Financial Reporting MCQ Quiz - Objective Question with Answer for Financial Reporting - Download Free PDF
Last updated on May 29, 2025
Latest Financial Reporting MCQ Objective Questions
Financial Reporting Question 1:
Which of the following enhances the usefulness of relevant and faithfully represented financial information?
Answer (Detailed Solution Below)
Financial Reporting Question 1 Detailed Solution
The correct option is option 2
Additional Information:
Enhancing characteristics:
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Comparability
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Verifiability
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Timeliness
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Understandability
Financial Reporting Question 2:
Which of the following is an acceptable measurement basis under the Conceptual Framework?
Answer (Detailed Solution Below)
Financial Reporting Question 2 Detailed Solution
The correct option is option 3
Additional Information:
Historical cost is one of the measurement bases outlined in the Framework.
Financial Reporting Question 3:
Which of the following is NOT one of the five elements of financial statements defined by the Conceptual Framework?
Answer (Detailed Solution Below)
Financial Reporting Question 3 Detailed Solution
The correct option is option 4
Additional Information:
Working capital is a calculated measure, not a fundamental element.
The five elements are:
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Assets
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Liabilities
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Equity
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Income
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Expenses
Working capital = Current assets – Current liabilities → not a core element.
Financial Reporting Question 4:
Jack CO
The consolidated statements of profit or loss for the Jack group for the years ended 31 December 20X9 and 20X8 are shown below.
The following information is relevant:
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On 31 December 20X9, the Jack group disposed of its entire 80% holding in Ross Co, a software development company, for $300m. The Ross Co results have been fully consolidated into the consolidated financial statements above. Ross Co does not represent a discontinued operation.
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The proceeds from the disposal of Ross Co have been credited to a suspense account and no gain/loss has been recorded in the financial statements above.
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Jack Co originally acquired the shares in Ross Co for $210m. At this date, goodwill was calculated at $70m. Goodwill has not been impaired since acquisition, and external advisers estimate that the goodwill arising in Ross Co has a value of $110m at 31 December 20X9.
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On 31 December 20X9, Ross Co had net assets with a carrying amount of $260m. In addition to this, Ross Co’s brand name was valued at $50m at acquisition in the consolidated financial statements. This is not reflected in Ross Co’s individual financial statements, and the value is assessed to be the same at 31 December 20X9.
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Ross Co is the only subsidiary in which the Jack group owned less than 100% of the equity. The Jack group uses the fair value method to measure the non-controlling interest. At 31 December 20X9, the non-controlling interest in Ross Co is deemed to be $66m.
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Until December 20X8, Jack Co rented space in its property to a third party. This arrangement ended and, on 1 January 20X9, Ross Co’s administrative department moved into Jack Co’s property. Jack Co charged Ross Co a reduced rent. Ross Co’s properties were sold in April 20X9 at a profit of $2m which is included in administrative expenses.
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On 31 December 20X9, the employment of the two founding directors of Ross Co was transferred to Jack Co. From the date of disposal, Jack Co will go into direct competition with Ross Co. As part of this move, the directors did not take their annual bonus of $1m each from Ross Co. Instead, they received a similar “joining fee” from Jack Co, which was paid to them on 31 December 20X9. These individuals have excellent relationships with the largest customers of Ross Co, and are central to Jack Co’s future plans.
