Corporate Accounting
Study Guide Questions
Course Introduction
Corporate Accounting focuses on the principles, practices, and regulatory framework governing the accounting of corporations. The course covers the preparation and analysis of financial statements, accounting for share capital and debentures, treatment of dividends, amalgamations, absorptions, and reconstructions. It also examines the legal requirements under company law, contemporary issues in financial reporting, and the use of accounting information for managerial decision-making. Through practical case studies and real-world examples, students gain a comprehensive understanding of how corporations maintain accurate records, report financial results, and comply with statutory obligations.
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) The Corporations Act 2001 requires that the governing board of the company:
A) table standards in the Commonwealth House of Representative and the Senate
B) establish accounting standards in preparing financial statements
C) provide a true and fair view of the accounting standards
D) comply with AASB accounting standards in preparing financial statements
Answer: D
Q2) Which of the following is/are true concerning the issue of accounting standards in Australia after internationalisation?
A) The AASB adds to proposed international standards material detailing their scope and applicability in Australia
B) The AASB adds material to broaden the content of international standards to cover the not-for-profit sector
C) After issuing an exposure draft for comment and considering the response, the AASB issues an Australian standard equivalent to the IASB standard
D) All of the statements are true
Answer: D
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3
Chapter 2: The Conceptual Framework: Purpose, reporting
Entity, the Objective of Financial Reporting, and Qualitative
Characteristics
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Q1) SAC1 defines an entity which has users who are dependent on general purpose financial reports as a/an:
A) accounting entity
B) reporting entity
C) company entity
D) legal entity
Answer: B
Q2) Which term best illustrates the assurance that financial information faithfully represents the economic phenomena it purports to represent?
A) Timeliness
B) Understandability
C) Verifiability
D) Comparability
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's definition of expenses:
A) there is no distinction between expenses and losses
B) expenses must be matched against income
C) the causes of expenses are specifically identified
D) if the definition is satisfied the item must be recognised in the financial statements
Answer: A
Q2) Under the Framework,profit is defined as:
A) an increase in 'well-offness'
B) a matter of display
C) an increase in wealth
D) including all changes in equity occurring during a period
Answer: B
Q3) In the Framework,'probable' means:
A) greater than 50% certainty
B) 50% certainty
C) greater than 75% certainty
D) greater than 95% certainty
Answer: A
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Chapter 4: Fair Value Measurement
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Q1) How may an exit price be determined?
A) Direct observation
B) Estimation
C) Both A and B are correct
D) Neither A nor B is correct
Q2) When making a fair value measurement,management of the entity should strive to maximize ________ while minimizing _________.
A) Observable inputs; market value
B) Transaction costs; transport costs
C) Observable inputs; unobservable inputs
D) Sufficient data; transaction costs
Q3) Which of the following is an example of a non-recurring fair value measurement?
A) Inventory
B) Income taxes payable
C) Land held for sale
D) Current liabilities
Q4) Discuss the three widely used valuation techniques utilised to determine the appropriate fair value measurement.
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) Which of the following is not a time period considered in developing an accounting standard?
A) Convergence period
B) Harmonisation period
C) Deliberation period
D) Conceptual framework period
Q2) Recent research on the manipulation of profit numbers by managers with a view to influencing share price has shown:
A) no evidence of manipulation
B) firms reporting continuous growth are priced at a discount to other firms
C) reporting of small losses is rare and reporting of small profits fairly common
D) none of the above
Q3) A company decides to switch inventory costing methods to minimise income taxes paid.Which type of 'creative accounting' option was used by the company?
A) Timing of transactions
B) Disclosure of transactions or events
C) Choice of accounting policies
D) Estimates or predictions of future events
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Chapter 6: The Statement of Financial Position
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Q1) 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.
Q2) Australian standard setters have adopted the view that:
A) there should be some flexibility in the format of financial statements
B) companies should use a fixed format when preparing financial statements
C) Schedule 5 provides an example of a flexible format for preparers of financial statements
D) the statement of financial position is merely a link between successive income statements
Q3) The correction of errors relating to prior periods is now covered by:
A) AASB 1034
B) AASB 101
C) AASB 108
D) none of the above
Q4) Discuss the concept of reserves and the sources from which they arise.
