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Free Questions › ACCA › Financial Accounting
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 61
What is the purpose of the statement of changes in equity?
Select an option first.
Correct answer: B — To explain all movements in equity — including profit, OCI, dividends paid, and share issues
Explanation: B is correct. SOCE bridges opening and closing equity: profit (from P&L), OCI items, dividends paid, share capital changes. A is cash flow. C is just the closing balance. D is a tax note.
Question 62
What is 'total comprehensive income'?
Select an option first.
Correct answer: B — The sum of profit or loss for the period and other comprehensive income
Explanation: B is correct. Total Comprehensive Income = Profit (or loss) + OCI. Captures all wealth creation/destruction excluding owner transactions. A is just profit after tax. C misuses 'revenue'. D uses PBT (not PAT) — wrong.
Question 63
What is the 'cost of an asset' for initial recognition?
Select an option first.
Correct answer: B — Purchase price plus all directly attributable costs needed to bring the asset to its intended location and condition for use
Explanation: B is correct. Under IFRS, initial cost = purchase price + directly attributable costs (delivery, installation, legal fees). A is market price only. C is replacement cost. D is NRV — not used for initial recognition of fixed assets.
Question 64
100,000 shares issued at £2.50 each, nominal value £0.50. What is the correct split?
Select an option first.
Correct answer: B — Share capital £50,000; share premium £200,000
Explanation: B is correct. Share capital = 100,000 × £0.50 = £50,000. Share premium = 100,000 × (£2.50 − £0.50) = £200,000. A ignores the premium. C and D use wrong amounts.
Question 65
What is share premium and can it be used to pay dividends?
Select an option first.
Correct answer: B — The excess received above nominal value when shares are issued — a capital reserve that CANNOT be used to pay dividends
Explanation: B is correct. Share premium is a non-distributable capital reserve. Dividends must come from distributable profits (revenue reserves). It can be used for: bonus issues, writing off share issue costs. A says distributable — wrong. C and D are wrong.
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Question 66
What are retained earnings and how do they change each year?
Select an option first.
Correct answer: B — Cumulative profit since incorporation less dividends paid — increase by current year profit, decrease by dividends declared
Explanation: B is correct. Retained earnings: Opening + Profit − Dividends = Closing. The distributable reserve. A is a cash concept. C is current year only. D incorrectly includes capital reserves.
Question 67
What is a 'limited liability partnership' (LLP)?
Select an option first.
Correct answer: B — A hybrid combining partnership flexibility with limited liability protection — members are not personally liable for the LLP's debts beyond their capital contribution
Explanation: B is correct. LLP (LLP Act 2000): separate legal entity — members have limited liability similar to company shareholders. A is a general partnership. C and D are incorrect.
Question 68
What is 'realisable value' as a measurement basis?
Select an option first.
Correct answer: B — The amount that would be received from selling an asset in an orderly transaction
Explanation: B is correct. Realisable value = exit price on orderly sale. Conceptual Framework measurement bases: historical cost, current cost, realisable value, value in use. A is current cost. C is value in use. D is net book value.
Question 69
What is 'inventory turnover' and what does a high ratio indicate?
Select an option first.
Correct answer: B — Cost of sales divided by inventory — the number of times inventory is sold and replaced per period. A high ratio indicates fast-moving stock and efficient inventory management
Explanation: B is correct. Inventory turnover = Cost of sales ÷ Inventory (times per year). High = sells quickly, lower holding costs. C is inventory days (days version). A uses revenue. D is asset turnover.
Question 70
A business has equity of £60,000 and liabilities of £35,000. What are total assets?
Select an option first.
Correct answer: C — £95,000
Explanation: C is correct. Assets = Liabilities + Equity = £35,000 + £60,000 = £95,000. A subtracts instead. B gives equity only. D gives liabilities only.
Question 71
What is the effect on equity when a business earns revenue of £5,000 on credit?
Select an option first.
Correct answer: B — Equity increases by £5,000 as assets (trade receivables) increase and income earned increases equity
Explanation: B is correct. Earning revenue on credit: Trade Receivables (asset) +£5,000; Revenue (income) +£5,000 → increases retained earnings → increases equity. Equity = Assets − Liabilities, so when assets increase without a liability increase, equity increases. A, C and D are wrong.
Question 72
What does 'double materiality' mean in the context of sustainability reporting?
Select an option first.
