📒 Financial Accounting

1. Najd Logistics Company keeps its records mainly on a cash basis and converts to the accrual basis at year-end. For the year ended 31 December 2026: - cash received from customers: SAR 520,000 - trade receivables: SAR 40,000 at 1 January 2026 and SAR 55,000 at 31 December 2026 - unearned revenue (customer deposits received in advance): SAR 12,000 at 1 January 2026 and SAR 20,000 at 31 December 2026 Revenue for 2026 on the accrual basis is:

1. SAR 497,000
2. SAR 513,000
3. SAR 527,000
4. SAR 543,000

Under accrual accounting (paragraph 1.17 of the Conceptual Framework) revenue is recognised when earned, not when cash is received. Revenue equals cash received plus the increase in receivables (SAR 15,000) minus the increase in unearned revenue (SAR 8,000): 520,000 + 15,000 - 8,000 = SAR 527,000. SAR 497,000 deducts the increase in receivables instead of adding it; SAR 513,000 reverses both adjustments (520,000 - 15,000 + 8,000); SAR 543,000 adds the increase in unearned revenue instead of deducting it.

2. According to the Conceptual Framework for Financial Reporting (2018), an asset is:

1. a resource legally owned by the entity that is certain to produce future cash inflows
2. a present economic resource that the entity controls as a result of past events
3. a right to receive cash that the entity has recorded at its historical cost
4. a past transaction expected to produce economic benefits for the owners

Paragraph 4.3 of the Conceptual Framework defines an asset as a present economic resource that the entity controls as a result of past events, and paragraph 4.4 explains that an economic resource is a right with the potential to produce economic benefits. Legal ownership is not required, because control is the test, and the benefits need not be certain. An asset is not limited to a right to cash or to historical cost, and it is the resource itself, not the past transaction, that is the asset.

3. On 1 October 2026 Al-Waha Furnishings paid SAR 36,000 for an insurance policy covering 18 months from that date. Its financial year ends on 31 December 2026. The insurance expense for the year ended 31 December 2026 is:

1. SAR 6,000
2. SAR 24,000
3. SAR 30,000
4. SAR 36,000

The premium covers 18 months, so the monthly cost is 36,000 / 18 = SAR 2,000, and only the 3 months from 1 October to 31 December 2026 belong to the year: SAR 6,000, with SAR 30,000 carried forward as a prepaid expense (Conceptual Framework 1.17, accrual accounting). SAR 24,000 charges a full 12 months; SAR 30,000 is the prepaid balance, not the expense; SAR 36,000 expenses the whole premium when paid and makes no adjusting entry.

4. Which of the following events occurring after the reporting period, and before the financial statements are authorised for issue, is NOT an adjusting event under IAS 10?

1. A fall in the market value of investments that were held at the reporting date
2. A court ruling that confirms an obligation which existed at the reporting date
3. The insolvency of a customer whose balance was outstanding at the reporting date
4. The discovery of an error showing that the financial statements were incorrect

A decline in the fair value of investments after the reporting period reflects conditions arising after that date, so it is a non-adjusting event (paragraphs 10 and 11 of IAS 10), disclosed if material (paragraph 21). A court ruling confirming a present obligation, the insolvency of a customer that confirms an impaired receivable, and the discovery of an error or fraud are all examples of adjusting events listed in paragraph 9 of IAS 10, because they give evidence of conditions at the reporting date.

5. On 1 January 2023 Najd Logistics Company bought a machine for SAR 840,000, with an estimated residual value of SAR 60,000 and a useful life of 10 years, depreciated on the straight-line basis. On 1 January 2027, after four years of depreciation, management revised the remaining useful life to 5 years from that date. The residual value is unchanged. The depreciation charge for the year ending 31 December 2027 is:

1. SAR 78,000
2. SAR 93,600
3. SAR 105,600
4. SAR 156,000

A revision of useful life is a change in accounting estimate and is applied prospectively (paragraphs 34 and 36 of IAS 8; paragraph 51 of IAS 16). Annual depreciation was (840,000 - 60,000) / 10 = 78,000, so accumulated depreciation is 4 x 78,000 = 312,000 and the depreciable amount left is 840,000 - 312,000 - 60,000 = 468,000, spread over 5 years: SAR 93,600. SAR 78,000 keeps the original estimate; SAR 105,600 ignores the residual value (528,000 / 5); SAR 156,000 ignores the accumulated depreciation (780,000 / 5).

