Association of Chartered Certified Accountants (ACCA) Financial Reporting (FR) Flashcards

24 sample cards from the Financial Reporting (FR) deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Under IAS 7, how does the indirect method derive cash generated from operations?

   Start with profit before tax, add back non-cash items (depreciation, amortisation, impairment) and finance costs, remove investment income, then adjust for working capital changes (increase in inventory/receivables decreases cash; increase in payables increases cash).

2. Under IAS 7, give examples of cash flows classified under investing activities.

   Purchases and sales of property, plant and equipment and intangibles, acquisitions/disposals of subsidiaries and other investments, and interest/dividends received (where so classified).

3. Under IAS 33, state the formula for basic earnings per share.

   $$\text{Basic EPS} = \frac{\text{Profit attributable to ordinary equity holders}}{\text{Weighted average number of ordinary shares}}$$

4. Under IAS 33, how is the bonus fraction applied to a rights issue when calculating the weighted average number of shares?

   A rights issue includes a bonus element, so prior periods' shares are multiplied by the bonus fraction: $$\frac{\text{Cum-rights (actual) price}}{\text{Theoretical ex-rights price (TERP)}}$$

5. Under IAS 33, how is diluted EPS adjusted for convertible loan notes?

   Increase the numerator by the after-tax interest saved on the convertible debt and increase the denominator by the number of ordinary shares that would arise on conversion.

6. Under IAS 8, how is a change in accounting policy versus a change in accounting estimate treated?

   A change in accounting policy is applied retrospectively (restate prior periods/opening reserves). A change in accounting estimate is applied prospectively (in the current and future periods).

7. Under IAS 8, how should a prior period error be corrected?

   Retrospectively, by restating the comparative amounts for the prior period(s) presented (or adjusting opening balances of the earliest period presented if the error occurred before that).

8. Under IFRS 5, how is a non-current asset held for sale measured and presented?

   Measured at the lower of carrying amount and fair value less costs to sell; it is no longer depreciated and is presented separately from other assets. Discontinued operations' results are shown as a single line on the face of the statement of profit or loss.

9. Under IAS 10, distinguish adjusting and non-adjusting events after the reporting period.

   Adjusting events provide evidence of conditions existing at the reporting date (adjust the financial statements). Non-adjusting events relate to conditions arising after the reporting date (disclose if material, do not adjust).

10. State the formulas for gross profit margin and operating (net) profit margin.

    $$\text{Gross margin} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100\% \qquad \text{Operating margin} = \frac{\text{Operating profit}}{\text{Revenue}} \times 100\%$$

11. State the formula for return on capital employed (ROCE).

    $$\text{ROCE} = \frac{\text{Operating profit (PBIT)}}{\text{Capital employed}} \times 100\%$$ where capital employed = total equity + non-current liabilities (or total assets − current liabilities).

12. State the formulas for the current ratio and the quick (acid-test) ratio.

    $$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}} \qquad \text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$

13. State the formula for the gearing ratio (debt-to-equity and debt-to-capital basis).

    $$\text{Gearing} = \frac{\text{Debt}}{\text{Equity}} \times 100\% \quad\text{or}\quad \frac{\text{Debt}}{\text{Debt} + \text{Equity}} \times 100\%$$

14. State the formulas for inventory holding period and trade receivables collection period (in days).

    $$\text{Inventory days} = \frac{\text{Inventory}}{\text{Cost of sales}} \times 365 \qquad \text{Receivables days} = \frac{\text{Trade receivables}}{\text{Credit sales}} \times 365$$

15. State the formula for the trade payables payment period (in days).

    $$\text{Payables days} = \frac{\text{Trade payables}}{\text{Credit purchases (or cost of sales)}} \times 365$$

16. State the formula for interest cover and explain what it measures.

    $$\text{Interest cover} = \frac{\text{Profit before interest and tax (PBIT)}}{\text{Finance costs}}$$ It measures the number of times operating profit covers interest payable — a key indicator of solvency/risk for lenders.

17. How does the cash operating cycle relate to working capital management?

    $$\text{Cash cycle} = \text{Inventory days} + \text{Receivables days} - \text{Payables days}$$ A longer cycle ties up more cash in working capital; a shorter (or negative) cycle improves liquidity.

18. When interpreting financial statements for a potential lender, which ratios are most relevant and why?

    Gearing and interest cover (assess financial risk and ability to service debt), liquidity ratios (current/quick, ability to meet short-term obligations), and cash flow from operations (genuine cash generation) rather than profit alone.

19. When interpreting financial statements for a potential equity investor, which ratios matter most?

    Profitability (ROCE, margins, EPS), dividend cover and dividend yield, growth in revenue/profit, and gearing (risk to returns). Investors focus on return and capital growth prospects.

20. Why might a high return on capital employed (ROCE) be misleading when comparing two companies?

    ROCE can be inflated by old, heavily depreciated (low carrying amount) assets, by leasing/off-balance-sheet financing, by use of the cost vs revaluation model, or by different capital structures — reducing comparability of the denominator.

21. State three inherent limitations of ratio analysis when interpreting performance.

    Ratios are based on historical figures (may not reflect current/future position); they can be distorted by different accounting policies and estimates; and they ignore non-financial factors, seasonality, inflation and the effect of one-off items, reducing comparability.

22. How can creative accounting or window dressing undermine the interpretation of financial statements?

    Management may time transactions (e.g. sale and repurchase, channel stuffing), choose favourable estimates/policies, or reclassify items to improve apparent profit, liquidity or gearing — so users should review accounting policies, cash flows and notes critically.

23. What special considerations arise when interpreting the financial statements of a not-for-profit entity?

    Profit ratios are less relevant; focus shifts to value for money (economy, efficiency, effectiveness), achievement of objectives, surplus/deficit against budget, and stewardship of funds rather than return to shareholders.

24. How does a statement of cash flows aid interpretation beyond the profit or loss statement?

    It reveals the quality of earnings by showing whether profits convert into cash, highlights reliance on financing, capital expenditure levels, and liquidity/solvency trends — cash being harder to manipulate than accruals-based profit.

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