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Contemporary Accounting 8e Mike Bazley, Phil Hancock (Test Bank All Chapters, 100% Original Verified, A+ Grade) Chapter 1 – Introduction to accounting TRUE/FALSE 1. An objective of accounting is to provide information to predict and evaluate the going concern of an entity. ANS: T PTS: 1 TOP: What is accounting

AACSB:

Knowledge, Analytical

2. Accounting information is always quantitative and objective. ANS: F PTS: 1 TOP: What is accounting

AACSB:

Knowledge, Analytical

3. Stewardship is the term used to refer to management’s role in protecting an entity’s economic resources from theft, fraud and wastage. ANS: T PTS: 1 AACSB: TOP: For what purpose is accounting used?

Knowledge, Analytical

4. Management is an external user of accounting information. ANS: F PTS: 1 AACSB: TOP: Who uses accounting information?

Knowledge, Analytical

5. The balance sheet is an example of a management accounting report. ANS: F PTS: 1 AACSB: TOP: Who uses accounting information?

Knowledge, Analytical

6. The statement of comprehensive income is an example of a financial accounting report. ANS: T PTS: 1 AACSB: TOP: Who uses accounting information?

Knowledge, Analytical

7. The difference between management accounting and financial accounting is that management accounting focuses on external users whereas financial accounting focuses on internal users. ANS: F PTS: 1 AACSB: TOP: For what purpose is accounting used?

Knowledge, Analytical

8. Management has the responsibility of selecting accounting policies. ANS: T PTS: 1 AACSB: TOP: Economic consequences of accounting information.

Knowledge, Analytical

9. Where an Accounting Standard exists, accounting policies must comply with the Accounting Standard. ANS: T PTS: 1 AACSB: TOP: Economic consequences of accounting information.

Knowledge, Analytical

10. The economic consequences of accounting information are limited to the compensation schemes paid to managers. ANS: F PTS: 1 AACSB: TOP: Economic consequences of accounting information.

Knowledge, Analytical

11. Political costs create incentives for managers to select accounting policies that increase reported profits. ANS: F PTS: 1 AACSB: TOP: Economic consequences of accounting information.

Knowledge, Analytical

12. Triple bottom line reporting confirms the maximisation of profit as the major objective of listed companies. ANS: F PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

13. A triple bottom line report refers to the publication of economic, environmental and corporate governance information in an integrated report. ANS: F PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge

14. Because triple bottom line reports are voluntary, the provision of an independent verification of the reports should enhance the reliability of the information provided. ANS: T PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

15. The GRI indicators are established by the committee without any input from stakeholders. ANS: F PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

16. The audit of a triple bottom line report is normally completed by the financial auditor. ANS: F PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

MULTIPLE CHOICE 1. Accounting information: A. is helpful for financing decisions but not for marketing decisions. B. is useful for profit-making entities but is not needed for not-for-profit entities. C. must follow accounting principles provided by management. D. is useful for all economic organisations. ANS: D PTS: 1 TOP: What is accounting

AACSB:

Knowledge, Analytical

2. The primary purpose of accounting is to: A. help people make decisions about economic activities. B. provide information that management can use to convince shareholders that management deserves high salaries. C. provide employment to persons who have a knack for dealing with numbers. D. minimise the amount of profit that a firm has earned. ANS: A PTS: 1 TOP: What is accounting

AACSB:

Knowledge, Analytical

3. Accounting is likely to involve: A. qualitative and financial information. B. quantitative and financial information. C. quantitative and non-financial information. D. qualitative and non-financial information. ANS: B PTS: 1 TOP: What is accounting

AACSB:

Knowledge, Analytical

4. For the individual, accounting has at least three functions. They are: A. planning, buying and selling. B. planning, decision support and spending. C. saving, controlling and buying. D. planning, controlling and decision support. ANS: D PTS: 1 TOP: What is accounting

AACSB:

Knowledge, Analytical

5. The difference between management accounting and financial accounting is: A. management accounting focuses on external users whereas financial accounting focuses on internal users. B. management accounting focuses only on the control function whereas financial accounting focuses on the reporting function. C. management accounting focuses on internal users whereas financial accounting focuses on external users. D. management accounting focuses on the reporting function whereas financial accounting focuses on the control function. ANS: C PTS: 1 AACSB: TOP: For what purpose is accounting information?

Knowledge, Analytical

6. Examples of internal and external users of information are: A. creditors and investors. B. managers and unions. C. creditors and unions. D. banks and government authorities. ANS: B PTS: 1 AACSB: TOP: Who uses accounting information?

Knowledge, Analytical

7. The basic difference between managerial accounting and financial accounting is that: A. the financial accounting system relies on accounting information whereas managerial accounting does not. B. financial accounting relies on information gathered from sources outside the business whereas managerial accounting relies on internally generated information.

C. financial accounting is concerned with providing information to outsiders, whereas managerial accounting is concerned with providing information to managers for their use in directing the activities of the organisation. D. managerial accounting information is useful to not-for-profit organisations, but financial accounting information is not. ANS: C PTS: 1 AACSB: TOP: For what purpose is accounting information?

Knowledge, Analytical

8. Which of the following is an example of a stakeholder of a business? A. An owner B. An investor C. A manager D. All of the above ANS: D PTS: 1 AACSB: TOP: Who uses accounting information?

Knowledge, Analytical

9. Financial accounting is the process of: A. preparing and reporting accounting information for external decision makers. B. preparing and reporting accounting information for internal decision makers. C. enacting generally accepted accounting principles. D. preparing and reporting accounting information to lenders. ANS: A PTS: 1 AACSB: TOP: For what purpose is accounting information?

Knowledge, Analytical

10. Management accounting is the process of: A. preparing and reporting accounting information for external decision makers. B. preparing and reporting accounting information for an organisation’s internal decision makers. C. enacting generally accepted accounting principles. D. preparing and reporting accounting information to lenders. ANS: B PTS: 1 AACSB: TOP: For what purpose is accounting information?

Knowledge, Analytical

11. Match the type of accounting information to the term that best describes it. Information prepared for external decision makers A. Financial accounting B. Financial accounting C. Managerial accounting D. Managerial accounting

Information prepared for internal decision makers Financial accounting Managerial accounting Financial accounting Managerial accounting

ANS: B PTS: 1 AACSB: TOP: For what purpose is accounting information used?

Knowledge, Analytical

12. Information contained in external financial reports can be useful to a firm’s: Suppliers A. No B. No C. Yes D. Yes

Employees No Yes No Yes

ANS: D PTS: 1 Who uses accounting information?

AACSB:

Knowledge, Analytical TOP:

13. Match the type of accounting information to the term that best describes it. Information prepared for suppliers’ use A. Managerial accounting B. Managerial accounting C. Financial accounting D. Financial accounting

Information prepared for creditors’ use Financial accounting Managerial accounting Financial accounting Managerial accounting

ANS: C PTS: 1 AACSB: TOP: For what purpose is accounting information?

Knowledge, Analytical

14. Which one of the following groups is not generally regarded as an external user of the accounting information of an entity? A. Employees B. Customers C. Management D. Lenders ANS: C PTS: 1 AACSB: TOP: Who uses accounting information?

Knowledge, Analytical

15. A possible limitation of accounting information is that accounting information: A. can only be used by bankers. B. is relevant depending on the needs of users. C. does not report in money terms. D. relates to past information ANS: D PTS: 1 AACSB: TOP: Limits on the usefulness of accounting information

Knowledge, Analytical

16. The selection of appropriate accounting policies for a company is the responsibility of: A. the body that sets Accounting Standards. B. the company secretary. C. the internal auditors of the company. D. the management of the company. ANS: D PTS: 1 AACSB: TOP: Economic consequences of accounting information

Knowledge, Analytical

17. What is meant by the term economic consequences of accounting policy choice? A. The selection of accounting policies is expensive and time-consuming. B. Accounting numbers affect the financial positions of various users.

