortisation method used and the expected period of amortisation A recognition of the carrying amounts at the beginning and at the end of the period, showing new expenditure incurred, amortisation and amounts written off because a project no longer qualifies for capitalisation Amortisation charged during the period Total amount of research and development expenditure recognised as an expense during the period. Accrued expenses - Correct answer Expenses that have been incurred but not yet paid at end of accounting period. Dr Expense Account (SOPL) Cr Accrual Account (SOFP) Prepaid expenses - Correct answer Expenses relating to the following year have been paid prior to the current accounting period end.

Dr Prepayment account (SOFP) Cr Expense Account (SOPL) Accrued income - Correct answer Income has been earned in the accounting period but cash has not been received. Dr Accrued income account (SOFP) Cr income account (SOPL) Prepaid income - Correct answer Income has been received during the current accounting period which relates to the next accounting period. Dr Income account (SOPL) Cr Prepaid income (SOFP) Aged receivables analysis - Correct answer A list ordered in account name showing the total owed by each receivable and analysed according to age. Credit limits - Correct answer The maximum amount of credit that the entity will provide a customer. Irrecoverable debts - Correct answer When it becomes likely that a customer is unlikely to pay, the receivable balance must be removed (since it is no longer an asset) and transferred to the SOPL as an expense. Dr Irrecoverable debt expense account Cr trade receivables ledger control account Irrecoverable debts recovered - Correct answer Dr Trade receivables ledger control account Cr Irrecoverable debts expense account Dr Bank Cr Trade receivables ledger control account Allowance for receivables - Correct answer Established to account for the receivable at its estimated recoverable amount Dr Irrecoverable debts expense Cr Allowance for receivables Specific allowance - Correct answer An allowance for specific customers who are known to be in financial difficulty or disputing an invoice. Doubtful debts - Correct answer An allowance that is created in the expectation that not all accounts receivable will pay.

Estimating allowance for receivables - Correct answer Using current economic and financial data to evaluate the impact upon the ability of individual customers to pay amounts outstanding Preparing and reviewing aged receivables analysis and assessing the ability of individual customers to pay amounts due, including awareness of any disputes or other communication with customers. Changes in allowance for receivables - Correct answer Only the movement in the allowance account is transferred to irrecoverable debts. Increase Dr Irrecoverable debts expense Cr Allowance for receivables Decrease Dr Allowance for receivables Cr Irrecoverable debts expense Legal obligation - Correct answer Enforceable by operation of law Constructive obligation - Correct answer Established by an entity having established or published policies and practices which creates a valid expectation that those policies or practices will be upheld IAS 37 Provisions - Correct answer A liability of uncertain timing or amount Recognising a provision - Correct answer Estimate of the potential cost of the uncertain event and immediate recognition in the financial statements Dr Expenses Cr Provision IAS 37 Contingent Liabilities - Correct answer A possible obligation that arises from past events A probable obligation that arises from past events but the amount of the obligation cannot be measured with sufficient reliability IAS 37 Contingent Assets - Correct answer A possible asset that rises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity Accounting for contingent liabilities - Correct answer Virtually certain >95% - Provide Probable 51% - 95% - Provide

Possible 5% - 50% - Disclosure note Remote <5% - Ignore Accounting for contingent assets - Correct answer Virtually certain >95% - Recognise Probable 51% - 95% - Disclosure note Possible 5% - 50% - Ignore Remote <5% - Ignore IAS 37 Disclosures - Correct answer When there is a requirement to provide for a contingent liability, the liability is reflected in the financial statements, but called a provision in order to highlight the uncertainty relating to it The movement in the provision is recorded in the financial statements each year When disclosure is made by note, the note should state the nature of the contingency,the uncertain factors that may affect the future outcome, and an estimate of the financial effect Debt - Correct answer Holders are entitled to some form of repayment and interest. Equity - Correct answer Holders are not entitled to any mandatory repayment. Instead they share the 'residual assets' of the business when it ceases Ordinary/Equity share capital - Correct answer The company has no obligation to pay a dividend or repay capital Classified within equity in the SOFP Loan notes - Correct answer The company is required to pay the loan holder an annual interest amount with the full debt repaid at a later date in time Classified as a liability on the SOFP Interest classified as a financial charge shown as an expense on the SOPL Preference shares - Correct answer Either debt or equity depending on contractual terms Redeemable preference shares - Correct answer Obligation to repay Liability on SOFP Dividends shown as financial charge (expense) on SOPL Irredeemable preference shares - Correct answer No obligation to repay Equity of SOFP