6. According to the Conceptual Framework (2018), the exercise of prudence in preparing financial statements:

1. requires deliberate understatement of assets and income to avoid overstating profit
2. permits hidden reserves to be built up in years of exceptionally high profit
3. requires expected losses to be recognised sooner than equally likely gains
4. is caution under uncertainty that supports neutrality and implies no asymmetry

Paragraph 2.16 of the Conceptual Framework describes prudence as the exercise of caution when making judgements under uncertainty, which supports neutrality, and paragraph 2.17 adds that prudence does not imply a need for asymmetry (a particular standard may still contain asymmetric requirements, but prudence itself does not demand them). Deliberately understating assets or income, building hidden reserves, or recognising losses earlier than equally likely gains would all introduce bias, which is incompatible with neutral information.

7. Najd Holdings has six operating segments. Total revenue of each segment for 2026, external and internal, was: Segment A SAR 586,000; Segment B SAR 208,000; Segment C SAR 158,000; Segment D SAR 120,000; Segment E SAR 83,000; Segment F SAR 45,000. Considering only the revenue quantitative threshold, how many segments must be reported separately under IFRS 8?

1. 3 segments
2. 4 segments
3. 5 segments
4. 6 segments

Paragraph 13 of IFRS 8 requires separate reporting of an operating segment whose reported revenue is 10% or more of the combined revenue of all operating segments. Total revenue is SAR 1,200,000, so the threshold is SAR 120,000 and segments A, B, C and D qualify, D exactly at 10%: four segments. Three segments applies a strict 'more than 10%' test that excludes D; five segments applies a 5% threshold (SAR 60,000), which does not exist in IFRS 8; six segments reports every segment regardless of size.

8. Al-Waha Furnishings makes a voluntary change in accounting policy under IAS 8. It is impracticable to determine the period-specific effects of the change on one of the prior periods presented. The entity applies the new policy:

1. prospectively from the next interim reporting date, leaving prior balances unchanged
2. retrospectively to the comparative periods presented, using estimates despite uncertainty
3. from the current year, taking the cumulative effect of the change directly to profit or loss
4. from the start of the earliest period for which retrospective application is practicable

Paragraph 23 of IAS 8 requires retrospective application except to the extent that it is impracticable, and paragraph 24 then applies the new policy to the opening carrying amounts of assets and liabilities of the earliest period in which retrospective application is practicable (possibly the current period), with a matching adjustment to opening equity of that period. Prospective application from the earliest practicable date is required only when the cumulative effect at the start of the current period cannot be determined (paragraph 25), and never from the next interim date; applying the policy to every comparative period regardless would ignore the impracticability limit; and the cumulative effect goes to opening equity, not to profit or loss.

9. The year-end of Najd Logistics Company is 31 December 2026 and its financial statements were authorised for issue on 10 March 2027. At 31 December 2026 it held a provision of SAR 84,000 for a lawsuit. After the year-end: - 20 January 2027: the court ordered payment of SAR 142,000 for facts existing at the year-end - 5 February 2027: a customer became insolvent because of events before the year-end, making a receivable of SAR 27,000 irrecoverable - 1 March 2027: a fire destroyed inventory with a carrying amount of SAR 135,000 The total additional charge to the 2026 profit required by IAS 10 is:

1. SAR 27,000
2. SAR 58,000
3. SAR 85,000
4. SAR 220,000

Under paragraph 8 of IAS 10 the entity adjusts for events that give evidence of conditions at the reporting date. The court order is adjusting (extra charge 142,000 - 84,000 = 58,000) and so is the insolvency (27,000), both being examples in paragraph 9 of IAS 10, giving SAR 85,000. The fire arose after the year-end, so it is a non-adjusting event (paragraphs 10 and 22 of IAS 10), disclosed if material (paragraph 21) but not charged to 2026 profit. SAR 27,000 and SAR 58,000 each include only one of the two adjusting events; SAR 220,000 wrongly adds the fire loss.

