Corporate Financial Reporting Exam
Review
Course Introduction
Corporate Financial Reporting explores the principles, standards, and practices involved in preparing and analyzing financial statements for corporations. The course covers the regulatory environment, the conceptual framework underlying financial accounting, and the application of International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Students learn how to interpret balance sheets, income statements, statements of cash flows, and statements of shareholders equity to assess an organizations financial health and performance. Emphasis is placed on the ethical considerations and the implications of financial reporting decisions for stakeholders, including investors, creditors, and regulatory agencies.
Recommended Textbook
Issues in Financial Accounting 16th Australia Edition by Scott Henderson
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Chapter 1: Institutional Arrangements for Setting Accounting Standards in Australia
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Q1) Discuss the role of the accounting bodies in the regulation of Australian accounting practice.
Answer: The accounting profession's attitude towards accounting standards has changed from regardingthem simply as recommendations during the 1960s to making them mandatory by the 1990s.InFebruary 2006,the APESB was established as an initiative of CPAA and the then Institute ofChartered Accountants in Australia (ICAA)primarily to develop and issue appropriate professionaland ethical standards for their membership.The IPA subsequently became a member of theAPESB.The initial focus of the APESB's activities was,inter alia,the review of existing professionaland ethical standards such as the old Code of Professional Conduct and MiscellaneousProfessional Statements (APS series)and guidance notes (GN series).The subsequent APESseries of ethical and professional standards approved by the APESB is mandatory for accountantswho are members of CPAA,CAANZ and the IPA.Broadly,these standards aim to regulatemembers' ethical conduct and the performance of professional services across various types ofprofessional engagements.
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Page 3
Chapter 2: The Conceptual Framework: Purpose, reporting
Entity, the Objective of Financial Reporting, and Qualitative
Characteristics
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Q1) From 1 January 2005 the Australian conceptual framework includes:
A) SAC 1-2 and the IASB conceptual framework
B) SAC 1-4 and the IASB conceptual framework
C) the IASB conceptual framework
D) none of the above
Answer: A
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
Q3) Which of the following is not a fundamental issue when an accountant faces a new type of transaction?
A) recognition
B) measurement
C) disclosure
D) issuance
Answer: D Page 4
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Page 5
Chapter 3: The Conceptual Framework:
Definition,
and Measurement of the Elements in General
Purpose Financial Statements
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Q1) 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.
Q2) 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
Q3) Under the Framework,the purchase of inventory by an entity is:
A) an expense as it decreases equity
B) an expense as it arises from carrying out the major activities of the entity
C) an expense because it is a flow
D) not an expense
Answer: D
Page 6
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Chapter 4: Fair Value Measurement
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Q1) What is used to assess fair value when there is insufficient evidence to reach a conclusion about whether a transaction is orderly?
A) Transaction price
B) Future cash flows
C) Quoted stock prices
D) Volume of the transaction
Q2) What is likely to occur when a seller is in financial distress or is legally required to dispose of an asset or liability?
A) The transaction will not be orderly
B) Marketing activities are hot adhered to
C) The transaction price can be confidently relied upon
D) The objective of fair value measurement changes
Q3) Discuss the three widely used valuation techniques utilised to determine the appropriate fair value measurement.
Q4) List and give examples of the inputs of the fair value hierarchy.
Q5) Explain the differences between the concept of unit of account and valuation premise.
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Chapter 5: The Choice of Accounting Methods
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Q1) 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
Q2) The order of preference set out in AASB 108 for reliance on authoritative pronouncements as a guide to selecting an accounting policy when there is no specific Australian standard is:
A) Related Australian Standards, International Accounting Standards, the Framework, accounting standards from other jurisdictions using a similar conceptual framework and accepted industry practices
B) Related Australian Accounting Standards, the definitions, recognition criteria in the Framework, accounting standards from other jurisdictions using a similar conceptual framework and accepted industry practices
C) Related Australian Standards and the Framework
D) None of the above
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8
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) Identify and discuss the requirements concerning the classification of liabilities contained in AASB 101.
Q3) Identify and discuss the requirements concerning the classification of assets contained in AASB 101.
