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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 121
Under IAS 8, what is the difference between a 'change in accounting estimate' and a 'change in accounting policy'?
Select an option first.
Correct answer: B — A change in estimate (e.g., revised useful life) is treated prospectively — affecting only current and future periods; a change in policy is treated retrospectively — restating prior periods
Explanation: B is correct. IAS 8: estimate change → prospective (no restatement). Policy change → retrospective (restate prior periods). A, C and D are wrong.
Question 122
What is 'earnings management' and why is it problematic?
Select an option first.
Correct answer: B — The deliberate manipulation of reported earnings (within or outside GAAP) to meet targets or smooth profits — conflicts with faithful representation and can mislead investors
Explanation: B is correct. Earnings management: uses accounting flexibility or timing manipulation to report desired earnings. Conflicts with neutrality and faithful representation. A misidentifies it as legitimate. C is investor relations. D is segment reporting.
Question 123
What does IAS 10 'Events After the Reporting Period' prescribe?
Select an option first.
Correct answer: B — Events occurring between the reporting date and authorisation for issue — classified as adjusting (evidence of conditions at reporting date → adjust) or non-adjusting (new conditions → disclose only)
Explanation: B is correct. IAS 10: adjusting events → adjust statements. Non-adjusting events → disclose in notes only. A is too broad. C is too broad. D is wrong.
Question 124
What is a 'contingent asset' under IAS 37?
Select an option first.
Correct answer: B — A possible asset depending on an uncertain future event — NOT recognised (to avoid premature gain recognition) but disclosed in notes if the inflow is probable
Explanation: B is correct. IAS 37: contingent asset — possible inflow, uncertain outcome. Recognised only when virtually certain. Disclosed if probable. Not disclosed if remote. Asymmetry with contingent liabilities reflects prudence. A, C and D are wrong.
Question 125
What is IAS 37 environmental provision recognition?
Select an option first.
Correct answer: B — Recognised when a past event creates a present obligation to clean up environmental damage — the entity must have a legal or constructive obligation with probable outflow reliably estimated
Explanation: B is correct. IAS 37: if an entity has contaminated land and law requires remediation, or a constructive obligation exists (e.g., published voluntary clean-up policy), a provision must be recognised. A and C are too broad. D is wrong.
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Question 126
What is 'IAS 20 Government Grants' — how is an asset-related grant treated?
Select an option first.
Correct answer: B — A grant related to an asset is recognised over the useful life of the asset — either deducted from the asset's carrying amount (reducing depreciation) or recognised as deferred income and released over the asset's life
Explanation: B is correct. IAS 20: asset-related grants — either reduce asset cost (lower depreciation) or deferred income (released over asset life). Income-related grants matched against related costs. A is too immediate. C is wrong. D violates disclosure requirements.
Question 127
What is 'IAS 36 recoverable amount'?
Select an option first.
Correct answer: B — The higher of: fair value less costs to sell (FVLCTS) and value in use (VIU) — the asset is written down only if carrying amount exceeds recoverable amount
Explanation: B is correct. IAS 36: Recoverable amount = higher of FVLCTS (exit value) and VIU (PV of future cash flows). Impaired only if CA > RA. Using the higher value represents the maximum the entity can recover. A is NBV. C is replacement cost. D is market price only.
Question 128
What is an 'impairment reversal' under IAS 36?
Select an option first.
Correct answer: B — An impairment loss may be reversed in a subsequent period if recoverable amount has increased — EXCEPT goodwill impairment which can NEVER be reversed
Explanation: B is correct. IAS 36: reversals permitted (except goodwill) — up to the NBV that would have existed had no impairment occurred. Goodwill impairment irreversible (to prevent manipulation). A is wrong. C applies sometimes. D is wrong.
Question 129
What is 'IAS 41 Agriculture' and its measurement principle?
Select an option first.
Correct answer: B — Biological assets and agricultural produce at harvest are measured at fair value less costs to sell — gains/losses in profit or loss
Explanation: B is correct. IAS 41: biological assets (livestock, growing crops) at FVLCTS. Changes in FV → P&L. Agricultural produce at harvest at FVLCTS, then transferred to IAS 2 as inventory. A is old cost approach. C is NRV. D is too narrow.
Question 130
What is 'net assets' and how does it relate to equity?
Select an option first.
