Accounting Theory Exam
Bank
Course Introduction
Accounting Theory explores the conceptual foundations and essential principles underlying the field of accounting. This course examines the development of accounting thought, including normative and positive theories, and critically analyzes the regulatory frameworks, ethical considerations, and standard-setting processes that shape accounting practices worldwide. Students will engage with diverse perspectives on measurement, recognition, disclosure, and the evolving role of accounting in providing useful information to stakeholders. By synthesizing theoretical approaches with contemporary issues and empirical research, learners will develop a comprehensive understanding of how accounting standards and policies impact financial reporting and decision-making in business and society.
Recommended Textbook
Understanding Australian Accounting Standards 1st Edition by Janice Loftus
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Page 2
Chapter 1: Accounting Regulation and the Conceptual Framework
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Q1) According to the Australian Accounting Standards, the following assets can be recorded initially at historical cost, except for:
A) land.
B) inventory.
C) equipment.
D) motor vehicle.
Answer: B
Q2) Which of the following statements is false?
A) Members of the IFRIC are appointed by the IASB.
B) The IFRS Advisory Council provides strategic advice to the IASB.
C) Compliance with IASB standards includes compliance with interpretations issued by IFRIC.
D) IFRS Foundation Trustees appoint members of both IASB and IFRS Advisory Council.
Answer: A
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Page 3
Chapter 2: Application of Accounting Theory
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Q1) Which of the following statements is not a market efficiency assumption?
A) Share price would adjust more rapidly to information contained in financial statements.
B) All information is available free of cost to all market participants.
C) There are no differences in the assessment of the implications of new information for the valuation of shares.
D) There are no transaction costs in trading securities.
Answer: A
Q2) The followings are the limitations of inductive reasoning, except:
A) it does not attempt to improve current practices.
B) it may result in a logically valid, but not sound arguments.
C) it does not question the appropriateness of the observed actions.
D) it has a tendency of maintaining the existing state of affairs.
Answer: B
Q3) The most correct reason of why residual loss is incurred is:
A) principals do not take any actions to control agents' behaviours.
B) agents do not always act in the best interest of principals.
C) it is too costly for principals to completely monitor agents' behaviours.
D) agents are rational wealth maximisers.
Answer: C
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Chapter 3: Shareholders Equity: Share Capital and Reserves
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Q1) In relation to an asset revaluation surplus, an entity
A) is not able to use this surplus for the payment of future dividends
B) is able to use this surplus for the payment of future dividends
C) is not able to transfer this surplus to any other reserve account
D) can transfer the surplus to current period profit or loss when the asset is disposed of
Answer: B
Q2) Which of the following journal entries demonstrates the appropriate accounting treatment for share issue costs?
A) Dr Deferred asset: Cr Cash;
B) Dr Cash: Cr Deferred asset;
C) Dr Share capital: Cr: Cash;
D) Dr Cash: Cr Share capital.
Answer: C
Q3) Accounting for share buy-backs is prescribed by
A) an IFRS accounting standard
B) an IFRIC interpretation
C) an IAS accounting standard
D) generally accepted accounting practices
Answer: D
5
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Chapter 4: Fair Value Measurement
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Q1) Unobservable inputs for the asset or liability are an example of:
A) a Level 1 input
B) a Level 2 input
C) a Level 3 input
D) a Level 4 input
Q2) Which are the two most common measures used in Accounting Standards?
A) fair value less costs to sell and cost
B) value in use and cost
C) cost and fair value
D) net realisable value and fair value.
Q3) Which of the following is an indication of an active market?
A) there are few recent transactions
B) price quotations vary substantially over time
C) price quotations vary substantially among market-makers
D) price quotations are based on current market information.
Q4) Trademarks would be measured primarily using which type of inputs?
A) Level 1 inputs
B) Level 2 inputs
C) Level 3 inputs
D) Level 4 inputs
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Chapter 5: Revenue
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Q1) ACC, a professional body charges an annual fee of $600 for subscription to its publications. The $600 fee entitles customers to receive a copy of the latest version of the professional standards relevant to their industry (updated annually). Subscribers also receive monthly newsletters for the duration of the subscription period. ACC should recognise the $600 as follows:
A) Recognise the whole $600 as revenue upfront
B) Recognise revenue of $50 per month across the period of the annual subscription.
C) Recognise an amount upfront in relation to the copy of the professional standards, with the balance being recognised evenly across the period of the annual subscription.
