Advanced Financial Accounting
Pre-Test Questions
Course Introduction
Advanced Financial Accounting delves into complex areas of accounting theory and practice beyond the introductory level, focusing on consolidated financial statements, intercompany transactions, business combinations, partnerships, foreign currency transactions, and accounting for governmental and not-for-profit entities. The course emphasizes the development and application of professional judgment in interpreting and applying accounting standards, such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), while considering ethical implications and real-world scenarios. Students will engage with advanced reporting issues, analytical techniques, and critical thinking to prepare for careers in public accounting, corporate finance, and related fields.
Recommended Textbook
Financial Accounting and Reporting An International Approach 1st Edition by
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Craig Deegan
Chapter 1: An Overview of the International External Reporting Environment
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Q1) In Europe International Financial Reporting Standards are adopted after being agreed by:
A)the Financial Reporting Council.
B)the European Union.
C)the Accounting Standards Review Board.
D)the Urgent Issues Task Force Group.
Answer: B
Q2) A criticism of the way the membership of the Financial Reporting Council has been structured is that:
A)Groups that are primarily interested in the financial performance of entities are represented while lobby groups with other interests are not.
B)It has increased the breadth of representation too widely.
C)The Treasurer does not have sufficient input into the selection process.
D)It is dominated by professional accountants.
Answer: A
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Page 3
Chapter 2: The Conceptual Framework of Accounting and Its Relevance
to Financial Reporting
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Q1) Which of the following factors should be considered in order to determine whether an entity is a reporting entity when it is not obvious that users exist who would be dependent on the financial reports of the entity?
A)separation of management from those with economic interest in the entity
B)economic or political importance/influence
C)financial characteristics
D)separation of management from those with economic interest in the entity and economic or political importance/influence
Answer: D
Q2) The Conceptual Framework identifies two aspects to financial information that are 'relevant'.These are:
A)verifiability and understandability.
B)predictability and verifiability.
C)neutrality and verifiability.
D)prudence and neutrality.
Answer: B
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Chapter 3: Theories of Financial Accounting
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Q1) An empirically based theory could be described as being:
A)developed and supported on the basis of observations.
B)based on a set of accepted scales and measures.
C)based on a political approach developed in the early nation states.
D)related to a specific time period and not able to be generalised.
Answer: A
Q2) From an efficiency perspective of PAT,what approach should be adopted when managers are approaching retirement?
A)Increase the percentage of their remuneration that is paid out as bonuses based on accounting profit in order to keep them motivated to work hard.
B)Use a market-based bonus scheme.
C)Make them redundant as early as possible.
D)Link an additional element of the manager's superannuation package to profits.
Answer: B
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Chapter 4: An Overview of Accounting for Assets
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Q1) The accountant in preparation for the financial statement for the year 2013 realised an error in the determination of recoverable amounts in last year's financial statements.This error had it been detected in 2012 would have required the recognition of impairment losses amounting to £500 000.To comply with IAS 8 Accounting Policies,Changes in Accounting Estimates and Errors,the accountant should:
A)make a prospective change to the 2013 figures, on the basis that he has made an error in 2012.
B)make a prospective change to the 2013 figures, on the basis that he is making a change to an estimate in 2012.
C)make a retrospective change to the 2013 figures, on the basis that that this is a change in accounting estimates.
D)make a retrospective change to the 2013 figures, on the basis that he has made an error in 2012.
Q2) Advertising expenditures are typically expensed as incurred because the future economic benefits are uncertain to occur.
A)True
B)False
Q3) Discuss the recognition rules of assets purchased in one lump-sum payment.
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Chapter 5: Depreciation of Property, Plant and Equipment
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Q1) All Saints Plc acquired a machine for £50 000 on 1 January.This asset has useful life of 4 years and a residual value of £10 000.The declining balance rate adopted by the entity for similar machines is 40%.What is the depreciation expense for the first year,if the depreciation policy adopted is straight-line,declining-balance or sum-of-digits method,respectively?
A)£10 000; £20 000; £16 000
B)£10 000; £25 000; £20 000
C)£12 500; £20 000; £16 000
D)£12 500; £25 000; £20 000
Q2) Depreciation represents a decline in the market value of an asset over its life. A)True
B)False
Q3) Depreciation is intended to track the asset's declining value.Do you agree or disagree with this statement.Discuss.
Q4) The depreciable base is the cost of a depreciable asset,or other amount substituted for cost in the financial statement,less its residual value.