Correct answer: B — An entity considers both the financial impact of sustainability risks on the entity AND the entity's impact on the environment/society — two perspectives of materiality
Explanation: B is correct. Double materiality (emerging in sustainability reporting): (1) financial materiality — how ESG risks affect the company's financial position; (2) impact materiality — how the company's activities affect people and the planet. A is an arbitrary threshold. C and D are wrong.
Question 73
What is a 'going concern disclosure' required when there is material uncertainty?
Select an option first.
Correct answer: B — The financial statements must disclose: the fact that material uncertainty exists, why there is doubt, and the basis on which statements have been prepared
Explanation: B is correct. IFRS 18 / IAS 1: where material uncertainty about going concern exists, this must be explicitly disclosed. If going concern is inappropriate, a different basis is used and disclosed. A is an audit matter. C is too drastic. D is wrong — disclosure is required.
Question 74
What is 'substance over form' in the context of IFRS 16 leases?
Select an option first.
Correct answer: B — A lease that transfers substantially all risks and rewards of ownership is treated as if the lessee owned the asset — right-of-use asset and lease liability recognised
Explanation: B is correct. IFRS 16: lessee recognises a right-of-use asset and lease liability for almost all leases — reflecting substance (lessee has economic control and benefits) over form (legal title stays with lessor). A is the old operating lease treatment. C and D are incorrect.
Question 75
What is a 'revenue reserve' and give an example?
Select an option first.
Correct answer: B — A reserve created from realised profits that is available for distribution as dividends — examples include retained earnings and the general reserve
Explanation: B is correct. Revenue reserves are distributable — created from accumulated trading profits. Examples: retained earnings, general reserve. Capital reserves (e.g., share premium, revaluation surplus) are non-distributable. A reverses the definition. C and D describe capital-related reserves.
Question 76
Which of the following would NOT be included in the cost of a self-constructed asset?
Select an option first.
Correct answer: C — Abnormal waste and inefficiencies during construction
Explanation: C is correct. IAS 16: the cost of a self-constructed asset includes direct materials, direct labour, and directly attributable overheads. Abnormal costs (waste, inefficiencies) are specifically excluded — they are expensed. A, B and D are all included in the cost.
Question 77
What is the difference between a 'capital reserve' and a 'revenue reserve'?
Select an option first.
Correct answer: B — Capital reserves arise from non-trading transactions (e.g., share premium, revaluation) and are generally non-distributable; revenue reserves arise from profits and are generally distributable
Explanation: B is correct. Capital reserves: non-distributable, from non-trading sources (share premium, revaluation surplus). Revenue reserves: distributable, from accumulated profits (retained earnings, general reserve). A is wrong. C reverses the rule. D is too restrictive.
Question 78
Why might financial statements prepared under historical cost accounting be criticised during periods of high inflation?
Select an option first.
Correct answer: B — Historical cost figures become less meaningful because assets are understated (shown at old prices), profit may be overstated (depreciation based on original cost), and comparability is reduced
Explanation: B is correct. During inflation, historical cost accounting: understates asset values (shown at old purchase prices), understates depreciation (based on original cost, not replacement cost), overstates profit, and reduces comparability. A is not a valid criticism. C and D are incorrect.
Question 79
What is the 'value in use' measurement basis?
Select an option first.
Correct answer: B — The present value of the future cash flows expected to be derived from an asset or cash-generating unit — used in IAS 36 impairment testing
Explanation: B is correct. Value in use (IAS 36): PV of estimated future cash inflows from the asset, discounted at an appropriate rate. Recoverable amount = higher of value in use and fair value less costs to sell. A is market price. C is NRV. D is replacement cost.
Question 80
What is a 'cash-generating unit' (CGU) in the context of impairment?
Select an option first.
Correct answer: B — The smallest identifiable group of assets that generates cash inflows largely independent of other assets — used when it is not possible to estimate the recoverable amount of an individual asset
Explanation: B is correct. CGU (IAS 36): when an asset doesn't generate independent cash inflows, it is grouped into the smallest CGU that does. Goodwill is allocated to CGUs for impairment testing. A is too narrow. C and D misapply the concept.
Question 81
What is the difference between 'authorised share capital' and 'issued share capital'?
Select an option first.
