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9706 · 3.2.1

International Accounting Standards (IAS) — practice questions

Practice and worked examples for 9706 International Accounting Standards (IAS). Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

The directors of Z plc review the Statement of Cash Flows for the year. Net cash from operating activities was $420,000; investing outflows $180,000; dividends paid $95,000.

Explain why the Statement of Cash Flows is essential for assessing liquidity.

Show solution outline

Profit per the SoPL can include non-cash items (depreciation, accruals). The SoCF shows actual cash generated ($420,000 from operations), whether the firm can fund investments ($180,000) and dividends ($95,000) without external borrowing, and highlights liquidity risk even when reported profit is higher.

Worked example 2

A company holds inventory which cost $50,000. Due to a warehouse flood, the goods were slightly damaged. The company estimates it can sell the inventory for $45,000 after incurring repair costs of $3,000 and sales commission of $1,500.

Calculate the value at which the inventory should be reported in the financial statements, in accordance with IAS 2.

Show solution outline

In accordance with IAS 2, inventory must be valued at the lower of cost and Net Realisable Value (NRV).

Step 1: Identify the cost. Cost = $50,000

Step 2: Calculate the Net Realisable Value (NRV). NRV = Estimated Selling Price - Costs of Completion - Selling Costs NRV = $45,000 - $3,000 - $1,500 NRV = $40,500

Step 3: Compare cost and NRV. Cost = $50,000 NRV = $40,500 The lower value is $40,500.

Step 4: Determine the final inventory valuation. The inventory should be reported in the Statement of Financial Position at $40,500.

An inventory write-down of $9,500 ($50,000 - $40,500) will be recognised as an expense in the Statement of Profit or Loss.

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