Advanced Financial Accounting
Exam Answer Key
Course Introduction
Advanced Financial Accounting delves into complex accounting issues faced by large, multinational, and diversified organizations. The course explores topics such as consolidated financial statements, accounting for intercompany transactions, mergers and acquisitions, foreign currency translation, and segment reporting. Students will also examine special reporting issues, accounting for partnerships, and current developments in financial reporting standards. Emphasis is placed on critical analysis, problem-solving, and the application of accounting standards to real-world situations, preparing students for advanced professional practice and further study in accounting.
Recommended Textbook Issues in Financial Accounting 16th Australia Edition by Scott Henderson
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Page 2
Chapter 1: Institutional Arrangements for Setting Accounting Standards in Australia
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Q1) Give an overview of the present institutional arrangements for standard setting in Australia.
Answer: In the private sector,the most important legislation specifying financial reporting requirements isthe Corporations Act 2001,which replaced the Corporations Act 1989.This legislation may be foundat <www.legislation.gov.au>.The Corporate Law Economic Reform Program (CLERP)wascommenced in 1998 as part of the Commonwealth Government's ongoing program to modernisebusiness regulation in Australia.As part of this program,the Corporations Act was simplifiedthrough substantial amendments made in 1998,some of which affected financial reporting.Section292 of the Corporations Act requires the preparation of financial statements for each financialyear by all disclosing entities,all public companies,all large proprietary companies and allregistered schemes
Q2) The role of the Australian Securities and Investments Commission is to:
A) issue accounting standards
B) administer and ensure compliance with the Corporations Act
C) develop the conceptual framework
D) supervise the AASB
Answer: B
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Chapter 2: The Conceptual Framework: Purpose, reporting
Entity, the Objective of Financial Reporting, and Qualitative
Characteristics
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Q1) The IASB Framework defines the objective of general purpose financial reporting as:
A) to provide about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity
B) to decide whether the reporting entity is achieving its objectives in accordance with Generally Accepted Accounting Principles
C) to give a true and fair view of the financial position and performance of the entity
D) None of the above
Answer: A
Q2) Assisting the users to assess the amount,timing and uncertainty associated with an entity's future
Cash flows is a decision common to:
A) the not-for-profit sector
B) auditors
C) standards setters
D) for-profit sector
Answer: D
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Chapter 3: The Conceptual Framework: Definition,
and Measurement of the Elements in General
Purpose Financial Statements
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Q1) What is the term for the action or process of recording a transaction or event in an entity's accounting records?
A) Recording
B) Valuation
C) Aggregating
D) Recognition
Answer: D
Q2) Which of these is not an essential characteristic of a liability under the Framework?
A) Future sacrifice of economic benefits
B) Control
C) Existence of a present obligation to another entity
D) A past transaction or other past event
Answer: B
Q3) According to Framework 2014,when should income be recognised?
A) When cash is received
B) On the date listed on the statement of financial position
C) On a straight-line basis in accordance with fixed assets
D) When it is probable that an increase in economic benefits has occurred
Answer: D
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Chapter 4: Fair Value Measurement
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Q1) Explain the differences between the concept of unit of account and valuation premise.
Q2) Which level of the fair value hierarchy can be utilised without any adjustments?
A) All levels
B) Level 3
C) Level 1
D) Level 2
Q3) Market-corroborated inputs are examples of:
A) Level 3 inputs on the fair value hierarchy
B) Level 1 inputs on the fair value hierarchy
C) Level 2 inputs on the fair value hierarchy
D) Items not included on the fair value hierarchy
Q4) A wide bid-ask spread is indicative of
A) An increase on market volume or activity
B) A decrease in market volume or activity
C) A Level 1 input in the fair value hierarchy
D) Highly developed price quotations
Q5) Explain the valuation premise and discuss how it is used,depending on what is identified as the highest and best use.