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Ross Co’s revenue remained consistent at $26m in both 20X9 and 20X8 and Ross Co has high levels of debt. Key ratios from the Ross Co financial statements are shown below:
Required:
(a)Calculate the gain/loss on the disposal of Ross Co which will be recorded in:
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The individual financial statements of Jack Co; and
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The consolidated financial statements of the Jack group. (5 marks)
(b)Calculate ratios equivalent to those provided in note (viii) for the Jack group for the years ended 31 December 20X9 and 20X8. No adjustment is required for the gain/loss on disposal from (a). (3 marks)
(c)Comment on the performance and interest cover of the Jack group for the years ended 31 December 20X9 and 20X8. Your answer should comment on:
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The overall performance of the Jack group;
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How, once accounted for, the disposal of Ross Co will impact on your analysis; and
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The implications of the disposal of Ross Co for the future results of the Jack group. (12 marks)
(20 marks)
Answer (Detailed Solution Below)
Financial Reporting Question 4 Detailed Solution
(a) Gain/loss on disposal
(i) Individual financial statements of Jack Co
(ii) Consolidated financial statements of the Jack group
(b) Key ratios
(c) Comment on performance and interest cover
Overall performance
The revenue for the group for the year has actually declined in the year. The scenario states that the Ross Co revenue has remained the same in both years, so this decrease appears to represent a decline from the remaining companies in the group.
Although there has been an overall decline in revenue, the gross profit margin (GPM) has improved in 20X9 (44.9% increased to 45.8%). Ross Co has a significantly higher GPM (81%) in relation to the rest of the group, suggesting that the rest of the Jack group operates at a lower GPM.
The operating profit margin (OPM) of the group has deteriorated in 20X9 (13.5% has decreased to 11.9%). This is initially surprising due to the significant increase in the OPM of Ross Co (41% has increased to 66%). However, the increase in Ross Co’s OPM may not represent a true increase in performance in Ross Co due to the following:
Ross Co has recorded a $2m profit on disposal of its properties, which will inflate its profit from operations in 20X9.
Also, Ross Co has been charged a lower rate of rent by Jack Co, which makes the profit from operations in 20X9 higher than the previous period if the rent is lower than the depreciation Ross Co would have recorded.
This concern is further enhanced when the share of the profit of the associate is considered. This has contributed $4.6m to the profit for the year, which is nearly 40% of the overall profit of the group.
The combination of these factors raises concerns over the profitability of Jack Co and any other subsidiaries in the group, as it appears to be loss making. Some of these losses will have been made through the loss of rental income through the new arrangement.
The joining fee paid to Ross Co’s previous directors is a one-off cost paid by Jack Co. Consequently, it is included in the consolidated statement of profit or loss for the year ended 31 December 20X9. A similar amount was paid by Ross Co in the form of an annual bonus in the year ended 20X8. Therefore, 20X8 and 20X9 are comparable but the joining fee represents a cost saving for Jack Co in future years.
Interest cover
The decline in interest cover appears to be driven by both the decrease in profit from operations and an increase in finance costs. As Ross Co has a large amount of debt, and much lower interest cover than the group, this should increase in future periods.
The disposal of Ross Co appears to be surprising, given that it generates the high margins compared to the rest of the group.
The loss on disposal of Ross Co should be brought into the consolidated statement of profit or loss. This would reduce profit from operations by a further $14m and would reduce the OPM further to 5.4%.
The sale of Ross Co at a loss is very surprising given that it appears to contribute good results and has a history of strong performance.
Although selling Ross Co at a loss may be a strange move, Jack Co may believe that the real value of the Ross Co business has been secured by employing the two founding directors.
Conclusion
The disposal of Ross Co does not appear to be a good move, as the Jack group seem to be losing its most profitable element. The Jack Co directors seem to have made a risky decision to move into the software development industry as a competitor of Ross Co.
Financial Reporting Question 5:
Joey CO
The following extract is from the trial balance of Joey Co at 31 December 20X8:
The following notes are relevant:
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Joey Co made a large sale of goods on 1 July 20X8, which was also the date of delivery. Under the terms of the agreement, Joey Co will receive payment of $8m on 30 June 20X9. Currently, Joey Co has recorded $4m in revenue and trade receivables. The directors intend to record the remaining $4m revenue in the year ended 31 December 20X9. The costs of this sale have been accounted for correctly in the financial statements for the year ended 31 December 20X8. Joey Co has a cost of capital of 8% at which an appropriate discount factor would be 0.9259.
