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Chapter 1: Accounting regulation and the Conceptual Framework Not for distribution in full. Instructors may assign selected questions in their LMS.

Chapter 1: Accounting regulation and the Conceptual Framework Multiple choice questions 1. The Corporations Act requires the preparation of a financial report and directors' report each financial year by all: a. small proprietary companies. b. non-disclosing entities. *c. public companies. d. private companies. General Feedback: Learning objective 1.1 understand the major sources of regulation of financial reporting in Australia. 2. The New Zealand External Reporting Board (XRB) accounting framework classify Tier 1 not-forprofit public benefit entities (PBEs) as: a. entities allowed by law to use cash accounting. b. non-large. c. expenses <= $2m. *d. publicly accountable, or large. General Feedback: Learning objective 1.3: Identify the roles of the key bodies involved in the financial reporting framework in New Zealand. 3. Which of the following statements is false? *a. The IFRS Advisory Council is directly accountable to the Monitoring Board. b. Australia adopted international accounting standards issued on or after 1 January 2005. c. The IASB and IFRS Interpretations Committee are appointed and overseen by a geographically and professionally diverse group called the IFRS Foundation Trustees. d. The IASB is an independent standard-setting board that develops and approves International Financial Reporting Standards. General Feedback: Learning objective 1.4: explain the structure, role and processes of the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC). 4. Which of the following is not a chapter in the IASB's Conceptual Framework?

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Testbank to accompany Financial reporting 4e by Loftus et al.

a. Measurement. b. Qualitative characteristics of useful financial reporting. c. The objective of general purpose financial reporting. *d. The issues with financial reporting. General Feedback: Learning objective 1.5: explain the key components of the Conceptual Framework. 5. Which of the following statements about the Conceptual Framework is true? a. The Conceptual Framework deals with the objective of special purpose financial statements. b. The Conceptual Framework for Financial Reporting provides guidelines intended to meet the information needs of a range of users who are able to command that reports be prepared to their own particular needs. *c. The Conceptual Framework deals with the objective of general purpose financial statements. d. the Conceptual Framework for Financial Reporting, SAC 1, and SAC 2 provides guidelines on the preparation of financial statements for a specific group of users. General Feedback: Learning objective 1.5: explain the key components of the Conceptual Framework. 6. The two fundamental qualitative characteristics of useful information are: a. materiality and timeliness. b. understandability and verifiability. c. faithful representation and comparability. *d. relevance and faithful representation. General Feedback: Learning objective 1.6: explain the qualitative characteristics that make information in financial statements useful. 7. For information to be considered material: a. it must be complete. b. it must not include any bias. *c. its omission or misstatement could influence users' decision-making. d. it has a predictive or confirmatory value. General Feedback: Learning objective 1.6: explain the qualitative characteristics that make information in financial statements useful.

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Chapter 1: Accounting regulation and the Conceptual Framework Not for distribution in full. Instructors may assign selected questions in their LMS.

8. Costs of providing useful information include: a. collection and processing costs. b. dissemination costs. c. verification costs. *d. All of these options are costs of providing useful information. General Feedback: Learning objective 1.6: explain the qualitative characteristics that make information in financial statements useful. 9. If different independent observers could reach the same general conclusions that the information represents, then the quality of the information has achieved: a. neutrality. b. understandability. *c. verifiability. d. comparability. General Feedback: Learning objective 1.6: explain the qualitative characteristics that make information in financial statements useful. 10. Which of the following statements about the going concern assumption is not true? a. it can justify the use of historical costs when measuring non-current assets. b. it supports the use of assets such as Prepaid Expenses. c. it supports the systematic allocation of depreciation over an asset's useful life. *d. it is used when an entity goes into liquidation. General Feedback: Learning objective 1.7: describe the objective and scope of financial statements prepared by a reporting entity. 11. Which of the following are the three essential criteria in the definition of an asset:

a. I, III, VI.

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Testbank to accompany Financial reporting 4e by Loftus et al.

*b. II, IV, VI. c. II, III, VI. d. I, III, V. General Feedback: Learning objective 1.8: define the basic elements in financial statements - assets, liabilities, equity, income and expenses. 12. The only financial statement element which cannot be defined independently of the other elements under the Conceptual Framework is: *a. equity. b. assets. c. income. d. expenses. General Feedback: Learning objective 1.8: define the basic elements in financial statements - assets, liabilities, equity, income and expenses. 13. Which of the following statements is correct? a. Equity is defined as 'the residual interest in the assets of the entity after deducting all its expenses'. *b. Equity is increased by profit and owner contributions. c. Equity is decreased by an entity's income. d. Equity cannot be sub-classified in the statement of financial position. General Feedback: Learning objective 1.8: define the basic elements in financial statements - assets, liabilities, equity, income and expenses. 14. An example of an expense, as defined in the Conceptual Framework, is: a. Payment to a supplier for purchases made on credit. b. Dividends paid to shareholders. c. Cash purchase of office equipment. *d. Wages paid on a weekly-basis to employees. General Feedback: Learning objective 1.8: define the basic elements in financial statements - assets, liabilities, equity, income and expenses.

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Chapter 1: Accounting regulation and the Conceptual Framework Not for distribution in full. Instructors may assign selected questions in their LMS.

