Business Accounting
Midterm Exam
Course Introduction
Business Accounting provides an essential foundation in the principles and practices of accounting as they relate to business organizations. The course covers key concepts including the accounting cycle, financial statement preparation, and the analysis and interpretation of financial information. Students will develop an understanding of how to record, summarize, and report economic events for both internal and external stakeholders, as well as the regulatory environment affecting accounting practices. Emphasis is placed on the role of accounting information in decision-making, planning, and control within businesses.
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) Penalties that can be imposed by the professional bodies on members who do not comply with accounting standards can be:
A) disciplinary proceedings
B) fines
C) expulsion from the professional body
D) all of the above
Answer: D
Q2) To practice in Australia,an accountant:
A) must be registered by the AASB
B) must be registered by the government
C) must be a member of CPA Australia or ICAA
D) none of the above
Answer: D
Q3) The body that oversees the operation of the Auditing and Assurance Standards Board is:
A) The Financial Reporting Council (FRC)
B) ASIC
C) AASB
D) ASX
Answer: A
Page 3
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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) What is not a key characteristic concerning users of general purpose financial statements?
A) The users do not necessarily have to be known to the entity
B) The users are internal to the entity
C) The users lack the power to demand that the entity provides them with specific information
D) All of the above are key characteristics
Answer: B
Q2) Which of the following is not one of the major potential benefits of a conceptual framework for accounting standards setters?
A) Improve the communication process
B) More consistent and logical accounting standards
C) Savings in auditing costs
D) Improved accountability
Answer: C
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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) In the Framework,'the present obligation of the entity arising from past events,the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits' is the definition of:
A) revenues
B) assets
C) expenses
D) liabilities
Answer: D
Q2) Explain and discuss three essential characteristics of an asset as defined by the Framework.
Answer: The essential characteristics of an asset are: future economic bene ts; control by the entity; and the result of a past event.
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
Page 5
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Chapter 4: Fair Value Measurement
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Q1) Which measurement is utilised when non-financial assets are assessed for fair value purposes?
A) Highest and best use
B) Historical cost
C) Lower-of-cost-or-market
D) Average use
Q2) Which of the following is an example of a Level 3 input,according to the fair value hierarchy?
A) Quoted stock prices
B) Quoted prices for similar assets in active markets
C) Quoted prices in non-active markets
D) Future net cash flows used to value a business
Q3) On which type of transaction is the measurement of fair value based?
A) Hypothetical
B) Actual
C) Anticipated
D) Standard
Q4) Explain the valuation premise and discuss how it is used,depending on what is identified as the highest and best use.
Q5) 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) 'Most creative accounting techniques do not lead to permanent increases in profits and assets and therefore achieve little.' Using at least three specific examples,explain what is meant by this statement and discuss whether or not you agree with it.
Q2) An example of legal form not reflecting economic substance is:
A) a legal document describing an accounts receivable as a debtor
B) a legal document describing a loan as an advance
C) a legal document describing a transaction as a lease when in fact it is a credit sale
D) all are examples of legal form not reflecting economic substance
Q3) The income-or-profit smoothing hypothesis suggests that:
A) a variable income stream supports a lower level of dividends and raises the perceived riskiness of the firm compared to a stable income stream
B) a variable income stream supports a higher level of dividends and raises the perceived riskiness of the firm compared to a stable income stream
C) a variable income stream supports a higher level of dividends and lowers the perceived riskiness of the firm compared to a stable income stream
D) none of the above
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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) The statement in relation to AASB 108 and the correction of prior-period errors that is incorrect is:
A) Prior-period errors are material omissions from and misstatements in an entity's statement of financial position and associated notes
B) The correction must not be included in the profit or loss for the period in which the error is discovered
C) Comparative figures for prior periods need not be restated
D) A retrospective correction must be made which will normally affect retained earnings in the current statement of financial position
Q3) Entities are required to disclose comparative information the previous period.Discuss how the correction of prior period errors may impact on the presentation of the financial statements.
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8
Chapter 7: Accounting for Current Assets
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Q1) Under the perpetual inventory system,the accounting entry to record a write-down of $600 of various inventory items from cost to net realisable value is:
A) debit cost of goods sold $600; credit inventory $600
B) debit inventory $600; credit cost of goods sold $600
C) debit inventory $600; credit bank $600
D) debit cost of goods sold $600; credit bank $600
Q2) Which of the following is not considered an inventory cost-flow assumption?
A) Average cost
B) First-in, first-out
C) Periodic
D) Last-in, first-out
Q3) Which two components of expense are recognised in the statement of comprehensive income?
