Accounting Principles
Practice Questions
Course Introduction
Accounting Principles introduces the fundamental concepts and frameworks of financial accounting, focusing on the systematic recording, reporting, and analysis of financial transactions. The course covers key topics such as the accounting cycle, preparation and interpretation of financial statements, application of generally accepted accounting principles (GAAP), and the ethical responsibilities of accountants. Students will gain practical skills in analyzing business transactions, applying double-entry bookkeeping, and understanding the impact of accounting information on business decision-making. This foundational knowledge forms the basis for more advanced accounting studies and is essential for various roles in business, finance, and management.
Recommended Textbook
Issues in Financial Accounting 16th Australia Edition by Scott Henderson
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Chapter 1: Institutional Arrangements for Setting Accounting Standards in Australia
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Q1) Which statement concerning AASB Interpretations is not correct?
A) In 2006, the AASB decided to take over the role of the Urgent Issues Group
B) The AASB has set up an Interpretations Agenda Committee comprising the chairman and two other AASB members
C) Interpretations of IASB standards made by the IFRIC are not relevant in Australia
D) None of the above, i.e., all statements are correct
Answer: C
Q2) Which of the following is/are true concerning the issue of accounting standards in Australia after internationalisation?
A) The AASB adds to proposed international standards material detailing their scope and applicability in Australia
B) The AASB adds material to broaden the content of international standards to cover the not-for-profit sector
C) After issuing an exposure draft for comment and considering the response, the AASB issues an Australian standard equivalent to the IASB standard
D) All of the statements are true
Answer: D
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Page 3
Chapter 2: The Conceptual Framework: Purpose, reporting
Entity, the Objective of Financial Reporting, and Qualitative
Characteristics
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Q1) Which factor(s)is/are identified in SAC1 to assist in determining whether an entity has users dependent on general purpose financial reports?
A) Type of accounting system
B) Classes of issued shares
C) Separation of management and ownership
D) All of the above
Answer: C
Q2) According to a study from the 1980's,what are the three components of the objective of accounting?
A) Relevance, control, and reliability
B) Faithful representation, control, and fair value
C) Accountability, decision usefulness, and control
D) Accountability, relevance, and decision usefulness
Answer: C
Q3) From 1 January 2005 the Australian conceptual framework includes:
A) SAC 1-2 and the IASB conceptual framework
B) SAC 1-4 and the IASB conceptual framework
C) the IASB conceptual framework
D) none of the above
Answer: A Page 4
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Page 5
Chapter 3: The Conceptual Framework:
Definition,
and Measurement of the Elements in General
Purpose Financial Statements
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Q1) An entity has decided to commit itself to the purchase of a new building in the next financial year.Under the Framework:
A) a liability exists because it is probable that a future sacrifice of economic benefits will be required
B) no liability exists because there is no present obligation
C) a liability exists because there is a constructive obligation
D) a liability exists because there is an equitable obligation
Answer: B
Q2) Explain and discuss three essential characteristics of an asset as defined by the Framework.
Answer: The essential characteristics of an asset are: future economic bene ts; control by the entity; and the result of a past event.
Q3) In the Framework,'probable' means:
A) greater than 50% certainty
B) 50% certainty
C) greater than 75% certainty
D) greater than 95% certainty
Answer: A
Page 6
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Chapter 4: Fair Value Measurement
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Q1) Discuss the three widely used valuation techniques utilised to determine the appropriate fair value measurement.
Q2) What is the purpose of AASB 13,'Fair Value Measurement'?
A) What to measure as fair value
B) When to disclose fair value measurements
C) How to measure fair value
D) Determining why fair value measurements are appropriate
Q3) Which valuation technique considers replacement cost of an asset when determining fair value?
A) Income approach
B) Cost approach
C) Market approach
D) Lower-of-cost-or-market approach
Q4) Which of the following is not a criticism of fair value measurement?
A) Fair value measures can be unreliable
B) Fair value measurements caused the global financial crisis of 2007
C) The measurements are not always relevant
D) The measurements impact the statement of financial position
Q5) List and give examples of the inputs of the fair value hierarchy.
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Chapter 5: The Choice of Accounting Methods
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Q1) What is not considered an earnings benchmark?