15. Which of the following statements about income is not true? *a. Income includes capital contributed by owners of the entity. b. Income can be in the form of decreases of liabilities. c. Income arises when there is control over the increase in economic benefits. d. Income results in increases in economic benefits. General Feedback: Learning objective 1.8: define the basic elements in financial statements - assets, liabilities, equity, income and expenses. 16. Which of the following is not an example of a settlement of a liability? a. cash payment. b. provision of services. *c. owner contribution. d. creditor waiving their rights to the obligation. General Feedback: Learning objective 1.8: define the basic elements in financial statements - assets, liabilities, equity, income and expenses. 17. Fiona's Flowers rents a small shop located in the outskirts of Sydney. In accordance with the Conceptual Framework, Fiona's Flowers should recognise the monthly payment for the shop rental as: a. an increase in income and a decrease in liabilities. b. a decrease in assets and an increase in equity. c. a decrease in assets and a decrease in income. *d. a decrease in assets and an increase in expense. General Feedback: Learning objective 1.8: define the basic elements in financial statements - assets, liabilities, equity, income and expenses. 18. The two recognition criteria for the elements of financial statements are: a. Faithful representation and Existence of economic benefits. b. Existence of economic benefits and Control. *c. relevant and faithful representation. d. Probability of occurrence and Control. General Feedback:

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Testbank to accompany Financial reporting 4e by Loftus et al.

Learning objective 1.9: explain the criteria for recognising and derecognising the elements of financial statements. 19. James Ltd purchased a block of land on 31 March and paid $300 000 cash to the land owner. An independent evaluation reveals that the land is worth $550 000. Using historical cost as a measurement base, how should James Ltd recognise this purchase of land in its financial statements? a. $300 000 recognised as an asset (land) and $250 000 as a liability. *b. $300 000 recognised as an asset (land). c. $550 000 recognised as an asset (land). d. The land should not be recognised as an asset as it cannot be reliably measured. General Feedback: Learning objective 1.10: compare alternative measurement bases for measuring the elements of financial statements. 20. Which of the following statements is incorrect about the physical capital concept? *a. The general price level accounting system follows the physical capital concept. b. Capital is seen as the operating capability of the entity's assets. c. Profit is earned after an entity has set aside enough capital to maintain the operating capability of the entity's assets. d. Physical capital may be measured under a current value system. General Feedback: Learning objective 1.12: outline concepts of capital.

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Chapter 2: Application of accounting theory Not for distribution in full. Instructors may assign selected questions in their LMS.

Chapter 2: Application of accounting theory Multiple choice questions 1. In which of the following contexts would accountants be required to exercise professional judgement? a. Deciding whether property, plant and equipment should be measured at fair value after its initial recognition. b. Determining the most appropriate depreciation method to be used for non-current assets. c. Measuring the net realisable value of inventories. *d. All of the options are correct. General Feedback: Learning objective 2.1: describe the role of professional judgement in the preparation of financial reports. 2. Which of the following correctly describes 'principles-based' accounting standards: a. Principles-based standards attempt to prescribe the accounting treatment for every possibility, leaving little room for judgement or discretion in its application. *b. Principles-based standards prescribe principles that can be applied to a range of different situations. c. Principles-based standards use objective criteria in determining which accounting treatment should be applied to a transaction. d. An example of a principles-based standard may state that all expenditure on advertising must be accounted for as an expense. General Feedback: Learning objective 2.1: describe the role of professional judgement in the preparation of financial reports. 3. Which of the following correctly describes 'rules-based' accounting standards: *a. Rules-based standards attempt to prescribe the accounting treatment for every possibility, leaving little room for judgement or discretion in its application. b. Rules-based standards prescribe rules that can be applied to a range of different situations. c. Rules-based standards involve a subjective assessment in applying the rules. d. Rules-based standards can usually be applied to a range of different situations. General Feedback: Learning objective 2.1: describe the role of professional judgement in the preparation of financial reports.

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Testbank to accompany Financial reporting 4e by Loftus et al.

4. Considering whether a past event has arisen relates to which of the following components in accounting policy decisions: *a. Definition. b. Recognition. c. Measurement. d. Disclosure. General Feedback: Learning objective 2.2: identify the major decision areas in considering policies to account for transactions and other events. 5. Positive theories: a. explain why managers choose a particular accounting method. b. might be descriptive of accounting practice. c. rely on real-world observations. *d. All of the options are correct. General Feedback: Learning objective 2.3: explain how normative and positive theories are used in accounting. 6. Positive theories are developed using the following process: a. Principles Assumptions Objectives Definitions/Actions. b. Objectives Definitions/Actions Assumptions Principles. *c. Definitions/Actions Principles Assumptions Objectives. d. Objectives Assumptions Principles Definitions/Actions. General Feedback: Learning objective 2.3: explain how normative and positive theories are used in accounting. 7. Normative theories are developed using the following process: a. Principles Assumptions Objectives Definitions/Actions. b. Objectives Definitions/Actions Assumptions Principles. c. Definitions/Actions Principles Assumptions Objectives. *d. Objectives Assumptions Principles Definitions/Actions. General Feedback: Learning objective 2.3: explain how normative and positive theories are used in accounting.

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Chapter 2: Application of accounting theory Not for distribution in full. Instructors may assign selected questions in their LMS.