10. Under IFRS 1, a first-time adopter prepares an opening statement of financial position at the date of transition and generally applies:

1. the IFRSs effective at the end of its first IFRS reporting period in all periods presented
2. the standards that were in force at each past reporting date, applied period by period
3. its previous accounting framework for the comparative periods and IFRS for the current year
4. the standards issued before the date of transition, ignoring any changes made later

Paragraph 6 of IFRS 1 requires an opening IFRS statement of financial position at the date of transition, and paragraph 7 requires the same accounting policies in that statement and in all periods presented, complying with each IFRS effective at the end of the first IFRS reporting period (subject to the exceptions and exemptions of IFRS 1). Using the standards in force at each past date would produce inconsistent policies; keeping the previous framework for comparatives would defeat comparability; and restricting the policies to standards issued before transition ignores the standards effective at the end of the first IFRS reporting period.

11. The adjusted trial balance of Al-Waha Furnishings at 31 December 2026 shows: revenue SAR 640,000; salaries SAR 280,000; rent SAR 96,000; depreciation SAR 54,000; utilities SAR 30,000; dividends paid SAR 70,000; retained earnings at 1 January 2026 SAR 210,000. After all closing entries are posted, retained earnings at 31 December 2026 is:

1. SAR 110,000
2. SAR 140,000
3. SAR 250,000
4. SAR 320,000

Closing entries transfer profit and dividends to retained earnings. Expenses total 280,000 + 96,000 + 54,000 + 30,000 = 460,000, so profit is 640,000 - 460,000 = 180,000 and closing retained earnings is 210,000 + 180,000 - 70,000 = SAR 320,000. SAR 110,000 omits the opening balance; SAR 140,000 omits the profit; SAR 250,000 deducts the dividends twice.

12. Ms Noura is a member of the key management personnel of Najd Logistics Company. Which of the following is a related party of Najd Logistics Company under IAS 24?

1. A bank that provides the company's normal overdraft facility
2. A customer that generates a large share of the company's sales
3. An entity that is controlled by the spouse of Ms Noura
4. A government agency that grants the company its operating licence

Under paragraph 9 of IAS 24, a close member of the family of a person who is key management personnel of the reporting entity (a spouse is such a close member) is related to the entity, and an entity controlled by such a person is a related party. Paragraph 11 states that providers of finance, government departments and agencies that do not control or significantly influence the entity, and a customer with which the entity transacts a large volume merely because of economic dependence, are not related parties simply because of those dealings.

13. Company X reports under IAS 34 and prepares quarterly interim reports. It estimates full-year pre-tax profit of SAR 2,400,000 and full-year income tax of SAR 540,000. The statutory tax rate is 30%. Pre-tax profit for the first quarter was SAR 380,000. The income tax expense recognised in the first-quarter interim report is:

1. SAR 85,500
2. SAR 114,000
3. SAR 135,000
4. SAR 540,000

Paragraph 30(c) of IAS 34 requires income tax expense in each interim period to be based on the best estimate of the weighted average annual effective tax rate applied to the interim pre-tax profit. The estimated annual rate is 540,000 / 2,400,000 = 22.5%, so the first-quarter expense is 22.5% x 380,000 = SAR 85,500. SAR 114,000 uses the 30% statutory rate; SAR 135,000 spreads the annual tax equally over four quarters; SAR 540,000 recognises the full-year tax in one quarter.

14. The financial year of Najd Logistics Company ends on 31 December 2026. On 15 February 2027, before the financial statements were authorised for issue, the general assembly declared a cash dividend of SAR 400,000 on the 2026 profit. In the 2026 financial statements the dividend is:

1. recognised as a liability at 31 December 2026 and deducted from equity
2. disclosed in the notes only, with no liability at 31 December 2026
3. recognised as an expense in the 2026 statement of profit or loss
4. booked as a provision, with the charge in other comprehensive income

Paragraphs 12 and 13 of IAS 10 state that dividends declared after the reporting period are not recognised as a liability at the end of the reporting period, because no obligation exists at that date; they are disclosed in the notes. Recognising a liability would treat a post-period decision as an adjusting event. A dividend is a distribution to owners, so it is never an expense in profit or loss, and it is not a provision charged to other comprehensive income.

15. At 31 December 2026 Al-Waha Furnishings has a term loan of SAR 3,000,000 repayable in five equal annual instalments of SAR 600,000 on 31 March each year, the first being on 31 March 2027. The company has no right to defer settlement beyond those dates. The non-current portion of the loan in the statement of financial position at 31 December 2026 is:

1. SAR 600,000
2. SAR 1,800,000
3. SAR 2,400,000
4. SAR 3,000,000

Under paragraph 69 of IAS 1 a liability is current when it is due to be settled within twelve months after the reporting period. Only the instalment due on 31 March 2027 falls within twelve months, so SAR 600,000 is current and 3,000,000 - 600,000 = SAR 2,400,000 is non-current. SAR 600,000 is the current portion itself; SAR 1,800,000 also treats the instalment due on 31 March 2028 as current; SAR 3,000,000 classifies the whole loan as non-current because it is a long-term borrowing, ignoring the instalment due within twelve months.

