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Free ACCA Financial Accounting Practice Questions & Answers
400 exam-style Financial Accounting questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 301
What is an 'associate' in accounting?
Select an option first.
Correct answer: B — An entity over which the investor has significant influence — typically 20-50% of voting rights — accounted for using the equity method
Explanation: B is correct. IAS 28: associate = significant influence (but not control). Presumed at 20-50% ownership. Equity method: initially at cost, then adjusted for the investor's share of post-acquisition profits. A is a trading partner. C is a joint venture. D mislabels an associate.
Question 302
What is the 'equity method' for an associate?
Select an option first.
Correct answer: B — Initially recording the investment at cost, then increasing/decreasing by the investor's share of post-acquisition profits and losses
Explanation: B is correct. Equity method (IAS 28): Investment = Cost + Share of post-acquisition retained profits − Dividends. Investor's share of associate's profit = one line in consolidated income statement. A is full consolidation (subsidiaries). C is the cost method. D is FVTPL.
Question 303
What is 'working capital' and its components?
Select an option first.
Correct answer: B — Current assets minus current liabilities — the short-term net assets funding day-to-day operations. Key components: inventory, trade receivables, trade payables
Explanation: B is correct. Working capital = Current assets − Current liabilities. Liquidity cushion after meeting short-term obligations. Key components: inventory, receivables, cash (CA) minus payables, accruals, overdraft (CL). A is long-term capital. C is net assets. D is only cash.
Question 304
What is a 'bonus issue' (scrip issue) of shares?
Select an option first.
Correct answer: B — Free additional shares issued to existing shareholders by converting reserves into share capital — no cash is raised
Explanation: B is correct. Bonus issue: converts reserves (e.g., retained earnings, share premium) into share capital. Shareholders receive new shares at no cost. Total equity unchanged. A is a discounted rights issue. C is a rights issue. D is a share option scheme.
Question 305
What is a 'rights issue' of shares?
Select an option first.
Correct answer: B — An offer of new shares to existing shareholders proportional to their holdings at a discounted price — raising new equity capital for the company
Explanation: B is correct. Rights issue: raises new capital. Existing shareholders have the right (not obligation) to buy new shares at a discounted price proportional to current holdings. A is a bonus issue. C is a share option scheme. D is a public offer.
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Question 306
Operating profit £150,000, finance costs £12,000, finance income £3,000. Profit before tax?
Select an option first.
Correct answer: C — £141,000
Explanation: C is correct. PBT = Operating profit − Finance costs + Finance income = £150,000 − £12,000 + £3,000 = £141,000. A adds finance costs. B deducts finance income. D deducts only part of finance costs.
Question 307
Revenue £600,000, opening receivables £45,000, closing receivables £60,000. Cash received from customers?
Select an option first.
Correct answer: B — £585,000
Explanation: B is correct. Cash received = Revenue + Opening receivables − Closing receivables = £600,000 + £45,000 − £60,000 = £585,000. Receivables ↑ by £15,000 → £15,000 revenue not yet collected. A adds the increase. C ignores the change. D is wrong.
Question 308
What is the difference between consolidated and separate (entity) financial statements?
Select an option first.
Correct answer: B — Consolidated financial statements present the group as a single economic entity; separate statements show the individual parent company's results with subsidiaries as investments at cost or fair value
Explanation: B is correct. Consolidated: group as one entity. Separate: parent alone (subsidiaries = investments). Both may be required under IFRS. A reverses the description. C and D are wrong.
Question 309
What is the 'net profit margin' ratio?
Select an option first.
Correct answer: B — Profit after tax divided by revenue × 100% — showing what proportion of revenue remains after ALL costs including tax
Explanation: B is correct. Net profit margin = (PAT ÷ Revenue) × 100%. Overall profitability after all costs. A is gross margin. C is cost ratio. D is closer to ROCE.
Question 310
What is 'earnings per share' (EPS)?
Select an option first.
Correct answer: B — Profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue
Explanation: B is correct. EPS = PAT attributable to ordinary shareholders ÷ Weighted average ordinary shares. Key indicator for listed companies. A is dividend per share. C is revenue per share. D is NAV per share.
Question 311
What is 'return on equity' (ROE)?
Select an option first.
Correct answer: B — Profit after tax divided by total equity × 100% — measuring the return generated for shareholders on their investment
Explanation: B is correct. ROE = (PAT ÷ Total equity) × 100%. Efficiency of using shareholders' funds. A uses PBT. C is dividend yield. D is closer to ROCE.