A) Cost of goods sold and gross profit
B) Cost of goods sold and inventory loss expense
C) Inventory loss expense and gross profit
D) Accounts payable and cost of goods sold
Q4) Discuss the disclosures relating to inventory required by AASB 102.Include a discussion on the disclosures required by not-for-profit entities.
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Chapter 8: Accounting for Property, plant and Equipment
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Q1) What are defined as immovable public facilities that are necessary to sustain living standards and concerned with essential services?
A) Current assets
B) Heritage assets
C) Property, plant and, equipment
D) Infrastructure assets
Q2) What must be present for an asset to be classified as held for sale?
A) Management has committed itself a plan to sell the asset
B) There is an active program to locate a buyer
C) The assets are available for immediate sale in their present condition
D) All of the above are required criteria
Q3) AASB 136 requires that assets are carried at no more than which amount?
A) Original cost
B) Current market value
C) Cost less accumulated depreciation
D) Recoverable amount
Q4) AASB 136 requires that assets are carried at no more than their recoverable amount.Outline the accounting treatment required to recognise an impairment loss.In your answer discuss the subsequent reversal of an impairment loss.
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Chapter 9: Accounting for Company Income Tax
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Q1) Consider each of the following separate situations.State whether each gives rise to a deferred tax asset (DTA)or a deferred tax liability (DTL).Give reasons for your answer and also indicate why and when any DTA or DTL will be reversed in the accounting records. (i)Depreciation for accounting purposes exceeds depreciation allowed for income tax purposes
(ii) A provision for doubtful debts has been made for the first time (iii) Goodwill is beingamortisedeach year
(iv) A loss has been incurred, for both accountingand taxation purposes, but the company expects to earn profits in each of the next two years
Q2) Accounting standards require disclosure of the amount of:
A) deferred tax expense (or revenue) relating to changes in tax rates or tax laws
B) current tax expense (or revenue)
C) any adjustments for the current tax of prior reporting periods
D) all of the above
Q3) 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) Discuss the accounting treatment for trademarks and brand names in accordance with AASB 138.
Q2) Which of these is not correct under AASB 138 concerning the measurement of intangible assets subsequent to acquisition?
A) If the revaluation model is used, amortisation is not required even if the useful life of the asset is finite
B) With both the cost and the revaluation models, all assets should be regularly tested for impairment
C) If the cost model is used, amortisation is required if the useful life of the asset is finite
D) The revaluation model is only permitted to be used if there is an active market for the asset
Q3) 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
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Chapter 11: Accounting for Leases
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Q1) What are the two elements in identifying whether a contract contains a lease?
A) The type of lease and the identified asset
B) The identified asset and the minimum lease payments
C) Identified asset and the right to control the use of an identified asset
D) The type of lease and the minimum lease payments
Q2) Which of the following is not a disclosure related to finance leases?
A) Lease income
B) Selling profit or loss
C) Finance income on the net investment in the lease
D) A maturity analysis of the lease payments receivable
Q3) Consider the following statements:
A sale-and-leaseback transaction,as far as the seller is concerned,can
(a) generate neither a profit nor a loss
(b) can generate an immediate profit but not a deferred profit
(c) can generate a deferred profit but not an immediate profit
(d) can generate an immediate loss but not a deferred loss
A) All are correct
B) Only (a) is correct
C) Only (b) and (d) are correct
D) All are incorrect
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Chapter 12: Accounting for Employee Benefits
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Q1) Sick leave entitlements should be reflected as a liability in accordance with AASB 119 when:
A) it is non-accumulating sick leave
B) it is accumulating sick leave which is vesting
C) it is accumulating sick leave which is non-vesting
D) never
Q2) Under AASB 119,the recognition criteria for liabilities for profit sharing and bonus plans is:
A) It is probable the liability will be settled and the amount of the liability can be measured consistently
B) It is reasonably certain the liability will be settled
C) It is probable the liability will be settled
D) The entity has a present legal or constructive obligation to settle the liability, and the amount of the liability is capable of being measured reliably
Q3) Which of the following is not considered a post-employment benefit by AASB 119?
A) Superannuation
B) Termination benefits
C) Administrative support
D) Free travel
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Chapter 13: Accounting for Financial Instruments
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Q1) Which of the following is not a type of hedging relationship?
A) Cash flow
B) Net investment in a foreign operation
C) Commodities
D) Fair value
Q2) Financial instruments include accounts receivable,accounts payable,futures contracts,equity securities and options.Which of the following statements is correct?