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Joey Co also sold goods to an overseas customer on 1 December 20X8 for 12m Kromits (Kr). They agreed a 60‑day payment term. No entries have yet been made to record this sale, although the goods were correctly removed from inventory and expensed in cost of sales. The amount remains unpaid at 31 December 20X8.
Relevant exchange rates are:
1 December 20X8: 6.4 Kr/$
31 December 20X8: 6.0 Kr/$
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Joey Co acquired $9m 5% bonds at par value on 1 January 20X8. The interest is receivable on 31 December each year. Joey Co incurred $0.4m broker fees when acquiring the bonds, which has been expensed to operating expenses. These bonds are repayable at a premium so have an effective rate of 8%. Joey Co has recorded the interest received on 31 December 20X8 in investment income.
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During the year, Joey Co revalued its head office for the first time, resulting in an increase in value of $12m at 31 December 20X8. Deferred tax is applicable to this gain at 25%.
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Joey Co values its investment properties using the fair value model. The investment properties increased in value by $4m at 31 December 20X8.
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The tax figure in the trial balance represents the under/over provision from the previous year. The current tax liability for the year ended 31 December 20X8 is estimated to be $3.2m.
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At 1 January 20X8, Joey Co had 30 million $1 equity shares in issue. On 1 April 20X8, Joey Co issued an additional 5 million $1 equity shares at full market price. On 1 July 20X8, Joey Co performed a 2 for 5 rights issue, at $2.40 per share. The market price of a Joey Co share at 1 July 20X8 was $3.10 per share.
Required:
(a) Produce a statement of profit or loss and other comprehensive income for Joey Co for the year ended 31 December 20X8. (15 marks)
(b) Calculate the earnings per share for Joey Co for the year ended 31 December 20X8. (5 marks)
(20 marks)
Answer (Detailed Solution Below)
Financial Reporting Question 5 Detailed Solution
Solution
(a) Statement of profit or loss and other comprehensive income
WORKING NOTES
(1) Sale with significant financing component
As the sale has a significant financing component, the initial revenue should be recorded at present value, with the discount unwound and recorded as finance income.
Therefore, the initial revenue should be $7.407m ($8m/1.08), which is taken to revenue and receivables. As $4m has been already taken, a further $3.407m must be added to revenue and receivables.
The receivable of $7.407m is then increased by 8% over the year to get to the $8m in June 20X9. As Joey Co has a reporting date of 31 December 20X8, six months’ interest should be added.
$7.407m × 8% × 6/12 = $0.296m, which is added to receivables and finance income.
(2) Overseas sale
The sale should initially be recorded at the historic rate at the date of the transaction, which is $1.875m (12m Kr/6.4). This should be recorded in revenue and receivables.
At 31 December 20X8, the unsettled receivable must be retranslated at the closing rate.
12m Kr/6 = $2m. Therefore the receivable must be increased by $0.125m, with the increase going through the profit or loss (although not through revenue).
(3) Bonds
The professional fees on the bonds must be added to the bond asset, and not expensed, resulting in a $0.4m decrease to operating expenses.
If the bonds are held at amortised cost, then:
Joey Co should record $0.752m in investment income. As only $0.45m has been recorded, a further $0.302m must be added into investment income.
(4) Revaluations
The $12m gain on the property used by Joey Co must be shown in other comprehensive income, net of the $3m deferred tax liability applicable to it.
The $4m gain on investment properties must go through the statement of profit or loss, not other comprehensive income.
(5) Tax
The tax of $0.13 in the trial balance represents an under-provision, as it is a debit balance. The $3.2m tax estimate for the year should be added to this in order to calculate the tax expense for the year.
(b) Earnings per share
12,845,000/41,870,689 (W1) = $0.307 or 30.7 cents
WORKING NOTES
(1) Weighted average number of shares
(2) Theoretical ex-rights price
TERP = $20.30/7 = $2.90
The rights fraction is the market price before the issue/TERP (3.10/2.9 OF) and should be applied to all periods up to the date of the rights issue.