16. On 1 January 2026 Najd Logistics Company issued 300 convertible bonds of SAR 10,000 each (SAR 3,000,000 in total) at par, redeemable at par after four years. Interest is 5% a year (SAR 150,000, paid on 31 December). The market rate for similar bonds without a conversion option is 8%. Present value factors at 8%: year 1, 0.925926; year 2, 0.857339; year 3, 0.793832; year 4, 0.735030. To the nearest riyal, the amount recognised in equity on issue is:

1. SAR 298,091
2. SAR 496,819
3. SAR 794,910
4. SAR 2,701,909

Under paragraphs 28 to 32 of IAS 32 the liability component is the present value of the contractual cash flows at the market rate for non-convertible debt, and the equity component is the residual. Liability = 150,000 x (0.925926 + 0.857339 + 0.793832 + 0.735030) + 3,000,000 x 0.735030 = 496,819 + 2,205,090 = SAR 2,701,909, so equity = 3,000,000 - 2,701,909 = SAR 298,091. SAR 2,701,909 is the liability; SAR 496,819 is the present value of interest only; SAR 794,910 deducts only the present value of the principal.

17. Under IFRS 9, the effective interest rate is the rate that exactly discounts:

1. the stated coupon payments over the contractual term to the face value of the instrument
2. expected market yields over the next twelve months to the fair value at each reporting date
3. principal repayments over the contractual term to the carrying amount at the issue date
4. estimated future cash flows over the expected life to the gross carrying amount or amortised cost

Appendix A of IFRS 9 defines the effective interest rate by reference to the estimated cash payments or receipts over the expected life of the instrument: it is the rate that discounts them exactly to the gross carrying amount of an asset, or to the amortised cost of a liability, and paragraph 5.4.1 applies it to calculate interest revenue. It is not the stated coupon rate measured against face value, it is not a market yield reset to fair value at each reporting date, and it takes account of all expected cash flows, not just principal repayments.

18. Al-Waha Furnishings made credit sales of SAR 2,750,000 in 2026 and had no cash sales. Trade receivables were SAR 340,000 at 1 January 2026 and SAR 415,000 at 31 December 2026. Receivables of SAR 18,000 were written off as irrecoverable during the year. Under the direct method of IAS 7, cash received from customers in 2026 is:

1. SAR 2,657,000
2. SAR 2,675,000
3. SAR 2,807,000
4. SAR 2,843,000

Receivables reconcile as opening 340,000 + sales 2,750,000 - cash received - write-offs 18,000 = closing 415,000, so cash received is SAR 2,657,000 (paragraph 18(a) of IAS 7 presents receipts from customers gross under the direct method). SAR 2,675,000 ignores the write-off; SAR 2,807,000 adds the increase in receivables and deducts the write-off; SAR 2,843,000 adds both the increase and the write-off.

19. Which of the following cost formulas is NOT permitted by IAS 2 for measuring the cost of inventories?

1. Last-in, first-out for inventories that are ordinarily interchangeable
2. First-in, first-out for items that are ordinarily interchangeable
3. Weighted average cost for items that are ordinarily interchangeable
4. Specific identification for items that are not ordinarily interchangeable

Paragraph 25 of IAS 2 allows the first-in, first-out and weighted average cost formulas for interchangeable items, and the last-in, first-out formula is not permitted. Paragraph 23 requires specific identification of individual costs for items that are not ordinarily interchangeable and for goods segregated for specific projects, so that method is allowed.

20. At the year-end Najd Logistics Company holds a batch of goods with these details: cost SAR 96,000; estimated selling price SAR 100,000; estimated costs to complete SAR 8,000; estimated costs necessary to make the sale SAR 7,000; current replacement cost SAR 78,000. Under IAS 2 the batch is carried at:

1. SAR 78,000
2. SAR 85,000
3. SAR 92,000
4. SAR 96,000

Paragraph 9 of IAS 2 requires inventories to be measured at the lower of cost and net realisable value, and paragraph 6 defines net realisable value as the estimated selling price less costs of completion and costs necessary to make the sale: 100,000 - 8,000 - 7,000 = 85,000, which is below cost of 96,000. SAR 78,000 uses replacement cost; SAR 92,000 deducts only the costs to complete; SAR 96,000 ignores the write-down.