Page 6
Q6) 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) Research suggests that post-Enron,Chief Financial Officers:
A) are reluctant to use accounting policy choices to manipulate earnings
B) prefer not to smooth earnings
C) are more likely to use accounting policy choices to smooth earnings
D) use volatile earnings to signal low risk prospects
Q2) Means by which accountants may be 'creative' in the preparation and presentation of accounting reports is/are:
A) by the way transactions are disclosed
B) by the way estimates and predictions are made
C) by the timing of transactions
D) all of the above
Q3) In relation to agency theory the statement that is not correct is:
A) The self-interest of various parties is often in conflict
B) It assumes that managers act opportunistically all of the time
C) It assumes that individuals act primarily to advance their own self-interest
D) None of the statements is incorrect, i.e., all are correct statements
Q4) Describe and discuss how agency theory seeks to explain the choice of accounting methods by financial report preparers.
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Chapter 6: The Statement of Financial Position
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Q1) Which accounting standard addresses the presentation of the statement of financial position?
A) AASB 129
B) AASB 10
C) ASX 1
D) AASB 101
Q2) Identify and discuss the requirements concerning the classification of assets contained in AASB 101.
Q3) AASB 101 allows which of these statements of financial position formats?
A) Current/non-current format
B) Order-of-liquidity format
C) A mixed basis of presentation using both the current/non-current basis and the order-of-liquidity format for different asset groups
D) All of the above are allowable formats.
Q4) What are the two broad categories of changes in equity?
A) Current and long-term
B) Investor and investee
C) Less than 50% and 50% and more ownership interests
D) Owner and Non-owner
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Chapter 7: Accounting for Current Assets
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Q1) Which Australian accounting standard deals with inventory?
A) AASB 101
B) AASB 132
C) AASB 9
D) AASB 102
Q2) A disadvantage of the LIFO method of inventory valuation is:
A) it gives a poor matching of current costs with current revenues
B) its use accentuates the business cycle
C) closing inventory on the balance sheet may be undervalued
D) all of the above are disadvantages
Q3) The inventory valuation rule 'the lower of cost and net realisable value' cannot be used with which of these methods?
A) Perpetual inventory method
B) Periodic inventory method
C) Last-in-first-out method
D) None of the above, i.e., it can be used with all of the methods
Q4) Explain and discuss the criteria contained in AASB 101 for distinguishing between current and non-current assets.
Q5) Explain the concept of the lower of cost and net realisable value rule.
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Chapter 8: Accounting for Property, plant and Equipment
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Q1) The accounting standard that specifically deals with property,plant and equipment is:
A) AASB 138
B) AASB 116
C) AASB 132
D) AASB 101
Q2) AASB 136 proposes factors that may indicate the existence of asset impairment.Which of the following is not one of those factors?
A) Evidence of obsolescence or physical damage to an asset
B) Changes in interest rates that would reduce fair value calculations involving future cash flows
C) The carrying amount of net assets exceeds the entity's market capitalisation
D) None of the above, i.e., all are factors that may indicate the existence of impairment
Q3) 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
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Chapter 9: Accounting for Company Income Tax
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Q1) 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
Q2) Deferred tax assets and deferred tax liabilities:
A) may be offset for presentation in the financial statements
B) cannot both arise in the one business
C) usually offset one another in amount
D) must always be disclosed separately in the financial statements
Q3) Permanent differences (between revenues and expenses for accounting and tax purposes):
A) can cause Deferred Tax Liabilities but not Deferred Tax Liabilities to arise
B) can cause both Deferred Tax Assets and Deferred Tax Liabilities to arise
C) can cause Deferred Tax Assets but not Deferred Tax Liabilities to arise
D) can cause neither Deferred Tax Assets nor Deferred Tax Liabilities to arise
Q4) 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) AASB 138 permits two bases for measuring intangible assets,subsequent to initial recognition,the cost model and the revaluation model:
A) in practice the revaluation model is the one that is most commonly applied
B) the conditions for the use of the revaluation model will only be met on rare occasions
C) in practice the two models are applied about 50/50
D) none of the above
Q2) What is a popular method of recording the gain on bargain purchase?