Q4) Discuss the concept of reserves and the sources from which they arise.
Q5) The fixed format for the statement of financial position required by AASB 101 is:
A) assets = liabilities + equity
B) assets - liabilities = equity
C) assets = equities
D) no fixed format is required
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9
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) Discuss the disclosures relating to inventory required by AASB 102.Include a discussion on the disclosures required by not-for-profit entities.
Q3) If inventory prices are rising:
A) the LIFO method will give the lowest profit
B) the LIFO method will give the highest profit
C) the FIFO method will give the lowest profit
D) the LIFO method will give the highest closing inventory valuation
Q4) The item that is not part of manufacturing inventory is:
A) supplies inventory
B) raw materials
C) work-in-process
D) none of the above, i.e., all are part of manufacturing inventory
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) On 1 January 20X0 an asset that had a useful life of five years and a cost of $100 000,had a carrying value of $60 000.(The asset had been depreciated for two years at $20 000 per annum).On 1 January 20X0 it was decided to revalue the asset upwards to $90 000 with no change in its useful life.A year after the revaluation on 1 January 20X1 the asset was sold for $80 000.Under the provisions of AASB 116,the gain or loss on disposal is:
A) $10 000 gain
B) $20 000 gain
C) $10 000 loss
D) $30 000 gain
Q2) 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
Q3) Explain and discuss how donated assets should be recorded in the accounts.
Q4) Should borrowing costs incurred during the construction period of an asset be expensed or capitalised? Discuss.
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Page 11
Chapter 9: Accounting for Company Income Tax
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Q1) 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
Q2) Empirical research on whether tax-effect accounting should continue to be applied indicates that:
A) share prices are more highly associated with taxable income, and therefore financial reports should conform to the taxation treatments
B) share prices are more highly associated with accounting income, and therefore accounting standards should not be changed
C) share prices are equally associated with both accounting and taxable income, and therefore both accounting and taxation income should be reported in the financial reports
D) share prices are unrelated to either accounting or taxation income
Q3) Discuss the results of empirical research that examines whether tax-effect accounting should continue to be required.
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12
Chapter 10: Accounting for Intangible Assets
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Q1) Which of the following is recommended as the preferred accounting treatment for excess on acquisition?
A) Reduce proportionately the fair values of the non-monetary assets acquired until the excess is eliminated
B) Reduce proportionately the fair values of the monetary assets acquired until the excess is eliminated
C) Treat it as a deferred credit in the balance sheet and periodically allocate it as income
D) Immediately recognise the excess on acquisition as income in the income statement
Q2) When the sum of the fair values of the identifiable net assets acquired exceeds the cost of acquisition,the difference is known as:
A) negative goodwill
B) excess on acquisition
C) goodwill
D) both A and B
Q3) Explain and discuss the application of AASB 138 in its proposals to account for research and development expenditure.
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Chapter 11: Accounting for Leases
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Q1) How is a finance lease distinguished from an operating lease?
Q2) What term is used to describe the right of the lessee to purchase the underlying asset when the option becomes exercisable at a price well below the estimated fair value at that time.
A) Bargain purchase option
B) Residual value guarantee
C) Unguaranteed residual value
D) Minimum lease payment
Q3) 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
Q4) How is the lessee to measure the lease liability after the commencement date.
A) Increasing the carrying amount to re ect interest on the lease liability
B) Reducing the carrying amount to re ect the lease payment made
C) Remeasuring the carrying amount to re ect any reassessment or lease modi cations
D) All the above are measurement requirements
Q5) 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) What are employee profit-sharing and bonus plans commonly based on?
A) Equity
B) Cash
C) Employee longevity
D) All of the above answers are correct
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) 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
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Page 15
Chapter 13: Accounting for Financial Instruments
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Q1) An 'interest rate swap' generally involves:
A) a lender and a borrower agreeing to change a floating interest rate to a fixed interest rate or vice versa
B) two (or more) parties exchanging floating interest rates for fixed interest rates on loans
C) two (or more) parties agreeing to guarantee each others' loan obligations
D) two (or more) parties in different countries agreeing to deal at fixed currency exchange rates
Q2) A trader purchases 4 futures contracts with a total value of $100 when the price of the contracts (based on the SPI 200 share price index)is 3026.When these contracts expire,the index itself is at 2950 points and the price of the SPI 200 contract units is 2975.The trader has:
A) made a gain of $5100
B) made a loss of $5100
C) made a loss of $2550
D) made a gain of $2550
Q3) What is meant by an 'interest rate swap'? Illustrate your answer with a simple example of how such a swap operates and how it would affect the parties concerned.Why might businesses engage in an interest rate swap?
