accn3 IAS exam questions

Refers to the presentation of financial statements (1). It states that there must be compliance with accounting concepts (1) including consistency (1) and therefore the same inventory (stock) valuation method should be used for all accounting periods (1). (January 2012)

Inventory should be valued at the lower of cost and net realisable value (1) in accordance with the concept of prudence (1). The net realisable value is the selling price less any conversion costs into a saleable condition (1). The selling price would be £75 000 (£60 000 x100/80) (1). The net realisable value would therefore be £52 250 (£75 000 – £22 750) (1). As this is lower than the cost, then the inventory would need to be reduced by £7750 (1) in both the income statement under cost of sales (1) and the balance sheet under current assets (1). (June 2013)

Deals with the preparation of cash flow statements. Inventory (stock) is adjusted against profit from operations (1) by either adding a decrease (1) or deducting an increase (1). (June 2011)

Refers to accounting policies (1) and states that consistency (1) must apply unless a change would provide more reliable and relevant information (1). In this case, a change would lead to an increase in both stock valuation and profit (1) which is against prudence (1). Any change that relates to accounting policy must be identified in the notes to the financial statements (1). (January 2012)

The legal proceedings would be an adjusting event (1) of they existed at the year end and the outcome was known before the financial statements were approved (1). In this case, the financial statements would be altered (1) to show the financial impact such as the legal costs and compensation amounts (1). The legal proceedings would be a non-adjusting event (1) if the situation arose after the year end but the outcome was still known before the financial statements were approved (1). In this case, the outcome would be disclosed in the notes to the financial statements only (1). (June 2013)

The IT equipment will be shown in the balance sheet at the carrying amount or net book value (1). It will then usually be depreciated each year (1) using either the straight line or reducing balance method (1) over the estimated useful life (1). However, in this situation the recoverable amount is lower than the carrying amount (1) and so the asset has incurred an impairment loss (1). The £7750 (1) will be written off as an expense (1) in the income statement (1) and deducted from the NBV (1) in the balance sheet (1). (June 2013)

no past questions but :

 Sets out the accounting treatment to ensure that revenue is correctly shown the income statement. It covers the recognition of revenue:

* Sale of goods and services

* Interest, royalties and dividends

Impairment of an asset exists when the recoverable amount is less than the carrying amount (1). The recoverable amount is the higher of the fair value (NRV) and the value in use (future cash flows) (1). The recoverable amount is therefore £34 750 (1) and the asset is impaired because this is lower than £42 500 (1). £7750 will therefore be written off as an expense to the income statement (1) and also deducted from non-current assets in the balance sheet (1). (June 2013)

The unresolved legal proceedings represent a provision (1) which is a liability of uncertain timing and amount (1). As a liability, it represents a present obligation as a result of past events (1) where settlement is expected to result in the future outflow of economic benefits (1). It is probable that the proceedings will result in a loss and there is more than a 50% likelihood of this happening (1). The damages of £65 000 need to therefore be included in the financial statements as an expense in the income statement (1) and as a liability in the balance sheet (1). (June 2013)

The patent cost of £62 000 represents a purchased intangible asset (1) which is recognised in the financial statements at cost price (1). It is capitalised in the balance sheet if this cost can be reliably measured (1) and if there are probable future economic benefits (1). If the patent has a finite life (1) then it can be written down via amortisation (1). If instead it has an indefinite life (1) then it is not amortised (1). (January 2011)