A) Sustaining a smooth income stream
B) Meeting analysts' forecasts of earnings
C) Avoiding losses
D) Mimimising taxes
Q2) An increase in reported net profit in the short term will occur from:
A) overestimating the useful life of a non-current asset
B) writing off supplies that are still on hand as an expense
C) underestimating the residual value of a depreciable asset
D) choosing the reducing balance rather than the straight-line method of depreciation
Q3) All of these are ways in which accountants may be 'creative' in the preparation and presentation of financial reports except:
A) by timing transactions within the limits of generally accepted accounting practice
B) by changing an accounting policy to achieve a desired outcome
C) by making estimates in a way biased towards achieving a desired outcome
D) none of the above, i.e., all are ways in which accountants may be 'creative'
Q4) Explain the meaning of creative accounting and discuss various factors that tend to limit its operation.
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Chapter 6: The Statement of Financial Position
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Q1) Current assets,as defined in AASB 101,are those that:
A) are expected to be realised within the normal course of the operating cycle
B) are held primarily for the purpose of being traded
C) are expected to be realised within 12 months after the end of the accounting period
D) any of the above
Q2) Which accounting standard addresses the presentation of the statement of financial position?
A) AASB 129
B) AASB 10
C) ASX 1
D) AASB 101
Q3) Which statement is incorrect?
A) Under AASB 101, assets and liabilities must not be set-off unless set-off is permitted or required by another accounting standard
B) Between 1979 and 1999, there was no Australian accounting standard dealing specifically with the statement of financial position
C) Under AASB 101, there is no materiality override
D) None of the statements is incorrect
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Chapter 7: Accounting for Current Assets
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Q1) Inventory item Z8 has a cost price of $30 and a net realisable value $25,while item D3 has a cost price of $20,a net realisable value $25 and a replacement cost of $21.Under the lower of cost and net realisable value rule of inventory valuation,applied on an item-by-item basis,the value of inventory is:
A) $50
B) $51
C) $45
D) none of the above
Q2) Inventories are undervalued in periods of rising prices. This is a disadvantage of which of the inventory cost-flow assumption?
A) First-in, first-out
B) Last-in, first-out
C) Perpetual
D) Average cost
Q3) Explain the effects on the financial reports of the FIFO cost flow assumption in a period of rising prices and discuss the arguments that have been raised for and against the use of this assumption to value inventory.
Q4) Explain the concept of the lower of cost and net realisable value rule.
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Page 10
Chapter 8: Accounting for Property, plant and Equipment
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Q1) Which of these items does AASB 116 apply to?
A) Assets held for sale
B) Biological assets
C) Mineral rights and mineral reserves
D) None of the above
Q2) Under AASB 116,which of the following would normally not be regarded as separate classes of assets?
A) Computer equipment
B) Office desks
C) Motor vehicles
D) None of the above, i.e., all would normally be regarded as separate classes of assets
Q3) Which factor should be considered when selecting a depreciation method?
A) The profit or loss for the year
B) Whether the asset has been re-valued
C) The amount that can be claimed as a tax deduction
D) None of the above
Q4) Should borrowing costs incurred during the construction period of an asset be expensed or capitalised? Discuss.
Q5) Explain and discuss how donated assets should be recorded in the accounts.
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Chapter 9: Accounting for Company Income Tax
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Q1) A temporary difference arises due to:
A) the timing difference between the end of the financial year and when the income tax payable is paid
B) a difference between the amounts of the accounting expenses and the tax deductions of a company which will be reversed in future periods
C) a difference between the amounts of the accounting expenses and the tax deductions of a company which will never be reversed
D) a difference in the amount of the deferred tax assets and the deferred tax liabilities
Q2) A difference between the amounts of the accounting expenses and the tax deductions of a company which will be reversed in future periods indicates:
A) unethical accounting practices
B) a permanent difference
C) a greater annual income tax expense
D) a temporary difference
Q3) Discuss the results of empirical research that examines whether tax-effect accounting should continue to be required.
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Chapter 10: Accounting for Intangible Assets
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Q1) Purchased computer software should be:
A) recognised as an asset and recorded at cost
B) amortised over its useful life
C) subject to an impairment test
D) all of the above
Q2) Which of these provisions of AASB 138 is inconsistent with the asset recognition criteria of the Framework?
A) Reviewing the unamortised balance of goodwill annually and, to the extent it is no longer supported by probable future economic benefits, writing it down
B) Recognising purchased goodwill as an asset
C) Not recognising internally generated goodwill as an asset when the market value of an entity can be measured reliably
D) Amortising goodwill
Q3) When the value of an intangible asset is impaired,the change in the value of the asset is:
A) recognised as a charge in the statement of comprehensive income
B) recognised as a charge to equity
C) amortised over a period not exceeding 20 years
D) all of the above
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Chapter 11: Accounting for Leases
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Q1) What is a possible future event that can be excluded toward a supplier's substantive substitution rights?
