ICAEW AF · Chapter 13
Limited company financial statements MCQs with Answers
12 multiple-choice questions on Limited company financial statements for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A company issues 200,000 ordinary shares with a nominal value of £0.50 each at a price of £1.40 per share, all paid in cash. How is the issue recorded in equity?
- A) Share capital £280,000
- B) Share capital £100,000 and share premium £180,000
- C) Share capital £100,000 and retained earnings £180,000
- D) Share capital £200,000 and share premium £80,000
Show answer & explanation
Answer: B) Share capital £100,000 and share premium £180,000
Share capital is always recorded at nominal value: 200,000 x £0.50 = £100,000. The excess received over nominal value is credited to share premium: 200,000 x (£1.40 - £0.50) = £180,000. Cash of £280,000 is debited.
Question 2
Where are ordinary dividends paid during the year shown in a company's financial statements prepared under IFRS?
- A) In the statement of profit or loss, as a finance cost
- B) In the statement of profit or loss, as an administrative expense
- C) In other comprehensive income
- D) In the statement of changes in equity, as a deduction from retained earnings
Show answer & explanation
Answer: D) In the statement of changes in equity, as a deduction from retained earnings
Dividends are distributions to owners of their share of profits, not expenses of the business. They are therefore presented in the statement of changes in equity as a reduction of retained earnings. Finance costs relate to interest on borrowings, not to returns to shareholders.
Question 3
A company's reporting date is 31 December. In February, after the reporting date but before the financial statements are authorised for issue, the directors declare a final ordinary dividend for the year just ended. How should this dividend be treated in the financial statements for the year ended 31 December?
- A) It is recognised as a current liability at the reporting date
- B) It is not recognised as a liability at the reporting date, but is disclosed in the notes
- C) It is recognised as an expense in the statement of profit or loss
- D) It is deducted from retained earnings at the reporting date
Show answer & explanation
Answer: B) It is not recognised as a liability at the reporting date, but is disclosed in the notes
At 31 December the company had no present obligation to pay the dividend, because it had not yet been declared, so it does not meet the Conceptual Framework definition of a liability and is not recognised. It will be deducted from retained earnings in the statement of changes in equity of the following year, when it is declared. IAS 1 requires the amount of dividends proposed or declared before the financial statements are authorised for issue, but not recognised, to be disclosed in the notes. Dividends are never an expense in profit or loss.
Question 4
A company's income tax liability for the previous year was estimated at £31,000. It was settled during the current year for £33,200. The estimated income tax for the current year is £38,000. What is the income tax expense in the statement of profit or loss for the current year?
- A) £33,200
- B) £35,800
- C) £38,000
- D) £40,200
Show answer & explanation
Answer: D) £40,200
The previous year's estimate of £31,000 was £2,200 too low (£33,200 - £31,000), an under-provision. This is a change in estimate and is added to the current year's charge. Tax expense = £38,000 + £2,200 = £40,200. The liability in the statement of financial position is the current year estimate of £38,000.
Question 5
A company's retained earnings were £145,000 at the start of the year. Profit for the year was £62,300, dividends paid were £24,000, and £3,000 was transferred from the revaluation surplus to retained earnings for excess depreciation. What are the retained earnings at the end of the year?
- A) £186,300
- B) £180,300
- C) £183,300
- D) £210,300
Show answer & explanation
Answer: A) £186,300
Closing retained earnings = opening £145,000 + profit £62,300 - dividends £24,000 + transfer from revaluation surplus £3,000 = £186,300. The transfer moves the realised part of the surplus into retained earnings; it does not pass through profit or loss.
Question 6
Which of the following is NOT a component of a complete set of financial statements under IAS 1 Presentation of Financial Statements?
- A) A statement of cash flows
- B) A statement of changes in equity
- C) A statement of financial position
- D) A chairman's statement
Show answer & explanation
Answer: D) A chairman's statement
IAS 1 states that a complete set of financial statements comprises a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity, a statement of cash flows and notes, with comparative information. A chairman's statement may be published alongside the financial statements but is not required by IAS 1.
Question 7
At its year end, a company has a bank loan of £50,000, repayable in equal annual instalments of £10,000, with the first instalment due nine months after the year end. How should the loan be presented in the statement of financial position?