A)True
B)False
Q5) Discuss how the useful life of a depreciable asset is determined.
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Chapter 6: Revaluations and Impairment Testing of
Non-Current Assets
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Q1) Brown,Izan and Loh (1992)found that revaluations are more likely to take place:
A)in small firms with low value assets that wished to borrow more.
B)in industries that are strike prone.
C)in entities that are highly geared.
D)in industries that are strike prone and in entities that are highly geared.
Q2) According to IAS 36 the recoverable amount of an asset or cash-generating unit is the:
A)lower of its fair value less costs of disposal and its value in use.
B)lower of its fair value plus costs of disposal and its value in use.
C)higher of its fair value less costs of disposal and its value in use.
D)higher of its fair value plus costs of disposal and its value in use.
Q3) Recoverable amount is the amount expected to be recovered through the ongoing use and subsequent disposal of an asset.
A)True
B)False
Q4) Discuss the process for the reversal of revaluation decrements and increments.
Q5) The revaluation model is a tool used by managers to reduce political costs.
A)True
B)False
Q6) Differentiate depreciation expense from impairment loss. Page 8
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Page 9
Chapter 7: Inventory
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Q1) Identify and discuss the items included as inventory cost.
Q2) The cost of inventory is defined by IAS 2 as including:
A)the cost of purchase and conversion.
B)duties and taxes on purchase of goods or services for sale.
C)the cost incurred in the normal course of operations to bring the inventories to their present location and condition.
D)all of the given answers.
Q3) Explain the circumstances where borrowing costs are permitted to be included in the cost of inventories?
Q4) According to IAS 2 material information relating to which of the following must be disclosed?
A)the carrying amount of closing inventories included in equity accounted profits
B)the carrying amount of inventories classified as non-current assets
C)the aggregate amount of inventory recorded at recoverable amount
D)the carrying amount of inventories revalued upwards as at the end of the period
Q5) IAS 2 Inventories applies to biological assets related to agricultural activity.
A)True
B)False
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Page 10
Chapter 8: Accounting for Intangibles
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Q1) Discuss the factors considered to determine amortisation of deferred development costs.
Q2) The requirement of IAS 38 in relation to the amortisation of development cost is that:
A)It is to be amortised straight-line over a period not greater than 20 years.
B)It is to be amortised from the time of deferral so as to match the cost to the related benefits.
C)It is to be amortised using an accelerated depreciation rate over a period not exceeding 10 years.
D)It is to be amortised from the time the asset is available for use and shall reflect the consumption of the economic benefits by the entity.
Q3) Continuously Contemporary Accounting (CoCoA)emphasises an entity's ability to adapt.Therefore goodwill is considered an important asset in this model.
A)True
B)False
Q4) Explain the difference between an 'infinite life' and an 'indefinite life'.
Q5) Outline the requirements of IAS 38 on recognition and measurement of research and development activities.
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Chapter 9: An Overview of Accounting for Liabilities
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Q1) Outside the situation where specific types of provisions are covered in standards,a provision exists when and only when:
A)The entity has a present legal, equitable or constructive obligation to make a future sacrifice of economic benefits to other entities as a result of past transactions or other past events; and the amount or timing of the future sacrifice of economic benefits that will be made to satisfy the present obligation is uncertain.
B)There is a legal or constructive obligation to make a future sacrifice of economic benefits within the entity as a result of past transactions or other past events, the amount or timing of which is uncertain.
C)The entity has a present legal obligation to make a future sacrifice of economic benefits to other entities as a result of past transactions or other past events; and the amount or timing of the future sacrifice of economic benefits that will be made to satisfy the present obligation is uncertain.
D)The amount, timing and entity to whom the obligation to sacrifice future economic benefits as a result of a past legal or constructive obligation are unknown.
Q2) Discuss the criteria required to classify a liability as current.
Q3) Discuss the substance-over-firm approach in IAS 32 Financial Instruments.
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Page 12
Chapter 10: Accounting for Leases
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Q1) If the lease arrangement contains a bargain purchase option,it is reasonable to assume that the risks and rewards of ownership are transferred to the lessee.
A)True
B)False
Q2) The rental payments made during the term of a finance lease:
A)are reductions of the lease liability that should be debited to the liability account.
B)are an expense that should be recognised in the annual statements of comprehensive income.