8. John observes that the bank overdraft account is a liability account and has a credit balance. He also notices that the accounts payable account is a liability account and has a credit balance. Therefore, John comes to the conclusion that all liability accounts have a credit balance. Which approach is Marcus using in developing his theory that all liability accounts having credit balances? a. Conceptual reasoning. b. Conclusive reasoning. *c. Inductive reasoning. d. Deductive reasoning. General Feedback: Learning objective 2.3: explain how normative and positive theories are used in accounting. 9. A limitation of the use of inductive reasoning in the development of an accounting theory is that it: *a. does not question the appropriateness of the observed actions. b. attempts to improve a particular process. c. is based on identifying a set of objectives. d. is only useful for developing normative theories. General Feedback: Learning objective 2.3: explain how normative and positive theories are used in accounting. 10. Which of the following statements is correct? a. Accounting is only concerned with recording transactions and does not require professional judgement. b. Normative theories tend to maintain the status quo. *c. The process of deductive reasoning starts with objective setting. d. The conceptual framework is developed through an inductive approach. General Feedback: Learning objective 2.3: explain how normative and positive theories are used in accounting. 11. Positive accounting theory is based on an economic assumption that all individuals act in their own self-interest and are wealth maximisers. This economic assumption is referred to as the: a. responsible economic person assumption. b. logical economic person assumption. *c. rational economic person assumption. d. reasonable economic person assumption. General Feedback:

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Testbank to accompany Financial reporting 4e by Loftus et al.

Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 12. Which of the following is not a relationship focused on by positive accounting theory? a. debt contracts. b. political contracts. c. managerial contracts. *d. creditor contracts. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 13. Which of the following statements is not consistent with agency theory? a. Managers are employed to conduct business on behalf of the shareholders. b. Managers have a legal and fiduciary duty to act in the best interests of the shareholders. *c. Managers are more likely to favour the interests of lenders in managing debt contracts. d. Costs are incurred in monitoring and controlling agent's behaviour. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 14. An example of monitoring costs is: *a. implementing a management remuneration plan. b. preparing quarterly financial statements for lenders. c. linking management incentives to entity performance. d. measuring the residual loss of the manager purchasing office supplies for his/her own personal use. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 15. The majority of monitoring and bonding costs will be borne by: a. shareholders. b. creditors. *c. agents.

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Chapter 2: Application of accounting theory Not for distribution in full. Instructors may assign selected questions in their LMS.

d. principals. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 16. Residual loss, as an agency cost, refers to: a. the costs incurred by the agent when implementing assurances that they are acting in the principal's best interests. b. the costs incurred by the principal in observing, evaluating and controlling the agent's behaviour. c. the amount by which the marginal cost is less than the expected benefit of additional monitoring and bonding. *d. the amount by which the marginal cost exceeds the expected benefit of additional monitoring and bonding. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 17. Positive accounting theory suggests that the separation of ownership and control within an entity means managers, as agents, are likely to act: *a. in their own interests. b. in the interests of the debtholders. c. in the interests of the shareholders. d. in the interests of the directors. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 18. Which of the following is not identified as one of the major problems that can arise in ownermanager agency relationships? a. Risk aversion. b. Dividend retention. *c. Reduced incentives. d. Horizon problems. General Feedback:

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Testbank to accompany Financial reporting 4e by Loftus et al.

Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 19. In an owner-manager agency relationship the problem of risk aversion arises because: a. shareholders prefer the managers to take fewer risks in order to maximise the returns on their investment. *b. managers prefer to make decisions that are less risky for the entity as they have more to lose than the shareholders. c. managers have less capital invested in the entity than shareholders. d. shareholders generally have no other sources of income. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 20. An agreement between managers and lenders to maintain a minimum ratio of working capital can assist which of the following problems in relation to increased lender's risk? a. claim dilution. b. asset substitution. c. underinvestment. *d. excessive dividend payments. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 21. Claim dilution arises when: a. the entity is unable to repay a loan. b. a lender restricts an entity from obtaining debt of a lower priority. *c. the entity takes out a secured loan after obtaining an unsecured loan from another lender. d. a lender restricts an entity from obtaining debt with an earlier maturity date. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 22. The problem of 'underinvestment' occurs when managers are reluctant to undertake projects with positive net present value because:

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Chapter 2: Application of accounting theory Not for distribution in full. Instructors may assign selected questions in their LMS.

a. shareholders prefer less risk than do lenders and managers. *b. the increased funds obtained from the projects will rank higher in priority of payments to creditors over shareholders in the event of the entity being liquidated. c. the projects would result in a reduction of managers' incentives. d. managers prefer to maintain a high level of funds within the entity. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 23. The following statements about asset substitution are true except for: a. Managers have incentives to use debt finance to invest in higher-risk assets with the expectation of obtaining higher returns for shareholders. *b. Lenders are willing to share higher returns earned when managers invest in higher-risk projects. c. A debt covenant that restricts investment opportunities of the entity can reduce the entity's borrowing costs. d. Asset substitution arises when an entity uses borrowed funds to invest in higher risk assets than those agreed upon in the debt contract. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 24. An example of political costs is: a. lower taxes on mining companies. *b. economic sanctions imposed on retailers who purchase their supplies from overseas businesses that use child labour. c. excessive consumption of perquisites. d. having a debt covenant. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 25. Under the debt hypothesis for accounting policy choice: a. managers act in their own interests and therefore prefer more remuneration. b. managers of entities with bonus plans prefer accounting policies that increase profit in the long-term. c. managers have no discretion in choosing accounting policies relating to debt.

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Testbank to accompany Financial reporting 4e by Loftus et al.

*d. managers of entities with high leverage are likely to choose accounting policies that increase profit and equity. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 26. Which of the following statements is true with regards to the political cost hypothesis? a. Political costs arise as a result of an entity's relationships with shareholders and lenders. b. Managers of financial institutions may prefer to increase profits to reduce government pressure to pass on interest rate cuts. c. Smaller entities are more likely to be the target of environmental groups. *d. Managers of entities that are more politically visible are expected to choose accounting policies that reduce profit in order to avoid political costs. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 27. The horizon problem in owner-manager agency relationships can be reduced by: a. paying a bonus linked to the dividend pay-out ratio. b. encouraging managers to invest in higher risk projects. c. linking management's bonus to profits. *d. aligning manager's interests with the longer-term interests of shareholders through sharebased remuneration schemes. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice. 28. Which of the following is not an example of a debt covenant? a. a maximum leverage ratio of 70%. *b. a maximum interest cover of 2.5 times. c. a restriction in the amount of dividends distributed as a percentage of profit. d. a restriction in undertaking mergers and takeovers unless approved by the lender. General Feedback: Learning objective 2.4: explain the implications of positive accounting theory for accounting policy choice.

