Accounting Principles II
Pre-Test Questions
Course Introduction
Accounting Principles II builds upon the foundational concepts introduced in Accounting Principles I, focusing on the application of accounting concepts to partnerships, corporations, and manufacturing operations. Topics include the preparation and analysis of financial statements, inventory valuation, long-term assets, liabilities, stockholders' equity, and cash flow statements. Students will also explore managerial accounting concepts such as budgeting, cost behaviors, and performance evaluation, providing a comprehensive understanding of how accounting information is used for decision-making in business.
Recommended Textbook
Intermediate Accounting 2nd Edition Volume I by Kin Lo George Fisher
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Page 2
Chapter 1: Fundamentals of Financial Accounting Theory
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Sample Questions
Q1) Explain the process an accountant uses to determine the appropriate accounting method for a business transaction.
Answer: As GAAP refers to broad principles, not specific rules, accounting involves exercising professional judgment to determine the appropriate accounting. Judgment is exercised by: considering the range of possible methods of accounting; evaluating whether and how the particular method of accounting is consistent with the conceptual framework underlying GAAP; appreciation for the underlying economic forces at work and ensuring that the accounting appropriately reflects the substance of the transaction.
Q2) Which statement is correct?
A)Financial reporting is the process of preparing information for internal parties.
B)Financial reporting involves issuing financial statements to external parties.
C)Financial reporting provides the same information as management accounting.
D)Financial reporting is based on rules issued by the CICA or IASB.
Answer: B
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Chapter 2: Conceptual Frameworks for Financial Reporting
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Sample Questions
Q1) Which is an assumption of financial information in the IFRS Framework?
A)Accrual basis of accounting.
B)Historical cost.
C)Timeliness.
D)Financial capital maintenance.
Answer: D
Q2) In which of the following transactions would it not be appropriate to recognize an asset in the financial statements?
A)SGG receives a firm commitment from another company to purchase goods from SGG.
B)SGG pays $10,000 to a lawyer for services to be provided next year.
C)SGG provides services to another company, but will not be paid until after year end.
D)A customer of SGG makes a deposit of $1,500 for goods to be custom-made.
Answer: A
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Chapter 3: Accrual Accounting
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Sample Questions
Q1) Changes in accounting estimates are based on
A)information available from the use of hindsight.
B)information available at the time financial statements are prepared.
C)providing comparable information in the financial statements.
D)low quality of professional judgment being exercised.
Answer: B
Q2) Explain why estimates are necessary in accrual accounting and why a "true" measure of income cannot be provided.
Answer: Since accrual accounting includes information about cash cycles that are not yet complete, management/accountants need to estimate the cycles' outcomes, which are inherently uncertain.
There are better or worse estimates based on available information, but since the future is unknowable, none of the predictions about the future can be considered to be True and therefore "True" income does not exist.
Q3) Using the conceptual frameworks and other ideas, discuss whether a change in accounting policy should be treated prospectively or retrospectively.
Answer: 11ea7f0e_5368_8642_92e1_6deda440a44f_TB2820_00_TB2820_00
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Page 5
Chapter 4: Revenue Recognition
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Sample Questions
Q1) Which statement is correct about the impact of estimation errors on construction contracts?
A)Underestimating future costs decreases the percentage complete ratio.
B)Overestimating future costs increases the percentage complete ratio.
C)Underestimating future costs increases the profit recognized in future periods.
D)Underestimating future costs increases the profit recognized in the current period.
Q2) Which of the following is correct about the value creation process?
A)The value creation process is the same for all entities.
B)The value creation process is the same for all industries.
C)Any point on the value creation process is acceptable for revenue recognition.
D)The value creation process is specific to each entity.
Q3) Which condition is not necessary to recognize revenue from the sale of goods?
A)When the entity has transferred ownership to the buyer.
B)When the amount of revenue can be measured reliably.
C)When it is probable that the economic benefits will be flow to the entity.
D)When the entity retains no managerial control over the assets.
Q4) Discuss advantages and disadvantages of using the cash basis to recognize revenues. Provide three valid reasons in your discussion.
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Page 6
Chapter 5: Cash and Receivables
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Sample Questions
Q1) Maximum Inc. reported credit sales of $880,000, bad debt write-offs of $297,000 and bad debt expense of $257,000 for last year. Accounts receivable had a balance of $1,367,000 at the beginning of the year and $1,381,000 at the end of the year. How much cash was collected from customers during the year?
A)$457,000
B)$569,000
C)$714,000
D)$866,000
Q2) Fruit Valley Inc. reported cash sales of $250,000, credit sales of $850,000, cash collections from receivables of $500,000, bad debt write-offs of $25,000 and bad debt expense of $35,000 for last year. Accounts receivable had a balance of $1,000,000 at the end of the year. What was the balance in the accounts receivable account at the beginning of the year?
A)$425,000
B)$460,000
C)$650,000
D)$675,000
Q3) Explain how a company's revenue recognition policy can be used to manipulate earnings.