C. Accounting policies are selected to minimise the position of creditors. D. The creation of accounting standards consumes a large amount of resources. ANS: B PTS: 1 AACSB: TOP: Economic consequences of accounting information

Knowledge, Analytical

18. In a firm that offers a bonus scheme based on accounting profit, managers can, in most cases, be expected to adopt a: A. profit-decreasing accounting policy. B. profit-increasing accounting policy. C. dividend-increasing accounting policy. D. liability-increasing accounting policy. ANS: B PTS: 1 AACSB: TOP: Economic consequences of accounting information

Knowledge, Analytical

19. Debt covenants primarily protect the interests of which of the following parties? A. Shareholders B. Creditors C. Employees D. Companies ANS: B PTS: 1 AACSB: TOP: Economic consequences of accounting information

Knowledge, Analytical

20. Triple bottom line reporting A. reinforces profit as the primary objective of companies. B. recognises the legal and non-legal obligations of a company to all legitimate stakeholders in a company. C. is mandatory in Australia. D. is where a result is produced for financial, social and environmental benefit. ANS: B PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

21. Arguments in favour of triple bottom line reporting include: A. enhanced all-round company credibility from greater transparency. B. that it facilitates the implementation of an environmental strategy. C. enhanced communication with stakeholders. D. all of the above. ANS: D PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

22 The Global Reporting Initiative: A. refers to an institution based in Sweden. B. is the most widely cited benchmark for the determination of the content of a triple bottom line report. C. was established as a private, profit-making initiative. D. is a set of reporting obligations agreed as part of the Kyoto agreement. ANS: B PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

23 . Which of the following would not form part of social reporting under the GRI 3? A. Number of female employees. B. Number of indigenous employees. C. Donations to charities. D. Greenhouse gas emissions. ANS: D PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

24. Which of the following would not be part of environmental reporting under the GRI 3? A. Greenhouse gas emissions B. Amount of recycled paper C. Child labour D. Biodiversity management ANS: C PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

25. Which of the following reports are not reports specifically on sustainability issues? A. Sustainability report B. Annual report C. Triple bottom line report D. Stakeholder impact report ANS: B PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

26. Which of the following disclosures would you expect to be included by a company in a triple bottom line report? A. Greenhouse gas emissions B. Donations to charities C. Percentage of female staff in senior management positions D. All of the above ANS: D PTS: 1 TOP: Triple bottom line reporting

AACSB:

Knowledge, Analytical

27. Accounting firms generally provides the following services: A. audit, assurance and taxation. B. audit, budgeting and management consulting. C. audit, budgeting and cost accounting. D. internal audit, budgeting and management consulting. ANS: A PTS: 1 TOP: Careers in accounting

AACSB:

Knowledge, Analytical

28. Managers may select accounting policies for which of the following reasons? A. To provide useful information to users B. To avoid violating debt contracts C. To influence compensation plans D. All of the above are correct ANS: D PTS: 1 AACSB: TOP: Economic consequences of accounting information

Knowledge, Analytical

SHORT ANSWER 1. What is the role of accounting information in business? ANS: Accounting information helps decision makers. It aids managers by providing quantitative information about the entity to help them in planning, operating and evaluating the entity’s activities. Accounting information helps external decision makers by providing them with financial statements containing economic information about the performance and financial position of the entity. PTS: 1 AACSB: accounting information used?

Knowledge, Communication

TOP:

For what purpose is

2. Distinguish managerial accounting from financial accounting. Your answer should include a brief discussion of differences in the types of information provided to users as well as differences in the identity of users of financial and managerial accounting information. ANS: Financial accounting is used primarily by external users such as shareholders and creditors and by senior management as a means of evaluating performance. Financial accounting is presented in summary form and must follow generally accepted accounting principles (GAAP). GAAP ensures that information is consistent from period to period and comparable across entities. Managerial accounting is used internally by senior management, functional and division managers and middle managers. Managerial accounting information is frequently presented with detailed information for day-to-day decisions. The information provided does not have to conform to GAAP or need not be consistent between periods or comparable across entities. Rather, it focuses on the information needs of managers. It is critical that managerial accounting information be provided in a timely manner. PTS: 1 AACSB: accounting information used?

Knowledge, Communication

TOP:

For what purpose is

PROBLEM 1. Doug Murphy, a newly hired accountant, wanted to impress his boss, so he stayed late one night to analyse the office supplies expense. He determined the cost by month, for the past 12 months, of each of the following: computer paper, copy paper, fax paper, pencils and pens, note pads, postage, corrections supplies, stationery, and miscellaneous items. Why do entities, such as companies, not include information of this nature in published (general purpose) financial statements? ANS: Entities provide information to external users to make decisions. The primary decision makers external to the business are creditors, bankers, analysts, shareholders, and potential shareholders. These users need to know that the company can repay its debts, earn a profit, and pay dividends. The cost by month for each item of office supplies does not provide any additional information that would be helpful for any external users. In addition, the time and expense necessary to create the additional detail would outweigh the benefits of the final product. PTS: 1 AACSB: Knowledge, Communication, Analytical purpose is accounting information used?

TOP:

For what

CASE 1. In October 2002, Duke Power, the regulated electricity utility of the United States (US) corporation Duke Energy, agreed to pay $25 million to its customers to settle allegations by regulators in North and South Carolina that it had underreported net earnings by about $123 million between 1998 and 2002. The under reporting of net earnings by Duke Energy was allegedly undertaken in order to avoid having to cut its electricity rates. Required: Explain what is meant by the term ‘economic consequences’ and relate this to the underreporting of net earnings by Duke Energy. ANS: Economic consequences: wealth effects, resulting from accounting policy choices, impacting, for example, managers, the firm, shareholders and/or debtholders. Given Duke Energy’s status as a regulated electricity utility, and the explanation for the underreporting, from an economic consequences perspective the entity’s choice of accounting policies lies with political costs ( p 17). Further, ultimately if large companies attract lower political costs its managers will be rewarded (p 17). PTS: 1 AACSB: Knowledge, Communication, Analytical TOP: Economic consequences of accounting information

Chapter 2 – Types of organisations and the financial reporting framework TRUE/FALSE 1 Mutual agency refers to the fact that each member of the partnership form of business entity can bind the other(s) in contract within the scope of normal operations. ANS: T PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

2. There are several advantages to forming a partnership, including the ease with which it can be formed and the limited rules and regulations that apply to it. However, as for a company, one of the regulations is that a partnership must prepare financial statements in accordance with Accounting Standards if it is deemed to be a reporting entity. ANS: T PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

3. Although partnerships may have a tax advantage over companies in that it is the partners that are taxed and not the partnership, a disadvantage of partnerships is that they have unlimited liability. ANS: T PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

4. All companies can raise funds through the general public but not all companies have limited liability. ANS: F PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

5. If a company has sales of $8 million, assets of $4 million and 60 employees, then it may be classified as a small proprietary company. ANS: T PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

6. All limited-by-shares companies must have ‘Ltd’ in their names, but a private company is distinguishable from a public company because it has ‘Pty’ as well as ‘Ltd’ in its name. ANS: T PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

7. Two companies were formed on 1 January 20X3, with the names Pluto Pty Ltd and Neptune NL. From the names of the companies, it is clear that the former is a proprietary company and the latter is a mining company. ANS: T PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

8. There are several differences between the financial statements of a company and those of a partnership, not least of which is the disclosure of taxation on the balance sheet as a liability. For a company, the disclosure is a single amount as it is the company that is liable and not the owners. For a partnership, the amount of taxation is split and reported separately in accordance with each partner’s liability. ANS: F PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

9. The reason why company shareholders may have the advantage of limited liability rests with the entity principle in accounting, not the legal status of the company. ANS: F PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

10. The partnership form of business organisation exists where two or more carry on a business in common with a view to profit. ANS: T PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

11. Accounting Standards set by the Australian Accounting Standards Board (AASB) apply to both the private and public sectors in Australia. ANS: T PTS: 1 AACSB: TOP: The framework for setting accounting standards

Knowledge, Analytical

12. Due process is primarily concerned with producing Accounting Standards that meet managers’ objectives. ANS: F PTS: 1 TOP: The standard setting process

AACSB:

Knowledge, Analytical

13. The Corporations Act 2001 requires that financial statements include a directors’ report, a directors’ statement and an auditor’s report. ANS: T PTS: 1 TOP: The Corporations Act

AACSB:

Knowledge, Analytical

14. The directors’ report included with a company’s financial statements contains an opinion on whether the balance sheet and income statement present a ‘true and fair’ view. ANS: F PTS: 1 TOP: The Corporations Act

AACSB:

Knowledge, Analytical

15. Half-yearly reports contain more detailed information than annual reports. ANS: F PTS: 1 TOP: The Corporations Act

AACSB:

Knowledge, Analytical

16. A conceptual framework can be defined as a set of interrelated objectives and fundamentals that is expected to lead to consistent standards, and that prescribes the nature, function and limits of financial accounting and reporting. ANS: T PTS: 1 TOP: What is a conceptual framework?