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Page 16
Chapter 14: The Statement of Comprehensive Income
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Q1) A difference between the all-inclusive and the comprehensive income approaches to profit measurement is that:
A) the all-inclusive approach is broader than the comprehensive income approach
B) the two approaches have different treatments for prior-period adjustments
C) the comprehensive income approach includes all recognised changes in the carrying amount of assets and liabilities in the profit calculation
D) all are differences
Q2) Under AASB 101,which of these items need not be disclosed separately on the face of the 'statement of profit or loss and other comprehensive income'?
A) Income tax expense
B) Bad and doubtful debts
C) Finance costs
D) None of the above, i.e., all must be disclosed separately on the face of the income statement
Q3) Define income and explain how it differs from revenue.
Q4) Explain and discuss the advantages and disadvantages of the operating-profit and the comprehensive income approaches to profit measurement.Which approach do you think is the most useful for decision making?
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Page 17
Chapter 15: Revenue
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Questions
Q1) 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
Q2) 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
Q3) Which two issues have been the most controversial in regards to revenue?
A) Timing and nature
B) Nature and recognition
C) Recognition and presentation
D) Disclosure and timing
Q4) Discuss the three types of repurchase agreements.
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Chapter 16: The Statement of Cash Flows
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Q1) The approach to presenting cash flows from operating activities where reported net profit is adjusted for non-cash income statement items and changes in non-cash working capital accounts is known as:
A) the direct approach
B) the adjustment approach
C) the indirect approach
D) none of the above
Q2) Which of the following is considered an investing activity?
A) Payment of dividends to shareholders
B) Payment to a supplier for inventory
C) Interest payments to a lender
D) Cash payments from swap contracts
Q3) Discuss the arguments for and against the presentation of the cash flow statement using the indirect approach rather than the direct approach.
Q4) All of these are possible definitions of 'funds' except:
A) working capital
B) investment
C) total resources
D) cash
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Chapter 17: Financial Reporting: Segment Reporting and Highlights Statements
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Q1) A company reports the following in relation to its latest financial year: \[\begin{array} { l l }
\text { Cument assets } & \$ 175 \\
\text { Non-current assets } & \mathbf { 3 0 0 } \\
\text { Current liabilities } & 50 \\
\text { Non-current liabilities } & 250
\end{array}\]
Writing a cheque for $25 to pay off some long-term debentures payable means that the current ratio will be:
A) 7.0 times
B) 3.0 times
C) unchanged
D) 5.5 times
Q2) Reporting by segments of a business is believed to have a number of advantages.Which of the following is not likely to be such an advantage?
A) Allowing better assessment of expected returns from and risks of investing
B) Preventing management from hiding failures in decision making
C) Increasing the net profit of a business
D) Improving investors' decision making
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Chapter 18: Further Financial Reporting Issues
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Q1) Events after the reporting date are of two types:
Type 1 \(\quad \)Those that provide new evidence about conditions that existed at the reportingdate
Type2 \(\quad \)Those that relate to new conditions arising after the reportingdate
Which of the following statements is correct?
A) Only type 1 events affect the figures in the financial statements of the previous period
B) Only type 2 events affect the figures in the financial statements of the previous period
C) Both type 1 and type 2 events affect the figures in the financial statements of the previous period
D) Neither type 1 nor type 2 events affect the figures in the financial statements of the previous period
Q2) 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?
Q3) Explain the significance of related-party transactions.
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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) 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
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Chapter 20: Accounting for Agricultural Activity
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Q1) In what ways is agricultural activity different from other forms of assets? In what ways are they similar to other forms of assets? How do these differences,and similarities,affect accounting for agricultural activity?