Correct answer: B — Authorised share capital is the maximum number of shares a company can issue (set in its constitution); issued share capital is the shares actually issued to shareholders — issued ≤ authorised
Explanation: B is correct. Authorised = maximum allowed (from company's constitution); Issued = shares actually allotted to shareholders. Issued cannot exceed authorised. A is wrong — companies often have unissued authorised capital. C is impossible. D is incorrect.
Question 82
What does 'par value' (nominal value) of a share represent?
Select an option first.
Correct answer: B — The original face value assigned to a share — the minimum price at which shares can be issued, used for legal capital maintenance purposes
Explanation: B is correct. Par value (nominal value) is the face value — e.g., £1 par. Shares cannot be issued below par value. It is a legal concept for capital maintenance, not reflective of market value. A is market price. C is NAV per share. D is dividend per share.
Question 83
What is the 'accounting equation' effect when a business pays a dividend of £10,000?
Select an option first.
Correct answer: B — Assets decrease by £10,000 (bank) and equity decreases by £10,000 (retained earnings)
Explanation: B is correct. Paying a dividend: Bank (asset) −£10,000; Retained Earnings (equity) −£10,000. Total assets decrease and equity decreases by the same amount — the equation remains balanced. A increases assets incorrectly. C increases liabilities. D decreases liabilities.
Question 84
What is 'financial capital maintenance' in the context of the IASB Conceptual Framework?
Select an option first.
Correct answer: B — Profit is earned only if the financial (monetary) amount of net assets at the end of the period exceeds the financial amount at the beginning — after excluding owner contributions and distributions
Explanation: B is correct. Financial capital maintenance (Conceptual Framework): profit = increase in net assets in monetary terms during the period, excluding owner transactions. This is the most common basis used. A is physical capital maintenance. C is liquidity management. D is share capital preservation.
Question 85
What is 'negative equity' and when might it arise?
Select an option first.
Correct answer: A — Equity less than zero — arising when total liabilities exceed total assets, often due to accumulated losses exceeding the initial capital invested
Explanation: A is correct. Negative equity: Liabilities > Assets → Equity < 0. Arises when: a company has accumulated significant losses that exceed all reserves and paid-in capital. A sole trader might have negative equity if they have taken excessive drawings. B, C and D are not definitions of negative equity.
Question 86
What is an 'impairment review' trigger (indicator of impairment)?
Select an option first.
Correct answer: A — A significant decline in an asset's market value, damage to an asset, or adverse changes in the technology or economic environment affecting the asset
Explanation: A is correct. IAS 36: indicators of possible impairment include: significant decline in market value, physical damage, adverse market/technology changes, interest rate increases reducing the discount rate. B is routine depreciation (not an impairment trigger). C is a revaluation (upward). D is a policy change.
Question 87
What are 'distributable reserves' and why are they important?
Select an option first.
Correct answer: B — Profits available to be legally paid as dividends to shareholders — primarily retained earnings; ensuring dividends are only paid from realised profits protects creditors
Explanation: B is correct. Distributable reserves: realised profits available for dividends. Important for creditor protection — dividends paid only from profits, not from capital. Capital reserves (share premium, revaluation surplus) are non-distributable. A is a physical cash concept. C includes non-distributable reserves. D gives management too much discretion.
Question 88
What is a 'partnership' and what document governs the relationship between partners?
Select an option first.
Correct answer: B — A business owned by two or more people carrying on a business with a view to profit — governed by a partnership agreement; where none exists the Partnership Act 1890 applies
Explanation: B is correct. A partnership has two or more partners with unlimited liability (unless an LLP). The partnership agreement sets profit sharing, capital contributions, salaries, and interest on capital. Without an agreement the Partnership Act 1890 defaults apply. A and D describe companies. C is a joint venture.
Question 89
Under the Partnership Act 1890 with no partnership agreement, how are profits and losses shared?
Select an option first.
Correct answer: B — Equally between all partners, regardless of capital contributed or time spent
Explanation: B is correct. Partnership Act 1890 default: profits and losses shared equally. No partner salary, no interest on capital, interest on loans at 5% p.a. only. A, C and D are not default rules.
Question 90
What is a 'partnership appropriation account'?
Select an option first.
Correct answer: B — The account showing how net profit is divided among partners — after partner salaries, interest on capital, and interest on drawings — with the balance shared in the profit-sharing ratio
Explanation: B is correct. The appropriation account distributes profit: Net profit + Interest on drawings − Partner salaries − Interest on capital = Residual profit shared in PSR. A is drawings. C is the capital account. D is a loan account.
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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