Accounting and Auditing Textbook
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Course Introduction
This course provides a comprehensive overview of the principles and practices of accounting and auditing. Students will explore the preparation and interpretation of financial statements, understand accounting cycles, and learn how to apply generally accepted accounting principles (GAAP). The auditing portion covers the purpose, procedures, and standards of auditing, including the evaluation of internal controls and ethical considerations. Emphasis is placed on the role of both accounting and auditing in ensuring transparency, accuracy, and accountability in financial reporting, equipping students with foundational skills for careers in finance, business, and related fields.
Recommended Textbook
Financial Accounting and Reporting A Global Perspective 5th Edition by Herv Stolowy
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Chapter 1: Accounting: the Language of Business
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Q1) Accounting is a specialized language.It needs to be specific enough to:
A) Describe a state or a result
B) Provide a rank ordering of results
C) Describe the events that led to a result
D) All of these.
Answer: D
Q2) Accounting reports are prepared only for capital providers.
A)True
B)False
Answer: False
Q3) Limited liability companies must periodically file financial statements with a regulatory organization.
A)True
B)False
Answer: True
Q4) Financial accounting only recognizes transactions that have or will have monetary implications.
A)True
B)False
Answer: True
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Chapter 2: Introduction to Financial Statements
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Q1) Obligations and resources are listed in:
A) Increasing order of liquidity.
B) Either increasing or decreasing order of liquidity.
C) Decreasing order of liquidity.
D) Alphabetical order.
Answer: B
Q2) Expenses are ____ in shareholders' equity.
A) Decreases
B) Not included
C) Increases
D) None of these.
Answer: A
Q3) Which items are traditionally listed first in North America?
A) Short-term
B) Valuable
C) Long-term
D) None of these.
Answer: A
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Chapter 3: Financial Statements: Interrelations and Construction
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Q1) The income statement impact on the statement of cash flows is through revenues and expenses collected or paid during the year.
A)True
B)False
Answer: True
Q2) All over the world,the overall structure of the accounts code is left entirely up to company management.
A)True
B)False
Answer: False
Q3) Which of the following statements is true?
A) The accounts kept by a company constitute legal evidence,must be easily accessible to controllers and comply with laws and regulations.
B) The accounts kept by a company are a source of management information.
C) The accounts kept by a company are an instrument for business management.
D) All of these.
Answer: D
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Chapter 4: Accounting Principles and End-Of-Period Adjustments
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Q1) What are the four critical requirements or constraints which information users place on accounting?
A) Objectivity,Prudence,Accuracy,Periodicity
B) Objectivity,Prudence,Quality of information,Timeliness
C) Subjectivity,Prudence,Quality of information,Periodicity
D) Objectivity,Prudence,Quality of information,Periodicity
Q2) If the resale price of an item in inventory decreases below its acquisition or manufacturing cost,when should the loss in value be recognized?
A) Immediately
B) When the item is replaced
C) When the item is sold
D) None of these
Q3) Where there is modest inflation,accounting assumes that the purchasing power of the monetary unit is:
A) Stable.
B) Decreasing.
C) Increasing.
D) None of these.
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Chapter 5: Regulation of Accounting and Financial Reporting
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Q1) IAS 1 specifies that: 'an entity shall disclose the amount expected to be recovered or settled after more than ____ months for each asset and liability line item that combines amounts expected to be recovered or settled: (a)no more than ____ months after the reporting period,and (b)more than ____ months after the reporting period'
A) Three
B) Six
C) Twelve
D) Twenty-four
Q2) Which of the following is a financial liability?
A) Bank overdraft
B) Debt to tax authorities
C) Advance payment received from customers
D) Accounts payable
Q3) Which type of companies traditionally publish an annual report?
A) Listed companies
B) Small companies
C) Foreign companies
D) All companies
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Chapter 6: Revenue Recognition Issues
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Q1) Permanent differences are created by revenue and expense items,which are recognized for accounting purposes but not for tax purposes or which are recognized for tax purposes but not for accounting purposes.
A)True
B)False
Q2) In which country a loss carry-forward allows the entity to offset future taxable income against the accumulated losses for up to 20 years?
A) Australia
B) France
C) United States
D) None of these
Q3) IFRS 15 states that,revenue associated with a transaction should be recognized as a function of the stage,or percentage of completion of the transaction,at the end of the reporting period,when the outcome of a transaction involving the rendering of services can be estimated ____.