AACSB:

Knowledge, Analytical

17. One of the objectives of a conceptual framework is that it is considered to be a defence against politicisation. ANS: T PTS: 1 AACSB: TOP: Objectives of a conceptual framework

Knowledge, Analytical

18. A general-purpose financial report is primarily directed toward the common information needs of a wide range of users. ANS: T PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

19. Users of general-purpose financial reports include investors, financial advisors, employees, lenders, suppliers and customers. ANS: T PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

20. A reporting entity is an entity for which there are users who rely on financial statements as their major source of information about the entity. ANS: T PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

21. General-purpose financial reports provide the information that is required for both internal and external user group needs. ANS: F PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

22. Accrual accounting refers to the method of measuring profit on the basis of cash flow, rather than when revenues and expenses occur. ANS: F PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

23. The going concern assumption assumes that an entity will continue to operate successfully into the foreseeable future. ANS: T PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

24. An asset must have physical qualities that can be measured reliably. ANS: F PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

25. A liability must always be a legal obligation that arises from past events. ANS: F PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

26. Equity is the residual interest in the assets of the entity after deduction of all its liabilities. ANS: T PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

27. Revenue means the gross inflows arising from normal operations plus all gains during the accounting period. ANS: F PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

28. The elements of financial statements are always measured using the historical cost method. ANS: F PTS: 1 AACSB: TOP: Measurement of the elements of financial statements

Knowledge, Analytical

29. The Australian Financial Reporting Council is not able to directly influence the content of the AASB’s accounting standards, but has the capacity to do so given its control of the budget and priorities of the AASB. ANS: T PTS: 1 AACSB: TOP: The framework for setting accounting standards

Knowledge, Analytical

30. The political nature of standard setting refers to the fact that, for example, preparers may lobby the standard setters to promote their own self-interest rather than the decision-making usefulness of general purpose reports. ANS: T PTS: 1 AACSB: TOP: The political nature of accounting standard setting

Knowledge, Analytical

31. The fundamental element equity does not require recognition criteria, because it represents the residual interest in assets, after deducting liabilities. ANS: T PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

32. In accordance with the IASB Conceptual Framework, income includes both revenue and gains. ANS: T PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

33. The external auditor is responsible for preparing the general-purpose financial reports of a company. ANS: F PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

34. The responsibilities of the Australian Financial Reporting Council include advising the government on the process of setting accounting standards. ANS: T PTS: 1 AACSB: TOP: The framework for setting accounting standards

Knowledge, Analytical

35. In Australia the overriding responsibility for the preparation and presentation of general-purpose reports resides with the directors of a company. ANS: T PTS: 1 TOP: The corporations act

AACSB:

Knowledge, Analytical

36. An external auditor seeks to provide reasonable assurance that the financial statements of a company are true and fair, not a guarantee that every error in the financial statements of the entity has been detected. ANS: T PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

MULTIPLE CHOICE 1. Which of the following is not true of sole traders? A. They are one-owner businesses. B. They are not normally reporting entities. C. They are separate legal entities. D. They usually have limited funds at their disposal. ANS: C PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

2. Which of the following is not true for a partnership? A. Creditors can supply goods on credit to a partnership. B. Debtors can purchase goods on credit from a partnership. C. Partnerships have to pay their tax yearly. D. Partnerships can enter contracts on behalf of the partnership. ANS: C PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

3. Which of the following statements regarding partnerships is incorrect? A. There are no legal formalities required to form a partnership and it can be an oral agreement. B. Partnerships have unlimited liability not subject to the amount contributed by each partner. C. The partnership is subject to income tax, not the individual partners. D. Each partner has the authority to enter contracts on behalf of the partnership, provided the contracts relate to normal operations. ANS: C PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

4. Which of the following would not be considered a disadvantage of forming a partnership? A. Limited life B. Unlimited liability C. Ease of formation D. Mutual agency

ANS: C PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

5. Jack and Jill Repairers is founded by partners Jack, Jill and Jolly. Jack, Jill and Jolly contributed $3000, $5000 and $8000 respectively. For the year ending 20X2, Jack and Jill Repairers produced a profit of $12,000. If the profits are distributed in accordance with the initial investment which of the following is true? A. Jack gets $2250 and Jill gets $6000. B. Jack gets $3750 and Jolly gets $6000. C. Jack gets $2250 and Jill gets $3750. D. Jack gets $2250 and Jolly gets $8000. ANS: C PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

6. Which of the following items of information would not be found in the balance sheet of a partnership? A. Assets B. Liabilities C. Dividends payable D. Distribution of profits to partners ANS: C PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

7. Which of the following is true of companies? All companies: A. are limited liability companies. B. are separate legal entities. C. have a limited life. D. are bound by the contracts signed by shareholders. ANS: B PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

8. A large proprietary company must have its financial statements audited and lodged with the: A. Australian Securities Exchange. B. Australian Securities and Investments Commission. C. Financial Reporting Council. D. Australian Accounting Standards Board. ANS: B PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

9. Which of the following types of business organisation has a legal identity separate from those of the owners? A. Sole proprietorships B. Companies C. Partnerships D. All of the above. ANS: B PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

10. Limited liability is a feature of what form(s) of business organisation? A. Company B. Sole proprietorship C. Partnership D. Both a company and a partnership ANS: A PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

11. It can be determined that Alpha Pty Ltd is a proprietary company as its records show that: A. no approach has been made to the public for funds. B. it has fewer than 50 employees. C. it is a family company. D. it has ‘Pty Ltd’ in its name. ANS: D PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

12. Gamma Pty Ltd would be a small proprietary company as its records show: A. assets of $15m, sales of $26m and 40 employees. B. assets of $6m, sales of $26m and 60 employees. C. assets of $15m, sales of $9m and 55 employees. D. assets of $4.5m, sales of $12m and 45 employees. ANS: D PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

13. An advantage that a company typically has over a partnership is: A. mutual agency. B. access to greater amounts of capital. C. avoidance of moral hazard. D. smaller size. ANS: B PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

14. The advantages of the corporate form of business organisation do not include: A. ready transferability of shares. B. limited liability. C. mutual agency. D. continuity of existence. ANS: C PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

15. Which one of the following is not an advantage of a company? A. Separate legal entity B. Access to capital C. Continuous existence D. No regulation ANS: D PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

16. In which section of a balance sheet would a general reserve be found? A. Current Assets B. Current Liabilities C. Non-current Assets D. Shareholders’ Equity ANS: D PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

17. Equity on the balance sheet of a sole proprietorship is normally referred to as: A. owner’s equity. B. shareholders’ equity. C. reserves. D. ordinary shares. ANS: A PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

18. A small proprietary company is one that has: A. less than $25 million sales and fewer than 50 employees. B. less than $5 million liabilities and fewer than 50 employees. C. less than $5 million expenses and less than $12.5 million assets. D. less than $10 million equity and less than $12.5 million assets. ANS: A PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

19. Which of the following items does not appear on the balance sheet of a partnership? A. Debtors B. Equipment C. Creditors D. Income tax payable ANS: D PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

20. The ability of a partner to enter into a contract on behalf of all partners is called: A. voluntary association. B. mutual agency. C. the partnership agreement. D. unlimited liability. ANS: B PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

21. The separation of ownership and control is normally a characteristic of: A. companies. B. partnerships. C. sole traders. D. partnerships and companies. ANS: A PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

22. The factors that should be considered before forming the partnership and company forms of entity would include: A. income taxation implications. B. the liability of the equity participants for the debts of the business. C. the scale/magnitude of the operations involved and the access to finance. D. all of the above. ANS: D PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

23 Due process involves: A. the maximum opportunity to comment on proposed accounting standards. B. the selection and discussion of emerging issues of accounting. C. a process of fast-tracking the implementation of accounting standards. D. adequate consultation between the FRC and the AASB before an accounting standard is issued. ANS: A PTS: 1 AACSB: TOP: The framework for setting accounting standards

Knowledge, Analytical

24. The principle purpose of an audit is to: A. assure investors of the wealth of the entity. B. assure investors of the future profitability of the entity. C. express an opinion on the truth and fairness of the entity’s financial statements. D. detect fraud by the entity’s employees. ANS: C PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

25. If the conceptual framework sets out the concepts that underlie the preparation and presentation of financial statements for external users, which of the following questions is the conceptual framework not attempting to answer? A. Who are the users of general-purpose financial reports? B. Which entities should prepare special-purpose financial reports? C. How should the elements of the financial statements be measured and displayed? D. What are assets, liabilities, income, expenses and equity? ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

26. Objectives of a conceptual framework include: A. providing a defence against lobby groups. B. fewer and more consistent Accounting Standards. C. improved communication. D. all of the above. ANS: D PTS: 1 AACSB: TOP: Objectives of a conceptual framework

Knowledge, Analytical

27. Which of the following statements is incorrect? A. Compliance with the conceptual framework is non-mandatory in general purpose financial statements. B. Compliance with Accounting Standards is mandatory in general purpose financial statements.