Top Financial Reporting MCQ Objective Questions
Financial Reporting Question 6:
The following information of Salvatore Co is available for the year ended 31 October 20X2:
| Property | $ |
| Cost as at 1 November 20X1 | 102,000 |
| Accumulated depreciation as at 1 November 20X1 | (20,400) |
| 81,600 |
On 1 November 20X1, Salvatore Co revalued the property to 120,000. Salvatore Co's accounting policy is to charge depreciation on a straight−line basis over 50 years.On revaluation, there was no change to the overall useful life. It has also chosen to make the annual transfer of excess depreciation on revaluation in equity. What should be the balance on the revaluation surplus and the depreciation charge as shown in Salvatore Co's financial statements for the year ended 31 October 20X2?
| Depreciation Charge | Revaluation Surplus | |
| $ | $ | |
| A | 3,000 | 37,440 |
| B | 3,000 | 38,400 |
| C | 2,400 | 39,360 |
| D | 2,400 | 18,000 |
Answer (Detailed Solution Below)
Financial Reporting Question 6 Detailed Solution
The correct option is option 1
Additional Information:
- When revaluing an asset, the revaluation surplus can be identified as the difference between the revalued amount and the carrying amount of the asset = $38,400 ($120,000 - $81,600).
- As the revaluation takes place on 1 November 20X1, a full year's depreciation is calculated on the revalued amount. The new charge will take the revalued amount of $120,000 and depreciate the asset over its remaining useful life.
- Original depreciation charge: $102,000/50 years = $2,040 per annum and as $20,400 is accumulated depreciation brought forward, then the asset must have already been owned for 10 years. Therefore, the remaining useful life is 40 years.
- The new depreciation charge should be calculated as: $120,000/40 years = $3,000 per annum. The excess depreciation transfer between accumulated depreciation and revaluation surplus is $960 ($3,000 - $2,040). The balance on revaluation surplus at 31 October 20X2 is $37,440 ($38,400 - $960).
Financial Reporting Question 7:
The International Accounting Standards Board’s Conceptual Framework for Financial Reporting identifies qualitative characteristics of financial statements.
Which of the following characteristics are enhancing qualitative characteristics according to the IASB’s The Conceptual Framework for Financial Reporting?
- Relevance
- Reliability
- Understandability
- Comparability
Answer (Detailed Solution Below)
Financial Reporting Question 7 Detailed Solution
The correct option is option 1
Additional information :
- It is important to learn that the four enhancing characteristics are verifiability, comparability, understandability, and timeliness.
Financial Reporting Question 8:
Mohit acquired a new office building on 1 October 20X4. Its initial carrying amount consisted of:
The estimated lives of the building structure and air conditioning system are 25 years and 10 years respectively.
When the air conditioning system is due for replacement, it is estimated that the old system will be dismantled and sold for $500,000.
Depreciation is time-apportioned where appropriate.
At what amount will the office building be shown in Mohit’s statement of financial position as at 31 March 20X5?
Answer (Detailed Solution Below)
Financial Reporting Question 8 Detailed Solution
The Correct Answer is Option 1, i.e. 1
Additional information:
Financial Reporting Question 9:
Cisco Co owns a pharmaceutical business with a year-end of 30 September 20X4. Cisco Co commenced the development stage of a new drug on 1 January 20X4. $40,000 per month was incurred until the project was completed on 30 June 20X4, when the drug went into immediate production. The directors became confident of the project’s success on 1 March 20X4. The drug has an estimated life span of five years and time-apportionment is used by Cisco where applicable.
What amount will Cisco charge to profit or loss for development costs, including any amortisation, for the year ended 30 September 20X4?
Answer (Detailed Solution Below)
Financial Reporting Question 9 Detailed Solution
The correct option is option 4
Additional information:
Financial Reporting Question 10:
Comprehension:
The directors of Veer Co are preparing the financial statements for the year ended 30 September 20X3. Veer Co is a publicly listed company.