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Chapter 2: Application of accounting theory Not for distribution in full. Instructors may assign selected questions in their LMS.

29. Which of the following statements about the efficient-market hypothesis is not correct? a. Security prices in an efficient market rapidly respond to new information. b. Investors in an efficient-market are unable to earn returns greater than those commensurate with the level of risk. *c. Good news of an entity's future prospects would lead to a decrease in demand for the entity's shares. d. Increased demand for shares will lead to an increase in the share price. General Feedback: Learning objective 2.5: compare the implications of the mechanistic hypothesis and the efficient market hypothesis for financial reporting. 30. The mechanistic hypothesis of capital markets means that: *a. investors are assumed to ignore differences in accounting policies when analysing financial statements. b. investors are not easily fooled by changes in the depreciation rates. c. investors respond differently to increases in profit when they result from cash flow implications as opposed to non-cash flow implications. d. available information can be used to earn returns beyond those that compensate for the risk involved. General Feedback: Learning objective 2.5: compare the implications of the mechanistic hypothesis and the efficient market hypothesis for financial reporting. 31. Which of the following statements about the strong form of market efficiency is not correct? a. Security prices fully reflect all information, including that which is not publicly available. *b. Investors are able to participate in 'insider trading'. c. Investors are unable to earn abnormal returns through private information. d. Capital markets are not considered to be efficient in the strong form. General Feedback: Learning objective 2.5: compare the implications of the mechanistic hypothesis and the efficient market hypothesis for financial reporting. 32. A weak form of market efficiency implies that: a. investors would be able to earn abnormal returns by using publicly available information.

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Testbank to accompany Financial reporting 4e by Loftus et al.

*b. a security's price at a particular time fully reflects the information contained in its sequence of past prices. c. investors would be unable to earn abnormal returns by trading on private information. d. a security's price at a particular time fully reflects both publicly and privately available information. General Feedback: Learning objective 2.5: compare the implications of the mechanistic hypothesis and the efficient market hypothesis for financial reporting. 33. The most relevant form of market efficiency to financial reporting is: a. the weak form. *b. the semi-strong form. c. the strong form. d. None of the options is correct. General Feedback: Learning objective 2.5: compare the implications of the mechanistic hypothesis and the efficient market hypothesis for financial reporting.

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Chapter 3: Ethics Not for distribution in full. Instructors may assign selected questions in their LMS.

Chapter 3: Ethics Multiple choice questions 1. Ethics is the study of how to: a. explain phenomena. *b. make moral choices. c. predict phenomena. d. ensure legal compliance. General Feedback: Learning objective 3.1: explain the nature of ethics and its relevance to accounting practice 2. Which of the following professional bodies follow APES 110 Code of Ethics for Professional Accountants: a. Chartered Accountants Australia and New Zealand. b. CPA Australia. c. Institute of Public Accountants. *d. All of the options are correct. General Feedback: Learning objective 3.1: explain the nature of ethics and its relevance to accounting practice 3. There are a number of reasons why understanding different perspectives on ethics is important, such as: a. laws and codes of conduct cannot cover every ethical challenge. b. enabling you to judge the strengths and weakness of laws and codes. c. interpretation is often still required. *d. All of the options are correct. General Feedback: Learning objective 3.1: explain the nature of ethics and its relevance to accounting practice 4. A code for ethical conduct provides a framework for ethical problems. It is not intended to assist with:

a. identifying ethical problems. b. evaluating ethical problems. *c. enforcing laws to ethical problems.

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Testbank to accompany Financial reporting 4e by Loftus et al.

d. addressing ethical problems. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 5. The following are possible sanctions a professional body may impose for breaches of APES 110 by a member, except for: a. permanent expulsion. b. fines. c. membership suspension. *d. waiver of membership fees. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 6. The APES 110 Code of Ethics for Professional Accountants fundamental principles include:

a. I. *b. II. c. III. d. IV. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards)

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Chapter 3: Ethics Not for distribution in full. Instructors may assign selected questions in their LMS.

7. The threats to the APES 110 Code of Ethics for Professional Accountants fundamental principles include:

a. I. b. II. *c. III. d. IV. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 8. To act with 'integrity' is to: a. not to compromise professional or business judgements because of bias, conflict of interest or undue influence of others. b. to comply with relevant laws and regulations and avoid any conduct that the Member knows or should know might discredit the profession. *c. to be straightforward and honest in all professional and business relationships. d. to respect the confidentiality of information acquired as a result of professional and business relationships. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 9. To follow the principle of 'professional behaviour', means to: a. be straightforward and honest in all professional and business relationships. b. not compromise professional or business judgements because of bias, conflict of interest or undue influence of others.

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Testbank to accompany Financial reporting 4e by Loftus et al.

