Free SOCPA Financial Accounting questions

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1. Question 1

   An entity has two classes of inventory at year end that it values item by item. The first class has a cost of 180,000 riyals and a net realisable value of 195,000 riyals, and the second class has a cost of 240,000 riyals and a net realisable value of 220,000 riyals. The inventory amount that appears in the statement of financial position is:

   1. A.415,000 riyals
   2. B.400,000 riyals
   3. C.420,000 riyals
   4. D.435,000 riyals
   Show answer and explanation

   Correct answer

   • B. 400,000 riyals

   Inventories are measured at the lower of cost and net realisable value, and the rule is applied on an item-by-item basis, not to inventories in total. The first class has a cost of 180,000 riyals and a net realisable value of 195,000 riyals, so the lower is cost and it is measured at that with no write-down. The second class has a cost of 240,000 riyals and a net realisable value of 220,000 riyals, so the lower is net realisable value and it is written down to that, and a write-down loss of 20,000 riyals is recognised. The inventory amount is therefore 400,000 riyals. The importance of applying the rule item by item is that the surplus on the first class does not cover the shortfall on the second, because an unrealised gain is not recognised.

2. Question 2

   An entity's net profit was 600,000 riyals. Its expenses included depreciation of 90,000 riyals, and the receivables balance rose during the year by 50,000 riyals. There were no other changes. Net cash flow from operating activities under the indirect method is:

   1. A.740,000 riyals
   2. B.690,000 riyals
   3. C.640,000 riyals
   4. D.460,000 riyals
   Show answer and explanation

   Correct answer

   • C. 640,000 riyals

   The indirect method starts from net profit and then adjusts it for non-cash items and for changes in working capital. Depreciation expense of 90,000 riyals is added back because it is an expense that reduced profit without a corresponding cash outflow. The increase in receivables of 50,000 riyals is deducted because it means that part of the revenue recognised has not yet been collected in cash. Net operating cash flow is therefore 640,000 riyals. The general rule is that an increase in an operating current asset is deducted and a decrease is added, and the opposite applies to operating current liabilities.

3. Question 3

   An entity's sales were 1,800,000 riyals during the year and its cost of sales was 1,150,000 riyals. Gross profit and its percentage of sales are, respectively:

   1. A.1,150,000 riyals and 63.9%
   2. B.650,000 riyals and 56.5%
   3. C.650,000 riyals and 36.1%
   4. D.2,950,000 riyals and 36.1%
   Show answer and explanation

   Correct answer

   • C. 650,000 riyals and 36.1%

   Gross profit is the difference between revenue and cost of sales, so it is 1,800,000 minus 1,150,000, or 650,000 riyals. The gross-profit percentage of sales is computed by dividing gross profit by sales and is 36.1%. The percentage of sales must be distinguished from the percentage of cost; the latter is computed by dividing gross profit by cost of sales and is 56.5% here, which is always a higher percentage because the denominator is smaller. That distinction is decisive when the gross-profit method is used to estimate inventory.

4. Question 4

   An entity acquired a machine at a cost of 2,500,000 riyals with an estimated residual value of 100,000 riyals and a useful life of 8 years. Annual depreciation expense under the straight-line method is:

   1. A.266,667 riyals
   2. B.312,500 riyals
   3. C.300,000 riyals
   4. D.325,000 riyals
   Show answer and explanation

   Correct answer

   • C. 300,000 riyals

   The straight-line method allocates the depreciable amount evenly over the years of useful life, so the charge is constant each year. The depreciable amount is the cost of the asset less its estimated residual value, or 2,500,000 minus 100,000, or 2,400,000 riyals. Dividing that by the useful life of 8 years, the annual charge is 300,000 riyals. A common error is to divide the full cost by the life without deducting residual value, which gives 312,500 riyals and depreciates the asset below its residual value.