21. Under IFRS 9, a debt instrument is measured at amortised cost only if:

1. it is held for trading purposes and its contractual cash flows are fixed in amount and date
2. it is held to collect contractual cash flows that are solely payments of principal and interest
3. its contractual cash flows are solely payments of principal and interest, whatever the business model
4. it is held in a business model both to collect contractual cash flows and to sell the asset

Paragraph 4.1.2 of IFRS 9 sets two cumulative conditions: the asset is held in a business model whose objective is to collect contractual cash flows, and its contractual terms produce, on specified dates, cash flows that are solely payments of principal and interest. Instruments held for trading are measured at fair value through profit or loss; the cash flow test alone is not enough, since the business model also matters; and a model that both collects and sells leads to fair value through other comprehensive income under paragraph 4.1.2A.

22. At 31 December 2026 Al-Waha Furnishings applies the IFRS 9 simplified approach with a provision matrix to trade receivables of SAR 1,260,000: - not yet due: SAR 720,000, loss rate 1% - 1 to 30 days past due: SAR 340,000, loss rate 3% - 31 to 60 days past due: SAR 120,000, loss rate 12% - over 60 days past due: SAR 80,000, loss rate 35% The allowance account has a credit balance of SAR 46,000 before adjustment. The impairment loss recognised in profit or loss for 2026 is:

1. SAR 6,600
2. SAR 13,800
3. SAR 59,800
4. SAR 105,800

The required allowance is 720,000 x 1% + 340,000 x 3% + 120,000 x 12% + 80,000 x 35% = 7,200 + 10,200 + 14,400 + 28,000 = SAR 59,800 (paragraphs 5.5.15 and B5.5.35 of IFRS 9). Because the allowance already holds SAR 46,000, the charge is 59,800 - 46,000 = SAR 13,800. SAR 59,800 forgets the existing balance; SAR 105,800 adds it instead of deducting it; SAR 6,600 leaves out the receivables not yet due (52,600 - 46,000).

23. All of the following are classified as financing activities in the statement of cash flows under IAS 7 EXCEPT:

1. cash proceeds from the issue of ordinary shares to outside investors
2. cash repayments of amounts borrowed from banks and other lenders
3. cash receipts from the sale of items of property, plant and equipment
4. cash payments by a lessee for the principal part of a lease liability

Paragraph 16(b) of IAS 7 classifies cash receipts from the sale of property, plant and equipment as investing activities, so they are the exception. Paragraph 17 of IAS 7 lists cash proceeds from issuing shares and cash repayments of amounts borrowed as financing activities, and paragraph 17(e) lists a lessee's cash payments for the principal portion of a lease liability.

24. Najd Logistics Company uses the periodic system. Its 2026 inventory data are: opening inventory 200 units at SAR 50; purchases of 300 units at SAR 56, then 500 units at SAR 60; sales of 700 units. Closing inventory under the weighted average cost formula, with the average computed on all units available for sale, is:

1. SAR 15,600
2. SAR 16,600
3. SAR 17,040
4. SAR 18,000

Paragraph 27 of IAS 2 describes the weighted average cost formula, which may be computed on a periodic basis. Total cost is 200 x 50 + 300 x 56 + 500 x 60 = 56,800 for 1,000 units, an average of SAR 56.80, so 300 units remaining are valued at SAR 17,040. SAR 18,000 is the first-in, first-out value (300 x 60); SAR 16,600 uses the simple average of the three prices (55.33); SAR 15,600 is the last-in, first-out value, a formula that paragraph 25 of IAS 2 does not permit.

25. Najd Logistics Company issues preference shares that it must redeem for cash at a fixed amount on a fixed date, and on which it must pay a fixed annual dividend. Under IAS 32 the shares are classified as:

1. equity, because the instrument is legally issued in the form of a share
2. a financial liability, because the issuer must contractually deliver cash
3. a compound instrument, with part of the redemption amount shown in equity
4. a non-controlling interest, because the holders are outsiders to the group

Paragraph 18(a) of IAS 32 states that a preference share providing for mandatory redemption at a fixed amount on a fixed date is a financial liability, because paragraph 11 defines a liability by the issuer's contractual obligation to deliver cash, and substance prevails over legal form. With a mandatory fixed dividend as well, no element is discretionary, so no equity component arises and the instrument is not compound. Holders of such shares are creditors, not non-controlling interests in a subsidiary.

