ACCA Audit and Assurance (F8) Practice Exam

What is the primary rule for payable cut-off at year-end?

1. Include goods received after year-end only

2. Include goods received before year-end only

3. Include all invoices regardless of date

4. Include only goods physically present at year-end

The correct answer is: Include goods received before year-end only

The primary rule for payable cut-off at year-end emphasizes that only goods received before the year-end should be included in the financial statements for that period. This is fundamental in ensuring that the financial statements accurately represent the company's liabilities and expenses. Under the accrual accounting principle, expenses should be matched with the revenues they help to generate in the period they are incurred. Therefore, only those goods for which the company has accepted delivery and is obligated to pay should be recorded as accounts payable. Including only goods received before the year-end ensures that liabilities are not understated, which would misrepresent the financial position of the business to stakeholders. Including goods received after year-end, regardless of their order date or invoicing, would improperly inflate liabilities, as these costs are not obligations of the reporting period. Similarly, including all invoices regardless of dates would violate the matching principle, leading to a distorted view of the company’s financial health. Lastly, only including goods that are physically present at year-end would disregard liabilities for goods that have been received but not yet recorded, thus failing to capture the complete obligation the company has at year-end.