A) As a deferred credit that is shown in the statement of financial position
B) To allocate the identifiable non-monetary net assets
C) Both A and B are popular methods
D) Neither A nor B are a method of recording the gain
Q3) AASB 138 requires disclosure of:
A) the aggregate amount of research and development costs recognised as an expense during the period
B) the amortisation methods used for intangible assets with finite lives
C) a reconciliation of the opening and closing asset balances showing additions, revaluations, impairment losses and amortisation
D) all of the above
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Chapter 11: Accounting for Leases
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Q1) The viewpoint that assets and liabilities should be recognised in the accounts of the lessee is known as:
A) The lease capitalization approach
B) The operating lease approach
C) The financing lease approach
D) The fair value approach
Q2) What are two components of the lease liability that are measured in terms of net present value?
A) Expected guaranteed residual value and estimated cost of dismantling and restoring the asset
B) Expected guaranteed residual value and variable payments (indexed)
C) Termination penalty if reasonably certain and the lessee's initial direct costs
D) The lessee's initial direct costs and the payment at or before commencement date less any incentives received
Q3) How is a finance lease distinguished from an operating lease?
Q4) List and explain the different items set out in a typical lease agreement.
Q5) Discuss the implications of the proposal that operating/finance lease distinction be dropped.
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Chapter 12: Accounting for Employee Benefits
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Q1) What are the two approaches to accounting for post-employment benefit costs by employers?
A) the current and deferred methods
B) the deferred debit and the deferred credit methods
C) the defined benefit method and the defined contribution methods
D) the form method and the net-worth methods
Q2) Wendell is employed at a salary of $150 000 per annum,paid in cash,the company income tax rate is 30%,and the average personal income tax rate is 42%.There are no other taxes.The after-tax cost of employing Wendell for the year and the after-tax benefit received by Andy are,respectively:
A) $105 000; $63 000
B) $105 000; $87 000
C) $87 000; $63 000
D) None of the above
Q3) Discuss the three types of share-based payment transactions as outlined by AASB 2 'Share-based Payment'.
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Chapter 13: Accounting for Financial Instruments
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Q1) 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
Q2) Which of the following is a characteristic of preference share dividends?
A) May be set at a fixed minimum level
B) May be redeemable
C) May accumulate if they are not paid
D) All of the above are characteristics of preference share dividends
Q3) The buyer of a put option on shares:
A) obtains the right to sell the shares at an agreed future time at their market price at that time
B) must sell the shares at an agreed future time at a price determined now
C) obtains the right to sell the shares at an agreed future time at a price determined now
D) must sell the shares at an agreed future time at their market price at that time
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15
Chapter 14: The Statement of Comprehensive Income
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Q1) 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
Q2) Which items bypass the profit figure under the operating-profit approach?
A) Revenues and expenses resulting from changes in accounting policies
B) Revenue and expenses relating to prior periods
C) Revenues and expenses relating to events outside the ordinary operations of the entity
D) All of the above
Q3) Which of these is correct? An advantage of the comprehensive income approach to profit measurement is:
A) profit is determined conceptually not arbitrarily
B) no revenue or expense items bypass the income statement
C) the method gives the most useful profit for estimating future profit performance
D) A and B are both correct
Q4) Define income and explain how it differs from revenue.
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Chapter 15: Revenue
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Q1) What is a cost that can be incurred with regard to the generation of revenue from contracts with customers?
A) Incremental costs of obtaining a contract
B) Costs incurred to fulfil a contract
C) Both A and B are correct
D) Neither A nor B is correct
Q2) Which of the following are considered 'distinct' goods or services according to AASB 15?
A) Granting licenses
B) Constructing an asset on behalf of a customer
C) Sale of goods produced by an entity
D) All of the above are considered distinct
Q3) What is a type of cost that can be incurred with regard to the generation of revenue from contracts with customers?
A) Incremental costs of obtaining a contract
B) Costs incurred to fulfil a contract
C) Both A and B can be incurred
D) Neither A nor B is incurred
Q4) Discuss the three types of repurchase agreements.
