Accounting Theory Exam
Bank
Course Introduction
Accounting Theory explores the fundamental principles, frameworks, and concepts that inform modern accounting practices. This course examines the development and history of accounting thought, the role of standard-setting bodies, and the application of various accounting theories to real-world scenarios. Students will analyze contemporary issues, ethical considerations, and the impact of international differences in accounting standards. Emphasis is placed on understanding how different theoretical perspectives influence the preparation, presentation, and interpretation of financial information, equipping students with a critical approach to evaluating accounting policies and practices.
Recommended Textbook
Intermediate Accounting Volume 1 3rd Edition by Kin Lo
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10 Chapters
1103 Verified Questions
1103 Flashcards
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Page 2
Chapter 1: Fundamentals of Financial Accounting Theory
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33 Verified Questions
33 Flashcards
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Sample Questions
Q1) Explain the meaning of adverse selection and moral hazard.Give an example of each.
Answer: Adverse selection: A type of information asymmetry whereby one party to a contract has an information advantage over another party.Examples: buying a resale home;buying a used car;buying shares in a company,etc.
Moral hazard: A type of information asymmetry whereby one party to a contract cannot observe some actions relating to the fulfillment of the contractual terms by the other party.Examples: renting an apartment to a tenant;car insurance;hiring an executiveseparation of ownership and management or the principal-agent problem;lending money to a company,etc.
Q2) Management motivation to increase the likelihood that the company will receive a $50,000 government rebate best illustrates which of the following?
A)Earnings management.
B)Positive accounting theory.
C)Information asymmetry.
D)Efficient securities market.
Answer: A
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3
Chapter 2: Conceptual Frameworks for Financial Reporting
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Which of the following is not a purpose of a conceptual framework of accounting concepts and financial reporting objectives?
A)To increase the user's ability to understand financial statements.
B)To increase financial statement users' confidence in financial reporting.
C)To provide a foundation for detailed accounting and reporting rules.
D)To enhance comparability among companies' financial statements.
Answer: C
Q2) When actual financial statements routinely report results that overstate or understate a company's financial position,which qualitative characteristic is violated?
A)Relevance.
B)Neutrality.
C)Conservatism.
D)Reliability.
Answer: B
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Chapter 3: Accrual Accounting
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160 Verified Questions
160 Flashcards
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Sample Questions
Q1) The following event occurred after the company's year-end but before the completion of the audit.For this subsequent event,determine whether the event: requires an adjustment to the year-end financial statements, requires note disclosure,or requires neither adjustment to recognized amounts nor disclosure. There is a significant fall in the market price of a major portion of inventory due to new technology making the existing items obsolete.The market price is lower than the current carrying value.(Justify your recommendation. )
Answer: An adjustment is required as the market price is lower than cost,and inventory should be valued at the lower of cost and market.The drop in market price is relevant to the measurement of inventories at year-end because it reflects conditions at that point in time.No additional disclosure is required;this is just an unfortunate (albeit unusual)operating occurrence.
Q2) Explain what is meant by "quality of earnings."
Answer: Quality of earnings conceptually refers to how close the reported earnings are to an unbiased amount.Since we cannot observe unbiased earnings,quality of earnings is difficult to measure in practice.
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Page 5
Chapter 4: Revenue and Recognition
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) Which statement best explains the cost recovery method?
A)An accounting method that recognizes revenue and expenses on a contract only after it is completed.
B)An accounting method that recognizes revenue and expenses on a contract in proportion to the degree of progress.
C)An accounting method that recognizes contract costs as incurred and an amount of revenue equal to the costs that are expected to be recovered on the contract.
D)An accounting method that recognizes revenue and expenses based on the fair value of the contract.
Q2) List the five key steps in the revenue recognition process.
Q3) 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.
Q4) Compare and contrast the revenue recognition criteria for a transaction involving the sale of goods with a transaction involving the provision of services.
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6
Chapter 5: Cash and Receivables
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) Explain why a bank reconciliation is necessary.
Q2) Which statement about "cash and cash equivalents" is correct?
A)The definition for "cash and cash equivalents" used on the balance sheet differs from the definition for "cash and cash equivalents" used on the cash flow statement.
B)A change in the composition of "cash and cash equivalents" is considered an operating activity on the cash flow statement.
C)A change in the composition of "cash and cash equivalents" is not considered a cash flow for purposes of the cash flow statement.
D)"Cash and cash equivalents" are short term liquid investments that can be converted to cash within a short time frame.
Q3) A $100,000 sale transaction is made with terms of 5/10,net 30.What entry is made to the accounts receivable account when the sale is made under the net method of recording a discount?
A)$95,000 credit
B)$95,000 debit
C)$100,000 credit
D)$100,000 debit
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Chapter 6: Inventories
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156 Verified Questions
156 Flashcards
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Sample Questions
Q1) JP Corporation had net income of $1,000,000 for 2016.After issuing its financial statements,the corporation realized that it had failed to include inventory from one of its small warehouses for two years.Specifically,it forgot to include $20,000 on December 31,2015 and $30,000 on December 31,2016.Which of the following is TRUE regarding JP's 2015 net income?
A)Net income was understated by $10,000.