(1)Most of Veer Co's competitors value their inventory using the average cost (AVCO) basis,whereas Veer Co uses the first in first out (FIFO) basis. The value of Veer Co's
inventory at 30 September 20X3 on the FIFO basis, is $40 million, however on the AVCO basis it would be valued at $36 million. By adopting the same method (AVCO) as its competitors,the assistant accountant says the company would improve its profit for the year ended 30 September 20X3 by $4 million. Veer Co's inventory at 30 September 20X2 was reported as $30 million, however on the AVCO basis it would have been reported as $26.8 million.
(2)Veer Co sold a machine to Poisson SA, a French company which it agreed to invoice in €.
The sale was made on 1 October 20X6 for €250,000. €155,000 was received on 1 November 20X6 and the balance is due on 1 January 20X7.
The exchange rate moved as follows:
1 October 20X6 - €0.85 to $1
1 November 20X6 - €0.84 to $1
31 December 20X6 - €0.79 to $1
(3) After correctly accounting for the information in (1) and (2), Veer Co has earnings of $9,160,000. It had 2,000,000 ordinary $1 shares in issue during the year to 30 September
20X3. Veer Co has an additional 1,000,000 shares under option at the year end. The fair value of the shares at that date is $12.00 per share and the exercise price for the options is
$10.00 each.
The auditors of Veer Co have discovered a fundamental error in the prior year financial statements. The directors of Veer Co have agreed to correct the prior period error.
Which of the following are the disclosures which the directors should present in the financial statements?
(1) The nature of the error
(2) The amount of the correction for each item of the financial statements affected by the error and correction
Answer (Detailed Solution Below)
Financial Reporting Question 10 Detailed Solution
The correct option is option 4
Additional Information:
IAS 8 states that the nature and the amount of the error should be disclosed, detailing each of the lines affected by the adjustment and the error.
Financial Reporting Question 11:
Ryan Co is engaged in a number of research and development projects during the year ended 31 December 20X5:
Project 1 - A project to investigate the properties of a chemical compound. Costs incurred on this project during the year ended 31 December 20X5 were $34,000.
Project 2 - A project to develop a new process which will save production time in the manufacture of widgets. This project commenced on 1 January 20X5 and met the capitalisation criteria on 31 August 20X5. The cost incurred during 20X5 was $78,870 to 31 August and $27,800 from 1 September.
Project 3- A development project which was completed on 30 June 20X5. Development costs incurred up to 31 December 20X4 were $290,000, with a further $19,800 incurred between January and June 20X5. Production and sales of the new product commenced on 1 September and are expected to last 36 months.
What amount should be expensed to the statement of profit or loss and other comprehensive income of Ryan Co in respect of these projects in the year ended 31 December 20X5?
Answer (Detailed Solution Below)
Financial Reporting Question 11 Detailed Solution
The correct option is option 2
Additional Information:
| $ | |
| Project 1 | 34,000 |
| Project 2 | 78,870 |
| Project 3 ($290,000 + $19,800) × 4/36 | 34,422 |
| 147,292 |
Financial Reporting Question 12:
On 1 January 20X8, Fredo Co. owned a building which cost $480,000 with a carrying amount of $384,000. On that date the building was valued at 600,000 and Fredo Co wishes to include that valuation in its financial statements.Fredo Co's accounting policy is to depreciate buildings at the rate of 2%. What is the amount of the annual transfer of excess depreciation that Fredo Co will make as a result of the revaluation?
Answer (Detailed Solution Below)
Financial Reporting Question 12 Detailed Solution
The correct option is option 2
Additional Information:
- Annual depreciation charge before revaluation: 2% x $480,000 = $9,600
- Years since purchase: $480,000 - $384,000 / $9,600 = 10 years
- Total estimated useful life is 50 years, with a remaining estimated useful life of 40 years. Thus depreciation following revaluation: $600,000 / 40 = $15,000.
