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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 331
What is 'profit before interest and tax' (PBIT) also called?
Select an option first.
Correct answer: B — Operating profit — or EBIT (Earnings Before Interest and Tax)
Explanation: B is correct. PBIT = EBIT = Operating profit — profit from operations before deducting finance costs and income tax. It is used as the numerator for ROCE and interest cover. A is net/PAT. C is before operating expenses are deducted. D is after tax.
Question 332
What is 'negative working capital' and what does it suggest?
Select an option first.
Correct answer: B — Current liabilities exceed current assets — in some industries (e.g., supermarkets) this indicates efficient operations, but in others it may indicate liquidity risk
Explanation: B is correct. Negative working capital = Current liabilities > Current assets. In supermarkets: goods sold for cash before suppliers paid — efficient. In manufacturing: may mean the business struggles to meet short-term obligations. Context is crucial. A reverses the definition. C is insolvency. D is extreme.
Question 333
What is the 'cash conversion cycle' and how is it calculated?
Select an option first.
Correct answer: B — Inventory days + Receivable days − Payable days — measuring how long cash is tied up in working capital before being returned
Explanation: B is correct. Cash conversion cycle = Inventory days + Receivable days − Payable days. Shorter cycle = cash tied up for less time → lower working capital financing need. A and C are unrelated. D is only part of the cycle.
Question 334
What is a 'finance lease' under the old IAS 17 treatment (now replaced by IFRS 16)?
Select an option first.
Correct answer: B — A lease that transfers substantially all the risks and rewards of ownership to the lessee — recognised on the lessee's balance sheet as an asset and a liability
Explanation: B is correct. Under IAS 17 (now superseded by IFRS 16): a finance lease = substantially all risks and rewards transferred to lessee → recognised on balance sheet as asset and liability. Operating leases (IAS 17): off-balance sheet, expense recognised straight-line. IFRS 16 now requires virtually all leases on balance sheet. A describes an operating lease. C and D are not the definition.
Question 335
What is a 'management performance measure' (MPM) under IFRS 18?
Select an option first.
Correct answer: B — A measure defined by management to communicate financial performance that is not specified by an IFRS Standard — must be disclosed in the notes with a reconciliation to the most directly comparable IFRS measure
Explanation: B is correct. IFRS 18: MPMs are entity-specific measures used in public communications (earnings calls, annual reports) — e.g., 'adjusted EBITDA'. If disclosed outside financial statements, IFRS 18 requires: definition, purpose, and reconciliation to the directly comparable IFRS line item in the notes. A, C and D are wrong.
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Question 336
What is 'horizontal analysis' of financial statements?
Select an option first.
Correct answer: B — Comparing financial statement figures over multiple years — calculating the change (£ and %) from one period to the next to identify trends
Explanation: B is correct. Horizontal (trend) analysis: year-on-year comparison showing the direction and magnitude of change over time. Helps identify growth trends, deterioration, or unusual changes. A is benchmarking/cross-sectional. C is cross-sectional analysis. D is vertical analysis.
Question 337
What is 'vertical analysis' (common-size analysis) of financial statements?
Select an option first.
Correct answer: B — Expressing each line item as a percentage of a key total (e.g., revenue for the income statement; total assets for the balance sheet) — enabling comparison across periods and between entities of different sizes
Explanation: B is correct. Vertical analysis: each item expressed as a % of the base figure — e.g., cost of sales as % of revenue. Useful for comparing companies of different sizes and for spotting structural changes over time. A is horizontal analysis. C is cross-sectional. D is too narrow.
Question 338
A company's current ratio deteriorated from 2.5 to 1.2 over the year. Which of the following would BEST explain this?
Select an option first.
Correct answer: B — The company used cash to repay a long-term bank loan
Explanation: B is correct. Repaying a long-term bank loan using cash: Cash (current asset) decreases; Long-term liability decreases. This reduces current assets → current ratio falls. C could also worsen the ratio but is less precise. A increases equity but could increase cash (improving ratio). D is non-current — not directly affecting current ratio.
Question 339
What is the effect on gearing if a company repays a long-term loan using retained cash?
Select an option first.
Correct answer: B — Gearing decreases — non-current liabilities decrease relative to equity and total capital employed
Explanation: B is correct. Repaying a long-term loan: Non-current liabilities decrease; Cash (asset) decreases. Gearing = Non-current liabilities ÷ (Equity + Non-current liabilities) × 100%. Both numerator and denominator decrease, but proportionally the ratio falls — gearing improves. A, C and D are wrong.
Question 340
What is the effect on ROCE if revenue increases but capital employed stays constant?
Select an option first.
Correct answer: B — ROCE increases — higher operating profit (assuming costs increase proportionally less than revenue) with the same capital base produces a higher return
Explanation: B is correct. If revenue increases and operating profit grows (assuming costs don't rise proportionally), PBIT increases. If capital employed is constant: ROCE = PBIT ÷ Capital employed → increases. A assumes all revenue becomes costs. C is wrong — revenue drives operating profit which drives ROCE. D is indirect.