*c. comply with relevant laws and regulations and avoid any conduct that the Member knows or should know might discredit the profession. d. respect the confidentiality of information acquired as a result of professional and business relationships. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 10. The 'self-review' threat to the APES 110 Code of Ethics for Professional Accountants principles means that: *a. a Member will not appropriately evaluate the results of a previous judgement made when forming a judgement as part of performing a current activity. b. due to a long or close relationship with a client, a Member will be too sympathetic to their interests. c. a Member will be deterred from acting objectively because of actual or perceived pressures. d. a Member will promote a client's position to the point that the Member's objectivity is compromised. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 11. The 'advocacy' threat to the APES 110 Code of Ethics for Professional Accountants principles means that: a. a Member will not appropriately evaluate the results of a previous judgement made when forming a judgement as part of performing a current activity. b. due to a long or close relationship with a client, a Member will be too sympathetic to their interests. *c. a Member will promote a client's position to the point that the Member's objectivity is compromised. d. a Member will be deterred from acting objectively because of actual or perceived pressures. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 12. The 'Self-interest' threat to the APES 110 Code of Ethics for Professional Accountants principles means that:

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Chapter 3: Ethics Not for distribution in full. Instructors may assign selected questions in their LMS.

a. a Member will not appropriately evaluate the results of a previous judgement made when forming a judgement as part of performing a current activity. b. due to a long or close relationship with a client, a Member will be too sympathetic to their interests. c. a Member will be deterred from acting objectively because of actual or perceived pressures. *d. a financial or other interest will inappropriately influence a Member's judgement or behaviour. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 13. When threats exist to compliance with the fundamental principles, APES 110 Code of Ethics for Professional Accountants sets out the following actions, except for: a. applying safeguards to reduce the threats to an acceptable level. b. eliminating the circumstances that are creating the threats. *c. appointing another Member to oversee and review all work undertaken. d. ending the specific professional activity. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 14. There are three options for responding to threats to the fundamental principles, including: a. eliminating the threat(s). *b. appointing an overseer. c. ending the engagement. d. applying safeguards. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 15. The general definition of 'safeguards' per paragraph 120.10 A2 is: a. a level at which a Member using the reasonable and informed third party test would likely conclude compliance with the fundamental principles. b. eliminating the circumstances, including interests or relationships, that are creating the threats. *c. actions, individually or in combination, that the Member takes that effectively reduce threats to compliance with the fundamental principles to an Acceptable Level.

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Testbank to accompany Financial reporting 4e by Loftus et al.

d. declining or ending the specific Professional Activity. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 16. Requirement R220.4 states when preparing or presenting information, a Member shall: a. present information in a manner to mislead. *b. exercise professional judgement. c. omit anything with the intention of rendering the information misleading. d. prepare information outside of the reporting framework. General Feedback: Learning objective 3.2: explain the fundamental ethical principles for accounting professionals specified in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) 17. The theory that views are subjective and there can be no 'right' answer to ethical questions is called: *a. moral relativism. b. moral universalism. c. virtue ethics. d. duty-based ethics. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 18. Which of the following was not one of virtues provided by Aristotle: a. wisdom. b. courage. *c. anger. d. temperance. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 19. The ethical idea that one should do 'the greatest good for the greatest number' is referred to as: a. moral relativism.

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Chapter 3: Ethics Not for distribution in full. Instructors may assign selected questions in their LMS.

*b. utilitarianism. c. duty-based ethics. d. discourse ethics. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 20. Immanuel Kant's proposed that all rational beings would agree on a 'categorical imperative', which would dictate what our moral obligations are towards all other people. This was part of which ethical approach? a. moral relativism. b. utilitarianism *c. duty-based ethics. d. discourse ethics. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 21. The ethical perspective that you should act in accordance with the decision freely agreed to by all affected stakeholders is called: *a. discourse ethics. b. virtue ethics. c. duty-based ethics. d. teleological ethics. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 22. Which of the following statements describes how Aristotle's ethical perspective is determined: a. Whether conduct would violate the categorical imperative principles of universality, ends versus means and autonomy. *b. If conduct is in accordance with a list of virtues. c. Assemble all stakeholders and facilitate dialogue under conditions of ideal speech. d. Affected stakeholders and calculate the impact on their utility. General Feedback:

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Testbank to accompany Financial reporting 4e by Loftus et al.

Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 23. Criticisms of Bentham's ethical perspective include: a. How to know which virtues to apply? b. What to do in cases of conflicting rights? *c. What stakeholders should be included in terms of location and time? d. Assumption that stakeholders will eventually agree is unrealistic. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 24. Criticisms of Kant's ethical perspective include: a. How to know which virtues to apply? *b. What to do in cases of conflicting rights? c. What stakeholders should be included in terms of location and time? d. Assumption that stakeholders will eventually agree is unrealistic. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 25. How was Aristotle's ethical perspective reflected in APES 110 Code of Ethics for Professional Accountants? *a. A list of virtues such as 'fundamental principles' is provided. b. The standard was developed via the process of stakeholder consultation. c. Potentially conflicting duties of confidentiality versus public disclosure. d. Overarching requirement is to act in the 'public interest'. General Feedback: Learning objective 3.3: Distinguish between ethical perspectives based on character, consequences, rights and discourse. 26. The first step of the DECIDE model is to: a. Ethically review the situation. b. Consider options. c. Decide on a plan.

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Chapter 3: Ethics Not for distribution in full. Instructors may assign selected questions in their LMS.

