Set 4

Question 1

Will a rights issue of shares appear on a Statement of Cash Flows?

Answer 1

It will appear under the heading Cash Flows from Financing Activities.

Question 2

Will a surplus on revaluation appear on a Statement of Cash Flows?

Answer 2

It will not appear because there has been no cash received.

Question 3

Will a bonus issue of shares appear on a Statement of Cash Flows?

Answer 3

It will not appear because there is no cash received – the shares are issued free.

Question 4

What is the difference between the Direct and Indirect methods of arriving at the ‚cash generated from operations‘ on a Statement of Cash Flows?

Answer 4

The direct method shows the actual amount of cash received and cash paid in respect of operations.The indirect method starts with the profit before tax and adjusts it to result in the cash generated

Question 5

What items appear on the Statement of Cash Flows under the heading Financing Activities?

Answer 5

• Proceeds from the issue of shares* Long term borrowings made or repaid

Question 6

What items appear on a Statement of Cash Flows under the heading Investing Activities?

Answer 6

Cash spent acquiring non-current assets Cash received from the sale of non-current assets Income from investments

Question 7

What are the three main headings that will appear on Statement of Cash Flows?

Answer 7

Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities

Question 8

According to IAS 38 – Intangible assets – how should research be treated in the financial statements?

Answer 8

Research costs should be expensed in the Income Statement.

Question 9

How is a contingent asset treated in the Financial Statements if the likelihood of the asset being confirmed is regarded as probable?

Answer 9

If it is probable, then the asset should not be recognised in the Financial Statements, but it should be disclosed by way of note.

Question 10

How is a contingent asset treated in the Financial Statements if the likelihood of the asset being confirmed is regarded as possible?

Answer 10

If it is possible, then the asset should not be recognised in the Financial Statements and should not be disclosed by way of note – it is ignored completely.

Question 11

How is a contingent liability treated in the Financial Statements if the likelihood of the liability being confirmed is regarded as remote?

Answer 11

If it is remote, then the liability should not be provided for in the Financial Statements and should not be disclosed by way of note - it is ignored completely.

Question 12

How is a contingent liability treated in the Financial Statements if the likelihood of the liability being confirmed is regarded as possible?

Answer 12

If it is possible, then the liability should not be provided for in the Financial Statements but should be disclosed by way of note.

Question 13

How is a contingent liability treated in the Financial Statements if the likelihood of the liability being confirmed is regarded as probable?

Answer 13

It is is probable, then the liability should be provided for in the Financial Statements.

Question 14

What is a contingent asset?

Answer 14

A contingent asset is a possible asset that may appear due to past events.

Question 15

What is a contingent liability?

Answer 15

A contingent liability is a possible liability that may arise due to past events.

Question 16

What is meant by the term ‚provision‘?

Answer 16

A provision is a liability of uncertain timing or amount.

Question 17

In the context of IAS 10 – Events after the reporting period – what is the treatment of a non-adjusting event?

Answer 17

The financial statements are not amended to reflect the event, but it is disclosed by way of a note if material.

Question 18

In the context of IAS 10 – Events after the reporting period – what is the treatment of an adjusting event?

Answer 18

The financial statements are amended to reflect the event.

Question 19

What are revenue reserves?

Answer 19

Revenue reserves are profits that have been earned (and retained) by the company – retained earnings and general reserve.They represent amounts owing to shareholders that can be paid out as dividend.

Question 20

What are capital reserves?

Answer 20

Capital reserves are the share premium account and the revaluation reserve. They represent amounts owing to shareholders, but this amount cannot be paid out as dividend.

Question 21

What does the share premium account record?

Answer 21

The share premium account records the excess of the amount of cash received from the issue of shares over the nominal (par) value of the shares.

Question 22

What is a bonus (scrip) issue of shares?

Answer 22

A bonus issue of shares is an issue of new shares to existing shareholders in proportion to their existing shareholdings, free of charge. No cash is received.

Question 23

What is a rights issue of shares?

Answer 23

A rights issue is an offer of new shares to existing shareholders in proportion to their existing shareholdings.

Question 24

What are the differences between ordinary and preference shares?

Answer 24

Ordinary shares have voting rights – preference shares usually do not.The dividend on ordinary shares is recommended by the directors – preference shares carry a fixed dividend.The ordinary dividend is paid out of profits left after the preference dividend has been paid.

Question 25

In consolidations, under what circumstances will a provision for unrealised profit (PURP) adjustment be necessary?

Answer 25

When one company in the group has made sales to the other company, and the other company has some of those goods in inventory at the end of the year.

Question 26

In a consolidated Statement of Financial Position, how is the share capital calculated?

Answer 26

The share capital is the share capital of the parent company.

Question 27

How is the goodwill arising on consolidation calculated?

Answer 27

It is the difference between the fair value of the subsidiary and the fair value of the net assets of the subsidiary.