Financial Reporting Situations
A company prepares its financial statements assuming the business will continue for the foreseeable future.This assumption is known as:
A. Prudence
B. Going concern
C. Consistency
D. Materiality
B – Going Concern
Explanation: Financial statements are normally prepared assuming the business will continue its operations.
Inventory should be valued at:
A. Cost
B. Net Realisable Value
C. Selling Price
D. Lower of Cost or NRV
D – Lower of Cost or NRV
Explanation: Ind AS 2 requires inventory to be measured at the lower of cost and net realisable value.
Property, Plant and Equipment (PPE) should be initially measured at:
A. Fair value
B. Cost
C. Market value
D. Net realisable value
B – Cost
Explanation: Ind AS 16 requires PPE to be initially recognised at cost.
A company receives an order from a customer, but the payment terms and delivery schedule are not yet agreed by both parties. According to Ind AS 115, when can revenue recognition begin?
A. When the order is received
B. When goods are ready for delivery
C. When payment is received
D.When a valid contract with enforceable rights and obligations exists
D. When a valid contract with enforceable rights and obligations exists
Explanation: Revenue recognition starts only after a valid contract exists.
A company is valuing a piece of equipment. Management decides to use the purchase price paid three years ago because it is recorded in the books, even though current market conditions have changed. Which of the following best explains the mistake in this approach?
A. Fair value should be based on historical cost
B. Fair value should be calculated only when the asset is sold
C. Fair value should be based on expected future profits
D. Fair value should reflect current market conditions at the measurement date
D. Fair value should reflect current market conditions at the measurement date
Explanation: Fair value is a market-based exit price determined at the measurement date, not historical cost.
A company receives electricity bill for March in April and records the expense in April instead of March.Which accounting concept is not properly followed?
A. Accrual concept
B. Matching concept
C. Consistency concept
D. Prudence concept
A – Accrual concept
Explanation: Expenses should be recorded in the period in which they are incurred, not when paid.
Which of the following is included in inventories as per Ind AS 2?
A. Goods held for sale in the ordinary course of business
B. Office furniture
C. Land held for long-term use
D. Investment property
A. Goods held for sale in the ordinary course of business
Explanation: Inventories include goods held for sale or used in production.
A company purchases a specialised machine, but its cost cannot be measured reliably due to lack of proper documentation.
According to Ind AS 16, what should be done?
A. Do not recognise the asset
B. Recognise the asset at market value
C. Recognise the asset at estimated value
D. Recognise the asset at ₹1
A. Do not recognise the asset
Explanation: PPE is recognised only when cost can be measured reliably.
A company sells a laptop along with a one-year warranty that only covers manufacturing defects.How should the warranty be treated?
A. Separate performance obligation
B. Part of normal product assurance
C. Recognise revenue after warranty period
D. Ignore warranty in revenue recognition
B. Part of normal product assurance
Explanation: Assurance-type warranties are not separate performance obligations.
An asset can be sold in two markets:
Market A: High volume and frequent transactions Market B: Lower activity but slightly higher selling price
Both markets are accessible to the company. According to Ind AS 113, which market should be used for fair value measurement?
A. Market B
B. Average price of both markets
C. Market A
D. Any market selected by management
C. Market A
Explanation: If a principal market exists (highest activity), fair value must be based on that market.
A company changes its depreciation method from Straight Line Method to Written Down Value Method during the year, which increases current year profit. The company does not provide any justification or disclosure for the change.Which principle is violated?
A. Prudence
B. Materiality
C. Accrual
D. Consistency and Disclosure
D – Consistency and Disclosure
Explanation: Changes in accounting methods must be justified and properly disclosed to maintain consistency.
During production, a company incurs normal wastage and abnormal wastage. The company includes both in inventory valuation.What is the correct treatment?
A. Include both in inventory cost
B. Exclude both from inventory cost
C. Include normal loss in cost and expense abnormal loss
D. Expense normal loss and include abnormal loss in cost
C. Include normal loss in cost and expense abnormal loss
Explanation: Normal loss is part of production cost, but abnormal loss must be charged to Profit & Loss.
A company purchases machinery and incurs the following costs:Purchase price, Installation cost, Training cost for employees. Which of the following should be included in the cost of PPE?
A. Purchase price only
B. Purchase price and installation cost
C. Installation and training cost
D. All the above
B. Purchase price and installation cost
Explanation: Training costs are excluded; only costs necessary to bring the asset to working condition are capitalised.
A company sells machinery and also provides installation services. The customer can use the machinery without installation by hiring another service provider. What should the company do?
A. Recognise full revenue for machinery only
B. Recognise revenue only after installation
C. Treat machinery and installation as separate performance obligations
D. Recognise installation as an expense
C. Treat machinery and installation as separate performance obligations
Explanation: Distinct goods/services must be accounted for separately.
While determining fair value, management estimates the value based on special advantages the asset provides only to its own business operations. These benefits would not be available to other buyers in the market. Why is this approach incorrect?