C. Compliance with the conceptual framework is mandatory in general purpose financial statements. D. Accounting Standards are more specific than the conceptual framework. ANS: C PTS: 1 AACSB: TOP: The framework for setting accounting standards

Knowledge, Analytical

28. Which of the following sets of entities are not likely to meet the definition of a reporting entity? A. Small proprietary companies, large proprietary companies and partnerships B. Small proprietary companies and sole traders C. Large proprietary companies, sole traders and partnerships D. Small proprietary companies and large professional accounting practices ANS: B PTS: 1 TOP: The Conceptual Framework

AACSB:

Knowledge, Analytical

29. An example of a reporting entity is likely to be a: A. public company. B. partnership. C. family trust. D. small proprietary company. ANS: A PTS: 1 TOP: The Conceptual Framework

AACSB:

Knowledge, Analytical

30. Which of the following are likely to be reporting entities? I. II. III. IV.

BHP Billiton The corner store An unincorporated business with 10 employees A large proprietary company with over 500 employees and 200 creditors

A. I only B. I and IV only C. II, III and IV only D. I, III and IV only ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

31. Which one of the following groups is not generally regarded as an external user of the accounting information of an enterprise? A. Employees B. Customers C. Management D. Lenders ANS: C PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

32. FeelGood Limited has been set up specifically for the building of an inner-city women’s refuge. When the building has been erected and becomes operational (estimated time four months), the company will be liquidated. Which basic assumption underlying the preparation of general-purpose financial reports will not apply in preparing the reports for FeelGood Limited? A. The business entity principle. B. The principle of duality.

C. The going-concern principle. D. The period assumption. ANS: C PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

33. Assets are best defined as a: A. resource owned by the entity as a result of current event, from which future economic benefits are expected to flow. B. resource owned by the entity as a result of past event, from which future economic benefits are expected to flow. C. resource controlled by the entity as a result of past event, from which future economic benefits are expected to flow. D. resource controlled by the entity as a result of a future event, from which future economic benefits are expected to flow. ANS: C PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

34. Which of the following is not a primary characteristic of the accounting definition of an asset? A. The capacity to provide benefits to the entity B. Control but not necessarily ownership C. Representing past events D. The ability to be reliably measured ANS: D PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

AACSB:

Knowledge, Analytical

35. Which of the following is not an asset? A. Equipment B. Accounts receivable C. Accounts payable D. Inventory ANS: C PTS: 1 TOP: The conceptual framework

36. Which of the following elements does not require recognition criteria in order to decide whether it should be recognised in the financial statements? A. Assets B. Revenues C. Equity D. Expenses ANS: C PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

37. In terms of the conceptual framework, an asset is recognised on a balance sheet if it: A. is capable of reliable measurement and it is probable that the asset will be realised. B. is owned by the entity and is capable of reliable measurement. C. results from a past event and is owned by the entity. D. provides future economic benefits. ANS: A PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

38. Which one of the following is not an asset? A. Inventory B. Accounts receivable C. Revenue D. Cash ANS: C PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

AACSB:

Knowledge, Analytical

39. Which of the following is not a liability? A. Accounts payable B. Loan payable C. Investment by owner D. Unearned revenue ANS: C PTS: 1 TOP: The conceptual framework

40. Which of the following is not an attribute of a liability? A. Present obligation to transfer resources to another entity. B. The transfer is unavoidable by the entity. C. The transfer results in reduced economic benefits to the entity making the transfer. D. The event creating the responsibility has not yet occurred. ANS: D PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

41. Which of the following accounts is a liability? A. Interest Expense B. Interest Payable C. Interest Revenue D. Interest Receivable ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

42. Liabilities are: A. resources under an organisation’s legal control. B. obligations owed by an organisation to its creditors. C. the amount of investment made by owners in a business. D. the profits earned by a corporation. ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

43. Which of the following accounts is not a liability? A. Wages Payable B. Prepaid Rent C. Accounts Payable D. Notes Payable ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

44. Revenues result when a business: A. creates resources by selling goods or services. B. borrows money. C. receives money from owners of the business. D. pays its employees. ANS: A PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

45. Expenses result when a business: A. pays a supplier for goods purchased last month. B. consumes resources during the production and sale of goods or services. C. distributes money to owners. D. hires employees. ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

46. Torger Associates sold business services to another organisation for cash. As a result, Torger’s assets increased. Which accounting term best describes the concept involved in the other part of this transaction? A. Liability B. Revenue C. Financing activity D. Dividends ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

47. Which of the following types of entities would not fit the category of a profit-making entity? A. Sole proprietorship B. Partnership C. Charitable institution D. Company ANS: C PTS: 1 TOP: Types of organisations

AACSB:

Knowledge, Analytical

48 The present obligation to make a future sacrifice that is an essential criteria of the definition of a liability under the IASB Conceptual Framework: A. can only arise from legal obligations. B. may arise out of moral or constructive obligations. C. meets the definition of an expense. D. may vary in different countries. ANS: B PTS: 1 TOP: The conceptual framework

AACSB:

Knowledge, Analytical

49 According to the Corporations Act, an external auditor must: A. have appropriate tertiary qualifications. B. satisfy ASIC that he/she is capable of performing the duties of an auditor. C. satisfy ASIC that he/she is a fit and proper person to be registered as an auditor. D. all of the above. ANS: D PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

50. The role of an auditor is to: A. review accounting systems and internal controls. B. detect fraud. C. ensure that every transaction is correct. D. ensure that there is no fraud and that all transactions are correct. ANS: A PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

51. The auditor’s report: A. expresses an opinion as to the truth and fairness of the financial statements. B. states that the reporting entity is in a sound financial position. C. is prepared by internal auditors. D. includes forecasts of future profits. ANS: A PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

52. The relationship between the task undertaken by auditors and the understanding of the users is called: A. the experience gap. B. the auditor’s report. C. the expectations gap. D. the information gap. ANS: C PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

53. What is the audit expectation gap? A. The auditors’ ensuring that financial statements are prepared in accordance with accounting standards. B. The difference between what an auditor is required to do and what is expected by users. C. The auditors’ ensuring that they meet the requirements of an audit. D. The auditors’ providing a true and fair view of the financial statements. ANS: B PTS: 1 TOP: External audits

AACSB:

Knowledge, Analytical

SHORT ANSWER 1. What is a conceptual framework from the perspective of financial reporting? ANS: The Financial Accounting Standards Board (FASB) in the US defined the conceptual framework as a coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards and that prescribes the nature, function and limits of financial accounting and reporting. The IASB Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The framework establishes that the purpose of financial reporting is to provide external users with useful information. PTS: 1 AACSB: TOP: What is a conceptual framework?

Knowledge, Analytical

2. Describe four objectives of a conceptual framework. ANS: Four objectives of a conceptual framework: 1.

Fewer accounting standards. A conceptual framework is designed to enable the resolution of accounting problems faced by the preparers of general purpose reports, thus reducing the need for an accounting standard to be issued for every occasion.

More consistent accounting standards. A conceptual framework also guides the development of accounting standards by regulatory authorities. Thus, the resulting standards should be consistent with each other, leading to improved reporting quality.

Improved communication. Improved communication between stakeholders (regulators, preparers, and users) results from the fact that the concepts that comprise the conceptual framework, including the fundamental concepts of the financial statements – assets, liabilities, income and expenses – are common to all parties.

Defence against politicisation. The politicisation of the standard setting process is reduced, as standards are grounded in the conceptual framework i.e., the framework acts as a buffer against the self-serving interests of various stakeholders involved in the standard setting process.

PTS: 1 AACSB: Knowledge, Analytical TOP: The objectives of a conceptual framework 3. Outline the nature and purpose of general-purpose financial reports. ANS: Nature of GPFRs: typically statements of comprehensive income, financial positions, changes in equity, cash flows and the notes. Purpose of GPRs: to meet the common financial information needs of a diverse set of external users who do not have the authority to have their specific information needs met. PTS: 1 AACSB: TOP: The conceptual framework

Knowledge, Analytical

4. Under what circumstances does an entity represent a ‘reporting entity’ for the purposes of the Australian conceptual framework? ANS: A reporting entity is one for which there are users who rely on the (general purpose) financial statements as their major source of financial information about the entity. PTS: 1 AACSB: TOP: The conceptual framework

Knowledge, Analytical

5. Describe the purpose of the external auditor in financial reporting. ANS: The purpose of the external auditor is to express an independent opinion on whether the financial statements provide a true and fair view of the company’s financial position, performance and cash flows. That is, the external audit is designed to add credibility to general purpose reports. PTS: 1 AACSB: TOP: External audits

Knowledge, Analytical

6. What is the expectation gap associated with the external audit? ANS: The expectation gap refers to the gap between user expectations’ of the duties and responsibilities of the external auditor and the role fulfilled by the auditor in fact. PTS: 1 AACSB: TOP: External audits

Knowledge, Analytical

PROBLEMS 1. Explain what is meant by the term limited liability as it relates to the shareholders of a corporation; and explain why shareholders are able to gain the benefit of limited liability whereas sole traders cannot. ANS: The limited liability of shareholders refers to the fact that the members’ liability for the debts of the company is limited to the issue price of the shares held. Shareholders are able to gain the benefit of limited liability because a corporation is a separate legal entity. The debts of a company are at law those of the company, not the shareholders. However, in the case of a sole trader, the business is not a separate legal entity from the sole traders. Legally, the debts of a sole tradership are those of the owner, and, the assets of the business part of the individual’s pool of resources all of which are available to settle the debts. PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