A) A change in the expected useful life of the asset to the lessor
B) The introduction of new technology that is not substantially developed at the inception of the contract
C) A change in the amount in the minimum lease payments
D) An agreement to pay a below-market rate for the use of the assets
Q2) What are the two elements in identifying whether a contract contains a lease?
A) The type of lease and the identified asset
B) The identified asset and the minimum lease payments
C) Identified asset and the right to control the use of an identified asset
D) The type of lease and the minimum lease payments
Q3) What is the result of the on-balance sheet treatment of a lease?
A) Increased return on total assets and decreased debt ratio
B) Increased earnings per share and decreased debt ratio
C) Increased return on total assets and increased debt ratio
D) Decreased return on total assets and increased debt ratio
Q4) List and explain the different items set out in a typical lease agreement.
Q5) How is a finance lease distinguished from an operating lease?
Q6) What are the main characteristics of a sale-and-leaseback agreement?
Page 14
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Chapter 12: Accounting for Employee Benefits
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Q1) In terms of post-employment benefits,at what point does past-service costs arise?
A) an employee is terminated and the employer must provide compensation for the past service of the employee
B) a defined benefits post-employment plan is established or when the plan's benefits are increased
C) a defined contributions post-employment plan is established or when the plan's benefits are increased
D) a new employee commences employment
Q2) The timing of the recognition of an expense and liability is based on the date:
A) when the entity can no longer withdraw for the offer of those benefits
B) when the entity recognises costs for a restructuring that is within the scope of AASB 137
C) of the most recent financial statements
D) the earlier of A or B
Q3) Discuss the rationale for AASB 119 recognising long service leave as a liability during the preconditional period.How would you account for the possibility that an employee may not remain in your employ long enough to collect long service leave.
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Chapter 13: Accounting for Financial Instruments
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Q1) A futures exchange clearing house is mainly concerned with:
A) calling in margins from traders as and when required
B) establishing and collecting deposits from brokers trading on the exchange
C) calculating the gains and losses made by futures traders
D) all of the above
Q2) A futures contract provides for:
A) a purchase or sale now at a price to be determined based on future events
B) a purchase or sale in the future at a price to be determined when the transaction is completed
C) a purchase or sale in the future at a fixed price agreed at the date of the agreement
D) any of the above
Q3) Which of the following is not a type of hedging relationship?
A) Cash flow
B) Net investment in a foreign operation
C) Commodities
D) Fair value
Q4) Discuss the disclosure requirements in AASB 7 Financial Instruments Disclosure and AASB 132 Financial Instruments Presentation.
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Chapter 14: The Statement of Comprehensive Income
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Q1) In the United States,SFAS 130 requires which profit figure to be disclosed?
A) Profit after tax after applying all other accounting standards
B) The comprehensive income figure which includes all income and expenses that have previously bypassed the profit calculation after tax and been taken directly to equity
C) Neither A nor B
D) Both A and B
Q2) Which statement in relation to the treatment of expenses under AASB 101 is correct?
A) It is optional for an entity with revenue from the sale of goods to disclose cost of sales
B) Expenses should be classified according to their nature or their function
C) Expenses are defined exactly in accordance with the Framework
D) A and B are correct
Q3) The inclusion of increments and decrements of non-current assets required by the comprehensive income approach:
A) may reduce the reliability of the financial statements
B) must always be confirmed as an arms-length transaction
C) A and B above
D) None of the above
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Chapter 15: Revenue
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Q1) What are the promises about the goods and/or services that are to be provided by the entity to the customer commonly referred to as?
A) Contract modifications
B) Performance obligations
C) Articles of the contract
D) Warranties
Q2) What is a characteristic of the income statement approach to revenue recognition?
A) Changes in asset balances
B) Movements in liabilities
C) Dependence on the cash-basis of accounting
D) Based on the concept of income realization
Q3) How is the transaction price to be measured by the entity when receiving non-cash consideration from a customer?
A) Fair value of the goods and/or services transferred to the customer
B) Present value of future cash flows
C) Fair value of the non-cash consideration received from the customer
D) Book value of the non-cash consideration received from the customer
Q4) Distinguish the differences between a contract asset and a contract liability.