5. Question 5

   An entity bought a machine at a price of 600,000 riyals and incurred transport and installation costs of 50,000 riyals to bring it to its site and make it ready for operation. The cost at which the machine is recognised is:

   1. A.50,000 riyals
   2. B.600,000 riyals
   3. C.650,000 riyals
   4. D.550,000 riyals
   Show answer and explanation

   Correct answer

   • C. 650,000 riyals

   The cost of an item of property, plant and equipment includes the purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Examples of those costs are transport and handling, installation and assembly, site preparation, professional fees, and costs of testing whether the asset is functioning properly. Cost is therefore 600,000 plus 50,000, or 650,000 riyals, which is the base on which depreciation is subsequently calculated. Transport and installation costs are not charged as an expense of the period, because they are necessary to make the asset capable of operating, so the entity benefits from them over its entire life.

6. Question 6

   An entity bought land and erected a building on it that it uses in its activity. Which of the two assets is subject to depreciation?

   1. A.Neither is depreciated because together they represent a single property asset.
   2. B.Both are depreciated over the estimated useful life of the building erected on it.
   3. C.The building alone; land is not depreciated because its useful life is indefinite.
   4. D.Land alone; the building is revalued annually instead of being depreciated.
   Show answer and explanation

   Correct answer

   • C. The building alone; land is not depreciated because its useful life is indefinite.

   Land and buildings are separable assets and are accounted for separately, even if acquired together in a single transaction. Land ordinarily has an indefinite useful life so it is not depreciated, because its benefits are not consumed by the passage of time. Buildings have finite useful lives so they are depreciated over those lives. Excepted from the rule of not depreciating land are cases in which it has a finite life, such as quarries and landfill sites. Likewise if the cost of the land includes costs of dismantling, removal or site restoration, that portion is depreciated over the period in which the related benefits are realised. A rise in the land's market value has no bearing on the depreciation decision.

7. Question 7

   An entity issued bonds with a nominal value of 4,000,000 riyals at exactly nominal value, at a coupon of 5% a year, and incurred no issue costs. Annual interest expense is:

   1. A.100,000 riyals
   2. B.400,000 riyals
   3. C.200,000 riyals
   4. D.4,000,000 riyals
   Show answer and explanation

   Correct answer

   • C. 200,000 riyals

   When bonds are issued at exactly nominal value and no issue costs are incurred, the effective interest rate equals the coupon, so neither a discount nor a premium arises to be amortised. Interest expense is 4,000,000 times 5%, or 200,000 riyals, which equals cash interest paid. The carrying amount remains constant at nominal value throughout the term, so no gain or loss arises on repayment at maturity. The position differs if issue costs exist: they are deducted from proceeds, so the effective rate rises above the coupon and the expense exceeds cash interest.

8. Question 8

   A lease liability of 2,000,000 riyals at a discount rate of 6% and an annual payment of 500,000 riyals at the end of the year. The liability balance at the end of year 1 is:

   1. A.1,620,000 riyals
   2. B.1,500,000 riyals
   3. C.2,120,000 riyals
   4. D.2,000,000 riyals
   Show answer and explanation

   Correct answer

   • A. 1,620,000 riyals

   A lease liability is subsequently measured by increasing its carrying amount by interest and reducing it by payments made. Interest is 2,000,000 times 6%, or 120,000 riyals, and the payment of 500,000 riyals is deducted. The closing balance is 1,620,000 riyals. The payment is therefore split implicitly between interest of 120,000 riyals and a repayment of principal of 380,000 riyals. Deducting the payment without first adding interest drops the financing burden and gives 1,500,000 riyals.

9. Question 9

   A partnership between two partners shares profits two to one, with net income of SAR 600,000 and no salaries or interest. The first partner's share is:

   1. A.SAR 400,000
   2. B.SAR 600,000
   3. C.SAR 200,000
   4. D.SAR 300,000
   Show answer and explanation

   Correct answer

   • A. SAR 400,000

   Two thirds of 600,000 is 400,000.

10. Question 10

    A subsidiary's profit for the year is SAR 5,000,000. NCI holds 30%. The NCI's share of profit is:

    1. A.SAR 3,500,000
    2. B.SAR 1,250,000
    3. C.SAR 1,500,000
    4. D.SAR 5,000,000
    Show answer and explanation

    Correct answer

    • C. SAR 1,500,000

    NCI share = 30% × 5,000,000 = 1,500,000.