B)Net income was overstated by $10,000.
C)Net income was understated by $30,000.
D)Net income was overstated by $30,000.
Q2) Which statement best depicts the inventory cost flow equation?
A)Beginning inventory + Sales = Cost of sales + Ending inventory.
B)Beginning inventory + Goods manufactured = Cost of sales + Ending inventory.
C)Beginning inventory - Purchase returns = Cost of sales + Ending inventory.
D)Ending inventory + Purchases = Cost of sales + Beginning inventory.
Q3) Why are inventories reported at the lower of cost and market?
A)Neutrality.
B)Matching.
C)Conservatism (prudence).
D)Comparability.
Q4) Explain why the absorption costing method is appropriate under GAAP.
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Chapter 7: Financial Assets
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137 Verified Questions
137 Flashcards
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Sample Questions
Q1) On January 1,2017,The Freedom Company purchased a $5 million face value bond that pays interest at 7% when the market yield for bonds of equivalent risk and maturity was 5%.Interest is payable annually on December 31.The bond matures on December 31,2022.
Required:
a.How much did The Freedom Company pay for this bond on January 1,2017?
b.On December 31,2017,the market yield for bonds of equivalent risk and maturity is 6%.What would be the market value of this bond on December 31,immediately after the coupon payment on that date?
c.On December 31,2018,the market yield for bonds of equivalent risk and maturity is 7%.What would be the market value of this bond on December 31,immediately after the coupon payment on that date?
d.For each of three scenarios: (i)amortized cost, (ii)FVOCI,and (iii)FVPL:
i What would be the balance sheet value of this bond be on December 31,2017?
ii How much income would be reported in profit or loss in 2017 for this bond?
iii How much other comprehensive income would be reported in 2017 for this bond?
iv How much comprehensive income would be reported in 2017 for this bond?
Q2) Explain the nature of and the impact on the balance sheet and the income statement of investments subsequently measured at amortized cost.
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Page 9
Chapter 8: Property, plant and Equipment
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128 Verified Questions
128 Flashcards
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Sample Questions
Q1) A large piece of earth-moving equipment was upgraded at a cost of $440,000 so that it could self-unload.After the upgrade was completed,management estimated that this feature would save the company $40,000 a year for the next six years. Prepare the necessary journal entry to record the transaction.Provide a short justification for your chosen treatment.
Q2) What does a "gain on disposal of property,plant and equipment" mean? Does a gain suggest good or excellent management and a loss on disposal indicate poor management? Explain your conclusion.
Q3) What is the accounting treatment recommended under IFRS for interest capitalization for property,plant and equipment (PPE)?
A)Capitalize cost of debt directly attributable to construction of the PPE.
B)Capitalize cost of internal funds directly attributable to construction of the PPE.
C)Expense cost of debt directly attributable to construction of the PPE.
D)IFRS does not provide any specific guidance for interest capitalization.
Q4) Using the conceptual framework,explain why there is a difference between IFRS and ASPE in accounting for interest capitalization for property,plant and equipment.
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Page 10
Chapter 9: Intangible Assets, goodwill, mineral Resources, and Government Grants
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81 Verified Questions
81 Flashcards
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Sample Questions
Q1) Which statement is correct?
A)Capitalization of costs ceases when the post development phase begins.
B)The development phase includes generating new ideas or searching for new materials.
C)The project must meet IAS 38 criteria before research costs can be capitalized.
D)The post development phase includes designing,constructing or testing a prototype.
Q2) Which of the following is not a difference between intangible assets and property,plant and equipment (PPE)?
A)Intangibles do not have physical substance.
B)PPE and intangibles benefit for more than one year.
C)Intangibles are not held for use in the ordinary course of business.
D)PPE are held for use in the ordinary course of business.
Q3) Which statement is not correct?
A)Significant uncertainties exist during mineral exploration.
B)Entities can choose to either capitalize or expense mineral exploration costs.
C)IFRS 6 applies when the mineral resources enter the development phase.
D)Under IFRS,all costs must be expensed if a mineral site is not worthy of further exploration.
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Chapter 10: Applications of Fair Value to Non-Current Assets
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121 Verified Questions
121 Flashcards
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Sample Questions
Q1) Explain why non-current assets held for sale are recorded at the lower of carrying value and fair value less costs to sell.
Q2) Which of the following is correct with respect to the "recoverable amount"?
A)It is defined as the lower of the value in use or fair value less cost to sell under IFRS.
B)It is defined as the lower of the value in use or fair value less cost to sell under ASPE.
C)Under IFRS,it is defined as the sum of the undiscounted cash flows expected from use of the asset.
D)Under ASPE,it is defined as the sum of the undiscounted cash flows expected from use of the asset.
Q3) Explain how non-current assets that are held for sale should be accounted for.
Q4) Which of the following is correct with respect to the "impairment loss"?
A)It is defined as the carrying amount less recoverable amount under IFRS.
B)It is defined as the carrying amount less recoverable amount under ASPE.
C)Under IFRS,it is defined as the sum of the undiscounted cash flows expected from use of the asset.
D)Under ASPE,it is defined as the sum of the undiscounted cash flows expected from use of the asset.
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