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Chapter 16: The Statement of Cash Flows
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Q1) All of these are classified as financing items under AASB 107 'Cash Flow Statements'-2 except:
A) in the cash flow statement of the lender cash repayments by borrowers
B) cash paid to buyback the company's shares
C) proceeds from the issue of debentures
D) none of the above, i.e., all are classified as financing items
Q2) What is a rationale for preparing a statement of cash flows,according to AASB 107?
A) Assessing the ability of an entity to generate cash and cash equivalents
B) Needs of the entity to utilise cash flows
C) Both A and B are rationales for preparing a statement of cash flows
D) Neither A nor B is considered a rationale related to the statement of cash flows
Q3) A criticism of the indirect approach to presenting cash flows from operating activities is:
A) adding back expenses such as depreciation may suggest that these items are sources of cash
B) it is unnecessarily complicated
C) it requires cash inflows to be netted against cash outflows
D) A and B
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Chapter 17: Financial Reporting: Segment Reporting and Highlights Statements
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Q1) Which of the following is an argument against the publication of a highlights statement?
A) Simplifies presentation of data
B) Additional audit work
C) A risk of unconscious bias exists
D) Includes too many financial ratios
Q2) Which of the following is not a quantitative threshold for reporting segment information?
A) Revenue
B) Investments
C) Profit
D) Assets
Q3) According to paragraph 19 of AASB 8,after which number of reportable segments should an entity consider whether a practical limit has been reached?
A) 10
B) 15
C) 8
D) None of the above
Q4) Discuss the benefits of the 'management approach' adopted by AASB 8.
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Chapter 18: Further Financial Reporting Issues
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Q1) The treatment of items that clearly belong to past reporting period is a long-standing problem.One way to handle this problem is to make adjustments to the retained earnings.The problem with this approach is that:
A) it could lead to manipulation of profit for the period
B) revenue and expenses are matched inappropriately
C) revenue and expenses are matched appropriately
D) none of the above
Q2) Transactions between related parties should be of special interest to users of financial information for which of the following reasons?
A) Income tax liabilities may be illegitimately or artificially lowered
B) Senior executives' personal friends may be favoured unduly
C) Profit amounts or asset values may be inflated
D) All of the above
Q3) Which of the following is not a primary feature of a 'reporting entity'?
A) The extent of government regulation of the business
B) Its political or economic influence or importance
C) Financial characteristics such as size or level of indebtedness
D) Separation of management from ownership
Q4) Explain the significance of related-party transactions.
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Chapter 19: Accounting for Extractive Industry
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Q1) According to the Statement of Accounting Concepts and the Framework,which of the following methods of accounting for exploration and evaluation costs in the extractive industries is most consistent?
A) The expense-and-reinstate method
B) The successful-efforts method
C) The expense (costs written-off) method
D) The full-cost method
Q2) Bigspill Gas & Oil Ltd began operations on 1 July 20X1.During the year ended 30 June 20X2,Bigspill explored five different areas of interest and spent $200 000 in each area.The exploration results indicated that three areas were likely to be productive and Bigspill acquired leases over the three areas at costs of $400 000,$720 000 and $480 000 respectively.Under the successful-efforts method of accounting for exploration and evaluation costs in the extractive industries,Bigspill would include which of the following amounts in its statement of financial position as at 30 June 20X2 for Exploration and Evaluation Costs?
A) $1 600 000
B) $2 600 000
C) $2 200 000
D) $ Nil
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Page 22
Chapter 20: Accounting for Agricultural Activity
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Q1) AASB 141 requires that biological assets be measured at net realisable value that is:
A) fair value less estimated point of sale costs
B) fair value less point of sales costs
C) fair value
D) none of the above
Q2) Which of the following statements about a growing crop expected to be sold within the next reporting cycle is not true?
A) It should never be classified as inventory
B) It should always be classified as a current asset
C) It should always be classified as inventory
D) It is in the process of production
Q3) Agricultural activity under the heading of Biological assets such as animals is most appropriately measured for accounting purposes at:
A) standard value
B) net realisable value
C) discounted market value
D) historical cost
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Chapter 21: Accounting for Superannuation Entities
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Q1) The general purpose financial reports of a superannuation plan should provide information to assist in answering the following question:
A) Who are the trustees?
B) Is the plan solvent?
C) What are the names of the professional advisers?
D) None of the above
Q2) Generally,insurance arrangements include which of the following?