D) Recognise the whole $600 as revenue at the end of the subscription period
Q2) Using the relative fair value approach the amount of revenue recognised in relation to the on-call advice is:
A) indeterminable based on the facts provided
B) $1000
C) $2167
D) $2600
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Chapter 6: Provisions, Contingent Liabilities and Contingent Assets
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Q1) According to AASB 137 Provisions, Contingent Liabilities and Contingent Assets, when providing for the future, a future event such as the clean-up of a contaminated site, gains and other cash inflows that are expected to arise on the sale of asset related to the clean-up, must be treated as follows:
A) set-off against the provision for the clean-up;
B) measured separately of the provision;
C) recognised directly in equity in the period in which the cash inflows arose;
D) recognised as a deferred asset.
Q2) Liabilities which fail the recognition criteria and where the possibility of an outflow is remote should:
A) be recognised as an accrual
B) be recognised as a provision
C) be recognised as a contingent liability
D) not be recognised in the financial statement at all
Q3) Which of the following statements is correct?
A) A present obligation is an example of a legal obligation.
B) A legal obligation is an example of a constructive obligation.
C) A constructive obligation is an example of an equitable obligation.
D) An equitable obligation is an example of a present obligation.
Page 8
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Chapter 7: Income Taxes
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Q1) The tax effect method of accounting for a company's income tax is based on an assumption that:
A) income tax expense is equal to income tax payable
B) an accounting balance sheet and a tax balance sheet are the same
C) a tax balance sheet is prepared according to accounting standards
D) income tax expense is not equal to current tax liability.
Q2) Beta Limited has an accounting profit before tax of $200 000. All of the following items have been included in the accounting profit: depreciation of equipment $30 000 (tax deductible depreciation is $20 000); entertainment expenses $15 000 (non-deductible for tax purposes); Long service leave expense provided $6000 (no employee took long service leave during the year). The tax rate is 30%. The amount of current tax liability is:
A) $81 300
B) $50 700
C) $69 300
D) $38 700.
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9
Chapter 8: Financial Instruments
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Q1) A financial asset classified as fair value through profit and loss (FVTPL) must be: I\(\quad\) a derivative that is a financial guarantee contract or a hedging instrument II \(\quad\)acquired princip ally for the purpose of selling it in the near term III\(\quad\) part of a portfolio of identified instrument that are managed together and for \(\quad\)\(\quad\)which there is evidence of a recent actual pattern of short-term profit-taking
IV \(\quad\)designated as such upon initial recognition
A) I, II and III
B) I, III and IV
C) I, II and IV
D) II, III and IV
Q2) Which of the following items is classified as a financial asset?
A) ordinary shares of the issuer;
B) loans payable (owed by the borrower);
C) accounts receivable;
D) inventory.
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10
Chapter 9: Share-Based Payments
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Q1) Which of the following is NOT within the scope of AASB 2 Share-based Payment.
A) Transactions in which the entity receives or acquires goods or services as part of the net assets acquired in a business combination to which IFRS 3 Business Combinations applies.
B) Equity instruments granted to employees of the acquiree in a business combination in their capacity as an employee.
C) Cancellation, replacement or other modification of share-based payment arrangements because of a business combination.
D) Cancellation, replacement or other modification of share-based payment arrangements because of other equity restructuring.
Q2) This is an example of:
A) an equity-settled share-based payment transaction
B) a cash-settled share-based payment transaction
C) a share-based payment transaction where the counterparty has the settlement choice
D) a share-based payment transaction where the entity has the settlement choice
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Chapter 10: Translation of the Financial Statements of Foreign Entities
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Q1) Under AASB 121 The Effects of Changes in Foreign Exchange Rates, an entity must disclose which of the following items in particular?
I. The amount of exchange differences included in profit or loss of the period.
II. The amount of the exchange difference included directly in share capital during the period.
III. Whether a change in the functional currency has occurred.
IV. The reason for using a presentation currency that is different from the functional currency.
A) I, II, III and IV;
B) II and III only;
C) I, III and IV only;
D) I and IV only.
Q2) When translating into the functional currency foreign currency denominated non-monetary items measured using historical cost must be translated using the:
A) rate current at end of reporting period; B) average rate for the reporting period;
C) exchange rate at the date of the transaction;
D) rate prevailing at the end of the last financial year.