2. Describe three advantages of a company over a partnership and a sole trader. ANS: • Separate legal entity – from the owners, which, in the case of limited liability companies, leads to reduced risk for equity holders. • Limited liability – by shares or guarantee, whichever applies. • Greater access to capital (equity and debt). • Ease of transfer of ownership. • Absence of mutual agency, with respect to partnerships. • Professional management. • Continuous existence. PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

3. R2 and E2 have been working as employees in the fashion industry. They are considering forming a partnership designing fashion clothing, trading under the RE2 label. Advise the individuals on the advantages and the disadvantages of forming a partnership. ANS: Advantages: • Ease of formation, compared to a company. • Limited rules and regulation, compared to a company. • Access to capital and expertise greater than in the case of sole trader. • There may be income taxation advantages, arising out of the sharing of profits. Disadvantages • Limited life – a partnership can be brought to an end at any time through, for example, the death, withdrawal or bankruptcy of a partner. • Unlimited liability – each partner is jointly and severally liable for the debts of the business, and that liability is unlimited. • Mutual agency – each partner is an agent of the other(s) when acting within the scope of the normal operations of the business. Mutual agency is essential to the efficient functioning of the business, but also has serious implications vis-a-vis each partner’s liability under the partnership. PTS: 1 AACSB: TOP: Types of organisations

Knowledge, Analytical

4. Required: (a) Does the deposit of silver meet the definition of an asset to Vanessa according to the IASB Conceptual Framework? Why?/Why not? (b) Under what circumstances may the deposit of silver be recognised in the balance sheet of Vanessa according to the IASB Conceptual Framework? ANS: (a) The metal deposit would appear to meet the three essential characteristics of the definition of an asset: future economic benefits (viability/profitability); control (the deposit may be deployed in the pursuit of the company’s objectives and the company has the exclusive legal right to mine vis-a-vis regulating/denying the access of others); and the past event (discovery). (b) Recognition criteria: The case study details suggest that it is probable that the future economic benefits will flow to the entity. The use of the present value measurement method may raise the question/discussion of the reliability of the value that has been placed on the asset, but the case details are not definitive vis-a-vis the reliability of the method. PTS: 1 AACSB: TOP: The conceptual framework

Knowledge, Analytical

5. Vanessa raised a $15,000,000 loan to fund the exploration that led to the discovery of the deposit of silver. Discuss whether the loan meets the definition and recognition criteria of a liability to Vanessa during the term of the loan, according to provisions of the IASB Conceptual; Framework.

ANS: The $15,000,000 loan clearly meets the definition and recognition criteria. Vanessa has an existing legal obligation to another entity arising out of a past event. It is probable that the loan will lead to an outflow (sacrifice) of economic benefits; and the figure can be measured reliably. PTS: 1 AACSB: TOP: The conceptual framework

Knowledge, Analytical

ESSAY 1. The opportunity for interested parties to participate in the development of accounting standards lies in the ‘due process’. Discuss. ANS: Accounting standards refer to regulations that are to be followed by preparers in the preparation of general purpose financial statements, where applicable. The standards deal, for example, with issues such as accounting for inventory, property, plant and equipment, long-term construction contracts, agriculture assets and leases. The development of the standards takes place within a regulatory framework, which includes a ‘due process’. The due process reflects a participatory (democratic) approach to the development of regulation. Therefore, it should engender greater stakeholder ‘ownership’ and acceptance of the final product, including a greater willingness to comply on the part of the regulated (preparers). The due process is also an important conduit of communication between the regulatory authority and stakeholders. Diversity of opinion has the capacity to enhance the quality of the final product. The process also has the capacity to allow the regulatory authority to gain a measure of the implications that proposed regulation may hold for wealth effects. PTS: 1 AACSB: TOP: The standard setting process

Knowledge, Analytical, Communication

2. Describe the role that the following organisations play in relation to Australian accounting standards: (i) the Financial Reporting Council; and (ii) the Australian Accounting Standards Board ANS: (i) Financial Reporting Council (FRC). The organisation has the oversight responsibility of the AASB. Specifically, the FRC is responsible for the priorities, business plan, budget and staffing arrangements of the AASB. However, it is not able to influence the AASB’s technical deliberations. (ii) Australian Accounting Standards Board. The organisation’s responsibilities, which are specified in S227 (a) of the Australian Securities and Investments Commission Act, include the following: – developing a conceptual framework, not having the force of an accounting standard, for the purpose of evaluating proposed accounting standards. – developing and issuing accounting standards which have the force of law. – formulating accounting standards for other purposes – participating in and contributing to the development of a single set of accounting standards for worldwide use. PTS: 1 AACSB: Knowledge, Analytical, Communication TOP: The framework for setting accounting standards.

Chapter 3 – Ethics and corporate governance TRUE/FALSE 1. Deontologists judge the moral correctness of actions by only looking at the consequences of such actions. ANS:

PTS:

AACSB:

Knowledge TOP:

Ethics and accounting

2. For accountants to use judgement in providing advice would be unethical. ANS:

PTS:

AACSB:

Knowledge TOP:

Ethics and accounting

3. It is ethical for an accountant to minimise the amount of tax his client is required to pay. ANS:

PTS:

AACSB:

Knowledge TOP:

Ethics and accounting

4. Effective corporate governance may reduce agency costs. ANS: T PTS: 1 AACSB: TOP: What is meant by corporate governance?

Knowledge, Analytical

5. Corporate governance is a new phenomenon that has grown out of recent corporate collapses. ANS: F PTS: 1 AACSB: TOP: What is meant by corporate governance?

Knowledge, Analytical

6. A company is classified as a separate legal entity, which often gives rise to a separation of powers, which in turn is a primary reason for ensuring there are effective corporate governance systems in place. ANS: T PTS: 1 AACSB: TOP: What is meant by corporate governance?

Knowledge, Analytical

7. The appointment of an audit committee is an example of internal corporate governance, whereas the ability of one company to take over another is an example of external corporate governance. ANS: T PTS: 1 AACSB: TOP: What is meant by corporate governance?

Knowledge, Analytical

8. Good governance is only relevant to the for-profit sector, not the not-for-profit sector. ANS: F PTS: 1 AACSB: TOP: What is meant by corporate governance?

Knowledge, Analytical

9. Corporate governance includes mechanisms, such as the board of directors, which exist to provide some assurance to equity investors that the management of a company is being held accountable for their actions, thus minimising agency costs. ANS: T PTS: 1 TOP: Board of directors

AACSB:

Knowledge, Analytical

10. The ASX principles and recommendations are mandatory on the top 200 listed companies. ANS: F PTS: 1 AACSB: TOP: Enforcement of corporate governance

Knowledge, Analytical

11. The role of the board of directors is to represent shareholders and debtholders. ANS: F PTS: 1 TOP: Board of directors

AACSB:

Knowledge, Analytical

12. An audit committee is a sub-committee of the board of directors, and part of the corporate governance structure of a company. ANS: T PTS: 1 TOP: The audit committee

AACSB:

Knowledge, Analytical

13. The major thrust for the creation of an audit committee is to add credibility to the financial reporting process. ANS: T PTS: 1 TOP: The audit committee

AACSB:

Knowledge, Analytical

14. Australian regulation requires the automatic rotation of the lead audit partner every seven years. ANS: F PTS: 1 TOP: The audit committee

AACSB:

Knowledge, Analytical

MULTIPLE CHOICE 1. According to Josephson (1992), characteristics of an ethical person include: A. honesty, caring and listening to clients’ orders. B. promise-keeping, not listening to client’s orders and respectfulness. C. loyalty, fairness and caring. D. honesty, coolness and being smart. ANS: C PTS: 1 TOP: What are ethics?

AACSB:

Knowledge, Ethics, Analytical

2. According to Josephson (1992), people do not behave in an ethical manner because of: A. faulty reasoning and loyalty. B. self-righteousness and greed. C. self-deception and fidelity. D. self-protection and faulty reasoning. ANS: D PTS: 1 TOP: What are ethics?

