ACCA F7 LRP - Questions.pdf - QUESTIONS KAPLAN P UBLI S H I...

KAPLAN PUBLISHING 1
QUESTIONS

ACCA F7: FINANCIAL REPORTING
2 KAPLAN PUBLISHING
A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
1 A COMPANY
Discuss what you understand by the terms:
(i) current purchasing power accounting;
(ii) current cost accounting;
(iii) real terms system of accounting
and state what you consider to be the advantages and disadvantages of each.
(12 marks)

LECTURER RESOURCE PACK: QUESTIONS
KAPLAN PUBLISHING 3
2 LIMITATIONS OF HISTORICAL COST
Even in times of inflation, published financial statements continue to be prepared under the
historical cost convention despite its alleged limitations.
Required:
Explain why historical cost accounting has been criticised and to explain some of the
advantages associated with its use. (15 marks)

ACCA F7: FINANCIAL REPORTING
4 KAPLAN PUBLISHING
3 FOREST
The overriding requirement of a company’s financial statements is that they should
represent faithfully the underlying transactions and other events that have occurred. To
achieve this transactions have to be accounted for in terms of their ‘substance’ or economic
reality rather than their legal form. This principle is included in the IASB (International
Accounting Standards Board) Conceptual Framework for Financial Reporting , and is also
used in many Standards, in particular IAS 17 Leases and IAS 18 Revenue .
Required:
(a) Describe why it is important that substance rather than legal form is used to
account for transactions, and describe how financial statements can be adversely
affected if the substance of transactions is not recorded. (5 marks)
(b) Describe, using an example, how the following features may indicate that the
substance of a transaction is different from its legal form:
(i) separation of ownership from beneficial use
(ii) the linking of transactions including the use of option clauses
(iii) when an asset is sold at a price that differs to its fair value. (9 marks)
(c) On 1 April 20X0, Forest had an inventory of cut seasoning timber which had cost
$12 million two years ago. Due to shortages of this quality of timber its value at
1 April 20X0 had risen to $20 million. It will be a further three years before this
timber is sold to a manufacturer of high-class furniture. On 1 April 20X0, Forest
entered into an arrangement to sell Barret Bank the timber for $15 million. Forest
has an option to buy back the timber at any time within the next three years at a
cost of $15 million plus accumulated interest at 2% per annum above base rate.
This will be charged from the date of the original sale. The base rate for the period
of the transactions is expected to be 8%. Forest intends to buy back the timber on
31 March 20X3 and sell it the same day for an expected price of $25 million.
Note: Ignore any storage costs and capitalisation of interest that may relate to
inventories.