FAC2602 FINANCIAL ACCOUNTING AND
REPORTING PRACTICE EXAMINATION
SEMESTER 2 2025 QUESTIONS AND ANSWERS
SECTION A: FINANCIAL STATEMENTS AND REPORTING
Questions 1-25
Question 1
According to the Conceptual Framework for Financial Reporting, which qualitative
characteristic enhances the usefulness of information that is both relevant and faithfully
represented?
A. Materiality
B. Understandability
C. Comparability
D. Going concern
Correct Answer: C
Explanation: Comparability, verifiability, timeliness, and understandability are enhancing
qualitative characteristics that improve the usefulness of relevant and faithfully
represented financial information.
Question 2
A company changes its depreciation method from straight-line to reducing balance
method. This change should be accounted for as:
A. A prior period adjustment
B. A change in accounting estimate
,C. A change in accounting policy
D. An error correction
Correct Answer: B
Explanation: A change in depreciation method is a change in accounting estimate, as it
reflects a change in the pattern of consumption of future economic benefits.
Question 3
Which of the following is NOT a fundamental qualitative characteristic according to the
Conceptual Framework?
A. Relevance
B. Faithful representation
C. Comparability
D. Materiality is a component of relevance
Correct Answer: C
Explanation: Comparability is an enhancing qualitative characteristic, not a fundamental
one. The fundamental characteristics are relevance and faithful representation.
Question 4
Green Energy Ltd prepares financial statements for the year ended 31 December 2025. A
significant fire damaged their warehouse on 15 January 2026. The financial statements
were authorized for issue on 28 February 2026. How should this event be treated?
A. Adjust the financial statements as it occurred before authorization
B. Disclose as a non-adjusting event in the notes
C. Ignore as it occurred after the reporting period
D. Record a provision for the loss
Correct Answer: B
Explanation: This is a non-adjusting event as it occurred after the reporting period but
before authorization. It should be disclosed if material.
Question 5
,Which of the following statements about materiality is CORRECT?
A. Materiality is a qualitative characteristic only
B. Materiality is entity-specific and depends on the nature and magnitude of omissions
C. Materiality is fixed at 5% of profit for all entities
D. Materiality only applies to quantitative factors
Correct Answer: B
Explanation: Materiality is entity-specific and depends on both the nature and magnitude
of omissions or misstatements in the context of the entity's financial statements.
Question 6
The going concern assumption implies that:
A. The entity will continue to operate indefinitely
B. The entity will cease operations in the next 12 months
C. The entity will be liquidated within the next reporting period
D. The entity will continue operations for the foreseeable future, typically 12 months
Correct Answer: D
Explanation: The going concern assumption means the entity will continue in operation for
the foreseeable future, typically at least 12 months from the reporting date.
Question 7
Which of the following is an example of a prior period error?
A. Change in estimate for useful life of asset
B. Mathematical mistake in prior year financial statements
C. Change in depreciation method
D. Change in inventory valuation method
Correct Answer: B
Explanation: A prior period error is an omission from or misstatement in the entity's
financial statements for one or more prior periods arising from failure to use reliable
information.
, Question 8
A company discovers that inventory was overstated in the previous year's financial
statements. The error is material. How should this be corrected in the current year's
financial statements?
A. Adjust the current year's opening retained earnings
B. Record the adjustment in current year's profit or loss
C. Ignore as it relates to a prior period
D. Disclose in the notes only
Correct Answer: A
Explanation: Material prior period errors are corrected retrospectively by adjusting the
comparative amounts and the opening balance of retained earnings.
Question 9
Which of the following is NOT a component of financial statements according to IAS 1?
A. Statement of financial position
B. Statement of changes in equity
C. Management commentary
D. Notes to the financial statements
Correct Answer: C
Explanation: A complete set of financial statements includes the statement of financial
position, statement of profit or loss, statement of changes in equity, statement of cash
flows, and notes. Management commentary is not a required component.