Question 341
Revenue £200,000, cost of sales £120,000, distribution costs £15,000, admin expenses £20,000, finance costs £5,000, tax £8,000. What is profit after tax?
Select an option first.
Correct answer: C — £32,000
Explanation: C is correct. Gross profit = £200,000 − £120,000 = £80,000. Operating profit = £80,000 − £15,000 − £20,000 = £45,000. PBT = £45,000 − £5,000 = £40,000. PAT = £40,000 − £8,000 = £32,000. A gives PBT. B gives operating profit. D gives gross profit.
Question 342
What is the formula for 'dividend yield'?
Select an option first.
Correct answer: B — Dividend per share ÷ Market price per share × 100% — showing the return an investor earns in dividends relative to the current share price
Explanation: B is correct. Dividend yield = (Dividend per share ÷ Market price per share) × 100%. It tells investors the income return on their investment. A is the earnings yield. C is dividend return on book equity. D is the retention ratio.
Question 343
What is the 'price-earnings (P/E) ratio'?
Select an option first.
Correct answer: B — Market price per share ÷ Earnings per share — indicating how many years of current earnings investors are paying for the share; a high P/E implies high growth expectations
Explanation: B is correct. P/E ratio = Market price ÷ EPS. A high P/E means investors expect strong future earnings growth — they are willing to pay a premium. A inverts and uses dividends. C is earnings yield. D is NAV per share.
Question 344
What is 'diluted EPS' and why might it differ from basic EPS?
Select an option first.
Correct answer: B — EPS calculated assuming all dilutive potential ordinary shares (e.g., convertible bonds, share options) have been converted — usually lower than basic EPS because more shares are outstanding
Explanation: B is correct. Diluted EPS: assumes conversion of all dilutive instruments (convertible debt, options). This increases the number of shares in the denominator and may change the numerator (e.g., interest saved on converted debt) → diluted EPS ≤ basic EPS. Shows the worst-case dilution for existing shareholders. A, C and D are wrong.
Question 345
What is a 'related party transaction' and why must it be disclosed?
Select an option first.
Correct answer: B — A transaction between parties related by common ownership, significant influence, or family ties — disclosed because it may not be at arm's length, enabling users to assess whether it influenced the financial statements fairly
Explanation: B is correct. IAS 24 Related Party Disclosures: related parties include subsidiaries, associates, key management personnel, their close family, and pension funds. Disclosures required: nature of relationship, transaction amounts, outstanding balances. Without disclosure, users cannot judge whether results were influenced by non-arm's-length dealings. A, C and D are not the definition.
Question 346
What is the correct treatment if a subsidiary has a minority shareholding (e.g., parent owns 80%)?
Select an option first.
Correct answer: B — 100% of the subsidiary's assets, liabilities, income, and expenses are consolidated — the non-controlling interest (20%) is then shown separately within equity (SFP) and profit (income statement)
Explanation: B is correct. IFRS 10: consolidate 100% of the subsidiary (control = 100% consolidation), then present the NCI separately. This reflects economic reality — the group controls all assets even if it doesn't own 100%. A is proportional consolidation (not permitted under IFRS 10 for subsidiaries). C is for associates. D is wrong.
Question 347
What is an 'operating segment' under IFRS 8?
Select an option first.
Correct answer: B — A component of an entity that engages in business activities from which it earns revenues and incurs expenses, whose operating results are regularly reviewed by the chief operating decision maker, and for which discrete financial information is available
Explanation: B is correct. IFRS 8 Operating Segments: a segment meets the definition if it: (1) earns revenues/incurs expenses, (2) results reviewed regularly by the CODM, (3) discrete financial information available. Segments are disclosed when they exceed size thresholds. A is too narrow. C and D are incorrect.
Question 348
If closing inventory is overstated by £5,000, what is the effect on profit?
Select an option first.
Correct answer: B — Profit is overstated by £5,000 — because overstated closing inventory reduces cost of sales: Cost of sales = Opening + Purchases − Closing inventory. Higher closing inventory = lower cost of sales = higher profit
Explanation: B is correct. Cost of sales = Opening + Purchases − Closing inventory. If closing inventory is overstated by £5,000, cost of sales is understated by £5,000, and profit is overstated by £5,000. This also means next period's opening inventory is overstated → next year's profit will be understated. A, C and D are wrong.
Question 349
What is 'the matching of revenue and costs' in preparing an income statement under the accruals concept?
Select an option first.
Correct answer: B — Revenue is recognised when the performance obligation is satisfied; the costs incurred to earn that revenue are matched against it in the same period — regardless of cash timing
Explanation: B is correct. Accruals/matching concept: income and expenses matched in the same period. This requires accruals (expenses incurred but unpaid), prepayments (paid in advance), and deferred income (cash received before performance). A is wrong. C is the cash basis. D is spreading — not the matching concept.
Question 350
What is a 'step acquisition' in group accounting?
Select an option first.
