Financial Reporting (F1)

Answer: A. IAS 16 specifies that the cost of an item of PPE includes the purchase price (net of trade and cash discounts), import duties and non-refundable purchase taxes, directly attributable costs of bringing the asset to its location and condition for use (including installation, testing and delivery), and the estimated cost of dismantling and restoring the site where there is an obligation. Annual insurance premiums are period costs, not part of the asset's cost. Costs prior to the asset being available for use may be included, not only post-installation costs.

Answer: D. The EOQ model seeks the order quantity that minimises the total of ordering costs (costs incurred each time an order is placed, such as administration and delivery charges) and holding costs (costs of physically storing inventory, including rent, insurance and deterioration). As order quantity increases, ordering costs fall (fewer orders placed) but holding costs rise (more inventory held on average). The EOQ is the point where total ordering costs equal total holding costs, minimising their combined total. Purchase price and lead time are relevant to other decisions but are not what the EOQ balances.

Answer: A. Taxable profit is calculated by adjusting accounting profit for differences between accounting and tax rules. Depreciation (£30,000) charged in the accounts must be added back, and capital allowances (£50,000) permitted for tax purposes are deducted instead: taxable profit = £200,000 + £30,000 − £50,000 = £180,000. Accounting depreciation is not deductible for tax; instead, the tax system uses its own capital allowance rules. This creates a temporary difference that gives rise to deferred tax.