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Chapter 7: Accounting for Current Assets
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Q1) The justification for the inventory valuation rule,the lower of cost and net realisable value,is:
A) conservatism
B) cost versus benefit
C) reliability
D) materiality
Q2) Inventory item Z8 has a cost price of $30 and a net realisable value $25,while item D3 has a cost price of $20,a net realisable value $25 and a replacement cost of $21.Under the lower of cost and net realisable value rule of inventory valuation,applied on an item-by-item basis,the value of inventory is:
A) $50
B) $51
C) $45
D) none of the above
Q3) Explain and discuss the criteria contained in AASB 101 for distinguishing between current and non-current assets.
Q4) Explain the concept of the lower of cost and net realisable value rule.
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9
Chapter 8: Accounting for Property, plant and Equipment
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Q1) What is the immediate accounting consequence of the acquisition of a depreciable asset?
A) Statement of financial position classification
B) Cash flow measurement
C) Prepayment of depreciation expense
D) Holding assets for sale
Q2) Under AASB 116 if an item of property,plant and equipment is acquired for cash,the cost includes:
A) the purchase price after deducting trade discounts and rebates
B) the insurance premium paid to cover the asset for the first 12 months of its life
C) any import duties
D) all of the above
E) both A and C
Q3) When equipment is acquired by exchange,how is the asset to be measured if the transaction lacks commercial substance?
A) Fair value of the surrendered asset
B) Net present value of the acquired asset
C) Carrying amount of the surrendered asset
D) Fair value of the acquired asset
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Page 10
Chapter 9: Accounting for Company Income Tax
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Q1) According to AASB 112,the prepayment of rent of $2000 that is claimed as a tax deduction immediately upon payment (assuming an income tax rate of 30%)will give rise to:
A) a Deferred Tax Liability of $600
B) a Deferred Tax Liability of $600 and a credit to Income Tax Payable of $600
C) a Deferred Tax Asset of $600
D) neither a Deferred Tax Liability nor a Deferred Tax Asset
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) Accounting Profit and Taxable Income can often differ because:
A) a tax deduction is not allowed for bad debts
B) revenue received in advance is not subject to tax
C) general purpose financial reporting and the income tax system have differing objectives
D) the Australian Taxation Office does not recognise depreciation as a legitimate expense
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Page 11
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 accounting standard distinguishes between intangible assets and goodwill?
A) AASB 136
B) AASB 3
C) AASB 138
D) AASB 9
Q3) What two models are permitted by AASB for measuring intangible assets subsequent to initial recognition.
A) Basis and fair value
B) Cost and revaluation
C) Cost and fair value
D) Revaluation and expected use
Q4) Which of the following is a necessary factor relating to the existence of an intangible asset?
A) Disclosure in financial statements
B) Classification
C) Liquidity
D) Existence of future economic benefits
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Chapter 11: Accounting for Leases
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Q1) A sale of goods under a sale-and-leaseback agreement is usually treated by accountants as a sale when the agreement is signed because:
A) the goods are physically transferred to the buyer when the agreement is signed
B) hire-purchase agreements are usually for a 12-month term
C) accountants are more interested in the economic substance of a transaction than in its legal form
D) ownership of the goods passes to the buyer when the agreement is signed
Q2) What is defined as the non-cancellable period for which the lessee has a right to use an underlying asset?
A) Lease term
B) Lessor's rights
C) Lessee's rights
D) Bargain-purchase window
Q3) List and explain the different items set out in a typical lease agreement.
Q4) Discuss the implications of the proposal that operating/finance lease distinction be dropped.
Q5) How is a finance lease distinguished from an operating lease?
Q6) What are the main characteristics of a sale-and-leaseback agreement?
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Chapter 12: Accounting for Employee Benefits
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Q1) 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
Q2) Which of the following methods for the recognition of actuarial gains and losses are acceptable under AASB 119?