C)need to be divided into an interest component and an expense component.The expense effectively shows the amortisation of the lease asset.
D)should be considered as a payment of principal (reduction in the lease liability) and interest (an annual expense).
Q3) Explain what is meant by a 'direct finance' lease,and how such leases should be accounted under IAS 17.
Q4) Explain the accounting treatment for a lease arrangement involving both land and building.
Q5) Explain the benefits of a sale and leaseback transaction.
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Page 13
Chapter 11: Share Capital, Reserves and Share Options
Employee Bonus Schemes
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Q1) Double entry accounting requires that:
A)the claims held by external parties equal the claims held by the owners.
B)the total assets of an entity equal the total of the claims held by external parties plus those claims held by the owners.
C)the liabilities of the entity equal its total assets plus the claims held by the owners.
D)the recognition of the claims held by owners will match the entity's total assets.
Q2) Accounts that make up owners' equity may include:
A)preference shares.
B)debentures.
C)general reserves.
D)preference shares and general reserves.
Q3) Which of the following would not apply to a preference shares?
A)higher order of ranking in relation to asset distributions on the winding up of the company
B)redeemable at a set date in the future
C)can be classified as an expense
D)can be converted to ordinary shares
Q4) Explain the differences between a rights issue and share options.
Page 14
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Chapter 12: Accounting for Financial Instruments
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Q1) Explain how financial instruments would be classified as financial liabilities or equity instruments.
Q2) Under IAS 23,interest incurred on a financial instrument,is able to be capitalised as part of a qualifying asset.When this is done:
A)interest is never expensed.
B)interest will be expensed as part of cost of goods sold when the asset is sold. C)interest will be expensed as part of the accounts payable balance. D)interest is recognised immediately.
Q3) Explain the reason for the rise in the development and use of financial instruments in recent years.Describe some of the key accounting issues regulators have had to face in light of this increased use and development.
Q4) Compound instruments contain both a financial liability and equity component but exclude convertible notes.
A)True
B)False
Q5) What three characteristics must be established before an instrument is considered to be a derivative?
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Chapter 13: Revenue Recognition Issues
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Q1) Discuss the different conditions detailed in IASB (2011)Revenue from Contracts with Customers that must be satisfied before the percentage-of-completion method can be used.
Q2) IASB and FASB initiated a joint project to address some inconsistencies of recognition of revenue in contracts with customers with other accounting standards.Discuss two of these inconsistencies.
Q3) Transfer of 'control' of the asset is central to the recognition of revenue under the new accounting standard IASB (2011)Revenue from Contracts with Customers.
A)True
B)False
Q4) If the borrower prepays interest,the inflow of future economic benefits represented by the prepayment would not constitute an item of revenue to the lender because the lender has a present obligation to the borrower to provide finance for the period to which the prepayment relates.
A)True
B)False
Q5) Explain the difference between revenue and gains as defined in the IASB Conceptual Framework.
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Chapter 14: The Statement of Comprehensive Income and Statement of Changes in Equity
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Q1) Which of the following would not be considered a 'prior period error' for the purposes of IAS 8?
A)mathematical mistakes
B)fraud
C)misinterpretations of fact
D)none of the given answers
Q2) By focusing only on the statement of profit and loss,we do not obtain a full picture of all the gains and losses that may have occurred for an entity during the period.
A)True
B)False
Q3) When initial application of an International Financial Reporting Standard has an effect on the current period or any prior period,would have such an effect except that it is impracticable to determine the amount of the adjustment,or might have an effect on future periods,an entity shall disclose:
A)the title of the International Financial Reporting Standard.
B)the nature of the change in accounting policy.
C)when applicable, a description of the transitional provisions.
D)all of the given answers.
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Chapter 15: Accounting for Income Taxes
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Q1) Deferred tax assets may arise from amounts of income taxes recoverable in future periods that arise from carry forward of unused tax losses.
A)True
B)False
Q2) Explain how a deferred tax liability arises from depreciation of machinery and equipment.
Q3) When the carrying amount of an asset exceeds the tax base,there will be a deferred tax ,because the taxation payments have effectively been .
A)asset; made in advance of recognising the expense
B)asset; deferred to future periods
C)liability; made in advance of recognising the expense
D)liability; deferred to future periods
Q4) The tax figure calculated and recorded on the statement of comprehensive income is an accurate reflection of the entity's tax liability for the stated period.
A)True
B)False
Q5) Discuss the criteria for recognising deferred tax assets when there are unused tax losses?