AACSB:

Knowledge, Ethics, Analytical

3. In a utilitarian ethical framework, moral correctness is based on the premise that: A. the underlying nature of an action determines its correctness. B. the consequences of an action determine its correctness. C. the nature of an action and its consequences determines its correctness. D. all of the above are correct. ANS: B PTS: 1 TOP: Ethics and accounting

AACSB:

Knowledge, Ethics, Analytical

4. Ethical behaviour in business will be achieved if: A. the strict letter of the law is applied. B. a course in ethics is undertaken. C. judgement is used, based on rules and morals. D. None of the above is correct. ANS: C PTS: 1 TOP: Ethics and accounting

AACSB:

Knowledge, Ethics, Analytical

5. Which of the following factors could weaken corporate governance? A. The appointment of independent directors to the audit committee B. Stipulating the maximum number of directorships a director can commit to C. Ensuring continuity of all directors over a long period to enhance familiarity with the company’s policies and procedures D. Ensuring the CEO is not the chairman of the board of directors ANS: C PTS: 1 TOP: Board of directors

AACSB:

Knowledge, Analytical

6. Which of the following is considered to be an example of good corporate governance according to the ASX principles? A. The appointment of a board of directors consisting of the company CEO, three company executives and one independent director. B. The appointment of an audit committee consisting of the audit partner and an independent auditor, and the company CEO and one company director. C. A board of directors that has intimate knowledge of the company’s activities since their appointment 10 years ago when the company was formed. D. Rotating the lead external audit partner every five years. ANS: D PTS: 1 AACSB: TOP: Enforcement of corporate governance

Knowledge, Analytical

7. Which of the following statements is incorrect? A. Corporate governance can provide assurances that management is accountable for their actions. B. The external auditor is responsible for the preparation of a company’s financial statements. C. Audit committees are now compulsory for the top 500 companies. D. An audit committee may be responsible for reviewing policies on internal control procedures. ANS: B PTS: 1 TOP: The audit committee

AACSB:

Knowledge, Analytical

8. Which of the following would not be considered a function of an audit committee? A. The responsibility for appointing the members of the committee B. Overseeing the appointment of the internal auditor C. Overseeing the appointment of the external auditor D. Overseeing a company’s risk management practices ANS: A PTS: 1 TOP: The audit committee

AACSB:

Knowledge, Analytical

9. Which of the following statements regarding audit committees is incorrect? A. Audit committees review internal control procedures. B. Audit committees oversee the appointment and relationship of the external auditor. C. Audit committees oversee the appointment of the internal and external auditors. D. Audit committee members must be employees of the company. ANS: D PTS: 1 TOP: The audit committee

AACSB:

Knowledge, Analytical

10. Corporate governance: A. refers to the governance of not-for-profit entities. B. is concerned with promoting corporate fairness, transparency and accountability. C. is a recent phenomenon in the conduct of company affairs. D. will improve the company’s financial performance. ANS: B PTS: 1 TOP: What is corporate governance?

AACSB:

Knowledge, Analytical

11. Which of the following recommendations are not associated with the principles of good corporate governance issued by the ASX Corporate Governance Council? A. A board of directors should have a majority of independent directors. B. The CEO should not be the chairman. C. There should be a separate nominations and remuneration committee for directors. D. All audit committee members should be accountants. ANS: D PTS: 1 AACSB: TOP: The ASX Corporate Governance Council

Knowledge, Analytical

12. The fundamental characteristic of the corporate form of business organisation that gives rise to the need for governance mechanisms is: A. the separation of ownership and control. B. mutual agency. C. the lack of separation of ownership and control. D. the abuses by professional managers. ANS: A PTS: 1 AACSB: TOP: What is meant by corporate governance?

Knowledge, Analytical

13. External corporate governance refers to: A. the board of directors. B. the audit committee. C. the discipline of the market place. D. triple bottom line reporting. ANS: C PTS: 1 AACSB: TOP: What is meant by corporate governance?

Knowledge, Analytical

14. ASX Ltd needs to appoint a new director from 1 January 20X7. Which of the following persons would meet the requirements for an independent director in accordance with the ASX principles? A. John who holds substantial shares in the company. B. Jill who is a major supplier of office supplies to the company. C. Jordan who was an employee of the company up until 31 December 20X5. D. Bill who was the auditor for the company from 1 January 19X7 until 31 December 20X3. ANS: D PTS: 1 TOP: Board of directors

AACSB:

Knowledge, Analytical

15. The majority of studies on board composition and firm performance and risk show that an increase in the number of independent directors on a board will: A. reduce the financial performance of a form. B. increase the financial performance of a firm. C. have no impact on the financial performance of a firm. D. increase the risk of a firm. ANS: C PTS: 1 TOP: Board of directors

AACSB:

Knowledge, Analytical

SHORT ANSWER 1. Explain what is meant by the term ‘corporate governance’. ANS: Corporate governance consists of mechanisms such as the board of directors and audit committees that exist to provide some assurance to the absentee owners that the management of a company are accounting for their actions and to minimise agency costs in respect of management. PTS: 1 AACSB: Knowledge, Analytical, Communication TOP: What is meant by corporate governance? 2. Describe the nature and general role of an audit committee. ANS: An audit committee is a subcommittee of a board. The audit committee, as the name suggests, is, generally speaking, responsible for ensuring the integrity of the financial statements; i.e., that the statements have been reliably prepared and verified. The committee is answerable to the board in that respect; i.e., the responsibility ultimately vests with the board as a whole. PTS: 1 AACSB: TOP: The audit committee

Knowledge, Analytical, Communication

The meaning of ‘ethical behaviour’ regarding the notion of ‘morality.’ Were the managers being honest and acting with integrity?

The role of ethics in business, including, perhaps, the question of whether there is a conflict between self-interest and ethical behaviour. Were the managers deriving higher benefits from engaging in behaviour which allowed the entity to increase its rates?

Josephson’s (1992) causes of unethical behaviour: self-deception, self-indulgence, self-protection, self-righteousness, faulty reasoning. Did the managers believe their strategy would go undetected?

The correctness, or otherwise, of management’s actions may also be addressed from the utilitarianism and deontological frameworks. Were the managers aware that their strategy would benefit shareholders but at the expense of customers?

PTS: 1

AACSB:

Ethics

TOP:

Ethics in business and accounting

ESSAY 1. Discuss the role of the board of directors in Australia and the key issues discussed in the literature about the board of directors impacting its effectiveness. ANS: Role of the board: to represent and create value for shareholders. The duties of the board include appointing and overseeing the performance of the CEO, ensuring that the company meets its legal and statutory obligations and managing risks. Corporate governance literature suggests that the following variables are important in relation to board effectiveness: • The number of independent directors on the board. The argument is that independent (non-executive) directors are more able to defuse agency conflicts between internal managers and absentee owners. • The determinants of director independence, which include matters associated with the independence of the selection process and the absence of family, financial, employment and other contractual relationships. • Duality of leadership. The question here is whether the CEO should be the chairman of the board or whether the position should be drawn from the non-executive directorship. Most codes suggest separation of these two roles. • Size of the board. • Qualifications of the directors – directors should possess the appropriate skills to allow the board to discharge its duties effectively. • Number of board memberships of directors. There is a view that some directors belong to too many boards and do not have the necessary time to properly carry out their duties. • Length of time. There is some suggestion that directors should be rotated to avoid the problems of apathy/complacency and familiarity with management. • The adequacy of the board’s duties and responsibilities. • Board diligence with respect to performing its duties and responsibilities. PTS: 1 AACSB: TOP: Board of directors

Knowledge, Analytical, Communication

Chapter 4 – Wealth and the measurement of profit TRUE/FALSE 1. The wealth of an entity is determined by what it controls and what it owes. ANS: T PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

2. Choosing a measurement system affects profit but does not affect wealth. ANS: F PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

AACSB:

Knowledge, Analytical

3. Profit represents an increase in wealth. ANS: T PTS: 1 TOP: Profit and wealth

4. Profit measures the flow of resources into and out of the business over time. ANS: T PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

5. Historic cost is the cost incurred by an individual or enterprise in acquiring an item, measured at the time of the originating transaction. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

6. The written down cost of an asset represents the cost of an asset after accumulated depreciation. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

7. Historical cost is often referred to as the most relevant method of measurement. ANS: F PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

8. Net realisable value is based on an expected selling price in a forced sale. ANS: F PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

9. The net realisable value is the estimated proceeds of sales less, where applicable, all further costs to the stage of completion, and less all costs to be incurred in marketing, selling and distribution to customers. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

10. The value of the expected earnings from using an item, discounted at an appropriate rate to give a present-day value, is the economic value. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

11. The common measurement method adopted in most countries is that of historic cost. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

12. The fair value of an asset is more reliable where there exists a liquid market for the asset, than when no liquid market exists. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

13. Where an asset is exchanged between a willing seller and a willing buyer and the exchange price is below the market price due to fact that the parties involved are related, the resulting exchange price is referred to as fair value. ANS: F PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

14. Fair value arises in circumstances where the price is based on an orderly transaction between a willing seller and a willing buyer. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

15. Economic value is considered to be an ideal approach to measuring value, but may lack reliability due to the fact that the measure relies on estimates. ANS: T PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

MULTIPLE CHOICE 1. Which of the following statements is true of profit and wealth? A. Profit is money and wealth is savings. B. Profit is a non-static measure and wealth is a static measure. C. Profit and wealth are non-circular. D. Profit and wealth are not related. ANS: B PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

2. Which of the following statements is incorrect? A. Profit is a non-static measure and wealth is a static one. B. Profit is the difference between wealth at the start and at the end of the period. C. Profit represents the sum of all gains . D. Profit represents an increase in wealth. ANS: C PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