- Amount of excess depreciation = $15,000 - $9,600 = $5,400
Financial Reporting Question 13:
On 1 January 20X3 Himani acquires a new machine with an estimated useful life of 6 years under the following agreement:
An initial payment of $13,760 will be payable immediately
5 further annual payments of $20,000 will be due, commencing 1 January 20X3
The interest rate implicit in the lease is 8%
The present value of the lease payments, excluding the initial payment, is $86,240
What will be recorded in Himani’s financial statements at 31 December 20X4 in respect of the lease liability?
Answer (Detailed Solution Below)
Financial Reporting Question 13 Detailed Solution
The correct option is option 1
Additional Information:
- The non‐current liability at 20X4 is the figure to the right of the payment in 20X5, $35,662. The current liability is the total liability of $55,662 less the non‐current liability of $35,662, which is $20,000.
- The finance cost is the figure in the interest column for 20X4, $4,123.
- If you chose 2 you have done the entries for year one. If you chose 3 or 4, you have recorded the payments in arrears, not in advance.
Financial Reporting Question 14:
On 31 March 20X5, Blade’s closing inventory was counted and valued at its cost of $ 2 million.
This included some items of inventory which had cost $ 420,000 and had been damaged ina flood on 15 March 20X5. These are not expected to achieve their normal selling price which is calculated to achieve a gross profit margin of 30%.
The sale of these goods will be handled by an agent who sells them at 75% of the normal selling price and charges Blade a commission of 10%.
At what value will the closing inventory of Blade be reported in its statement of financial position as at 31 March 20X5 ?
$ ______
Answer (Detailed Solution Below)
Financial Reporting Question 14 Detailed Solution
Total Inventory Value = 20,00,000
Value of Inventory excluding damaged goods = 15,80,000 [ 2 mn - 4,20,000 ]
Valuation of damaged goods
Inventory is valued at lower of cost or NRV
Let us assume that Sales Price is 100, gross profit margin is 30. So, cost of inventory will be 70 [ 100 - 30 ]
That means, Cost is 70% of Selling Price.
In our case, cost of these goods is 420000. So, normal selling price will be 420000 / 70% = 600000
These will be sold at 75% of normal selling price. That means, estimated selling price = 600000 * 75% = 450000
NRV = Estimated Selling price 450000 ( - ) 45000 Estimated cost to sell : 10% commission = 405000
So, Cost is 420000; NRV is 405000. NRV is lower.
So, Total Inventory value = 1580000 ( Value of goods excluding damaged ) + 405000 Value of damaged = 1585000
Financial Reporting Question 15:
Jay Co manufactures cycling equipment. It has a number of specialised frames in inventory which cost $20,000 to manufacture. These frames were manufactured following an order from a customer at an agreed selling price of $30,000. Due to recent technological advances, the current cost of manufacturing such frames is estimated to be $15,000. Jay Co also has inventory of 3,000 pedals with a cost of $20 each. These have become damaged. If Jay Co spends $5,000 to repair all of them, these could be sold for $21 each.
Which TWO of the following statements regarding Jay Co's inventory are true?
A. The frames should be valued at $15,000
B. The frames should be valued at $20,000
C. The frames should be valued at $30,000
D. The pedals should be valued at $60,000
E. The pedals should be valued at $58,000
F. The pedals should be valued at $65,000
Answer (Detailed Solution Below)
Financial Reporting Question 15 Detailed Solution
Inventory should be valued at lower of cost or NRV.
Frames
Cost of manufacturing : 20000
NRV = Estimated Selling Price ( - ) Estimated cost to sell = 30000 ( - ) ZERO = 30000
15000 is replacement cost, not relevant in this case.
Between Cost ( 20000 ) and NRV ( 30000 ); Cost is lower. So, inventory of frames is valued at 20000.
Pedals
Cost of pedals = 3000 * 20 = 60000
NRV = Estimated Selling Price ( - ) Estimated cost to sell = 3000 * 21 ( - ) 5000 = 58000
Between Cost ( 60000 ) and NRV ( 58000), NRV is lower. So, inventory is valued at 58000
So, answer is B and E