Correct answer: B — Net assets = Total assets − Total liabilities = Equity. They are mathematically identical from the accounting equation
Explanation: B is correct. Assets − Liabilities = Equity = Net assets. Two ways of expressing the same amount. A is wrong. C is too narrow. D describes profit.
Question 131
What is a 'redeemable preference share' and how is it classified under IAS 32?
Select an option first.
Correct answer: B — Classified as a liability because the mandatory redemption creates a financial obligation — the issuer must transfer cash — regardless of its legal form as a share
Explanation: B is correct. IAS 32: classification follows substance. Redeemable preference shares — mandatory redemption → financial obligation → liability. Dividends on such shares are finance costs (P&L). A ignores substance. C and D are incorrect.
Question 132
What is 'IFRS for SMEs' and how does it differ from full IFRS?
Select an option first.
Correct answer: B — A simplified, self-contained standard for SMEs not publicly accountable — fewer disclosures, simpler measurement, and some topics (e.g., goodwill amortisation) treated differently from full IFRS
Explanation: B is correct. IFRS for SMEs: reduced disclosures, simplified options (goodwill amortised over 10 years; no revaluation model for PPE), designed for SMEs not in the public interest. Full IFRS is more comprehensive. A sets wrong threshold. C and D are wrong.
Question 133
What is the accounting equation effect when a business pays a dividend of £10,000?
Select an option first.
Correct answer: B — Assets decrease £10,000 (bank) and equity decreases £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 — equation balanced. A increases assets. C increases liabilities. D decreases liabilities.
Question 134
What is 'financial capital maintenance'?
Select an option first.
Correct answer: B — Profit is earned only if the financial amount of net assets at period end exceeds the financial amount at the beginning — after excluding owner contributions and distributions
Explanation: B is correct. Financial capital maintenance: profit = increase in net assets in monetary terms, excluding owner transactions. Most common basis. A is physical capital maintenance. C is liquidity. D is share capital preservation.
Question 135
What is 'negative equity' and when does it arise?
Select an option first.
Correct answer: A — Equity less than zero — total liabilities exceed total assets, often due to accumulated losses exceeding all capital invested
Explanation: A is correct. Negative equity: Liabilities > Assets → Equity < 0. Arises from significant accumulated losses exceeding all reserves and paid-in capital. B, C and D are not definitions of negative equity.
Question 136
What is an 'impairment trigger' under IAS 36?
Select an option first.
Correct answer: A — Annual depreciation of an asset
Explanation: A is correct. IAS 36 impairment indicators include: significant decline in market value, physical damage, adverse market/technology/economic changes, interest rate increases. B is the actual trigger — A misidentifies depreciation (which is routine). Trick question designed to test understanding. Actually B is the correct answer: significant decline in market value, damage, or adverse changes. Reread: B as stated IS correct. A: annual depreciation is NOT a trigger.
Question 137
What are 'distributable reserves'?
Select an option first.
Correct answer: B — Profits available to be legally paid as dividends — primarily retained earnings; ensures dividends only come from realised profits, protecting creditors
Explanation: B is correct. Distributable reserves: realised profits available for dividends. Important for creditor protection. Capital reserves (share premium, revaluation surplus) are non-distributable. A is a physical cash concept. C includes non-distributable reserves. D gives too much discretion.
Question 138
What is a 'cash-generating unit' (CGU)?
Select an option first.
Correct answer: B — The smallest identifiable group of assets generating cash inflows largely independent of other assets — used when an individual asset's recoverable amount cannot be estimated
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 are wrong.
Question 139
What is 'substance over form' for factored receivables?
Select an option first.
Correct answer: B — If the entity retains substantially all risks and rewards of the receivables, they should NOT be derecognised — the transfer is a secured borrowing despite its legal form as a sale
Explanation: B is correct. IFRS 9 derecognition: derecognise only if substantially all risks/rewards transferred. If risks retained (e.g., entity guarantees uncollectable receivables), the receivable stays on balance sheet; cash received = liability. A is too absolute. C and D are wrong.
Question 140
What is an 'onerous contract provision' — how is the amount measured?
Select an option first.
Correct answer: B — At the lower of: the cost of fulfilling the contract, and the cost/penalty of exiting the contract — whichever is the lesser net cost
Explanation: B is correct. IAS 37 onerous contract provision = lower of net cost of fulfilling and the cost/penalty of exiting. Recognising the least-cost exit ensures the provision is not overstated. A is a single option. C only considers one alternative. D is profit (irrelevant for the provision amount).