3. Jane buys a 1957 FJ Holden at time T0 for $100,000. At time T1, the car is valued at $180,000. Jane’s profit and wealth at T1 are: A. $100,000 and $80,000 respectively. B. $80,000 and $180,000 respectively. C. $80,000 and $100,000 respectively. D. $80,000 and $80,000 respectively. ANS: B PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

4. James had $80,000 in the bank. He used some of this cash to buy a new car for $67,000 on 1 January 20X7. He subsequently modified the car, at no cost, and sold it for $78,000 on 1 March 20X7. What profit did James make from the sale of the car? A. $3000 B. $8000 C. $11,000 D. $14,000 ANS: C PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

5. Peter has the following assets at various dates. He has no liabilities and earned no other income over this two-year period. Date Asset 1 Asset 2 Asset 3

1/1/X5 $44,000 $24,000 $66,000

1/1/X6 $41,000 $29,000 $61,000

1/1/X7 $46,000 $39,000 $59,000

Which of these statements is correct? A. Peter’s wealth increased by $10,000 over this two-year period. B. Peter’s profit was $3000 for the year ended 1 January 20X7. C. Peter’s wealth was $134,000 at 1 January 20X7. D. Peter’s loss was $8000 for the year ended 1 January 20X6. ANS: A PTS: 1 TOP: Profit and wealth

AACSB:

Knowledge, Analytical

6. Historic cost refers to: A. the cost of selling an item. B. the cost to replace an item C. the purchase consideration of an item, plus incidental costs. D. economic value. ANS: C PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

7. When calculating costs associated with the sale of an item, which of the following are included in the net realisable value? A. Marketing, manufacturing and selling costs. B. Manufacturing, selling and distribution costs. C. Marketing, selling and distribution costs. D. Marketing and distribution costs.

ANS: C PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

8. Aaron sold his large lounge chair to his friend for $1000. He incurred costs of $100 for advertising, $120 for hiring a van to transport the chair to the buyer, and $200 for a speeding fine. What is the net realisable value? A. $1100 B. $1120 C. $1220 D. $1420 ANS: C PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

9. Tom purchased an item for $5050 in 20X6. He sold the item to a complete stranger for $7000 in 20X7 and incurred a sum of $250 for advertising it. Which of the following statements is true? A. Historical cost is $5050. B. Fair value is $7000. C. Net realisable value is $6750. D. All of the above. ANS: D PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

10. James had $80,000 in the bank. He used some of this cash to buy a new car for $67,000 on 1 January 20X7. James subsequently modified the car and sold it for $78,000 on 1 March 20X7. The modifications cost James $10,000. The historical cost of the car is: A. $67,000. B. $68,000. C. $78,000. D. $88,000. ANS: A PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

11. For which of the following accounts would the use of historical cost normally be a greater limitation than for the other three? A. Cash B. Accounts Receivable C. Plant and Machinery D. Prepaid Rent ANS: C PTS: 1 AACSB: TOP: Alternative systems of valuation and chapter 2

Knowledge, Analytical

12. For which of the following accounts would the limitation ‘use of estimates and allocations’ not be a concern? A. Inventory B. Cash C. Equipment D. Accounts Receivable ANS: B PTS: 1 AACSB: TOP: Alternative systems of valuation and chapter 2

Knowledge, Analytical

13. Which of the following statements about the limitations of financial statements is false? A. Many of the numbers reported in financial statements result from estimates. B. Financial statements report primarily the current value of assets. C. Some important factors may not be reported in a firm’s financial statements. D. Certain types of resources are not reported in the financial statements. ANS: B PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

14. Current accounting practice in Australia is to initially record property, plant and equipment at: A. economic value. B. cost. C. net realisable value. D. replacement cost. ANS: B PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

15. Where an asset is measured on the basis of the discounted net cash flows that are expected to be generated by the future use of the item, the resulting measure is referred to as: A. fair value. B. net realisable value. C. historic cost. D. economic value. ANS: D PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

16. Where an asset is measured at fair value, the figure involved: A. is more likely to be reliable if a liquid market for the asset exists than if no liquid market exists. B. reflects an historical value. C. is the same as replacement cost. D. is fair and reasonable. ANS: A PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

17. The replacement cost of an asset: A. is the same as historical cost. B. is sometimes called ‘current cost’. C. is the same as economic value. D. should always be used where the asset is to be replaced. ANS: B PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

18. James had $80,000 in the bank. He used some of this cash to buy a new car for $67,000 on 1 January 20X7. James subsequently modified the car and sold it for $78,000 on 1 March 20X7. The modifications cost James $9000, and he paid a total of $250 to advertise the car for sale. James made a profit on the sale of the car of: A. nil. B. $1750. C. $2000 D. $11,000

ANS: C PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

19. James had $80,000 in the bank. He used some of this cash to buy a new car for $67,000 on 1 January 20X7. James subsequently modified the car and sold it for $78,000 on 1 March 20X7. The modifications cost James $10,000, and he paid a total of $250 to advertise the car for sale. James’ wealth after the sale of the car was: A. $80,000. B. $80,750. C. $148,000. D. $158,000. ANS: B PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

20. Where an asset is measured using economic value, the figure involved: A. may lack reliability. B. represents the discounted value of expected future earnings from the use of the asset. C. represents a measure of current value. D. all of the above. ANS: D PTS: 1 TOP: Alternative systems of valuation

AACSB:

Knowledge, Analytical

SHORT ANSWER 1. Distinguish between the terms ‘wealth’ and ‘profit’. ANS: Wealth refers to the monetary value of an entity at a point in time i.e., the net assets of an entity. Profit, refers to the increase in wealth between two consecutive points in time. PTS: 1

AACSB:

Knowledge, Analytical

TOP: Profit and wealth

2. Explain what is meant by the term written-down value, and how the measure differs from the historic cost of an asset. ANS: Written-down value refers to the cost of an asset less accumulated depreciation in the books of an entity at a point in time. Historic cost on the other hand refers to the cost incurred by an entity in acquiring an item at the time of the originating transaction. PTS: 1 AACSB: TOP: Alternative systems of valuation

Knowledge, Analytical, Communication

PROBLEM 1. Assume that you bought a new computer from Computers Plus for $3200 in August 20X0. In January 20X1 your computer is in need of repair. You have been advised that it will cost $275 to repair the computer. You could sell the computer for $500 if you have it repaired and $100 if you do not have it repaired. The new price for a similar computer in January 20X1 is $3050. (a) What is the historic cost of the computer to you?

(b) What is the net realisable value of the asset to you in January 20X1 if you: (i) have the computer repaired? (ii) do not have the computer repaired? (c) What is the replacement cost of the computer in January 20X1? (d) Assuming the computer is repaired, do you consider the figure for the replacement cost an appropriate measure of the future economic benefits that will be derived from the continued use of the computer? Why/Why not? ANS: (a) $3200; (b) (i) $500 – $275 = $225, (ii) $100; (c) $3050. (d) The new price replacement cost ($3050) is likely to overstate the future economic benefits that will be derived from the use of the asset, due largely to changing technology. Written down replacement cost would provide a more appropriate measure in that respect. PTS: 1 AACSB: systems of valuation

Knowledge, Analytical

TOP: Alternative

2. Assume that the following information relates to you at today’s date. You have $120 cash in hand; $3350 deposited in a bank account; a motor vehicle valued at $13,000; jewellery and other miscellaneous items valued at $3200; and a friend owes you $100. You owe $1500 to a relative who lent you the money to purchase the vehicle. What is the amount ($) of your wealth, given the foregoing information? ANS: $120 + $3350 + 13000 + $3200 + $100 – $1500 = $18,270. PTS: 1

AACSB:

Knowledge, Analytical

TOP: Profit and wealth

3. In the season 2001–02 Manchester United (England) paid a transfer fee of USD $58.1 million to Leeds United (England) for the services of soccer star Rio Ferdinand. (a) What factors may Manchester United have taken into consideration in arriving at the value of Ferdinand’s services to the club? (b) What would be the advantages and disadvantage of using economic value to arrive at the transfer fee? ANS: (a) The factors would ultimately centre on the earnings that would accrue to the club on the basis of the player’s status and contribution to the overall success of the club. The earnings would include the following: membership fees, gate takings, sponsorships and sales of club merchandise. (b) The advantage of using economic value lies with the fact that it attempts to measure the net cash flows that will accrue from the future economic benefits that represent the asset. The disadvantages of the measurement model lie with the difficulties associated with estimating future net earnings, and arriving at an appropriate discount rate. The problem of forecasting future earnings would be compounded in this instance given the risks of ‘ownership’ associated with a human (as opposed to a non-human) asset vis-a-vis injury