A) Accounts receivable, accounts payable and options are primary financial instruments
B) Equity securities and futures contracts are primary financial instruments
C) Accounts receivable and accounts payable are derivative (secondary) financial instruments
D) None of the above is correct
Q3) 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
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Chapter 14: The Statement of Comprehensive Income
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Q1) 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
Q2) Items not included in the operating profit calculation under AASB 101 are:
A) prior period adjustments
B) events outside ordinary operations
C) adjustments due to changes in accounting policies
D) all of the above
Q3) Which term describes items of income and expense (including reclassification adjustments)that are not recognised in profit or loss as required or permitted by other Australian Accounting Standards?
A) Operating income
B) Other comprehensive income
C) Net income
D) Equity
Q4) Define income and explain how it differs from revenue.
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Chapter 15: Revenue
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Q1) Which point of the earnings cycle is revenue recognised in most cases?
A) Receipt of cash
B) Delivery of goods to customers
C) Progressively throughout production
D) Receipt of orders after completing production
Q2) Discuss the three types of repurchase agreements.
Q3) What term describes activities that are undertaken by an entity as part of its business or to meet its objectives and related activities in which the entity engages in furtherance of,incidental to,or arising from activities undertaken to meet its objectives' ?
A) Revenue
B) Income
C) Ordinary Activities
D) Equity-producing
Q4) What is a factor that might influence the transaction price?
A) Non-cash consideration
B) Currency of the customer
C) Oral agreements
D) Consideration payable to a third party
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) Which transaction would be included in a cash flow statement?
A) Receipts from customers
B) Credit sales
C) Acquisition of assets in exchange for shares
D) All of the above
Q2) A criticism of the indirect approach to presenting cash flows from operating activities is:
A) adding back expenses such as depreciation may suggest that these items are sources of cash
B) it is unnecessarily complicated
C) it requires cash inflows to be netted against cash outflows
D) A and B
Q3) Studies such as Bowen,Burgstahler and Daley (1986)and Cheng and Hollie (2008)in the USA and Percy and Stokes (1992),Cotter (1996)and Clinch Sidhu and Sin (2002)in Australia have found:
A) cash flow data appeared to be similar to profit data
B) cash flow data was significantly different from profit data
C) there was no relation between profit and cash flow data
D) none of the above
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Chapter 17: Financial Reporting: Segment Reporting and Highlights Statements
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Q1) Discuss the benefits of the 'management approach' adopted by AASB 8.
Q2) A business reports the following in its financial statements:
\[\begin{array} { l l }
\text { Net profit before tax } & \$ 100 \\
\text { Interest expense } & 20 \\
\text { Income tax expense } & 30 \\
\text { Preference dividends paid } & 10 \\
\text { Ordinary dividends paid } & 15 \\
\text { Total assets at the beginning of the year } & 750 \\
\text { Total assets at the end of the year } & 850 \\
\text { Total liabilities at the beginning of the year } & 3 7 5 \\
\text { Total liabilities at the end of the year } & 4 2 5 \end{array}\]
Its rate of return on shareholders' equity is: A) 11.25%
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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 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
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) Concise financial reports:
A) must be drawn up in accordance with AASB's
B) must achieve consistency with the changes in terminology contained in AASB 101
C) must include a statement of comprehensive income, a statement of financial position, a statement of cash flows and a statement of changes in equity
D) all of the above
Q5) Explain the significance of related-party transactions.
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Chapter 19: Accounting for Extractive Industry
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Q1) Bigspill Gas & Oil Ltd began operations on 1 July 20X1.During the year ended 30 June 20X2,Bigspill explored five different areas of interest and spent $200 000 in each area.The exploration results indicated that three areas were likely to be productive and Bigspill acquired leases over the three areas at costs of $400 000,$720 000 and $480 000 respectively.Under the successful-efforts method of accounting for exploration and evaluation costs in the extractive industries,Bigspill would include which of the following amounts in its statement of financial position as at 30 June 20X2 for Exploration and Evaluation Costs?
A) $1 600 000
B) $2 600 000
C) $2 200 000
D) $ Nil
Q2) 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.