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Chapter 16: The Statement of Cash Flows
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Q1) Railway Corporation provides the following information that relates to the period ended 30 June 2015: \(\begin{array}{|l|r|}
\hline & \$ 0 \\
\hline \text { Sales for the year } & 400 \\
\hline \text { Discounts provided to customers for early payment } & 7 \\
\hline \text { Bad debts expense } & 10 \\
\hline \text { Opening balance of accounts receivable } & 150 \\
\hline \text { Closing balance of accounts receivable } & 170\\\hline \end{array}\) What amount of cash was received from customers during the year?
A)$383 000
B)$363 000
C)$403 000
D)$397 000
Q2) In accordance with IAS 7 Statement of Cash Flows,cash payments to suppliers for goods and services are classified as cash flows from operating activities.
A)True
B)False
Q3) Discuss the treatment of interest and dividends in accordance with IAS 7 Statement of Cash Flows.
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Page 19
Chapter 17: Events Occurring After the Reporting Date
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Q1) Subsequent to the reporting date but before the authorisation date of the financial reports,the dividend to be paid by Hannibal Plc has been determined.How should this decision be recorded in the financial statements according to IAS 10?
A)The event should be disclosed in a note to the financial statements.
B)The event should be fully reflected in the financial statements.
C)No reporting is required.
D)The shareholders should be informed by separate letter.
Q2) The period covered by IAS 10 Events After the Reporting Period is from:
A)date of the report to date of release to shareholders.
B)reporting date to date financial report is authorised for issue.
C)balance date to reporting date.
D)balance date to date financial reports are presented to the board of directors.
Q3) Requirements regarding events after the reporting date are contained in IAS 10 and Company Law.
A)True
B)False
Q4) Provide an example of an adjusting event and explain why this event satisfies the criteria of IAS 10 Events After the Reporting Period.
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Chapter 18: Related-Party Disclosures
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Q1) IAS 24 Related Party Disclosures,requires relationships between parents and subsidiaries be disclosed irrespective of whether there have been transactions between those related parties.
A)True
B)False
Q2) Which of the following disclosures on key management personnel is/are required in IAS 24 for disclosing entities?
A)name of the person
B)position held
C)qualification(s) of the person
D)name of the person and position held
Q3) The most common example of a relationship reflecting control is that between an investor and its associate company.
A)True
B)False
Q4) Discuss the performance conditions utilised in the compensation plans for key management personnel.
Q5) What additional disclosures are required of disclosing entities with regards to related-party transactions?
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Chapter 19: Earnings Per Share
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Q1) The conversion of potential ordinary shares has no flow-on effects.
A)True
B)False
Q2) To maximise the dilution of basic earnings per share,discuss the requirements of IAS 33 Earnings per Share in determining whether potential ordinary shares are dilutive or antidilutive.
Q3) The requirement to apply IAS 33's definition of earnings and its definition of the number of shares means that the earnings per share figures for companies can be easily compared as they are not subject to the professional judgment involved in other areas of accounting.
A)True
B)False
Q4) A bonus issue will have an impact on:
A)the number of issued preference shares.
B)the overall debt of the entity.
C)the overall value of the owners' equity.
D)the weighted-average number of ordinary shares.
Q5) Discuss when potential ordinary shares are excluded from the calculation of diluted EPS?
Q6) Describe the IAS 33 EPS disclosure requirements.
Page 22
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Chapter 21: Further Consolidation Issues I: Accounting for
Intragroup Transactions
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Q1) Intragroup transactions that are to be eliminated in the consolidated accounts include:
A)inter-entity loans.
B)inter-entity sales of non-current assets.
C)the payment of management fees to a member of the group.
D)all of the given answers.
Q2) Blue Plc sold inventory items (with a cost of £90 000)to its subsidiary Maroon Plc for £120 000.Half of the inventory items were sold by Maroon Plc to external parties before the financial year end.Ignoring taxes,which of the following statements is correct with respect to this transaction only?
A)Consolidated sales will decrease by £60 000.
B)Consolidated sales will decrease by £100 000.
C)Consolidated profit will decrease by £15 000.
D)Consolidated profit will decrease by £20 000.
Q3) If a subsidiary makes a dividend payment out of pre-acquisition earnings,the parent entity should consider whether its investment in the subsidiary is impaired.