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Chapter 11: Employee Benefits
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Q1) Benefits paid to members of a defined benefit post-employment fund are based on:
I the level of employer contributions made to the fund
II remuneration levels while employed
III number of years service
IV investment returns generated by the fund
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only
Q2) AASB 119 defines employee benefits as:
A) any cash consideration given by an entity to employees or their authorised representatives in exchange for services rendered by the employee
B) all forms of consideration given by an entity to employees or their authorised representatives in exchange for services rendered by the employee
C) all forms of consideration given by an entity in exchange for service rendered by employees
D) all forms of consideration given by an entity to employees or their authorised representatives
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Chapter 12: Inventories
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Q1) Uno Ltd uses a periodic inventory system and rounds the average unit cost to the nearest dollar. The following data relates to Uno Ltd for the year ended 30 June 2014: \(\begin{array}{ll}
\text { Opening inventory } & 10 \text { units @ average cost of \$25 each } \\
\text { January purchases } & 10 \text { units @ \$24 each } \\
\text { February sales } & 8 \text { units } \\
\text { March product returns } & 4 \text { units } \\
\text { June sales } & 6 \text { units } \\
\text { July purchases } & 39 \text { units @\$26 each } \\
\text { August sales } & 18 \text { units } \\
\text { October purchases } & 10 \text { units @\$24 each } \\
\text { November sales } & 25 \text { units } \end{array}\)
A) $1528
B) $1734
C) $1425
D) $1984
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Page 14
Chapter 13: Property, Plant and Equipment
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Q1) Under AASB 116, the depreciation charge for a period reflects:
A) the fall in the fair value of the asset across the period;
B) a change in the re-sale value of the asset that has occurred over the period;
C) the consumption of economic benefits over the period;
D) a reduction in the estimated market value of the asset across the period.
Q2) Wilson Limited applied the straight-line method of depreciation to its non-current assets. The cost of the buildings was $640 000, the depreciable amount is $560 000, the residual value is $80 000 and the useful life is 8 years. The annual depreciation charge is:
A) $80 000
B) $75 000
C) $70 000
D) $60 000.
Q3) AASB 116 requires disclosure, for each class of property, plant and equipment:
A) the measurement bases used for determining the gross carrying amount
B) the deprecation methods used
C) the useful lives or the depreciation rates used
D) all of the options are correct.
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Chapter 14: Leases
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Q1) Which of the following is included within the scope of AASB 117?
A) lease agreements for motion picture films
B) lease agreements to explore for minerals
C) lease agreements for biological assets
D) lease agreement for an oil refinery
Q2) In relation to finance leases, the following information must be disclosed separately in the financial statements of lessors:
I Unearned finance income.
II Contingent rents recognised as income in the period.
III The unguaranteed residual values accruing to the benefit of the lessee.
IV The accumulated allowance for uncollectible minimum lease payments receivable.
A) I, II and IV only
B) I, III and IV only
C) II, III and IV only
D) II and IV only.
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16
Chapter 15: Understanding Australian Accounting Standards
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Q1) Parsons Limited was involved in a highly successful plastics manufacturing business. It commenced a project to design a more efficient extrusion system for its plastic pipes. The following outlays occurred: January Research salaries $50 000 February Research materials $30 000 March re-development of the extrusion plant $400 000 April Final adjustments to the extrusion plant $25 000. The amount to be expensed by this company at the end of the financial year, 30 June, is:
A) $30 000
B) $50 000
C) $80 000
D) $480 000.
Q2) A key characteristic that separates assets such as property, plant and equipment from intangible assets is:
A) separability
B) length of useful life
C) lack of physical substance
D) reliability.
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Page 17
Chapter 16: Impairment of Assets
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Q1) Jam Pty Ltd has two cash generating units. CGU A had a carrying amount of $700 and value in use of $750. CGU B has a carrying amount of $900 and a value in use of $800. The carrying amount of the head office assets is $400. CGU A & B utilise the head office services equally. The impairment loss for CGU A is:
A) $0
B) $50
C) $150
D) $350
Q2) Where an asset is measured using the cost model, any impairment loss is:
A) accumulated in a separate 'accumulated impairment losses' account
B) set off against the balance of revenue
C) taken directly to equity
D) added to the balance of the accumulated depreciation account.
Q3) When an asset is measured using the revaluation model, any impairment loss is treated as:
A) a revaluation decrement
B) a revaluation increment
C) a set-off against depreciation expense
D) an addition to depreciation expense.
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Page 18
Chapter 17: Accounting for Mineral Resources
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Q1) Subsequent to initial recognition E&E assets are required to be measured:
A) under the cost model
B) under the revaluation model
C) either under the cost model or revaluation model
D) at the lower of the cost and fair value
Q2) The obligation to record a provision for removal and restoration costs arising from mining exploration and evaluation arises through the application of:
A) AASB 6
B) AASB 137
C) The Framework
D) IFRIC 1
Q3) Which of the following E&E costs would be classified as intangibles?