A) offered to members, with the entity only acting as an agent
B) offered to members, with the entity accepting insurance risk
C) provided to defined benefit members in relation to their projected retirement benefit
D) all of the above
Q3) Discuss some of the changes to MS Plan's Income Statement under the AASB 1056 requirements.
Q4) The inclusion of a report of the trustees of a superannuation plan is:
A) required by AAS 25
B) the same as an actuarial report
C) recommended by the ASFA
D) not relevant for a self-managed plan
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Chapter 22: Accounting for Insurance
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Q1) Which type of insurance policy pays benefits only if the insured person dies within a specified period?
A) Whole-of-life
B) Term
C) Endowment
D) Disability
Q2) Which of the following is an obligation arising from past events?
A) Claims have been received but not been settled
B) Claims that have been received but for which the amount of the obligation is uncertain
C) Both A and B are correct
D) Neither A nor B are correct
Q3) Which disclosure requirement is to be presented in the statement of comprehensive income?
A) The component related to risk margin
B) Information regarding material non-insurance contracts
C) The amount of net claims incurred
D) The process used to determine risk margin
Q4) List and explain the three broad classes of assets insurers have.
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Chapter 23: International Accounting Standards, harmonisation and Convergence
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Q1) Discuss the significance of the Norwalk Agreement and the relationship between the IASB and various national standard setters.
Q2) Which of these statements is not correct concerning the adoption by Australia of international accounting standards?
A) Where words need to be changed in AASB adaptations of international standards to accommodate Australian legislation, these are identified by the use of 'Aus' paragraphs
B) Australian standards, where there is no international equivalent, have been withdrawn
C) The AASB is committed to ensuring that AASB equivalents will be issued for all international accounting standards
D) None of the above, i.e., all are correct statements
Q3) Australia adopted international accounting standards
A) on 30 June 2005.
B) on 31 December 2005.
C) on 15 January 2005.
D) on 1 January 2005
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Chapter 24: Foreign Currency Translation
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Q1) Once an entity has designated the hedging relationship and it qualifies for hedge accounting,it is classified as which one of three types of relationships:
A) a fair value excess capital
B) a cash flow analysis
C) the hedge of a net investment in a foreign operation as defined in AASB 121 (para. 86)
D) a fair value statement
Q2) Which of the following methods have been suggested for translating foreign currency financial statements:
A) historical method
B) closing-return method
C) current-return method
D) all of the above
Q3) The 'forward' rate of exchange for foreign currencies is:
A) the rate of exchange between the Australian dollar and the US dollar
B) the rate applicable to funds to be forwarded to an overseas country
C) the rate at which currencies can be exchanged at some future date
D) the rate at which currencies can be exchanged immediately
Q4) Explain,using simple numerical examples,the hedging of currency risk.
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Chapter 25: Accounting for Corporate
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Q1) Triple-bottom line reporting involves giving information on a company's:
A) economic, environmental, and social activities
B) economic, voluntary, and human rights activities
C) environmental, social, and community activities
D) environmental, social, and political activities
Q2) Corporate social responsibility is best thought of as:
A) the need to meet the objective of maximising the wealth of a company's ordinary shareholders
B) adopting safe work practices for all employees
C) consideration of the impact of a company's activities on the welfare of society as a whole
D) producing safe, as well as reliable, products
Q3) The most common approach adopted by Australian corporations in accounting for corporate social responsibilities is:
A) descriptive performance reporting
B) quantitative reporting
C) full cost reporting
D) asset valuation approach
Q4) Explain the three components of the Emissions Reduction Fund (ERF).
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Chapter 26: Ethics in Accounting
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Q1) Briefly describe three classes of deontological theories that have been used to examine ethical behaviour.
Q2) Reflecting on the rule of independence in setting ethical accounting standard,discuss the role of 'integrity' and 'objectivity' for auditors.
Q3) The ethical issues most frequently experienced by Australian accountants a 2005 survey by Leung and Cooper was:
A) fee problems
B) maintaining confidentiality
C) conflict of interest
D) admitting one's mistakes
Q4) The Code of Ethics for Professional Accountants is best described as:
A) deontological in nature
B) voluntary for all members of the ICAA, CPA Australia and the NIA
C) descriptive in nature
D) teleological in nature
Q5) Should accountants act ethically? Explain the reasons for your answer to this question.
Q6) Briefly describe the classes of teleological theories that have been used to examine ethical behaviour.
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