26. Al-Waha Furnishings holds a 90-day note receivable with a face value of SAR 200,000 and simple interest of 9% a year (360-day year). After 30 days it discounts the note at a bank, without recourse, at a discount rate of 12% a year on the maturity value for the remaining period. The cash proceeds from the bank are:

1. SAR 196,000
2. SAR 198,365
3. SAR 200,410
4. SAR 200,500

Maturity value is 200,000 + 200,000 x 9% x 90/360 = 204,500. The bank discounts this amount for the remaining 60 days: 204,500 x 12% x 60/360 = 4,090, so proceeds are SAR 200,410, and the note is derecognised because the transfer is without recourse (paragraph 3.2.3 of IFRS 9). SAR 196,000 ignores the interest earned (200,000 - 4,000); SAR 198,365 discounts for the full 90 days; SAR 200,500 applies the discount rate to the face value instead of the maturity value.

27. Under the IFRS 9 simplified approach, the loss allowance for trade receivables that do not contain a significant financing component is measured at:

1. an amount equal to lifetime expected credit losses at every reporting date
2. an amount equal to 12-month expected credit losses until a default occurs
3. the losses on those receivables that are already past due at the reporting date
4. an amount that depends on any significant increase in credit risk since recognition

Paragraph 5.5.15 of IFRS 9 requires an entity to measure the loss allowance for such trade receivables at an amount equal to lifetime expected credit losses, without tracking changes in credit risk. Twelve-month expected credit losses apply to the general approach for assets whose credit risk has not increased significantly; limiting the allowance to past-due balances is an incurred-loss view that IFRS 9 replaced; and the test of a significant increase in credit risk belongs to the general approach, not the simplified approach.

28. On 1 January 2026 Al-Waha Furnishings issued bonds with a face value of SAR 1,000,000, redeemable at par on 31 December 2028, with an annual coupon of 6% (SAR 60,000, paid on 31 December). The proceeds were SAR 900,526, which gives an effective interest rate of 10%, and the bonds are measured at amortised cost. To the nearest riyal, the interest expense for 2026 is:

1. SAR 54,032
2. SAR 60,000
3. SAR 90,053
4. SAR 93,158

A financial liability at amortised cost bears interest at the effective interest rate on its opening amortised cost (paragraph 4.2.1 and Appendix A of IFRS 9): 10% x 900,526 = SAR 90,053, so the carrying amount rises to 900,526 + 90,053 - 60,000 = 930,579. SAR 60,000 is the cash coupon only; SAR 54,032 applies the 6% coupon rate to the carrying amount; SAR 93,158 amortises the SAR 99,474 discount on a straight-line basis over three years (60,000 + 33,158).

29. Najd Logistics Company holds a portfolio of corporate bonds whose contractual cash flows are solely payments of principal and interest. The objective of its business model is achieved both by collecting the contractual cash flows and by selling bonds when needed to meet liquidity needs. Under IFRS 9 the portfolio is subsequently measured at:

1. amortised cost, because the cash flows pass the test of principal and interest
2. fair value through profit or loss, because some bonds will be sold
3. fair value through other comprehensive income, with no recycling to profit or loss
4. fair value through other comprehensive income, with recycling on derecognition

Paragraph 4.1.2A of IFRS 9 requires fair value through other comprehensive income for a debt instrument held in a business model of both collecting and selling that passes the test of solely payments of principal and interest. Gains and losses accumulated in other comprehensive income are reclassified to profit or loss on derecognition (paragraph 5.7.10). Amortised cost fits a collect-only model, fair value through profit or loss applies when neither model fits, and the no-recycling treatment is reserved for equity instruments designated under the irrevocable election.

