Accounting Theory
Textbook Exam Questions
Course Introduction
Accounting Theory explores the fundamental principles and conceptual frameworks that underpin the preparation and presentation of financial statements. This course examines the evolution of accounting thought, the role of accounting in society, and the theoretical foundations that guide the development of accounting standards and policies. Topics include the objective and qualitative characteristics of financial reporting, the conceptual framework, measurement and recognition of assets and liabilities, and the influence of regulatory environments. Through critical analysis of current issues and emerging trends, students gain a deeper understanding of how accounting theory informs practice and supports decision-making by users of financial information.
Recommended Textbook
Intermediate Accounting Vol. 1 4th Edition by Kin Lo
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10 Chapters
1100 Verified Questions
1100 Flashcards
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Page 2
Chapter 1: Fundamentals of Financial Accounting Theory
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Sample Questions
Q1) Discuss three reasons why it is important to understand accounting theory.
Answer: In order to make the best decisions possible, external investors as well as internal managers need to interpret financial and accounting information about the state of the business.
There is a misunderstanding that accounting standards are simply proclamations issued by government or quasi-governmental regulatory agencies such as the International Accounting Standards Board (IASB)that have no economic benefit to society.
Rather, financial reporting is an economic good and is therefore subject to the laws of supply and demand. Accounting standards reflect and respond to, although imperfectly, the demand for financial information and the ability of enterprises to supply that information. Financial accounting theory helps us to understand the complexities in the production and consumption (use)of accounting information. Viewed in this way, financial information can be, and is, a subject of rigorous economic analysis.
Q2) Explain the meaning of generally accepted accounting principles (GAAP).
Answer: GAAP refers to broad principles and conventions of general application as well as rules and procedures that determine accepted accounting practices.
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Page 3
Chapter 2: Conceptual Frameworks for Financial Reporting
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60 Flashcards
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Sample Questions
Q1) Which statement best explains the meaning of "recognition" in financial reporting?
A)Determining where items should be presented in the body of the financial statements.
B)Presenting an item in the financial statements, rather than simply disclosing in the notes.
C)Quantifying items so that they can be presented in the body of the financial statements.
D)Presenting expenses in the same accounting period as the related revenues.
Answer: B
Q2) JP Corporation had net income of $1,000,000 for 2020. After issuing its financial statements, the company realized that it had failed to include inventory from one of its small warehouses for several years. Specifically, it forgot to include $20,000 on December 31, 2019 and $30,000 on December 31, 2020. Which of the following is TRUE regarding JP's 2020 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.
Answer: A
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Page 4
Chapter 3: Accrual Accounting
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Sample Questions
Q1) A company's reported earnings are $1,000 and cash flows are $600. Based on economic conditions during the year, the company booked allowances of $250. As a result of contractual incentives, the company booked a further $150 in accruals. What is the total of the unbiased accruals and excessive accruals?
A)$150
B)$400
C)$600
D)$1,000
Answer: B
Q2) Which of the following is an example of a change in accounting policy?
A)Changing from weighted average to the first-in, first-out method of inventory valuation.
B)Capitalizing a delivery truck that had previously been expensed.
C)Using 5% for the allowance for bad debts because of the increased possibility of bankruptcy by customers.
D)Using 4% for the allowance for bad debts, instead of 2% as stated in the company's procedures manual.
Answer: A
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Chapter 4: Revenue and Recognition
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Sample Questions
Q1) On December 1, 2021, SuperTech sold 100 locks for laptop computers at $50 each with a 90-day unconditional right of return. Since this is a new product for SuperTech, it has no past history regarding estimated returns. Which of the following is TRUE regarding SuperTech's December 31, 2021 financial statements?
A)Sales of $5,000 should only be recognized in 2022 when the return privilege expires.
B)Sales of $5,000 should be recognized in 2021 as long as there is a reserve for returns.
C)Sales of $5,000 should be recognized in 2021, with future costs accrued as an estimated liability.
D)Sales should only be recognized as the related cash is collected.
Q2) Which statement is correct about unintentional errors on construction contracts?
A)Unintentional underestimates or overestimates may not be errors.
B)Errors are misstatements that should not have been made based on the information available at the time.
C)Both statements are correct.
D)Neither statement is correct.
Q3) What are three exceptions to the use of the percentage of completion method for construction contracts?
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Chapter 5: Cash and Receivables
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Sample Questions
Q1) 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 a financing activity on the cash flow statement.
C)A change in the composition of "cash and cash equivalents" is considered a cash flow for purposes of the cash flow statement.