I.Immediate recognition of all actuarial gains or losses through profit or loss
ii) Recognition of all actuarialgains or losses outside profitor loss
iii) The corridorapproach
A) i
B) i and ii
C) ii and iii
D) i, ii and iii
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Chapter 13: Accounting for Financial Instruments
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Q1) The reasons for the use of financial instruments such as futures contracts,options and swaps include all of the following except:
A) to provide 'off-balance-sheet' financing opportunities
B) to reduce the amount of outstanding accounts receivable
C) to assist in the management of interest rate and foreign currency exchange risks
D) to enable the raising of funds by businesses
Q2) A buyer of a futures contract:
A) may let the contract expire with no action required
B) has an obligation to buy the underlying asset
C) has a right, but not an obligation, to buy the underlying asset
D) must pay the futures price when the contract is made
Q3) 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
Q4) Discuss the disclosure requirements in AASB 7 Financial Instruments Disclosure and AASB 132 Financial Instruments Presentation.
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Page 15
Chapter 14: The Statement of Comprehensive Income
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Q1) 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
Q2) AASB 101 allows preparers two options in the classification of items for the statement of comprehensive income statements.Discuss.
Q3) Which statement concerning Australian accounting standards is correct?
A) Current Australian accounting standards do not identify any particular categories of 'unusual' items for special disclosure in the income statement
B) Current Australian accounting standards require activities that are attributable to transactions or other events outside the ordinary activities of the entity to be disclosed separately
C) AASB 101 requires the separate disclosure of significant items
D) None of the above is 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) A vehicle and plot of land were purchased for $115 000. The fair value of the vehicle was $20 000,and the fair value of the land was $130 000 at the time of purchase. To the nearest dollar,what amount should be allocated to the vehicle?
A) $20 000
B) $57 500
C) $46 000
D) $15 333
Q3) Which type of contract with customers is exempt from Paragraph 5 of AASB 15 'Revenue from Contracts with Customers'?
A) Lease contracts covered by AASB 117 'Leases'
B) Installment sales
C) Both A and B
D) Neither A nor B
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Page 17
Chapter 16: The Statement of Cash Flows
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Q1) The statement concerning a funds statement based on the total resources concept of funds that is incorrect is:
A) It excludes internal transactions such as depreciation
B) The total resources concept of funds is the broadest concept
C) Any transaction which increases liabilities or equity is a source of funds
D) Any transaction which reduces assets is a use of funds
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) Discuss the arguments for and against the presentation of the cash flow statement using the indirect approach rather than the direct approach.
Q4) Discuss how an entity that reports an after tax profit may be unable to generate positive cash flows from operating activities.
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Chapter 17: Financial Reporting: Segment Reporting and Highlights Statements
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Q1) A business reports the following in its financial statements: \[\begin{array} { l }
\text { Profit before tax and interest } &\$100\\
\text { Interest expense }&\quad\quad\quad\quad20\\
\text { Income tax expense }&\quad\quad\quad\quad\quad\quad\quad\quad30 \end{array}\]
Its 'times interest earned' ratio is:
A) 5.0 times
B) 6.5 times
C) 3.5 times
D) 4.0 times
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) Discuss the benefits of the 'management approach' adopted by AASB 8.
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Page 19
Chapter 18: Further Financial Reporting Issues
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Q1) Transactions between related parties should be of special interest to users of financial information for which of the following reasons?
A) Income tax liabilities may be illegitimately or artificially lowered
B) Senior executives' personal friends may be favoured unduly
C) Profit amounts or asset values may be inflated
D) All of the above
Q2) Discuss the importance of discrete reporting. What changes have been made AASB 134 and AASB 136 to improve 'Impairment of Assets'?
Q3) The effect of a change in an estimate is to be recognised in the statement of comprehensive income in which of the following:
A) the period of the change, if the change affects that period only
B) the period of the change, if the change affects other periods
C) the period of the change and future periods, if the change affects either
D) only the future periods,
Q4) A small proprietary company:
A) has operating revenue of $25 million or more
B) has assets of less than $12.5 million
C) has more than 50 employees
D) A and C above
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Chapter 19: Accounting for Extractive Industry
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Q1) Australian Accounting Standard AASB 6 Exploration for and Evaluation of Mineral Resources states that exploration and evaluation costs of a mining operation:
A) can be recognised as expenses or carried forward as an asset depending on the circumstances of the particular operation
B) must be accounted for in accordance with Australian Accounting Standard AASB 116 'Property, Plant and Equipment'
C) must be recognised as expenses as they are incurred
D) must be carried forward as an asset until production commences
Q2) Describe the activities involved in the pre-production phase in the production of minerals,oil and gas and the accounting treatments that might be allowed for costs arising from this phase.