Chapter 6 – Presentation of financial performance and the worksheet TRUE/FALSE 1. The statement of comprehensive income shows the results of operations over a period of time, and the balance sheet shows the financial condition of a business at a specific date. ANS: T PTS: 1 AACSB: TOP: Financial performance measurement

Knowledge, Analytical

2. The statement of comprehensive income reports revenues and expenses for the period but does not report income. ANS: F PTS: 1 AACSB: TOP: Financial performance measurement

Knowledge, Analytical

3. The statement of comprehensive income reflects the financial position of the business for the accounting period. ANS: F PTS: 1 AACSB: TOP: Financial performance measurement

Knowledge, Analytical

4. Income has the effect of increasing assets and increasing owners’ equity. ANS: T TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

5. An expense is a decrease in assets or an increase in liabilities, and will result in a decrease in owners’ equity. ANS: T TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

6. An essential characteristic of an expense is a decrease in economic benefits. ANS: T TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

7. Unexpired costs are found on the statement of comprehensive income. ANS: F TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

8. Capitalising a cost for the period instead of recording it as an expense of the period will understate profit for the period. ANS: F TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

9. Profitability means having enough funds on hand to pay debts as they fall due. ANS: F TOP: Chapter 6

PTS: 1

AACSB:

Knowledge, Analytical

10. The net profit figure is often referred to as the ‘bottom line’ and is the residual of income after deducting expenses for the period. ANS: T PTS: 1 TOP: The income statement

AACSB:

Knowledge, Analytical

11. Where the expenses of an entity exceed income for a period, a loss results. ANS: T PTS: 1 TOP: The income statement

AACSB:

Knowledge, Analytical

AACSB:

Knowledge, Analytical

12. Drawings by owners are an expense. ANS: F TOP: Expenses

PTS: 1

13. Gross profit is the sales revenue received, less the cost of the goods sold from ordinary operating activities. ANS: T PTS: 1 TOP: The income statement

AACSB:

Knowledge, Analytical

14. The statement of changes in equity includes transactions with owners. ANS: T PTS: 1 AACSB: TOP: The statement of changes in equity

Knowledge, Analytical

15. Earnings management enhances the decision usefulness of financial reporting. ANS: F PTS: 1 TOP: Earnings management

AACSB:

Knowledge, Analytical

16. Revenue is recognised under the historical cost accounting model when it has substantially been earned and the entity has the cash or a substantial claim to cash. ANS: T TOP: income

PTS: 1

AACSB:

Knowledge, Analytical

17. The essential difference between an asset and an expense revolves around whether the economic benefits involved lie in the future or the past. ANS: T TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

MULTIPLE CHOICE 1. The statement of comprehensive income shows financial information: A. at a point in time. B. over a period of time. C. at the time of the originating transaction. D. at the time of sale of an item.

ANS: B PTS: 1 AACSB: TOP: statement of comprehensive income

Knowledge, Analytical

2. The balance sheet shows the position of the entity: A. at a point in time. B. when it is insolvent only. C. when it is making profits. D. for a specified period of time. ANS: A TOP: Chapter 5

PTS: 1

AACSB:

Knowledge, Analytical

3. What information does a statement of comprehensive income not show? A. Net Profit B. Revenues C. Liabilities D. Tax Expense ANS: C PTS: 1 AACSB: TOP: Statement of comprehensive income

Knowledge, Analytical

4. Which one of the following statements is true? A. The statement of comprehensive income shows the financial position of an entity as of a specific date. B. The statement of comprehensive income shows the financial position of an entity for a specific period of time. C. The balance sheet shows the financial position of an entity at a specific date. D. The balance sheet shows the financial position of an entity for a specific period of time. ANS: C PTS: 1 TOP: Chapters 5 and 6

AACSB:

Knowledge, Analytical

5. A single statement of comprehensive income reports which of the following? A. Assets and liabilities. B. Cash inflows and cash outflows. C. Income and expenses. D. Retained earnings and dividends. ANS: C PTS: 1 AACSB: TOP: Statement of comprehensive income

Knowledge, Analytical

6. A single statement of comprehensive income: A. measures comprehensive income. B. reports net profit or loss for the period. C. is used by external decision makers. D. does all of the above. ANS: D PTS: 1 AACSB: TOP: Statement of comprehensive income 7. Income and expenses are reported on a(n): A. statement of comprehensive income. B. balance sheet. C. liability statement. D. asset statement.

Knowledge, Analytical

ANS: A PTS: 1 AACSB: TOP: Statement of comprehensive income

Knowledge, Analytical

8. Which of the following accounts would not be affected by a credit sale? A. Inventory B. Cost of Goods Sold C. Cash D. Sales Revenue ANS: C TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

9. Revenue has the effect of: A. increasing assets and decreasing liabilities. B. increasing assets and owner’s equity. C. increasing assets and decreasing owner’s equity. D. leaving the entire balance sheet unchanged. ANS: B TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

10. Revenues indicate: A. the sales price of goods and services sold during a period. B. how much cash was received from sales during a period. C. the cost of resources consumed in producing and selling goods and services sold during a period. D. the net profit earned during a period. ANS: A TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

11. Jeremy received $50 as a gift and $120 from his a job as a waiter. He then spent $15 on a silver ring. What is Jeremy’s revenue? A. $50 B. $120 C. $170 D. $155 ANS: B TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

12. Jeremy received $50 as a gift and $120 from his a job as a waiter. He then spent $15 on a silver ring. What is Jeremy’s income? A. $50 B. $120 C. $170 D. $155 ANS: C TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

13. During the first month of operations, Kelly’s Tax Service provided services and billed customers in the amount of $6000. By the end of the first month, $3600 had been collected and it was expected that the other $2400 would be collected during the following month. On Kelly’s statement of comprehensive income for the first month, what amount of revenue should be reported? A. $0 B. $2400 C. $3600 D. $6000 ANS: D TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

14. Which of the following transactions for July represents revenue for the month? A. Collected $1000 in advance for architectural services to be provided in August. B. Completed architectural services for $30,000, payable in seven days. C. Borrowed $60,000 from the bank, repayable over two years. D. Collected cash of $5000 from an account receivable outstanding since February. ANS: B TOP: Income

PTS: 1

AACSB:

Knowledge, Analytical

15. Which of the following is an essential characteristic of an expense? A. Decreases in future economic benefits. B. Contribution to owners. C. Increases in assets or reduction in liabilities. D. Increase in future economic benefits. ANS: A TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

16. Which of the following can Tim not recognise as an expense assuming all relate to his business? A. Payment of interest on a loan of $100. B. A suspicion that John will not return the $26 that he borrowed from Tim. C. Payment of electricity for the month of $50. D. Use of water to which Tim will be invoiced in two months. ANS: B TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

17. Which of the following would not result in the recording of an expense? A. Receipt of a bill from the telephone company. B. Recording of wages paid to managers. C. Drawings by the owner for personal expenses. D. Receipt of a bill for electricity used. ANS: C TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

18. Leslie started a computer software firm by investing $16,000 of her own money. She spent three-quarters of it on furniture, fixtures and operating supplies for the business. After borrowing $12,000 from First National Bank, she spent one-third of the funds on computer hardware. At that point in time what balances should be recorded in her accounting system for total assets and total expenses?

Total Assets A. $28,000 B. $12,000 C. $16,000 D. $28,000

Total Expenses $16,000 $16,000 $0 $0

ANS: D PTS: 1 TOP: Chapters 5 and 6

AACSB:

Knowledge, Analytical

19. Which of the following transactions is not an expense? A. Replacing an asbestos roof with a new tiled roof. B. Replacing tyres of a motor vehicle. C. Regular maintenance of equipment. D. The installation of new light globes. ANS: A TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

20. Which of the following pairs of items would normally be classified as expenses? A. Ordinary dividends and salaries paid. B. Salaries paid and interest paid on loans. C. Discount received and interest paid on loans. D. Amortisation of goodwill and loan payable. ANS: B TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

21. Which of the following transactions for July represents an expense for the month? A. Paid $15,000 in advance as first payment for a new computing system. B. Purchased inventory on account for resale in August. C. Paid cash of $2000 to the bank for July interest on loan. D. Borrowed $80,000 from the bank, repayable over four years. ANS: C TOP:

PTS: 1 Expenses

AACSB:

Knowledge, Analytical

22. Charging an interest cost as an expense when it should be capitalised as an asset will result in: A. an overstatement of total assets. B. the understatement of net profit for the next period. C. an overstatement of interest expense for the next period. D. the understatement of net profit for the current period. ANS: D TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical

23. Which of the following statements relating to expenses is not true? A. Expenses result in an increase in owner’s equity. B. Expenses may arise through immediate cash payments or through promises to pay cash in the future for services received. C. Expenses result from costs incurred normally to earn revenue. D. Cash may be paid out before expenses are incurred. ANS: A TOP: Expenses

PTS: 1

AACSB:

Knowledge, Analytical