Question 312
What is 'asset turnover'?
Select an option first.
Correct answer: B — Revenue divided by total assets (or capital employed) — showing how efficiently the entity uses assets to generate revenue
Explanation: B is correct. Asset turnover = Revenue ÷ Total assets. Higher = generating more revenue per £ of assets. ROCE = Net margin × Asset turnover. A uses only current assets. C uses gross profit. D inverts the ratio.
Question 313
What is 'goodwill impairment' under IFRS?
Select an option first.
Correct answer: B — Goodwill is tested for impairment at least annually — not amortised under IFRS. Impairment loss recognised in profit or loss and CANNOT be reversed
Explanation: B is correct. IFRS 3 / IAS 36: goodwill not amortised under IFRS — annual impairment test. Impairment loss: P&L charge, irreversible. A and D describe amortisation. C is revaluation — not applicable to goodwill.
Question 314
What are the limitations of financial ratio analysis?
Select an option first.
Correct answer: B — Ratios rely on historical accounts, different entities use different accounting policies, inflation distorts comparisons, and ratios exclude qualitative factors such as management quality and market conditions
Explanation: B is correct. Key limitations: backward-looking, policy differences, inflation distortion, potential manipulation, and exclusion of non-financial factors. A and C are wrong. D overstates the problem.
Question 315
What is a 'revaluation surplus' (revaluation reserve) and is it distributable?
Select an option first.
Correct answer: B — A capital reserve created when PPE is revalued upward — part of equity but NOT distributable as dividends as it represents an unrealised gain
Explanation: B is correct. Revaluation surplus (IAS 16): upward revaluation gain goes to OCI → accumulated in revaluation surplus (capital reserve). Cannot be distributed — unrealised gain. A is a P&L gain. C is a sinking fund. D is a realised disposal gain.
Question 316
How is a subsidiary's revenue treated if acquired during the year in a consolidated income statement?
Select an option first.
Correct answer: B — Include only the subsidiary's revenue from the date of acquisition to the year end
Explanation: B is correct. IFRS 3: only post-acquisition results consolidated. Revenue included from acquisition date to year-end. A inflates results. C is too conservative. D applies an arbitrary 50%.
Question 317
What is a 'performance obligation' under IFRS 15?
Select an option first.
Correct answer: B — A promise in a contract with a customer to transfer a distinct good or service to the customer
Explanation: B is correct. IFRS 15: a performance obligation is each distinct promise in a contract. Revenue recognised when (or as) each obligation is satisfied. Multiple obligations require allocating the transaction price. A describes a supplier obligation. C and D are not the IFRS 15 definition.
Question 318
Under IFRS 18 (2025-26 syllabus), what is the key structural change from IAS 1?
Select an option first.
Correct answer: B — The statement of profit or loss now has three mandatory categories — operating, investing, and financing — providing more structured and comparable presentation
Explanation: B is correct. IFRS 18's most significant change: three defined categories (operating, investing, financing) in the statement of profit or loss. More structured than the flexible IAS 1 format. Also introduces new OCI category and MPM requirements. A, C and D are not IFRS 18 changes.
Question 319
Revenue £500,000, cost of sales £300,000, operating expenses £80,000. Operating profit margin?
Select an option first.
Correct answer: B — 24%
Explanation: B is correct. Gross profit = £200,000. Operating profit = £200,000 − £80,000 = £120,000. OPM = £120,000 ÷ £500,000 × 100% = 24%. A is gross profit margin (40%). C and D use wrong calculations.
Question 320
What is 'pre-acquisition profit' in group accounts?
Select an option first.
Correct answer: B — Retained earnings of a subsidiary at the date of acquisition — included in the net assets used to calculate goodwill, NOT added to group retained earnings
Explanation: B is correct. Pre-acquisition retained earnings are locked in at acquisition — part of net assets for goodwill calculation. Only post-acquisition profits consolidated into group retained earnings. A and D are unrelated. C is disposal profit.
Question 321
What does positive operating cash flow indicate?
Select an option first.
Correct answer: B — The core business operations generate cash — the business converts trading profit into actual cash inflows
Explanation: B is correct. Positive operating cash flow = healthy, cash-generative operations. Main trading activities produce more cash than they consume. A is investing. C is financing. D is a negative signal.
Question 322
What is 'window dressing' in financial reporting?
Select an option first.