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Chapter 20: Accounting for Agricultural Activity
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Q1) Australian Accounting Standard AASB '141 Agricultural Activity' requires disclosure of the following items of information EXCEPT:
A) cost of agricultural produce is its fair value less costs to sell at the point of harvest;
B) specific requirements for government grants related to a biological asset
C) specific disclosures in relation to biological assets
D) the method of calculating the replacement cost of biological assets
Q2) On 1 September 20XX,Beuno Vista Ltd purchased an established forest for a total cost of $2 000 000.During the year ended 30 June 20XX,Beuno Vista spent $300 000 on maintaining the forest and $100 000 on office administration costs.In March 20XX,the company cut logs from the forest that had an estimated net realisable value of $800 000.Costs of logging were $150 000.The logs were sold in June 20XX for \( \$ 850000 \)
.On 30 June 20XX the forest had an estimated net realisable value of $1 300 000.The total profit (or loss)from operations for the year ended 30 June 20XX is:
A) $400 000 Profit
B) $(400 000) Loss
C) $350 000 Profit
D) $700 000 Profit
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Chapter 21: Accounting for Superannuation Entities
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Q1) The trustees of a superannuation fund can transfer their responsibility for the general conduct of the fund:
A) if it is non-contributory
B) if it provides portable benefits
C) if the fund is externally managed
D) in none of the above cases
Q2) The general purpose financial reports of a superannuation plan should provide information to assist in answering the following question:
A) Who are the trustees?
B) Is the plan solvent?
C) What are the names of the professional advisers?
D) None of the above
Q3) Generally,insurance arrangements include which of the following?
A) offered to members, with the entity only acting as an agent
B) offered to members, with the entity accepting insurance risk
C) provided to defined benefit members in relation to their projected retirement benefit
D) all of the above
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Chapter 22: Accounting for Insurance
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Q1) What is the proper treatment basis for the allocation of a premium?
A) The payment history of the policyholder
B) The number of parties to which the payment is to be allocated
C) The type of insurance (medical, general, etc.)
D) The probability of a claim
Q2) Which accounting standard covers accounting for the life insurance industry?
A) AASB 1023
B) AASB 1038
C) AASB 9
D) AASB 4
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) Differentiate the types of insurance liabilities that arise from events that have already occurred.
Q5) List and explain the three broad classes of assets insurers have.
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Chapter 23: International Accounting Standards, harmonisation and Convergence
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Q1) The primary benefit of harmonising financial reporting practices around the world is:
A) enhancing the attractiveness of exporting goods and services for smaller businesses
B) reducing the likely risks and costs of making transactions in different countries
C) eliminating the need for firms operating locally and in other countries to file detailed financial reports with regulatory authorities in other countries
D) that investors in international capital markets can make more reliable comparisons of the reports of different entities
Q2) For which of the following are the International accounting standards are applicable?
A) only to for-profit entities in the private sector
B) to for-profit and not-for-profit entities and government business enterprises
C) to for-profit and not-for-profit entities but not to government business enterprises
D) none of the above
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Chapter 24: Foreign Currency Translation
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Q1) Respectively,a company's domestic currency,functional currency and presentation currency are:
I.the currency in which the financial statements must be presented
ii) the currency in whichan entity is required to measureits financial performance and position
iii) the currency of the country of incorporation
iv) the currency of the country in which the majority of shareholders are located
A) i, ii, iv
B) iii, iv, i
C) iii, ii, i
D) iv, iii, ii
Q2) Explain,using simple numerical example(s),how hedging a foreign currency transaction can remove uncertainty about the outcome of the transaction.
Q3) There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.
Q4) Explain,using simple numerical examples,the hedging of currency risk.
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Chapter 25: Accounting for Corporate
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Q1) The quantitative reporting of a company's socially responsible activities may not be especially useful because:
A) there can be difficulty in allocating cost accurately to different activities
B) it provides no indication of the effectiveness of the expenditure incurred
C) much of the expenditure incurred may simply be the result of complying with legal requirements or enforcement action by government authorities
D) all of the above
Q2) When an entity's net emissions are less than the permits they hold,at the end of the year they:
A) must forfeit the excess credits
B) can sell the excess credits to other entities
C) can bank the excess credits for future use
D) B and C above
Q3) Triple-bottom line reporting involves giving information on a company's:
A) economic, environmental, and social activities
B) economic, voluntary, and human rights activities
C) environmental, social, and community activities
D) environmental, social, and political activities
Q4) Explain the three components of the Emissions Reduction Fund (ERF).
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Chapter 26: Ethics in Accounting
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Q1) Briefly describe the classes of teleological theories that have been used to examine ethical behaviour.
Q2) Where a conflict of interest arises for an accountant so that safeguarding the interest of one client may cause harm to another client,it is generally accepted that rules of professional ethical conduct require that:
A) the accountant should not continue to advise both clients
B) the accountant should ensure that information about either client is not made available by anyone to the other client
C) the accountant should ensure that information about either client is not made available by anyone to the client who might be harmed by the information
D) the accountant should not continue to advise either client
Q3) The Code of Ethics for Professional Accountants is best described as:
A) deontological in nature
B) voluntary for all members of the ICAA, CPA Australia and the NIA
C) descriptive in nature
D) teleological in nature
Q4) Should accountants act ethically? Explain the reasons for your answer to this question.
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