A)True B)False
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Chapter 22: Further Consolidation Issues II: Accounting for
Non-Controlling
Interests
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Q1) Where the parent entity holds less than 100 per cent interest in a subsidiary,IAS 10 requires the remaining shareholders' interests in what items to be disclosed?
A)the subsidiary's share capital and reserves
B)the subsidiary's profit or loss
C)the subsidiary's current and non-current assets
D)the subsidiary's share capital and reserves and the subsidiary's profit or loss
Q2) Discuss how the share capital and reserves of a non-controlling asset are determined at the date of the acquisition and post-acquisition changes in share capital and reserves.
Q3) IAS 1 Presentation of Financial Statements requires an entity to disclose separately in the statement of comprehensive income,profit or loss for the period attributable to non-controlling interests and owners of the parent.
A)True
B)False
Q4) Describe the two options in measuring the non-controlling interest.
Q5) Discuss the three elements considered when calculating non-controlling interests.
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Chapter 23: Further Consolidation Issues III: Accounting for
Indirect Ownership Interest
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Q1) Describe a non-sequential acquisition and explain the process of consolidation for this type of business combination.
Q2) A Plc owns 75% of the issued capital of B Plc and B Plc owns 65% of the issued capital of C Plc.What is the total outside equity interest in C Plc?
A)48.75%
B)35%
C)25.75%
D)51.25%
Q3) A Plc owns 85% of the issued capital of B Plc and B Plc owns 95% of the issued capital of C Plc.What is the total outside equity interest in C Plc?
A)23.5%
B)10.5%
C)19.25%
D)15%
Q4) Discuss how it is possible for one entity to control another entity without any direct ownership interest.
Q5) Discuss why it is necessary to differentiate between direct and indirect non-controlling interests in a group.
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Chapter 24: Accounting for Foreign Currency Transactions
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Q1) Which of the following items is within the scope of IAS 21 The Effects of Changes in Foreign Exchange Rates?
A)translation of cash flows from foreign operations
B)presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency
C)hedge accounting for hedging a net investment in a foreign operation
D)presentation of an entity's financial statements in a foreign currency
Q2) To classify an arrangement as a hedge,and therefore to apply 'hedge accounting',IAS 32 requires a set of strict conditions be met.
A)True
B)False
Q3) Explain the terms hedging instrument and hedged item,and how hedge accounting brings these two together.
Q4) Describe,with examples,the two tests of hedge effectiveness.
Q5) Explain why some opponents of the accounting prescribed in IAS 21 object to the requirement that long-term receivables and payables be translated using the reporting date spot rates.
Q6) What are presentation and functional currencies? How do they differ?
Page 26
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Chapter 25: Translating the Financial Statements of Foreign Operations
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Q1) As prescribed in IAS 21,when re-measuring financial statements of foreign operations to presentation currency,which of the following identifies all items to be remeasured at historic rates?
A)cash, accounts receivable and accounts payable
B)inventory, goodwill, property plant and equipment
C)accounts payable, unearned revenue and note payable
D)gain on sale of non-current assets, dividend revenue and dividends paid
Q2) If the exchange rate for US dollars relative to Euros goes from $1 = 2.10 to $1 = 2.20,the Euro has strengthened.
A)True
B)False
Q3) Exchange differences resulting from the translation of foreign operations to presentation currency are shown:
A)in the 'retained earnings' section of equity.
B)in the 'general reserve' section of equity.
C)in the 'asset revaluation reserve' section of equity.
D)none of the given answers.
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Chapter 26: Accounting for Corporate Social Responsibility
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Q1) The body/bodies that have been proactive in providing environmental reporting guidelines/framework include:
A)the International Accounting Standards Board.
B)the International Federation of Accountants.
C)Global Reporting Initiative body.
D)the International Oil and Gas Producers Board.
Q2) Discuss the Global Reporting Initiative's Sustainability Reporting Guidelines.
Q3) Global Reporting Initiative's (GRI)Sustainability Reporting Guidelines provide guidance to best practice reporting.These include reference to the following reporting principles:
A)reliability, relevance, comparability and understandability.
B)inclusivity, materiality, accuracy and timeliness.
C)reliability, clarity, balance, comparability, accuracy and timeliness.
D)inclusivity, materiality, sustainability context and completeness
Q4) AccountAbility's work is the AA1000 series of standard which is based on the following principle:
A)responsiveness.
B)inclusivity.
C)materiality.
D)all of the given answers.
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