Question 1

An entity prepares financial statements to 31 December each year. The following data applies:

1 December 20X0

• The entity purchased some inventory for $400,000.

• In order to protect the inventory against adverse changes in fair value the entity entered into a futures

contract to sell the inventory for a fixed price on 31 January 20X1.

• The entity designated this contract as a fair value hedge of the value of the inventory.

31 December 20X0

• The inventory had a fair value of $480,000 and the futures contract had a fair value of $75,000 (a financial

liability).

What will be the impact on the statement of profit or loss and other comprehensive income for the year ended

31 December 20X0 in respect of the change in the value of the inventory and the futures contract?

Options :

A : A loss of $75,000 will be recognised in profit or loss.

B : A loss of $75,000 will be recognised in other comprehensive income.

C : A net gain of $5,000 will be recognised in profit or loss.

D : A net gain of $5,000 will be recognised in other comprehensive income.

Answer: C

Question 2

A company has 6 million shares in issue. Each share has a market value of $4.00.

$9 million is to be raised using a rights issue.

Two directors disagree on the discount to be offered when the new shares are issued.

• Director A proposes a discount of 25%

• Director B proposes a discount of 30%

Which THREE of the following statements are most likely to be correct?

Options :

A : The theoretical ex-rights price will be higher under Director B-s proposal than under Director A's proposal.

B : More shares will be issued under Director B-s proposal than under Director A-s proposal.

C : The rights issue price will be $3.00 under Director A-s proposal.

D : The terms of the rights issue will be one new share for every two existing shares under Director A's proposal

E : Shareholder wealth will be higher under Director A-s proposal than under Director B-s proposal.

Answer: B,C,D

Question 3

A company is preparing an integrated report according to the International <IR> Framework as issued by the

International Integrated Reporting Council.

Which THREE of the following should be included in the report?

Options :

A : An explanation of how the organisation-s governance structure supports its ability to create value in the short, medium and long term.

B : A detailed analysis of the organisation-s business model.

C : The challenges and uncertainties that the organisation is likely to encounter in pursuing its strategy.

D : A comparison of the key elements of its financial statements with those of its main competitor.

E : A summary of the key issues discussed by directors in main board meetings.

Answer: A,B,C

Question 4

Z wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate

it pays. Z can borrow floating at Libor ' 1, and fixed at 10%.

Which of the following companies would be the most appropriate for Z to enter into a swap with?

Options :

A : Company A - it can borrow floating L +1 ½ and fixed at 9.5%

B : Company D - it can borrow at L +1 ½ and fixed at 10.5%

C : Company C - it can borrow at L +1 ½ and fixed at 9%

D : Company E - it can borrow floating at L +1 ½ and fixed at 12%

Answer: C

Question 5

M is an accountant who wishes to take out a forward rate agreement as a hedging instrument but the company treasurer has advised that a short-term interest rate future would be a better option. Which of the following is true of a short-term interest rate future?

Options :

A : It can be tailored to the exact reeds of the company.

B : It interest rates have gone down the price of the future will have fallen.

C : It must be kept for ne whole duration of the contract

D : The date is flexible and the position can be closed quickly and easily.

Answer: C