I \(\quad\)drilling rights
II \(\quad\)equipment inspection costs
III \(\quad\)exploration licenses
IV \(\quad\)capitalized consumable costs
A) I, II and III
B) II, III and IV
C) I, II and IV
D) I, III and IV
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Chapter 18: Agriculture
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Q1) AASB 141 requires disclosure of which of the following relating to government grants?
A) the nature and extent of grants recognised, unfulfilled conditions attached to the grant and significant increases expected in the level of government grants.
B) the nature and extent of grants recognised, unfulfilled conditions and other contingencies attached to the grant and details of grants applied for but not yet granted
C) unfulfilled conditions and other contingencies attached to the grant and details of grants applied for but not yet granted
D) the nature and extent of grants recognised, unfulfilled conditions and other contingencies attached to the grant and significant decreases expected in the level of government grants.
Q2) Which standard was issued in 2011 that amended AASB 141?
A) AASB 7
B) AASB 101
C) AASB 118
D) AASB 13
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20
Chapter 19: Financial Statement Presentation
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Q1) Under AASB 101 profit or loss attributable to non-controlling interests is prescribed for presentation in:
A) an equity statement
B) a statement of financial position
C) a statement of profit or loss and other comprehensive income
D) a statement of cash flows.
Q2) Where an accounting estimate has been revised materially the item is:
A) to be accounted for retrospectively;
B) not required to be recognised in the current period;
C) to be accounted prospectively;
D) to be adjusted in the comparative numbers of previous periods.
Q3) Which of the following items, if it exists, does NOT have to be presented as a line item on the face of a statement of profit or loss and other comprehensive income?
A) revenue
B) closing inventory
C) profit or loss attributable to non-controlling interests
D) post-tax profit or loss of discontinued operations.
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21
Chapter 20: Statement of Cash Flows
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Q1) The following item is classified as a 'financing activity' in the Statement of Cash Flows:
A) interest paid on debentures
B) cash received from accounts receivable
C) cash payment on redemption of the company's debentures
D) cash payment to purchase debentures of another entity.
Q2) Which of the following items is classified as part of 'operating activities' in the Statement of Cash Flows?
A) Depreciation of non-current assets
B) Receipts from customers from the sale of goods
C) Bad debts expense
D) Proceeds from the sale of non-current assets
Q3) Which of the following items would be presented in a Statement of Cash Flows?
A) Payment of dividends through a share investment scheme
B) Acquisition of an investment in a subsidiary for consideration consisting of an exchange of non-current assets and liabilities
C) Proceeds from the issue of debentures
D) Refinancing of long-term debt
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22
Chapter 21: Earnings Per Share
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Q1) Paragraphs 70-73 of AASB 133 prescribe various disclosures relating to earnings per share. The disclosures include:
I the amounts used as the numerators (earnings) in the ratios
II a reconciliation of the earnings amounts to the profit or loss attributable to the parent entity for the period including the individual effect of each class of instruments that affects earnings per share
III the number of ordinary shares outstanding at the end of the financial year
IV the weighted average number of ordinary shares used as the denominator in the ratios
A) I, II and III
B) I, III and IV
C) II, III and IV
D) I, II and IV
Q2) The basic earnings per share at 30 June 2014 is:
A) $0.80
B) $0.96
C) $3.50
D) $4.00
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Page 23
Chapter 22: Operating Segments
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Q1) Bloomsville Ltd has a board of directors that consist of a Managing Director (MD) and non-executive directors. The MD has a regular monthly meeting with the Chief Operating Officer (COO) and the managers of Bloomsville's three business units. During the meeting, each manager would present an update of their unit's financial performance. The financial information is then reviewed by the MD and the COO to assess the performance of each business unit and to make decisions related to resource allocation. In this case, who is the CODM of Bloomsville?
A) The board of directors.
B) The MD and the COO.
C) The MD, the COO, and the three managers.
D) The MD only.
Q2) Segment disclosures are designed to:
A) combine components of consolidated financial data to provide a higher level of summarisation;
B) condense particular items of consolidated financial data into one financial statement;
C) disaggregate selected consolidated financial data;
D) aggregate revenues and expenses so that only net profit is shown for each important segment.
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Page 24
Chapter 23: Operating Segments
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Q1) Examples of related party transactions that must be disclosed include: A) settlement of liabilities; B) disposal of assets; C) purchase or sales of goods; D) all of the above.
Q2) Which of the followings are most likely to be considered as key management personnel of an entity?
\(\begin{array}{|l|l|l|l|}
\hline \text { I. } & \text { Chief Financial Officer } & \text { III. } & \text { Non-executive directors } \\
\hline \text { II. } & \text { Admin Officer } & \text { IV. } & \text { General manager } \\ \hline
\end{array}\)
A) I, II, and III;
B) II, III, and IV;
C) I, III, and IV; D) I, II, III, and IV.