*d. Define the problem. General Feedback: Learning objective 3.4: develop solutions to ethical problems in an accounting context by clarifying values, making decisions ethically using the DECIDE model. 27. To review the possible actions available is which element of the DECIDE model: a. Evaluate results. b. Define the problem. *c. Consider options. d. Investigate ethical outcomes. General Feedback: Learning objective 3.4: develop solutions to ethical problems in an accounting context by clarifying values, making decisions ethically using the DECIDE model. 28. The last step of the DECIDE model involves: a. resolving to take an action and implement a plan. *b. reviewing the outcome, enabling a deeper understating as to how the situation might be addressed if it occurs again. c. establishing the facts of a case. d. seeking guidance from others who have faced similar situations. General Feedback: Learning objective 3.4: develop solutions to ethical problems in an accounting context by clarifying values, making decisions ethically using the DECIDE model. 29. Should you encounter a difficult ethical issue, sources of guidance may include: a. The human resources department. b. Helplines. c. Senior managers. *d. All of the options are correct. General Feedback: Learning objective 3.4: develop solutions to ethical problems in an accounting context by clarifying values, making decisions ethically using the DECIDE model. 30. Research suggests there are three ways to increase the probability of intention into action. Which of the following is not one of the three ways:

3.10

Testbank to accompany Financial reporting 4e by Loftus et al.

a. Considering context. *b. Being friendly. c. Optimising core activities. d. Having an appropriate response to ethical lapses. General Feedback: Learning objective 3.4: develop solutions to ethical problems in an accounting context by clarifying values, making decisions ethically using the DECIDE model.

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Testbank to accompany Financial reporting 4e by Loftus et al.

Chapter 4: Fair value measurement Multiple choice questions 1. The two most common valuation measures used in Accounting Standards are: a. Fair value less costs to sell and carrying amount. b. Net realisable value and fair value. c. Value in use and net realisable value. *d. Cost and fair value. General Feedback: Learning objective 4.1: identify the need for an accounting standard on fair value measurement. 2. All of the following statements are key reasons given by the IASB for issuing a standard on fair value measurement except for: *a. To require the use of fair value when accounting for all non-financial assets. b. To establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application. c. To clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly. d. To enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used and to inform them about the inputs used to derive those fair values. General Feedback: Learning objective 4.1: identify the need for an accounting standard on fair value measurement. 3. The objective of AASB 13/IFRS 13 is to: a. set out a framework for measuring fair value. b. define fair value. c. require disclosures about fair value measurements. *d. All of the options are correct. General Feedback: Learning objective 4.1: identify the need for an accounting standard on fair value measurement.

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Chapter 4: Fair value measurement Not for distribution in full. Instructors may assign selected questions in their LMS.

4. Which of the following documents issued alongside AASB 13/IFRS 13 would not be considered an integral part of the standard? I Appendix A: Defined terms. II Appendix B: Application guidance. III Basis for Conclusions. IV Illustrative Examples. a. I and II . b. II and III. *c. III and IV. d. IV and I. General Feedback: objective 4.2: explain the definition of fair value. 5. Appendix A of AASB 13/IFRS 13 Fair Value Measurement defines fair value as: a. The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. b. The price that would be paid to purchase an asset or transfer a liability. c. A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale). *d. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. General Feedback: Learning objective 4.2: explain the definition of fair value. 6. Fair value is determined as: *a. the current exit price. b. the current entry price. c. a future entry price. d. a future exit price.

General Feedback: objective 4.2: explain the definition of fair value. 7. AASB 13/IFRS 13 defines exit price as: © John Wiley and Sons Australia, Ltd 2022

4.2

Testbank to accompany Financial reporting 4e by Loftus et al.

a. A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale). *b. The price that would be received to sell an asset or paid to transfer a liability. c. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. d. The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction. General Feedback: objective 4.2: explain the definition of fair value. 8. Which of the following is not a characteristic of a market participant under AASB 13/IFRS 13? a. Buyers and sellers that are able to enter into a transaction for the asset or liability. *b. Buyers and sellers that are related parties. c. Buyers and sellers that are willing to enter into a transaction for the asset or liability. d. Buyers and sellers that are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information. General Feedback: Learning objective 4.2: explain the definition of fair value. 9. The following elements are required for a fair value measurement, except for: a. the appropriate valuation method(s). b. the particular asset or liability to be measured. c. for a non-financial asset, the appropriate valuation consistent with highest and best use. *d. the least advantageous market. General Feedback: Learning objective 4.3: Describe the steps involved in the fair value measurement approach. 10. Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date are an example of: *a. a Level 1 input. b. a Level 2 input. c. a Level 3 input.

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Chapter 4: Fair value measurement Not for distribution in full. Instructors may assign selected questions in their LMS.

d. a Level 4 input. General Feedback: Learning objective 4.4: apply the fair value measurement approach to non-financial assets. 11. The following are examples of an inactive market except for: a. Price quotations vary substantially over time. b. Price quotations vary substantially among market-makers. *c. Price quotations are based on current market information. d. There are few recent transactions. General Feedback: Learning objective 4.4: apply the fair value measurement approach to non-financial assets. 12. The fair value of an asset is based on its: *a. highest and best use. b. current use. c. proposed use. d. value in use. General Feedback: Learning objective 4.4: apply the fair value measurement approach to non-financial assets. 13. The market with the greatest volume and level of activity for the asset or liability is defined as the: a. most active market. b. current market. *c. principal market. d. most advantageous market. General Feedback: objective 4.4: apply the fair value measurement approach to non-financial assets. 14. Valuation techniques that reflect the amount that would be required currently to replace the service capacity of an asset is an example of: a. the fair value approach. b. the income approach.

4.4

Testbank to accompany Financial reporting 4e by Loftus et al.