Q5) 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) Under AASB 107,dividends paid by a company to its shareholders are classified as:
A) investing outflows
B) financing outflows
C) operating inflows
D) none of the above
Q2) 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
Q3) Which of the following is an example of a net cash flow that may be reported on the statement of cash flows?
A) Depreciation
B) Cash advances
C) Long-term notes payable
D) Payment of dividends
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Chapter 17: Financial Reporting: Segment Reporting and Highlights Statements
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Q1) When evaluating whether to calculate diluted earnings per share (EPS),a company issuing convertible notes should consider:
A) the time weighting factor
B) if the notes potentially convert to ordinary shares
C) if conversion of the notes is likely to increase earnings, or decrease losses, per share
D) both B and C must be considered
Q2) Which of the following is an efficiency ratio?
A) Current ratio
B) Rate of return on total assets
C) Debt-to-equity ratio
D) Times interest earned
Q3) Which of the following items need not be shown when reporting primary segment information for a business?
A) Segment results
B) Segment revenues
C) Segment receivables
D) Segment liabilities
Q4) Discuss the benefits of the 'management approach' adopted by AASB 8.
Page 19
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Chapter 18: Further Financial Reporting Issues
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Q1) Why have accountants always put so much emphasis on the concept of materiality? How does this concept affect accountants,if at all,in their day-to-day work and in the preparation of periodical financial reports?
Q2) Which of the following statements is not true of Special Purpose financial statements?
A) They are implicitly the reports prepared by non-reporting entities
B) They must state that the financial statements are special purpose financial statements
C) They must disclose the significant accounting policies adopted in the preparation and presentation of the Special Purpose Financial Statements
D) None; all statements are true
Q3) Discuss the concept of the reporting entity and the rationale for the revisions to the International Financial Reporting Standards for small and medium sized entities.
Q4) 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
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Chapter 19: Accounting for Extractive Industry
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Q1) The expense (or costs written-off)method of accounting for exploration and evaluation costs in the extractive industries would seem to be the most conservative of the suggested methods of accounting for these costs.Conservatism has a long history in accounting and is often used to justify or support many accounting practices.Why then is the expense method not favoured by the Australian Accounting Standards Board? Consider both the benefits and the disadvantages arising from the use of this method.
Q2) Extractive industries should value inventory held by businesses at:
A) lower of cost and net realisable value, including amortisation of pre-production cost
B) net realisable value less an allowance for future rehabilitation costs
C) net realisable value
D) lower of cost and net realisable value, excluding amortisation of pre-production costs
Q3) AASB 6 is an activity based standard; as such it does not fully cover other areas of extractive industries.Make a list and briefly explain the other relevant standards that a mining company has to consider in producing its financial statements under the new regime.
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Chapter 20: Accounting for Agricultural Activity
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Q1) At the beginning of the 20X1 financial year,Vaughn Downs Ltd owned a forest with an estimated net realisable value of $8 000 000.During the year,Vaughn Downs spent $300 000 on general administration costs and $400 000 on maintaining and improving the forest.Also during the year the company felled some timber from the forest that had an estimated net realisable value of $3 000 000.Costs of felling and treating the timber amounted to $800 000.The timber was sold later in the year for $3 100 000.At the end of the year,the forest had an estimated net realisable value of $8 700 000.The financial statements for the year should report:
A) a profit from operations of $1 700 000 and an increase in the revaluation surplus of $700 000
B) a profit from operations of $1 700 000
C) a profit from operations of $2 100 000 and an increase in the revaluation surplus of $300 000
D) a profit from operations of $2 300 000
Q2) Which of the following activities do not fall under the auspices of AASB 141?
A) Circus animals
B) Greyhounds and horses held for racing
C) Investment in a carbon sink
D) All of the above
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Chapter 21: Accounting for Superannuation Entities
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Q1) For each reporting period,superannuation entities are required to prepare each of the following except
A) a statement of consolidated benefits.