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Page 7
Chapter 6: Inventories
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Sample Questions
Q1) Which statement is correct?
A)The retail inventory method estimates ending inventory cost using wholesale prices and an average gross margin.
B)The retail inventory method estimates cost of goods sold using the inventory cost flow equation.
C)The gross margin method estimates ending inventory cost using retail prices and an average gross margin.
D)The gross margin method estimates cost of goods sold using the inventory cost flow equation.
Q2) Explain what happens if the value of inventory recovers after it has been written down. How often will such an adjustment actually be made to inventory?
Q3) Explain how fixed overhead costs should be accounted for if a plant is made idle due to a prolonged strike.
Q4) Which statement is correct about cost allocation methods under GAAP?
A)FIFO method expenses the oldest costs first.
B)FIFO method has the oldest costs on the balance sheet.
C)FIFO method has the most recent costs in the income statement.
D)FIFO is not an acceptable cost allocation method.
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Page 8
Chapter 7: Financial Assets
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Sample Questions
Q1) On January 1, 2013, Ella Ltd. purchased 25% of the common shares of JB Inc. for $2,200,000. In 2013, JB reported net income of $280,000 and paid dividends of $100,000. Required:
a. Which of the following conditions must be met for Ella to use the equity method to report its investment in JB?
i. Ella owns at least 20% of the voting shares of JB.
ii. Ella has control over JB.
iii. Ella has a significant interest in JB.
iv. Ella is able to exercise significant influence over JB.
b. How much income would be reported by Ella in 2013 related to its investment in JB under the equity method?
Q2) What is the meaning of "control"?
A)The power to participate in the financial and operating policy decisions of the investee.
B)The power to govern the financial and operating policies of an entity.
C)The power to share in strategic decisions affecting an entity.
D)The power to sell the shares of an entity.
Q3) Explain the meaning of the "effective interest method."
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Chapter 8: Property, Plant, and Equipment
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Q1) CeeMore owns a machine that it purchased on Jan 1, 2010 for $400,000. The machine had an estimated useful life of 10 years and a production capacity of 80,000 units and was expected to have no residual value. The company uses the units-of-production method to record depreciation. The machine produced 15,000 units in 2010, 18,000 units in 2011 and 25,000 units in 2012. The machine was sold on December 31, 2012 for $350,000. What was the accumulated depreciation at the end of 2011?
A)$75,000
B)$80,000
C)$90,000
D)$165,000
Q2) Explain why earnings manipulation of property, plant and equipment can have long-lasting impact on the financial statements.
Q3) What issue does not relate to the subsequent measurement of property, plant and equipment?
A)Which model to use to record depreciation.
B)How impairment should be recorded.
C)How to classify the expenditure.
D)Whether to use the fair value model.
Q4) Explain how non-monetary transactions are accounted for.
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Chapter 9: Intangible Assets, Goodwill, Mineral Resources, and
Government Grants
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Sample Questions
Q1) Which of the following is correct with respect to the accounting for re-payment of government grants?
A)Accounted for prospectively under IFRS.
B)Accounted for retrospectively under ASPE.
C)Partial prospective treatment and partial retrospective treatment under ASPE.
D)Partial prospective treatment and partial retrospective treatment under IFRS.
Q2) Explain the difference between indefinite lived and finite lived intangible assets.
Q3) In 2012, New Wave Inc. (NW)set up a new manufacturing facility in Manitoba. To encourage NW to set up its factory, the province provided equipment with a fair value of $75,000 and an estimated useful life of 10 years using straight-line depreciation. What journal entry would be required to record the equipment contribution in fiscal 2012, using the net method?
A)A credit to donation revenue of $75,000.
B)A credit to other comprehensive income - donated assets of $75,000.
C)A credit to deferred income of $75,000.
D)A credit to property, plant and equipment for $75,000.
Q4) Explain the difference in recognition of externally acquired intangibles versus internally developed intangibles.
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Chapter 10: Applications of Fair Value to Non-Current Assets
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Sample Questions
Q1) Sigma Company has a piece of equipment with an original cost of $1,440,000. The equipment's carrying value at the beginning of this year (net of accumulated depreciation)was $1,080,000. Sigma recorded $120,000 for depreciation for this year. The equipment's fair value at the end of the year was $1,056,000. This is the first year that the company has revalued this equipment.
Required:
a. Record the journal entry for the revaluation adjustment assuming that Sigma uses the elimination method.
b. Record the journal entry for the revaluation adjustment assuming that Sigma uses the proportional method.
Q2) When does agricultural activity end?
A)To point just before harvest.
B)To point of harvest.
C)To point of sale to wholesaler.
D)To point of sale to final customer.
Q3) Explain the accounting for assets related to the agricultural industry.
Q4) Explain the accounting under the revaluation model available under IFRS.
Q5) Explain why non-current assets held for sale are recorded at the lower of carrying value and fair value less costs to sell.
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