*c. the cost approach. d. the market approach. General Feedback: objective 4.4: apply the fair value measurement approach to non-financial assets. 15. The following are valuation techniques prescribed by AASB 13/IFRS 13 except for: a. The cost approach. b. The income approach. c. The market approach. *d. The fair value approach. General Feedback: Learning objective 4.4: apply the fair value measurement approach to non-financial assets. 16. Which type of input is the primary measurement basis for trademarks? a. Level 1 inputs. b. Level 2 inputs. *c. Level 3 inputs. d. Level 4 inputs. General Feedback: Learning objective 4.4: apply the fair value measurement approach to non-financial assets. 17. Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly, are an example of: a. a Level 1 input. *b. a Level 2 input. c. a Level 3 input. d. a Level 4 input. General Feedback: Learning objective 4.4: apply the fair value measurement approach to non-financial assets. 18. Which of the following is not an example of a level 2 input? a. Quoted prices for identical or similar assets or liabilities in markets that are not active.

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Chapter 4: Fair value measurement Not for distribution in full. Instructors may assign selected questions in their LMS.

b. Inputs such as interest rates and yield curves, volatilities, prepayment speeds, and credit risks. *c. Measuring accounts receivable based on the entity's historical records of recoverability. d. Inputs that are derived from or corroborated by observable market data by correlation or other means. General Feedback: Learning objective 4.4: apply the fair value measurement approach to non-financial assets. 19. Which of the following steps is not relevant when measuring liabilities? a. The particular liability that is the subject of the measurement. b. The principal (or most advantageous) market for the liability. *c. The valuation premise that is appropriate for the measurement. d. The valuation technique(s) appropriate for the measurement. General Feedback: Learning objective 4.5: apply the fair value measurement principles to liabilities. 20. When measuring the fair value of a liability, it is assumed that: *a. the liability will be settled by the market participant. b. the liability will not be settled. c. the liability will be settled by the holder. d. the liability is settled with the counterparty on measurement date. General Feedback: Learning objective 4.5: apply the fair value measurement principles to liabilities. 21. Where a liability is held as a corresponding asset by another entity, the fair value of the liability is determined from the perspective of a market participant that: a. applies a present value technique to measure the liability. b. applies the cost approach to valuing the liability. c. calculates the amount required to settle the present obligation. *d. holds the identical item as an asset at measurement date. General Feedback: Learning objective 4.5: apply the fair value measurement principles to liabilities.

4.6

Testbank to accompany Financial reporting 4e by Loftus et al.

22. According to Appendix B of AASB 13/IFRS 13, which of the following elements will be captured by using a present value technique: a. an estimate of future cash flows. b. the time value of money, represented by a risk-free interest rate. c. non-performance risk. *d. All of the options are correct. General Feedback: Learning objective 4.5: apply the fair value measurement principles to liabilities. 23. Which of the following statements relating to non-performance risk is incorrect? a. The entity's own credit risk is included. *b. The holder of a corresponding asset will not fulfil the obligation. c. The entity will not fulfil the obligation. d. It applies to liabilities. General Feedback: Learning objective 4.5: apply the fair value measurement principles to liabilities. 24. Which of the following is an example of a liability where there is no corresponding asset? a. A debenture issued by a listed company. b. A mortgage. c. A provision for warranties. *d. A provision for decommissioning. General Feedback: Learning objective 4.5: apply the fair value measurement principles to liabilities. 25. In measuring an equity instrument at fair value, the objective is to estimate an exit price at measurement date from the perspective of: a. the entity issuing the equity instrument. b. the party planning to repurchase the instrument. c. the party to whom the instrument will be transferred. *d. a market participant who holds the instrument as an asset. General Feedback: Learning objective 4.6: discuss the measurement of the fair value of an entity's own equity instruments.

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Chapter 4: Fair value measurement Not for distribution in full. Instructors may assign selected questions in their LMS.

26. The fair value of an equity instrument is based on determining a/an _________ price which may relate to the price paid for an entity to repurchase its shares. a. entry. *b. exit. c. transfer. d. settlement. General Feedback: Learning objective 4.6: discuss the measurement of the fair value of an entity's own equity instruments. 27. The fair value of an entity's own equity instruments will be determined under which of the following circumstances? a. Where the entity participates in a share buy-back. b. Where the entity is preparing for listing. *c. Where the entity undertakes a business combination and issues its own equity instruments in exchange for a business. d. Where there is a major change in the shareholding of the entity. General Feedback: Learning objective 4.6: discuss the measurement of the fair value of an entity's own equity instruments. 28. The following assumptions are made when measuring the fair value of an equity instrument except for: a. The market participant transferee will take on the rights and responsibilities associated with the instrument. b. An entity's own equity instrument would remain outstanding. c. The instrument would not be cancelled or otherwise extinguished on the measurement date. *d. An entity's own equity instruments are transferred to a market participant at transfer date. General Feedback: Learning objective 4.6: discuss the measurement of the fair value of an entity's own equity instruments. 29. Where a market has both a bid and an ask process, the price used in measuring fair value is:

4.8

Testbank to accompany Financial reporting 4e by Loftus et al.

a. the average of the bid-ask prices over a 3 month period. *b. the most representative price for the transaction. c. the ask price. d. the bid price. General Feedback: Learning objective 4.7: Describe two issues in the fair value measurement of financial instruments. 30. An entity holding both financial assets and liabilities is allowed to offset and determine fair value on the net position as long as: I the entity holds a net short position. II the entity holds a net long position. III the entity has a documented risk management strategy. IV the entity manages the group of financial assets and liabilities on a net exposure basis. a. I and II. b. I and III. c. II and IV. *d. III and IV. General Feedback: Learning objective 4.7: Describe two issues in the fair value measurement of financial instruments. 31. Which of the following disclosures are not required under AASB 13/IFRS 13? *a. Quantitative information about all unobservable inputs used in the fair value measurement. b. The valuation techniques used to measure fair value. c. The fair value measurement for each class of asset and liability at the end of the reporting period. d. The input level of the fair value hierarchy within which the fair value measurements are categorised. General Feedback: objective 4.8: summarise the disclosures required where assets, liabilities or equity is measured at fair value. 32. Which of the following disclosures are required under AASB 13/IFRS 13: a. The valuation techniques used to measure fair value.