30. For 2026, Najd Logistics Company reported profit before tax of SAR 640,000, after charging depreciation of SAR 96,000 and a loss on the disposal of equipment of SAR 18,000. Trade receivables increased by SAR 47,000, inventories decreased by SAR 28,000 and trade payables increased by SAR 35,000. Income tax paid was SAR 72,000. Under the indirect method of IAS 7, net cash from operating activities is:

1. SAR 602,000
2. SAR 628,000
3. SAR 662,000
4. SAR 698,000

Paragraph 20 of IAS 7 adjusts profit for non-cash items and for changes in working capital: 640,000 + 96,000 + 18,000 - 47,000 + 28,000 + 35,000 - 72,000 (income taxes paid, paragraph 35) = SAR 698,000. SAR 602,000 forgets to add back depreciation; SAR 628,000 deducts the increase in payables instead of adding it; SAR 662,000 deducts the loss on disposal instead of adding it back.

31. A bank overdraft of Al-Waha Furnishings is repayable on demand and forms an integral part of its cash management, with the bank balance often moving between positive and overdrawn. In the statement of cash flows under IAS 7, the overdraft is:

1. presented as a financing activity, because it is a form of borrowing
2. presented as an operating activity, as it arises from daily trading
3. left out of the statement, because it is shown as a current liability
4. included as a negative component of the entity's cash and cash equivalents

Paragraph 8 of IAS 7 states that bank borrowings are generally financing activities, but bank overdrafts repayable on demand that form an integral part of an entity's cash management are included as a component of cash and cash equivalents. Treating it as financing would apply the general rule that paragraph 8 sets aside for such overdrafts, and an operating classification has no basis in the standard. The statement of cash flows explains the change in cash and cash equivalents, so excluding the overdraft would misstate that balance.

32. Najd Logistics Company bought a sorting machine on 1 January and incurred the following costs: - Purchase price: SAR 840,000 - Installation: SAR 55,000 - Testing before the machine was ready for use: SAR 18,000 - Training of operating staff: SAR 24,000 The machine has an estimated residual value of SAR 73,000 and a useful life of 8 years, and the company uses the straight-line method. The annual depreciation charge is:

1. SAR 105,000
2. SAR 108,000
3. SAR 114,125
4. SAR 117,125

Paragraphs 16 and 17 of IAS 16 include in cost the purchase price and directly attributable costs such as installation and testing (SAR 913,000), while paragraph 19 excludes staff training. Under paragraph 53 the depreciable amount is SAR 913,000 - SAR 73,000 = SAR 840,000, which spread over 8 years gives SAR 105,000 a year. SAR 108,000 wrongly capitalises the training cost, SAR 114,125 ignores the residual value, and SAR 117,125 makes both errors.

33. Under IAS 16, when an entity replaces a significant part of an item of property, plant and equipment and the recognition criteria are met, it:

1. expenses the cost immediately in profit or loss as maintenance
2. capitalises the cost and leaves the replaced part's carrying amount in place
3. capitalises the cost and derecognises the carrying amount of the old part
4. recognises the cost in other comprehensive income until the part is sold

Paragraph 13 of IAS 16 requires the cost of the replacement to be added to the carrying amount when the recognition criteria are met, and the carrying amount of the replaced part to be derecognised. Expensing the cost is the treatment of day-to-day servicing under paragraph 12, not of a major replacement. Leaving the old part in the carrying amount would count the same component twice, and other comprehensive income is not used for these costs.

34. Company X bought a machine for SAR 720,000 on 1 January Year 1, with an estimated residual value of SAR 36,000. It depreciates the machine at 25% a year on the opening carrying amount (diminishing-balance method). The depreciation charge for Year 2 is:

1. SAR 101,250
2. SAR 135,000
3. SAR 171,000
4. SAR 180,000

Paragraph 62 of IAS 16 allows the diminishing-balance method, which applies the rate to the opening carrying amount: Year 1 is 25% x SAR 720,000 = SAR 180,000 and Year 2 is 25% x SAR 540,000 = SAR 135,000. SAR 180,000 repeats the Year 1 charge computed on cost, SAR 171,000 applies the rate to cost less residual value, and SAR 101,250 is the Year 3 charge.

35. Under IAS 40, investment property is property (land or a building) held to:

1. be used in the production or supply of goods or services
2. earn rentals or gain from capital appreciation, or both
3. be sold in the ordinary course of the entity's business
4. be disposed of within twelve months of the reporting date

Paragraph 5 of IAS 40 defines investment property as property held to earn rentals or for capital appreciation, or both. Property used in the production or supply of goods or services is owner-occupied and falls under IAS 16, property held for sale in the ordinary course of business is inventory under IAS 2, and a plan to dispose of an asset within a year points to IFRS 5, not to the IAS 40 definition.