A) Approximately
B) Undoubtedly
C) Accurately
D) Reliably
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Chapter 7: Tangible Fixed Assets
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Q1) Acquisition cost is the amount of cash or cash equivalents paid,or the fair value of the other consideration given,to acquire an asset at the time of its acquisition.
A)True
B)False
Q2) Which of the following equations is correct?
A) Gross value at the beginning of the period + Acquisitions of the period - Disposals of the period = Gross value at the end of the period
B) Gross value at the beginning of the period - Acquisitions of the period - Disposals of the period = Gross value at the end of the period
C) Gross value at the beginning of the period + Acquisitions of the period + Disposals of the period = Gross value at the end of the period
D) Gross value at the beginning of the period - Acquisitions of the period + Disposals of the period = Gross value at the end of the period
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Chapter 8: Intangible Assets
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Q1) Under the IASB standards,which of the following criteria is not required for R&D capitalization?
A) Intention to complete the intangible asset and use or sell it.
B) Technical feasibility of completing the intangible asset so that it will be available for use or sale.
C) Availability of adequate technical,financial and other resources to complete the development and to use or sell the intangible asset.
D) Ability to measure reliably future economic benefits generated by the intangible asset.
Q2) What is the duration of the protection offered by a patent?
A) Unlimited.
B) Varies between countries.
C) Lasts generally 10 years.
D) Is generally not defined by law.
Q3) Intangible assets are usually considered to have no physical substance and to be linked to legal rights.
A)True
B)False
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Chapter 9: Inventories
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Q1) Which of the following statements is not correct?
A) Contract in progress can legitimately represent large amounts.
B) Contract in progress measures the amount of resources consumed in realizing all or part of a long-term contract but for which no invoicing has been issued to the customer.
C) As soon as an invoice is issued,all corresponding resources are carried,as depreciation expense,to the income statement.
D) If invoicing on contract takes place,for example,every four months,up to the cost of four months of production may be listed under contract in progress.
Q2) In a context of rising costs,income reported under FIFO is:
A) Higher than under LIFO or WAC.
B) Lower than under LIFO or WAC.
C) The same as under LIFO or WAC.
D) Sometimes higher,sometimes lower than under LIFO or WAC.
Q3) Given the above data,what is the amount of the ending inventory under LIFO?
A) 60
B) 50
C) 55
D) 65
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Chapter 10: Financial Instruments in the Statement of
Financial Position and Fair Value Accounting
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Q1) Which of the following items is not a type of accounts receivable reported in the financial statements?
A) Doubtful accounts receivable
B) Disputed accounts receivable
C) Uncollectible accounts receivable
D) Overdue accounts receivable
Q2) It is necessary to know the amount of discounted notes in order to compute the average days of sale in a financial statement analysis.
A)True
B)False
Q3) Held-to-maturity investments are valued at fair value through profit or loss in the balance sheet.
A)True
B)False
Q4) Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
A)True
B)False
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Chapter 11: Shareholders Equity
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Q1) After the incorporation of reserves in the share capital,the total book value of the shareholders' equity is unchanged but the number of shares or par value of shares has been modified.
A)True
B)False
Q2) A stock option plan is a motivational device in which the corporation grants employees the right to acquire a specified personalized number of shares of the corporation at a predetermined invariant price and for a specified time window.
A)True
B)False
Q3) The 2<sup>nd</sup> European Directive states that at least ____ of the capital needs to be handed over to the corporation upon incorporation and initial issuance of shares.
A) 10%
B) 25%
C) 50%
D) 100%
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Chapter 12: Liabilities and Provisions
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Q1) What is the term used for the types of bonds which are all repaid in fine?
A) Term bonds
B) Serial bonds
C) Maturity bonds
D) Installment bonds
Q2) Long-term liabilities are generally divided between two categories.What are these categories?
A) Bank borrowings and private borrowings
B) Bank borrowings and bonds
C) Bank borrowings and bank loans
D) Public bonds and private bonds
Q3) IFRS 16,which supersedes IAS 17,is applicable for accounting periods on or after:
A) 1 January 2016
B) 1 January 2017
C) 1 January 2018
D) 1 January 2019
Q4) Contingent liabilities are recognized in the balance sheet.
A)True
B)False
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Chapter 13: Business Combinations
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Q1) What is the term used for the contractually agreed sharing of control between two or more legal entities over a third economic activity?
A) Joint control
B) Control
C) Significant influence
D) Insignificant influence
Q2) According to IFRS 10 (new standard),control exists if,and only if,the investor has
A) Power over the investee
B) Exposure,or rights,to variable returns from its involvement with the investee
C) The ability to use its power over the investee to affect the amount of the investor's return
D) All of these
Q3) Which concept is applied if one considers that the consolidated financial statements are established mainly for internal decision making-purposes?
