CIMA F1 flashcards

Inventory is valued at the lower of ___ and ___?

Inventory is valued at the lower of cost and net realisable value (NRV).

Buildings will be depreciated because they have a limited useful life. Land will not normally be depreciated because it has an unlimited life.

What are the two fundamental qualitative characteristics contained with the IASB Conceptual Framework?

The fundamental qualitative characteristics are relevance and faithful representation.

What are the four enhancing qualitative characteristics within the IASB Conceptual Framework? The four enhancing qualitative characteristics are:

• Comparability
• Verifiability
• Timeliness
• Understandability

Per IAS 1, a complete set of financial statements comprise of which financial statements?

• Statement of Financial Position
• Statement of Profit or Loss and Other Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in Equity
• Notes to the Financial Statements

For a non-current asset to be classed as “held for sale” it should be available for sale within the period three months to six months after being so classified.

Is the above statement true?

The statement is not true. To be classed as “held for sale” it should be available for immediate sale

What is the appropriate accounting treatment for a short-life, leased asset? The appropriate accounting treatment  is to expense the total lease payments over the lease period through profit or loss.

At what value should a lease liability be measured? A lease liability should be measured at the the present value of the minimum lease payments.

What is the definition of a lease? A lease is where there is the right to obtain substantially all of the benefits of using the asset and direct the use of the asset.

What is a “constructive obligation” of an entity? A constructive obligation of an entity is one which is neither legal nor contractual but, because the entity has acted in a consistent manner in the past (a demonstrable pattern of past practice), the entity has raised in the minds of those affected the valid expectation that it will continue to act in that consistent manner. An example of this would be where a company states on its website that it will clean up any environmental damage, so that even if there is no legal obligation to do so they have created the constructive obligation and must provide for the clean up costs.

What is an onerous contract? An onerous contract is one where the costs under the contract exceed the economic benefits of fulfilling the contract.  It essentially gives an entity no chance of an overall inflow of economic benefit and the company must provide for the onerous contract.

What is the definition of “events after the reporting period”? Events after the reporting period are defined as “those events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue.”  IAS 10 [3]

What is the correct double entry to reflect a non-adjusting event? A non-adjusting event does not have a double entry as we do not need to adjust the accounts. The appropriate accounting treatment is to disclose the matter in the notes to the financial statements, if it is material.

What is the appropriate accounting treatment for an adjusting event? The appropriate accounting treatment for an adjusting event is to ….. adjust the financial statements as though the event had happened before the reporting date.  So, if a customer went into liquidation after the reporting date but prior to the accounts being authorised for issue, this would be an adjusting event and the receivable balance would be written off through profit or loss.

What is a “cash equivalent” in the context of a Statement of Cash Flows? A cash equivalent in the context of a Statement of Cash Flows is the expression applied to short-term, highly liquid investments that are readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value.  An example being government bonds/guilts.

What are the three main sub-divisions in a Statement of Cash Flows? The three main sub-divisions in a Statement of Cash Flows are:

• Operating activities
• Investing activities, and
• Financing activities

Over what period of time should a right-of-use asset be depreciated? A right-of-use asset is depreciated over the shorter of the lease term and the useful life of the asset.

How is a lease incentive accounted for within the financial statements? A lease incentive is deducted from the initial measurement of the asset.

How are fixed overheads allocated to the cost of an item of inventory? Fixed overheads are allocated on the basis of normal/budgeted capacity.  This is the capacity that is expected to be achieved based on the average over several years.

How are variable overheads allocated to an item of inventory? Variable overheads are allocated based on the actual level of production.