Correct answer: B — A situation where an entity gains control in a subsequent acquisition after holding a non-controlling stake — at the control date, the previously held interest is remeasured to FV with gain/loss in P&L, and goodwill is calculated fresh
Explanation: B is correct. IFRS 3 step acquisition: previously held interest remeasured to FV on date control is obtained (gain/loss to P&L). Goodwill calculated using full consideration (cash + FV of previously held interest) minus FV of net assets. A is incomplete. C is wrong. D describes a different scenario.
Question 351
What is a 'partial disposal' retaining control?
Select an option first.
Correct answer: B — Selling some shares but retaining control — treated as an EQUITY TRANSACTION; no gain/loss in profit or loss; the NCI carrying amount is adjusted and any difference goes directly to equity
Explanation: B is correct. IFRS 10: partial disposal retaining control = equity transaction. No remeasurement; no P&L gain/loss. Adjust NCI and recognise difference in equity. A is full disposal. C is losing control. D occurs when control is lost.
Question 352
What is 'proportionate consolidation' and is it permitted under IFRS 11?
Select an option first.
Correct answer: B — A method including only the investor's share of joint venture assets/liabilities line by line — NOT permitted for joint ventures under IFRS 11 (equity method required)
Explanation: B is correct. IFRS 11: joint ventures → equity method only. Proportionate consolidation was used under old IAS 31 but is now prohibited for joint ventures. A, C and D are incorrect.
Question 353
What is a 'joint arrangement' under IFRS 11?
Select an option first.
Correct answer: B — An arrangement where two or more parties have joint control — classified as a joint operation (direct rights to assets and obligations for liabilities) or a joint venture (rights to net assets via a separate vehicle)
Explanation: B is correct. IFRS 11: joint control shared. Joint Operations (proportionate recognition); Joint Ventures (equity method). A and D are wrong. C is control.
Question 354
Equity method carrying amount: cost £100,000; cumulative post-acquisition profit share = £18,000; dividends received = £5,000. What is the carrying amount?
Select an option first.
Correct answer: B — £113,000
Explanation: B is correct. Equity method CA = Cost + Share of post-acq profits − Dividends received = £100,000 + £18,000 − £5,000 = £113,000. Dividends reduce the CA (return of investment). A ignores dividends. C deducts profit. D adds dividends.
Question 355
What is IAS 28 'significant influence' and what are the indicators?
Select an option first.
Correct answer: B — Significant influence = power to participate in financial and operating policy decisions — presumed at 20-50% ownership; also evidenced by board representation, policy participation, material intercompany transactions, management interchange, or technical information provision
Explanation: B is correct. IAS 28: significant influence presumed at 20-50%; rebuttable. Other indicators: board seat, policy participation, intercompany transactions, management interchange, technical provision. C describes control. D conflates the two. A sets wrong threshold.
Question 356
What is a 'fair value adjustment' in group accounts?
Select an option first.
Correct answer: B — An adjustment at acquisition date restating the subsidiary's identifiable assets and liabilities to fair values — ensuring goodwill is calculated correctly and post-acquisition depreciation reflects FV
Explanation: B is correct. IFRS 3: all identifiable assets/liabilities at FV on acquisition. This affects goodwill (lower than if book value used) and post-acquisition P&L (depreciation/amortisation based on FV). A is one-sided. C is too narrow. D is impossible.
Question 357
What is 'free cash flow'?
Select an option first.
Correct answer: B — Operating cash flows less capital expenditure — cash generated after maintaining/expanding asset base, available for debt repayment, dividends, and investment
Explanation: B is correct. Free cash flow = Operating cash flows − Capex. Shows cash available after investing in maintaining/growing assets. Not a formal IAS 7 measure but widely used by analysts. A uses profit (not cash). C mixes sections. D is net cash change.
Question 358
What is the IAS 33 basic EPS formula?
Select an option first.
Correct answer: B — Profit or loss attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period
Explanation: B is correct. IAS 33 Basic EPS = Profit attributable to ordinary shareholders ÷ Weighted average ordinary shares. Profit is after tax and after preference dividends. A uses gross profit. C uses revenue. D uses operating profit.
Question 359
2,000,000 shares at 1 January; 400,000 new shares issued 1 July. Weighted average shares for the year?
Select an option first.
Correct answer: B — 2,200,000
Explanation: B is correct. Weighted average = (2,000,000 × 6/12) + (2,400,000 × 6/12) = 1,000,000 + 1,200,000 = 2,200,000. A uses year-end total (wrong). C ignores new issue. D is just new shares.
Question 360
What is 'IFRS 15 variable consideration constraint'?
Select an option first.
Correct answer: B — Variable consideration included only to the extent it is highly probable that a significant revenue reversal will not occur — prevents premature recognition
Explanation: B is correct. IFRS 15: variable consideration estimated (expected value or most likely amount) then constrained — include only when highly probable no significant reversal will occur. A is too aggressive. C is too conservative. D specifies only one of two permitted methods.
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