D)The definition for "cash and cash equivalents" used on the balance sheet is the same as the definition for "cash and cash equivalents" used on the cash flow statement.
Q2) Which statement is correct about the bank reconciliation?
A)It compares cash in the company's records with those of the bank.
B)It does not identify accounting errors made by the bank.
C)It interferes with other internal controls over cash.
D)It compares cash in the general ledger with the monthly budgets.
Q3) Explain why it is important to segregate duties of employees dealing with cash in an organization. Provide at least three examples of ways which this segregation could be made on the receivables side.
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Chapter 6: Inventories
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Sample Questions
Q1) What definition is used for "market" under IFRS and ASPE?
A)The amount it would cost to repurchase an item of inventory.
B)The lowest amount that can be obtained from the sale of inventory.
C)The amount required to be paid to replace an item of inventory.
D)The amount that can be obtained from selling the inventory less selling costs.
Q2) Using the following information, what amount of "shrinkage" would be identified under the periodic inventory system? \(\begin{array}{|l|r}
\text { Inventory at the beginning of the year } & \$ 300,000 \\ \hline \text { Inventory based on count at the end of the year } & \$ 650,000 \\ \hline \text { Inventory purchases during the year } & \$ 1,000,000 \end{array}\)
A)$ 0
B)$300,000
C)$650,000
D)$700,000
Q3) Give some examples of how a manufacturing company can manipulate earnings by including non-production costs in inventories. What does an auditor or financial statement user do to detect this type of manipulation?
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Page 8
Chapter 7: Financial Assets
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Sample Questions
Q1) On January 25, 2020, Harper Ltd. purchased 2,500 common shares of RBC (Royal Bank of Canada)for $10 each. During the remainder of 2020, Harper received $2.75 per share in dividends and RBC's earnings per share were $5.25. The closing price of the shares on the fiscal year-end date of December 31, 2020 was $14.
Required:
Assume that Harper classified the investment at fair value through profit or loss.
a. At what value should the company report the RBC shares on its December 31, 2020 balance sheet?
b. How much income should the company report in relation to these shares?
c. How much other comprehensive income (OCl)should Harper report in relation to these shares?
Q2) What should an investment in a debt investment be classified as when management has not specifically identified the classification? That is to say, in the absence of an election, what is the default category?
A)Associate.
B)Amortized cost
C)At fair value through OCI.
D)At fair value through profit or loss.
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Page 9
Chapter 8: Property, Plant and Equipment
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Sample Questions
Q1) What accounting issue arises for recognizing non-monetary transactions?
A)Determining when the substantial risks and rewards of ownership are transferred.
B)Determining the amount to be allocated to each performance obligation.
C)Determining the costs incurred or still to be incurred to fulfill the performance obligation.
D)Determining the amount at which to record the transaction.
Q2) What is the meaning of "declining balance method"?
A)The systematic allocation of an asset's depreciable amount allocated in proportion to the productive capacity used.
B)The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated useful life.
C)The systematic allocation of an asset's depreciable amount over its estimated useful life.
D)The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the asset's net carrying amount multiplied by a fixed percentage.
Q3) Explain how the depreciation method should be selected for property, plant and equipment.
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Chapter 9: Intangible Assets, Goodwill, Mineral Resources, and
Government Grants
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Sample Questions
Q1) 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.
Q2) In 2021, 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 2021, 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.
Q3) What is economic profit as it would be defined in finance or economics? Why is accounting net income not the same as an economist's determination of earnings, as measured from a shareholder's perspective?
Q4) Explain how goodwill arises in a business. Give an example in your response.
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Chapter 10: Applications of Fair Value to Non-Current Assets
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Q1) Wallace Inc wishes to use the revaluation model for this property: \[\begin{array} { | l | r | }
\hline & \text { Before Revaluation } \\
\hline \text { Building Gross Value } & 150,000 \\
\hline \text { Building Accumulated Depreciation } & 70,000 \\
\hline \text { Net carrying value } & 80,000 \\
\hline
\end{array}\] The fair value for the property is $60,000. Assuming this is the first year of using the revaluation model, what amount would be booked to profit and loss if Wallace chooses to use the elimination method to record the revaluation?
A)$20,000 debit.
B)$20,000 credit.
C)$70,000 debit.
D)$80,000 credit.
Q2) Company One purchased land for $900,000 some years ago. Fair value was $450,000 at the beginning of this year and $340,000 at the end of this year. Prepare the journal entry to record this year's revaluation adjustment.
Q3) Explain how an impairment loss is recorded for non-current assets.
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