B) income statements.
C) a statement of cash flows.
D) consolidated financial reports.
Q2) In the notes section of a Future Annulation plan,insurance liabilities can do all of the following except that it
A) can elect to take out term life cover with FS Plan up to a maximum of $1.5 million per member
B) uses the services of an actuary to determine its insurance contract liabilities.
C) entity has reinsured all direct insurance risks with ABC Reinsurance (Australia)
D) all of the above
Q3) 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) Aside from details of income,expenses,assets,liabilities,and equity,what must life insurers disclose in financial statements?
A) Regulatory capital information
B) Disaggregated information
C) Managed funds
D) All of the above are correct
Q2) According to AASB 1023,how are assets backing general insurance liabilities to be measured?
A) Fair value
B) Book value of the insurer
C) Book value of the insured party
D) Historical cost
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 describe the five main types of traditional activities related to life insurance.
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Chapter 23: International Accounting Standards, harmonisation and Convergence
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Q1) Australia initially adopted the 'internationalisation' approach to setting accounting standards.This approach involves:
A) adopting accounting standards developed and adopted in other countries
B) developing local accounting standards based on an examination of accounting standards and practices developed outside Australia
C) the adoption by Australia and other countries of a single set of accounting standards for all countries
D) all of the above
Q2) Place these steps in the development of an accounting standard by the IASB in the order in which they occur in practice.
I.Developing an exposure draft for public comment
ii. Publishinga discussion paperfor publiccomment
iii. Establishingan advisory committee
iv. Approval by the IASB
A) i, ii, iii, iv
B) iii, i, ii, iv
C) ii, iii, i, iv
D) iii, ii, i, iv
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Chapter 24: Foreign Currency Translation
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Q1) When translating the assets and liabilities from functional currency to presentation currency,AASB 121 requires that:
A) the exchange rates at the dates of transaction are used
B) the exchange rate as at the end of the reporting period is used
C) an average exchange rate for the year of reporting be used
D) either a or c can be used
Q2) From paragraph 9,indicators of an entity's functional currency include which of the following:
A) that mainly influences sales prices for goods and services
B) of the country whose competitive forces and regulations mainly determine the sales price of its goods and services
C) the currency that mainly influences labour, material and other costs of providing goods or services
D) all of the above
Q3) Explain,using simple numerical examples,the hedging of currency risk.
Q4) There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.
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Chapter 25: Accounting for Corporate
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Q1) General standard disclosures are comprised of which of the following?
A) strategy and analysis
B) organisational profile
C) report profile
D) all of the above
Q2) The extent to which mandatory reporting of corporate environmental and social activities is useful can be questioned because:
A) it is too difficult to measure the costs of such activities
B) it may become merely a public relations or similar self-justifying exercise
C) it is a waste of time forcing companies to report
D) all of the above
Q3) The Australian government ratified the Kyoto Protocol on:
A) 3 December 2007
B) 1 January 2005
C) 11 December 1997
D) 16 February 2005
Q4) Explain the three components of the Emissions Reduction Fund (ERF).
Q5) 'A conflict of interest can be argued to exist between maximisation of shareholder's wealth and social responsibility'.Discuss this statement with respect to Australian corporations.
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Chapter 26: Ethics in Accounting
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Q1) Self-regulatory codes of ethics for professions,such as accountants means:
A) they are likely to be more lenient than legal rules and regulations enforced by the courts
B) they can forestall action by government regulatory bodies such as the Australian Securities and Investments Commission
C) they are developed and imposed by professionals who understand the problems of practitioners
D) All of the above are advantages
Q2) Ethical parochialism:
A) assumes that ethical behaviour should protect the individuals belonging to the 'in group'
B) suggests that the behaviour of individuals should be constrained by the law and the conventions of fair play
C) is evidenced when individuals seek to maximise their own utility
D) suggests that ethical behaviour should be concerned with the good of all humankind and that individuals are all of equal value
Q3) Briefly describe the classes of teleological theories that have been used to examine ethical behaviour.
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