Question 10
An entity's financial statements should be prepared on the accrual basis of accounting,
except for:
A. Statement of financial position
B. Statement of profit or loss
C. Statement of cash flows
D. Statement of changes in equity
Correct Answer: C
REPORTING PRACTICE EXAMINATION
SEMESTER 2 2025 QUESTIONS AND ANSWERS
SECTION A: FINANCIAL STATEMENTS AND REPORTING
Questions 1-25
Question 1
According to the Conceptual Framework for Financial Reporting, which qualitative
characteristic enhances the usefulness of information that is both relevant and faithfully
represented?
A. Materiality
B. Understandability
C. Comparability
D. Going concern
Correct Answer: C
Explanation: Comparability, verifiability, timeliness, and understandability are enhancing
qualitative characteristics that improve the usefulness of relevant and faithfully
represented financial information.
Question 2
A company changes its depreciation method from straight-line to reducing balance
method. This change should be accounted for as:
A. A prior period adjustment
B. A change in accounting estimate
,C. A change in accounting policy
D. An error correction
Correct Answer: B
Explanation: A change in depreciation method is a change in accounting estimate, as it
reflects a change in the pattern of consumption of future economic benefits.
Question 3
Which of the following is NOT a fundamental qualitative characteristic according to the
Conceptual Framework?
A. Relevance
B. Faithful representation
C. Comparability
D. Materiality is a component of relevance
Correct Answer: C
Explanation: Comparability is an enhancing qualitative characteristic, not a fundamental
one. The fundamental characteristics are relevance and faithful representation.
Question 4
Green Energy Ltd prepares financial statements for the year ended 31 December 2025. A
significant fire damaged their warehouse on 15 January 2026. The financial statements
were authorized for issue on 28 February 2026. How should this event be treated?
A. Adjust the financial statements as it occurred before authorization
B. Disclose as a non-adjusting event in the notes
C. Ignore as it occurred after the reporting period
D. Record a provision for the loss
Correct Answer: B
Explanation: This is a non-adjusting event as it occurred after the reporting period but
before authorization. It should be disclosed if material.
Question 5
,Which of the following statements about materiality is CORRECT?
A. Materiality is a qualitative characteristic only
B. Materiality is entity-specific and depends on the nature and magnitude of omissions
C. Materiality is fixed at 5% of profit for all entities
D. Materiality only applies to quantitative factors
Correct Answer: B
Explanation: Materiality is entity-specific and depends on both the nature and magnitude
of omissions or misstatements in the context of the entity's financial statements.
Question 6
The going concern assumption implies that:
A. The entity will continue to operate indefinitely
B. The entity will cease operations in the next 12 months
C. The entity will be liquidated within the next reporting period
D. The entity will continue operations for the foreseeable future, typically 12 months
Correct Answer: D
Explanation: The going concern assumption means the entity will continue in operation for
the foreseeable future, typically at least 12 months from the reporting date.
Question 7
Which of the following is an example of a prior period error?
A. Change in estimate for useful life of asset
B. Mathematical mistake in prior year financial statements
C. Change in depreciation method
D. Change in inventory valuation method
Correct Answer: B
Explanation: A prior period error is an omission from or misstatement in the entity's
financial statements for one or more prior periods arising from failure to use reliable
information.
, Question 8
A company discovers that inventory was overstated in the previous year's financial
statements. The error is material. How should this be corrected in the current year's
financial statements?
A. Adjust the current year's opening retained earnings
B. Record the adjustment in current year's profit or loss
C. Ignore as it relates to a prior period
D. Disclose in the notes only
Correct Answer: A
Explanation: Material prior period errors are corrected retrospectively by adjusting the
comparative amounts and the opening balance of retained earnings.
Question 9
Which of the following is NOT a component of financial statements according to IAS 1?
A. Statement of financial position
B. Statement of changes in equity
C. Management commentary
D. Notes to the financial statements
Correct Answer: C
Explanation: A complete set of financial statements includes the statement of financial
position, statement of profit or loss, statement of changes in equity, statement of cash
flows, and notes. Management commentary is not a required component.
Question 10
An entity's financial statements should be prepared on the accrual basis of accounting,
except for:
A. Statement of financial position
B. Statement of profit or loss
C. Statement of cash flows
D. Statement of changes in equity
Correct Answer: C