- A) Non-current liabilities £50,000
- B) Current liabilities £40,000; non-current liabilities £10,000
- C) Current liabilities £50,000
- D) Current liabilities £10,000; non-current liabilities £40,000
Show answer & explanation
Answer: D) Current liabilities £10,000; non-current liabilities £40,000
Under IAS 1, a liability is current if it is due to be settled within twelve months after the reporting period. The instalment of £10,000 due in nine months is current. The remaining £50,000 - £10,000 = £40,000 is due after more than twelve months and is non-current.
Question 8
Which of the following items is presented in a company's statement of changes in equity, rather than in its statement of profit or loss?
- A) Interest paid on the company's loan notes
- B) The income tax expense for the year
- C) An issue of ordinary shares for cash at a premium
- D) Depreciation of property, plant and equipment
Show answer & explanation
Answer: C) An issue of ordinary shares for cash at a premium
The statement of changes in equity shows transactions with owners in their capacity as owners, such as share issues and dividends, together with total comprehensive income for the year. A share issue increases share capital and share premium and is not income. Loan note interest is a finance cost, income tax is the tax expense and depreciation is an operating expense, so all three are charged in the statement of profit or loss.
Question 9
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a company is being sued by a customer. Its lawyers advise that it is possible, but not probable, that the company will lose the case. How should this be treated?
- A) Ignore the matter completely until the court reaches a decision
- B) Disclose a contingent liability in the notes, without recognising a provision
- C) Recognise a provision for the best estimate of the amount payable
- D) Recognise a provision and disclose a contingent asset
Show answer & explanation
Answer: B) Disclose a contingent liability in the notes, without recognising a provision
A provision is recognised only when there is a present obligation from a past event, an outflow of resources is probable and a reliable estimate can be made. Here an outflow is only possible, so no provision is recognised. Instead, a contingent liability is disclosed in the notes, unless the possibility of an outflow is remote, in which case nothing is disclosed.
Question 10
A company classifies expenses by function. For the year: opening inventory £34,000; purchases £286,000; closing inventory £41,500. Total depreciation is £25,000, of which 70% relates to production, 20% to distribution and 10% to administration. What is cost of sales?
- A) £311,000
- B) £303,500
- C) £296,000
- D) £278,500
Show answer & explanation
Answer: C) £296,000
Cost of sales = opening inventory + purchases - closing inventory + production depreciation. = £34,000 + £286,000 - £41,500 + (70% x £25,000 = £17,500) = £296,000. The distribution and administrative shares of depreciation are presented under distribution costs and administrative expenses.
Question 11
At the start of the year, a company's equity comprised: ordinary share capital (£1 shares) £100,000; share premium £20,000; retained earnings £150,000. During the year: 1. It issued 40,000 ordinary £1 shares for cash at £1.75 each. 2. After the share issue, it paid an ordinary dividend of 10p per share on all shares then in issue. 3. Profit for the year was £56,000. There were no other movements in equity. What is the company's total equity at the end of the year?
- A) £352,000
- B) £382,000
- C) £386,000
- D) £396,000
Show answer & explanation
Answer: B) £382,000
Share capital = £100,000 + (40,000 x £1) = £140,000. Share premium = £20,000 + 40,000 x (£1.75 - £1.00) = £20,000 + £30,000 = £50,000. Dividend = 140,000 shares x £0.10 = £14,000. Retained earnings = £150,000 + £56,000 - £14,000 = £192,000. Total equity = £140,000 + £50,000 + £192,000 = £382,000. Recording the share issue at nominal value only gives £352,000, paying the dividend on 100,000 shares gives £386,000, and ignoring the dividend gives £396,000.
Question 12
Under IAS 1 Presentation of Financial Statements, which of the following would be classified as a non-current liability in a company's statement of financial position?
- A) Income tax payable on the profit for the year just ended
- B) Trade payables due for payment within 30 days
- C) A bank overdraft repayable on demand
- D) Loan notes that are repayable in five years' time
Show answer & explanation
Answer: D) Loan notes that are repayable in five years' time
IAS 1 classifies a liability as current if it is due to be settled within twelve months after the reporting period, is held for trading, or is expected to be settled in the normal operating cycle; all other liabilities are non-current. Loan notes repayable in five years are not due within twelve months, so they are non-current. Income tax payable, trade payables and an overdraft repayable on demand are all due within twelve months and are current liabilities.