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Chapter 24: Business Combinations
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Q1) Goodwill is measured as the difference between the:
A) cost of the assets given up, and the cost of the net assets acquired
B) cost of the net assets acquired, and the net present value of the consideration given up
C) present value of the consideration transferred, and the present value of the net assets acquired
D) consideration transferred, and the fair value of the assets and liabilities acquired
Q2) In a business combination, the acquirer is the party that:
A) obtains control of the other entities
B) concedes control over the acquired entities
C) sells the acquired entity
D) receives the acquisition consideration.
Q3) The following items are NOT deemed to be items that would meet the definition of an intangible asset under AASB 3:
A) trademarks
B) experienced marketing team
C) newspaper mastheads
D) order backlogs.
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Chapter 25: Consolidation: Principles and Accounting Requirements
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Q1) For entities wanting to use the cost model of accounting, the revaluation of a subsidiary's assets would be undertaken in the:
A) subsidiary's records
B) parent entity's records
C) consolidation worksheet
D) notes to the consolidated financial statements.
Q2) In which of the following situations is an investor more likely to have power over an investee when the investor holds less than 50% of the investee's shares?
A) The remaining shares are held by a small number of shareholders.
B) The remaining shares are held by shareholders who majority live overseas.
C) Majority of remaining shareholders attend and vote at the annual general meeting.
D) Majority of remaining shareholders have concerns with environmental issues related to the investee's operations.
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27
Chapter 26: Consolidation: Intragroup Transactions
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Q1) When an entity sells a non-current asset at a profit to another entity within the same group the following adjustment is necessary on consolidation:
A) DR \(\quad\)Asset
CR\(\quad\)Cash
B) DR\(\quad\)Cash
CR\(\quad\)Asset
C) \(\begin{array} { l l }
\text { DR } & \text { Gain on sale } \\ CR& \text { Asset } \end{array}\)
D) DR\(\quad\) Asset CR \(\quad\)Gain on sale.
Q2) Janus Limited, a subsidiary entity, sold a non-current asset at a profit to its parent entity. The adjustment necessary on consolidation to reflect the tax effect of this transaction will result in an:
A) increase in deferred tax assets.
B) decrease in deferred tax liabilities.
C) increase in retained earnings.
D) decrease in retained earnings.
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Chapter 27: Consolidation: Non Controlling Interest
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Q1) The non-controlling interest columns on a consolidation worksheet are used to:
A) adjust the amounts that have been recorded for intragroup revenue transactions
B) adjust the amounts that have been recorded for intragroup services
C) eliminate the recorded amounts of the non-controlling investment in the subsidiary
D) compile the amounts of non-controlling interest and parent share of particular line items.
Q2) A non-controlling interest in the net assets of a subsidiary consists of the amount of those non-controlling interests at the date of the business combination:
A) less 100% of any post-acquisition dividends paid
B) less the parent's share of any post-acquisition dividends paid or declared
C) plus a share of the changes in equity since the business combination
D) less the non-controlling proportionate share of changes since the combination.
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Chapter 29: Joint Arrangements
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Q1) The particular relationship between parties that signifies the existence of a joint arrangement is:
A) significant influence by one party over the other party;
B) control over the operating policies of one party by another party;
C) shared influence by two parties over the activities of another party;
D) joint control by the parties over the activities of an operation.
Q2) Which of the following statements is not true in relation to joint control?
A) each party must have an equal interest for joint control to exist
B) joint control exists only where there is contractually agreed sharing of control
C) entities over which a party has joint control are accounted for in accordance with AASB 11 Joint Arrangements
D) joint control requires the unanimous consent of the parties sharing control
Q3) As part of its initial contribution entry A Ltd will record a:
A) Debit against the Services Receivable in JO account of $32,000;
B) Debit against the Plant in JO account of $54,000;
C) Credit against the Plant of $120,000;
D) Credit against the Gain on Sale of Plant of $18,000.
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Chapter 30: Associates and Joint Ventures
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Sample Questions
Q1) Investments in associates accounted for using the equity method are presented in the statement of financial position amongst:
A) equity;
B) non-current liabilities;
C) current assets;
D) non-current assets.
Q2) Investor Limited acquired a 30% interest in Investee Limited for $27 000. Investor holds other equity investments but does not prepare consolidated financial statements. Investee Limited revalued its buildings class of assets by $10 000 during the current financial period. The balance of the investment in associate account at the end of the current financial period is:
A) $11 100;
B) $18 100;
C) $27 000;
D) $30 000.
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