Question 141
What is 'IAS 37 a restructuring provision'?
Select an option first.
Correct answer: B — A provision recognised when an entity has a detailed formal plan for restructuring AND has raised a valid expectation in those affected (by starting implementation or announcing the plan)
Explanation: B is correct. IAS 37: restructuring provision recognised when constructive obligation exists — detailed formal plan + valid expectation created. Cannot provide for future operating losses or costs that don't arise from the obligation. A includes future operating costs. C waits too long. D gives too much latitude.
Question 142
What is the 'IAS 37 restructuring provision' recognition test?
Select an option first.
Correct answer: B — Recognised when there is a constructive obligation — a detailed formal plan exists AND a valid expectation has been created in those affected by announcing or starting to implement the plan
Explanation: B is correct. IAS 37: constructive obligation for restructuring = detailed formal plan + valid expectation created (announcement or implementation start). Provides for directly caused restructuring costs only (not future operating losses or costs that continue after restructuring). A is too broad. C is too late. D gives approval without external expectation.
Question 143
Under IAS 16, what costs are EXCLUDED from the initial cost of a self-constructed asset?
Select an option first.
Correct answer: C — Abnormal amounts of waste, labour, or other resources incurred during construction
Explanation: C is correct. IAS 16: cost of a self-constructed asset includes direct materials, direct labour, and directly attributable overheads. Abnormal costs (excess waste, inefficiencies) are specifically excluded — they are expensed immediately. A, B and D are all included in the cost.
Question 144
What is the double-entry bookkeeping system?
Select an option first.
Correct answer: B — Every transaction affects two accounts — one receives a debit and the other a credit of the same amount
Explanation: B is correct. Double-entry: every transaction has two equal and opposite effects — a debit and a credit of the same amount. This maintains the accounting equation's balance. A, C and D are not correct descriptions.
Question 145
Which accounts are INCREASED by a DEBIT entry?
Select an option first.
Correct answer: B — Asset accounts and expense accounts
Explanation: B is correct. DEAD CLIC: Debits increase Expenses, Assets, Drawings; Credits increase Liabilities, Income, Capital/Equity. A, C and D are incorrect combinations.
Question 146
A business sells goods on credit for £3,000. Correct double-entry?
Select an option first.
Correct answer: C — Debit Trade Receivables £3,000; Credit Sales Revenue £3,000
Explanation: C is correct. Credit sale: customer owes money (Debit Trade Receivables) and revenue is earned (Credit Sales Revenue). A reverses the entry. B records a cash sale. D uses trade payables (amounts owed by the business, not to it).
Question 147
A business pays rent of £1,200 by bank transfer. Correct double-entry?
Select an option first.
Correct answer: B — Debit Rent Expense £1,200; Credit Bank £1,200
Explanation: B is correct. Rent payment: Rent Expense increases (debit), Bank decreases (credit). A reverses the entry. C records an unpaid liability. D credits equity directly (wrong — expenses reduce equity indirectly through profit).
Question 148
What is a general (nominal) ledger?
Select an option first.
Correct answer: B — The main accounting record containing all accounts of a business — each account records all transactions of one type
Explanation: B is correct. The nominal ledger is the central repository for all accounts. Each account records transactions of that type and its balance feeds into the trial balance and financial statements. A, C and D describe other records.
Question 149
What is a journal entry and when is it used?
Select an option first.
Correct answer: B — A formal record of a double-entry transaction — used for non-routine items, period-end adjustments, corrections of errors, opening entries, and provisions
Explanation: B is correct. A journal entry formally records debits and credits with a narration. Used for: period-end accruals, depreciation charges, provisions, error corrections, and opening balance entries. A, C and D describe other records.
Question 150
How is sales tax (VAT) treated by a VAT-registered business?
Select an option first.
Correct answer: B — As a tax collected on behalf of the government — not business income; the net amount (output less input VAT) is a liability or asset
Explanation: B is correct. VAT-registered businesses collect output VAT (liability to HMRC) and reclaim input VAT. Net VAT payable is a current liability; net reclaimable is a current asset. VAT collected is NOT revenue. A and C are wrong. D is unrelated.
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