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Chapter 4: Fair value measurement Not for distribution in full. Instructors may assign selected questions in their LMS.

b. Non-recurring fair value measurements. c. Changes in the inputs used to measure fair value. *d. All of the options are correct. General Feedback: objective 4.8: summarise the disclosures required where assets, liabilities or equity is measured at fair value.

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Chapter 5: Inventories Not for distribution in full. Instructors may assign selected questions in their LMS.

Chapter 5: Inventories Multiple choice questions 1. Which of the following are common classifications for inventories in the financial statements:

a. I. b. II. *c. III. d. IV. General Feedback: Learning objective 5.1: explain the definition of inventories. 2. AASB 102/IAS 2 Inventories applies to the accounting for: a. biological assets. b. financial instruments. c. work in progress under long term construction contracts. *d. materials consumed in the manufacture of lawn mowers for sale. General Feedback: Learning objective 5.1: explain the definition of inventories. 3. When an entity's operating cycle is not clearly identifiable it is assumed to have a duration of: a. three months. b. six months. *c. 12 months. d. 2 years. General Feedback: Learning objective 5.1: explain the definition of inventories. 4. Inventories are defined in AASB 102/IAS 2 Inventories as assets:

5.2

Testbank to accompany Financial reporting 4e by Loftus et al.

a. in the form of materials or supplies to be consumed in the production process or in the rendering of services. b. in the process of production for such sale. c. held for sale in the ordinary course of business. *d. all of these options. General Feedback: Learning objective 5.1: explain the definition of inventories. 5. Which of the following measurement rules applies to inventories subsequent to their initial measurement? a. Historical cost. b. Fair value. c. Replacement cost. *d. Lower of cost and net realisable value. General Feedback: Learning objective 5.2: explain how to initially recognise and measure inventories. 6. AASB 102/IAS 2 states that the cost of purchase comprises of: a. import duties. *b. purchase price. c. transport and handling cost d. all of these options. General Feedback: Learning objective 5.3: explain what costs are included in the cost of inventories. 7. AASB 102/IAS 2 allows which of the following to be capitalised into the cost of inventories? a. Selling costs. *b. Normal costs of material wastage. c. Storage costs for finished goods. d. Administrative overheads. General Feedback: Learning objective 5.3: explain what costs are included in the cost of inventories. 8. Which of the following is specifically excluded by AASB 102/IAS 2 from the cost of inventories measurement?

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Chapter 5: Inventories Not for distribution in full. Instructors may assign selected questions in their LMS.

a. Trade discounts received *b. Freight (where the terms of sale are FOB destination) c. Costs of designing inventory for an individual customer. d. Costs of converting supplies into specific products for sale. General Feedback: Learning objective 5.3: explain what costs are included in the cost of inventories. 9. Taxes may be included in the cost of inventories except for those taxes that are: a. levied on the inventories by a foreign government. *b. recoverable by the entity from the taxation authority. c. in the nature of import duties. d. imposed on the raw materials component of manufactured inventories. General Feedback: Learning objective 5.3: explain what costs are included in the cost of inventories. 10. The terms '2/10, n/30' appearing on an invoice for the sale/purchase of inventories means that the buyer: a. will receive a 10% discount if paid within 2 days of the invoice date, otherwise the full amount must be paid within 30 days of the invoice date. *b. will receive a 2% discount if paid within 10 days of the invoice date, otherwise the full amount must be paid within 30 days of the invoice date. c. has 10 days from the invoice date to pay the full amount or a 2% surcharge will be applied and total amount owing must be paid within 30 days of invoice date. d. has 2 days from the invoice date to pay the full amount or a 7% surcharge will be applied and total amount owing must be paid within 30 days of invoice date. General Feedback: Learning objective 5.3: explain what costs are included in the cost of inventories. 11. Which of the following statements is correct? a. The relationship between the closing inventories balance under the periodic and perpetual methods will depend on whether the FIFO (first-in, first-out) or weighted average method is used to value inventories. *b. Closing inventories will always be the same under the periodic and perpetual methods. c. The periodic method of accounting for inventories will always result in a lower closing inventories balance than the perpetual method.

5.4

Testbank to accompany Financial reporting 4e by Loftus et al.

d. The periodic method of accounting for inventories will always result in a higher closing inventories balance than the perpetual method. General Feedback: Learning objective 5.4: Account for inventories transactions using both the periodic and the perpetual methods. 12. Under the perpetual method, which of the following is an appropriate journal entry to recognise inventories items that have been stolen?

a. *b. c. d. General Feedback: Learning objective 5.5: explain and apply end-of-period procedures for inventories under both the periodic and the perpetual methods. 13. Under the periodic method, which of the following is an appropriate journal entry to recognise inventories items that have been stolen?

a. b. c. *d. Under the periodic method, inventory losses and fraud cannot be identified and recorded as a separate expense. General Feedback: Learning objective 5.5: explain and apply end-of-period procedures for inventories under both the periodic and the perpetual methods. 14. Under the periodic inventories approach, an appropriate journal entry to measure closing inventories would be:

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