Correct answer: B — Manipulating transactions near year end to present an artificially improved financial position — e.g., temporarily repaying a loan to reduce reported gearing
Explanation: B is correct. Window dressing manipulates timing to flatter reported figures — conflicts with faithful representation. A, C and D are legitimate presentation activities.
Question 323
What is a 'cash equivalent' under IAS 7?
Select an option first.
Correct answer: B — Short-term, highly liquid investments readily convertible to known amounts of cash with insignificant risk of value change — typically maturing within 3 months
Explanation: B is correct. IAS 7: cash equivalents include treasury bills, money market deposits, short-term bonds (original maturity ≤ 3 months). A is cash itself. C is too long. D is receivables.
Question 324
What is the impact on goodwill when FV of subsidiary's net assets at acquisition is HIGHER than their book value?
Select an option first.
Correct answer: B — Goodwill decreases — goodwill = Consideration − FV of net assets; higher FV of net assets reduces the premium
Explanation: B is correct. Goodwill = Consideration − FV of identifiable net assets. Higher FV of net assets → smaller goodwill (the adjustment brings net assets up, reducing the unexplained premium). A is wrong. C ignores fair value adjustments. D is negative goodwill only if FV > consideration.
Question 325
What is 'negative goodwill' (bargain purchase gain) and how is it treated?
Select an option first.
Correct answer: B — Where consideration paid is less than the FV of identifiable net assets acquired — recognised immediately as a gain in profit or loss after reassessing the fair values
Explanation: B is correct. IFRS 3: if after reassessing measurements, consideration < FV of net assets, the difference (bargain purchase gain) is recognised immediately in profit or loss. A is impairment. C and D are wrong.
Question 326
What is a 'dividend' and where does it appear in financial statements?
Select an option first.
Correct answer: B — A distribution of profit to shareholders — appears in the statement of changes in equity as a deduction from retained earnings (and in cash flows as a financing outflow)
Explanation: B is correct. Dividends are distributions to shareholders — NOT expenses. They reduce retained earnings (statement of changes in equity) and appear as cash outflow in financing activities. A and C are wrong. D is incorrect — dividends are discretionary.
Question 327
What are 'deferred tax liabilities' and why do they arise?
Select an option first.
Correct answer: B — Future tax consequences of temporary differences — arising when an asset's carrying amount exceeds its tax base, meaning more tax will be paid in the future
Explanation: B is correct. IAS 12: deferred tax liabilities arise when carrying amount > tax base (e.g., asset worth £100,000 in books but £60,000 for tax → £40,000 temporary difference → future tax liability). A is a tax receivable. C is current tax prepayment. D is a contingent item.
Question 328
What is the purpose of 'notes to the financial statements'?
Select an option first.
Correct answer: B — To supplement and explain the primary financial statements — including accounting policies, disaggregated information, and all disclosures required by specific accounting standards
Explanation: B is correct. Notes are integral to financial statements — they explain accounting policies, provide detail on significant items, and include all standard-required disclosures. A is the strategic/directors' report. C is forward-looking guidance. D is bookkeeping records.
Question 329
What is the 'acquisition method' in group accounting?
Select an option first.
Correct answer: B — The IFRS 3 required method for business combinations — the acquired entity's assets and liabilities are recognised at fair value at acquisition date, with goodwill as the excess of consideration paid
Explanation: B is correct. IFRS 3 requires the acquisition method: (1) identify the acquirer; (2) determine acquisition date; (3) recognise identifiable assets/liabilities at FV; (4) calculate goodwill. A is the separate entity approach. C ignores FV adjustments. D is the old pooling method (prohibited under IFRS).
Question 330
What is 'working capital management' and why is it important?
Select an option first.
Correct answer: B — Managing short-term assets and liabilities to ensure the business has enough cash for day-to-day obligations while minimising unnecessary capital tied up
Explanation: B is correct. Working capital management: optimise inventory (not too much/little), collect receivables promptly, negotiate good payment terms — balancing liquidity with efficiency. A is capital budgeting. C is long-term financing. D is capital structure.
More free ACCA topics
Management Accounting401
Corporate and Business Law400
Performance Management400
Financial Reporting400
Financial Management400
Strategic Business Reporting400
Advanced Financial Management400
Advanced Performance Management400
Advanced Taxation400
Business and Technology300
Taxation300
Audit and Assurance300
Strategic Business Leader300
Advanced Audit and Assurance296
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