Q2) Agricultural assets that are plants or trees are most appropriately measured for accounting purposes at:
A) net realisable value
B) replacement cost
C) net present value
D) historical cost
Q3) 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.
Q4) Applying fair value to agricultural activity is assumed on the basis that it can be measured reliably.What do you think could potentially cause an asset's measurement to be unreliable,and why? How detailed should be the disclosure of any inherent unreliability?
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Chapter 21: Accounting for Superannuation Entities
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Q1) Discuss the roles of APRA,Asic and the ATO in the regulation of the superannuation industry.
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) Australian Accounting Standard AAS 25 'Financial Reporting by Superannuation Plans' requires that,wherever possible,the amount recorded for accrued liabilities of a defined benefit superannuation plan:
A) include allocated and unallocated contributions
B) be measured in present value terms using a published discount rate
C) equal the assets of the plan less the sum of tax and sundry liabilities
D) be measured in present value terms using an appropriate, risk-adjusted discount rate
Q4) Explain the essential features of a defined benefit,externally managed,non-contributory superannuation plan whose benefits are not vested.
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24
Chapter 22: Accounting for Insurance
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Q1) Differentiate the types of insurance liabilities that arise from events that have already occurred.
Q2) What must be present for an insurer to enter into an insurance contract?
A) Written contract
B) Insurance policy
C) Insurable risk
D) Insurable interest
Q3) List and explain the three broad classes of assets insurers have.
Q4) Explain the solvency requirements as outlined by the Insurance Act of 1973 and Prudential Standard GPS 110 'Capital Adequacy'.
Q5) Which of the following is the correct measurement of assets and liabilities,according to AASB 1038?
A) Assets Liabilities Net present value Fair value
B) Assets Liabilities Fair value Net present value
C) Assets Liabilities Fair value Fair value
D) Assets Liabilities Net present value Net present value
Q6) List and describe the five main types of traditional activities related to life insurance.
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Page 25
Chapter 23: International Accounting Standards, harmonisation and Convergence
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Q1) Explain how globalisation has impacted Australian accounting standards. What is the role of the various accounting governing bodies in harmonising the accounting standards?
Q2) Which of these statements is not correct concerning the adoption by Australia of international accounting standards?
A) Where words need to be changed in AASB adaptations of international standards to accommodate Australian legislation, these are identified by the use of 'Aus' paragraphs
B) Australian standards, where there is no international equivalent, have been withdrawn
C) The AASB is committed to ensuring that AASB equivalents will be issued for all international accounting standards
D) None of the above, i.e., all are correct statements
Q3) Australia adopted international accounting standards
A) on 30 June 2005.
B) on 31 December 2005.
C) on 15 January 2005.
D) on 1 January 2005
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Chapter 24: Foreign Currency Translation
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Q1) Which of the following represents three criteria of which all must be met by a hedging relationship for it to qualify for hedge accounting?
A) the hedging relationship consists only of eligible hedging instruments and eligible hedged items
B) at the inception of the hedging relationship there is formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge
C) the hedging relationship meets hedge effectiveness requirements
D) all of the above
Q2) There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.
Q3) Exchange rates between the Australian dollar and the US dollar are determined by:
A) jointly by the Reserve Bank of Australia and the US Federal Reserve Board
B) the Reserve Bank of Australia
C) the Australian Department of Treasury
D) the supply of and demand for the two currencies
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 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
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) '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.
Q4) Describe three means by which governments may take action that is likely to require businesses to act in a socially responsible manner.For each of these three means,explain what considerations are likely to influence a government decision to use that particular method in preference to the others.
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Chapter 26: Ethics in Accounting
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Q1) Teleological theories of ethics:
A) determine whether behaviour is ethical or unethical by observing the consequences of that behaviour
B) suggest that people behave with varying degrees of self-interest
C) are based on religious principles
D) can be all of the above
Q2) Of the following statements about the costs and benefits of unethical behaviour is false?
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) The Code of Ethics for Professional Accountants includes all of the following except:
A) Confidentiality
B) Accuracy
C) Independence
D) Objectivity
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