A) Property concept.
B) Parent company concept.
C) Entity concept.
D) Parent company extension concept.
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Chapter 14: Income Statement Analysis
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Q1) How is the total production for the period calculated?
A) Total production for the period = Sale of goods and/or services produced by the business - Change in inventory of finished manufactured goods and works in progress + Production capitalized
B) Total production for the period = Sale of goods and/or services produced by the business + Change in inventory of finished manufactured goods and works in progress + Production capitalized
C) Total production for the period = Sale of goods and/or services produced by the business - Change in inventory of finished manufactured goods and works in progressProduction capitalized
D) Total production for the period = Sale of goods and/or services produced by the business + (Change in inventory of finished manufactured goods and works in progress/Production capitalized)
Q2) Trend analysis and common-size analysis can give sufficient or final answers to the decision maker.
A)True
B)False
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Chapter 15: Balance Sheet Analysis
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Q1) If a firm faces short-term financing difficulties (as happened in the liquidity crisis of 2008-2009)and forecasts a reduction of its sales revenue due to global recession,which of the four possible course of action described below would it be best advised to implement:
A) Liquidate as much of its inventory as possible and sell its receivables so as to pay as much as possible of its short-term debt.
B) Use its cash on hand to first settle its short-term debt,negotiate longer credit terms with suppliers,and analyze receivables to stop selling to slow-paying customers.
C) Issue long-term bonds and invest in more capacity,more R&D,more product launches and higher levels of inventory to better serve customers.
D) Reduce simultaneously and within market constraints its inventory level,credit terms to customers,and cash in a reasoned way (leading to reduced activity and thus reduced payables)and weed receivables from slow payers.
Q2) A positive working capital need is typical of a firm operating in the distribution sector.
A)True B)False
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Chapter 16: Statement of Cash Flows Construction
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Q1) Which of the following transactions has a direct impact on current cash flows?
A) The acquisition of assets either by assuming directly related liabilities or by means of a finance lease.
B) The acquisition of an entity exclusively by means of an equity issue.
C) The acquisition of equipment for cash.
D) The conversion of debt to equity.
Q2) Past cash flows aid users of the financial statements in:
A) Predicting future cash flows.
B) Evaluating the way management generates and uses cash.
C) Determining a company's ability to pay interest and dividends and to pay debts when they are due.
D) All of these.
Q3) According to IAS 7,an entity shall prepare a statement of cash flows as an integral part of its financial statements for each period for which financial statements are presented.
A)True
B)False
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Chapter 17: Statement of Cash Flows Analysis and Earnings
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Q1) The primary impact of the timing difference between the recognition of 'revenue from sales' and the 'cash collected for customers' is on the level of:
A) Net profit
B) Gross margin
C) Allowance for bad receivables
D) Accounts receivables balance
Q2) Which type of business entity is likely to experience a value closest to 1 for their ratio of cash flow from operations to operating income?
A) An entity enjoying growing market demand for their product,investing in new equipment depreciated by an accelerated method.
B) An ageing entity with shrinking markets,and little R&D spending or new investment.
C) An entity with growing markets that sees it receivables,inventories and payables increase significantly year on year.
D) All three types of business entities.
Q3) Generally,the operating cash flow is expected to be positive.
A)True
B)False
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Chapter 18: Ratio Analysis, financial Analysis and Beyond
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Q1) Firm A and firm B are in the same risk class.Firm A has return on sales of 3% and an asset turnover of 4.Firm B generates 2 CU of profit per 100 CU of sales revenue and requires 25 CU of assets in order to support 100 CU of sales.In order for firm B to be seen as generating a better return on assets than firm A:
A) Firm A must increase its asset turnover to 6.67.
B) Firm A must increase its sales revenue to 110 CU.
C) Firm B must reduce the assets required to support its sales to 16.67 CU.
D) Firm B must increase its sales revenue to 110 CU.
Q2) Residual income is:
A) Income remaining after taxes have been paid.
B) Income remaining after dividends have been paid.
C) Income minus a virtual expense representing the cost of capital employed.
D) Income after R&D and competitiveness maintenance expenditures.
Q3) In order to calculate diluted earnings per share,the net profit attributable to ordinary shareholders and the weighted average number of shares outstanding should be adjusted for the effects of all dilutive potential ordinary shares.
A)True
B)False
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