Q3) Examples of expenditures that might be included in the initial measurement of exploration and evaluation assets provided in paragraph 9 are which of the following: A) topographical, geological, geochemical and geophysical studies
B) mining
C) cultiviating
D) refining
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Chapter 20: Accounting for Agricultural Activity
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Q1) The accounting treatment of government grants under AASB 141 requires that:
A) unconditional grants are to be treated as non-current assets when they become receivable
B) unconditional grants are to be treated as income when they become receivable
C) unconditional grants are to be treated as income
D) none of the above
Q2) Describe the sustained-yield method and the standard method of measuring forestry assets.
Q3) AASB 141 requires that biological assets be measured at net realisable value that is:
A) fair value less estimated point of sale costs
B) fair value less point of sales costs
C) fair value
D) none of the above
Q4) List three significant items of information that Australian Accounting Standard AASB 141 'Agricultural Activity' requires to be shown in the annual report and financial statements specifically of a primary production business.Explain why disclosure of each of these items is considered to provide useful information to investors.
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Chapter 21: Accounting for Superannuation Entities
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Q1) Superannuation-specific disclosures include which of the following?
A) disaggregated information when it is necessary to explain the risks and benefit arrangements relating to different categories of members
B) the main features of specific contractual or statutory arrangements in place between a superannuation entity and any relevant employer-sponsor(s)
C) qualitative and quantitative information that provides a basis for understanding the amount, timing and uncertainty of future cash flows relating to insurance liabilities and assets
D) all of the above
Q2) AAS 25 applies specifically to superannuation plans and:
A) overrides the Australian equivalent to IFR's
B) requires the preparation of information about the rights and benefits of individual members
C) applies only to private sector superannuation plans
D) all of the above
Q3) Explain the essential features of a defined benefit,externally managed,non-contributory superannuation plan whose benefits are not vested.
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Chapter 22: Accounting for Insurance
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Q1) Which of the following are components of expected future payments?
A) Amounts in relation to unpaid reported claims
B) Claim handling costs expected to be incurred by the insurer
C) Claims incurred but not reported
D) All of the above are components of expected future payments
Q2) Which type of insurance policy pays benefits only if the insured person dies within a specified period?
A) Whole-of-life
B) Term
C) Endowment
D) Disability
Q3) Which accounting standard covers accounting for the life insurance industry?
A) AASB 1023
B) AASB 1038
C) AASB 9
D) AASB 4
Q4) List and describe the five main types of traditional activities related to life insurance.
Q5) Differentiate the types of insurance liabilities that arise from events that have already occurred.
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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) An effective foreign currency hedging transaction will:
A) largely eliminate the risk of loss but allow a gain to be made on a foreign exchange transaction
B) require the services of a banker or similar financial intermediary
C) largely eliminate both the risk of loss and the possibility of gain on a foreign exchange transaction
D) involve both A and C above
Q2) AASB 121 requires that non-monetary items are measured,subsequent to their initial recognition,at:
A) the exchange rate at the date of transaction
B) the exchange rate at the date of that the fair value was determined
C) an average exchange rate at the end of the reporting period
D) both A and B can apply
Q3) AASB 121 requires an entity to measure its financial performance and financial position in its functional currency.What are the indicators of a functional currency? Is the functional currency the same as the presentation currency? Explain your answers.
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) Some requirements to account for corporate social responsibility in Australia are contained in:
A) AASB 1018
B) the Corporations Act
C) the Framework
D) There are no legal, accounting standard or Framework requirements for reporting on corporate social responsibility in Australia
Q2) The most common approach adopted by Australian corporations in accounting for corporate social responsibilities is:
A) descriptive performance reporting
B) quantitative reporting
C) full cost reporting
D) asset valuation approach
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).
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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) Which of the following statements about the costs and benefits of unethical behaviour is not true?
A) The benefits of unethical behaviour are nearly always material
B) The costs of unethical behaviour are nearly always material
C) The penalties for unethical behaviour are not imposed in many cases
D) A cost of unethical behaviour may be the loss of freedom of choice in future decisions about whether to act ethically
Q3) Briefly describe the classes of teleological theories that have been used to examine ethical behaviour.
Q4) Should accountants act ethically? Explain the reasons for your answer to this question.
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