A. Fair value should be based on entity-specific benefits
B. Fair value should ignore market conditions
C. Fair value should always equal book value
D. Fair value should reflect assumptions of market participants, not the entity
Answer:D
Explanation: Fair value is market-based and not entity-specific.
D. Fair value should reflect assumptions of market participants, not the entity
Explanation: Fair value is market-based and not entity-specific.
A company has suffered heavy losses and is facing serious financial difficulties. Management is uncertain whether the business will survive, but financial statements are still prepared on a going concern basis without any disclosure.What is the correct requirement under Ind AS 1?
A. Continue without any disclosure
B. Change all assets to market value
C. Disclose material uncertainty related to going concern
D. Stop preparing financial statements
C – Disclose material uncertainty related to going concern
Explanation: If there is significant doubt about survival, it must be clearly disclosed in the financial statements.
A company holds raw materials at cost. However, the finished goods produced from these materials are expected to be sold below their cost.According to Ind AS 2, how should raw materials be valued?
A. Continue to value at original cost
B. Value at selling price
C. Write down to replacement cost
D. Ignore the decline until goods are sold
C. Write down to replacement cost
Explanation: If finished goods will be sold below cost, raw materials should be written down to their replacement value.
A company exchanges its old machine for a new one. The transaction has commercial substance and the fair value of the new machine can be measured reliably. How should the new asset be recorded?
A. At carrying amount of the old asset
B. Do not recognise the new asset
C. At historical cost of the old asset
D. At fair value of the asset received
D. At fair value of the asset received
Explanation: When exchange has commercial substance and fair value is reliable, PPE is measured at fair value.
A company completes production of goods and issues an invoice to the customer, but the goods are still lying in the company’s warehouse and the customer has not yet taken delivery or control. According to Ind AS 115, when should revenue be recognised?
A. When control of goods transfers to the customer
B. When goods are produced
C. When invoice is issued
D. When payment is received
A. When control of goods transfers to the customer
Explanation: Revenue is recognised only when control of the goods transfers to the customer.
A company sells an asset urgently to repay a bank loan. The sale is completed quickly at a significantly reduced price without proper market exposure. For fair value measurement purposes, this transaction would be considered:
A. A forced transaction and not representative of fair value
B. A principal market transaction
C. An orderly transaction
D. The correct fair value because it is an actual sale
A. A forced transaction and not representative of fair value
Explanation: Fair value assumes an orderly transaction, not a distress or forced sale.
At the end of the year, management delays recording some expenses to show higher profits. They believe the amounts are small and will not affect the decisions of users of financial statements.Which accounting concept is most relevant in this situation?
A. Prudence
B. Materiality
C. Consistency
D. Going Concern
B – Materiality
Explanation: Materiality relates to whether an omission or misstatement is significant enough to influence users’ decisions.
A company holds raw materials at a cost of ₹90 per unit. These materials are used to produce finished goods whose cost is ₹200 per unit. Due to a fall in market demand, the expected selling price of finished goods is ₹180 per unit and selling expenses are ₹10 per unit. The replacement cost of raw materials is ₹75 per unit.How should the raw materials be valued according to Ind AS 2?
A. At original cost of ₹90 per unit
B. At replacement cost
C. At the expected selling price of finished goods
D. No change is required until finished goods are sold
B – At replacement cost
Explanation: Since the NRV of finished goods (₹180 – ₹10 = ₹170) is lower than their cost (₹200), the related raw materials must be written down to their replacement cost.
A company purchases a specialised machine for a new project. However, due to uncertainty about market demand, management is not sure whether the machine will be used in production. The cost of the machine is known and measurable. According to Ind AS 16, how should the company treat this machine?
A. Recognise as Property, Plant and Equipment
B. Recognise only when the machine is actually used
C. Do not recognise as PPE until future economic benefits are probable
D. Expense the entire amount immediately
C – Do not recognise as PPE until future economic benefits are probable
Explanation: PPE is recognised only when future economic benefits are probable and cost can be measured reliably.
A company enters into a contract to supply 100 units of a product. Later, the customer requests an additional 20 units at the same price per unit as the original contract. According to Ind AS 115, how should this change be treated?
A. Ignore the additional units until delivered
B. Treat it as a separate contract
C. Cancel the original contract and create a new one
D. Recognise revenue only after full completion of 120 units
B. Treat it as a separate contract
Explanation: If additional goods are priced at the stand-alone selling price, the modification is treated as a separate contract.
At the reporting date, management delays fair value measurement because they expect market prices to increase significantly in the next three months and plan to use the expected future price instead. According to Ind AS 113, how should fair value be determined?
A. Based on expected future prices
B. Based on the price at the measurement date
C. Based on management’s business plans
D. Based on the highest possible future value
B.Based on the price at the measurement date Explanation: Fair value must reflect market conditions at the measurement date, not future expectations.