Financial Accounting Test
Bank
Course Introduction
Financial Accounting introduces students to the fundamental concepts and principles of accounting, focusing on the preparation, interpretation, and analysis of financial statements. This course covers essential topics such as the accounting cycle, revenue recognition, asset and liability measurement, and the reporting of equity. Students will learn how to apply generally accepted accounting principles (GAAP) and explore the role of accounting information in decision-making by businesses and external stakeholders. Through practical exercises and case studies, students will develop a foundational understanding of the financial reporting process, enabling them to assess organizational performance and support effective management.
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) Which statement is incorrect regarding the Corporations Act 2001?
A) the accounting standards are deemed to be part of the Corporations Act
B) financial reports must comply with the accounting standards
C) the accounting standards need not be complied with if, in the opinion of the board of directors, this would not result in a true and fair view
D) if the financial statements and notes prepared in compliance with accounting standards would not give a true and fair view, then additional information necessary to give a true and fair view must be included in the notes to the statements
Answer: C
Q2) Compliance with accounting standards by reporting entities in the public sector is commonly supplemented by:
A) ASIC
B) 'Treasurer's Instructions'
C) FRC
D) the Corporations Act
Answer: B
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Chapter 2: The Conceptual Framework: Purpose, reporting
Entity, the Objective of Financial Reporting, and Qualitative
Characteristics
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Q1) Which components of the conceptual framework were withdrawn upon adoption of the IASB conceptual framework?
A) SAC 1 and SAC 2
B) Statements on Financial Accounting Concepts
C) SAC 3 and SAC 4
D) All of the above
Answer: C
Q2) When deciding whether an entity is a reporting entity reference should be made to:
A) relevant legislation rather than SAC1
B) SAC1 rather than relevant legislation
C) ASX listing rules rather than Australian Accounting Standards
D) Australian Accounting Standards rather than ASX listing rules
Answer: A
Q3) 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
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Chapter 3: The Conceptual Framework: Definition,
recognition and Measurement of the Elements in General
Purpose Financial Statements
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Q1) What characteristic is emphasised in the definition of income?
A) flow
B) change in stock
C) presentation
D) disclosure
Answer: A
Q2) Which of the following provides an example of measurement based on a nominal scale?
A) Postcode
B) Temperature using centigrade
C) Temperature using Fahrenheit
D) The outcome of an election process
Answer: A
Q3) What is the term for the action or process of recording a transaction or event in an entity's accounting records?
A) Recording
B) Valuation
C) Aggregating
D) Recognition
Answer: D
5
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Chapter 4: Fair Value Measurement
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Q1) Which level of the fair value hierarchy can be utilised without any adjustments?
A) All levels
B) Level 3
C) Level 1
D) Level 2
Q2) What is the level at which an asset or a liability is aggregated or disaggregated for recognition purposes?
A) Transaction
B) Unit of account
C) Balance Sheet
D) Corporate
Q3) A wide bid-ask spread is indicative of
A) An increase on market volume or activity
B) A decrease in market volume or activity
C) A Level 1 input in the fair value hierarchy
D) Highly developed price quotations
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) Research suggests that post-Enron,Chief Financial Officers:
A) are reluctant to use accounting policy choices to manipulate earnings
B) prefer not to smooth earnings
C) are more likely to use accounting policy choices to smooth earnings
D) use volatile earnings to signal low risk prospects
Q2) '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.
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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8
Chapter 6: The Statement of Financial Position
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Q1) Under AASB 101,the 'average time between the acquisition of materials entering into a process and their realisation in cash or as an instrument that is readily convertible into cash' is known as:
A) production cycle
B) production line
C) economic cycle
D) operating cycle
Q2) Which statement concerning the statement of financial position and the requirements of the Corporations Act is not true?
A) The Act requires the statement of financial position to present a 'true and fair view' of the entity's financial position
B) The Act states that if the financial statement would not give a true and fair view, additional information must be included in the notes to the statements in order to provide that view
C) True and fair view is defined in the Act to mean in accordance with generally accepted accounting standards
D) None of the above, i.e., all of the statements are true
Q3) 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) Explain the concept of the lower of cost and net realisable value rule.
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) Explain the effects on the financial reports of the FIFO cost flow assumption in a period of rising prices and discuss the arguments that have been raised for and against the use of this assumption to value inventory.
Q4) Which Australian accounting standard deals with inventory?
A) AASB 101
B) AASB 132
C) AASB 9
D) AASB 102
Q5) Two approaches to determining the number of units of inventory on hand are:
A) periodic, physical
B) lower of cost and net realisable value
C) FIFO, weighted average
D) periodic, perpetual
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Chapter 8: Accounting for Property, plant and Equipment
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Q1) AASB 116 para 6,defines depreciation expense as 'an expense recognised systematically for the purpose of allocating the depreciable amount of a depreciable asset over its useful life.'
Explain the terms,'depreciable amount' and 'useful life' and discuss the nature of depreciation that is implied by this definition.
Q2) Depreciable amount is defined in AASB 116 as:
A) the allocation of the cost of an asset, or other amount substituted for cost, over its useful life
B) the cost of an asset, or other amount substituted for cost, less accumulated depreciation
C) the cost of an asset, or other amount substituted for cost, less its residual value
D) none of the above
Q3) Should borrowing costs incurred during the construction period of an asset be expensed or capitalised? Discuss.
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) Discuss the results of empirical research that examines whether tax-effect accounting should continue to be required.
Q2) 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
Q3) When calculating income tax expense under the statement of financial position approach to income allocation,which of the following formulae is used?
A) Income tax payable minus deferred income tax expense
B) Current income tax expense plus deferred income tax expense
C) Deferred income tax expense minus income tax payable
D) Temporary differences plus permanent differences
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Page 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) The main reason why accounting for intangible assets is more difficult than accounting for other assets is:
A) intangible assets are inherently inert and their value can grow or dissipate quickly
B) intangible assets may be developed internally
C) intangible assets do not have physical substance
D) all of the above are equally important reasons why accounting for intangible assets is more difficult than accounting for other assets
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Chapter 11: Accounting for Leases
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Q1) What is a requirement listed in AASB 16 that addresses the exception of all leases to be listed on the balance sheet?
A) A right-of-use asset must be recognised
B) A lease liability must be recognised
C) Underlying asset is of low value
D) No exceptions are listed in AASB 16
Q2) For which party are adjustments required on transition?
A) Lessees
B) Lessors
C) Both parties
D) Neither parties
Q3) What is the maximum term of a short-term lease?
A) Six months
B) Two years
C) Twelve months
D) Three months
Q4) What are the main characteristics of a sale-and-leaseback agreement?
Q5) List and explain the different items set out in a typical lease agreement.
Q6) Discuss the implications of the proposal that operating/finance lease distinction be dropped.
Page 14
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Chapter 12: Accounting for Employee Benefits
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Q1) How should a reporting entity account for the fair value of a compound instrument?
Debt Component Equity Component
A) Cash-settled Cash-settled
B) Equity-settled Cash-settled
C) Equity-settled Equity-settled
D) Cash-settled Equity-settled
Q2) 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
Q3) The discount rate to be used when estimating future cash outflows relating to an employee benefit that is expected to be paid out in 20 years by a Sydney company should be restricted to:
A) the current yield on 20 year Australian Government Bonds
B) the current yield on high quality bonds
C) no estimation of future cash outflows is required
D) none of the above
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Page 15
Chapter 13: Accounting for Financial Instruments
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Q1) A futures exchange clearing house is mainly concerned with:
A) calling in margins from traders as and when required
B) establishing and collecting deposits from brokers trading on the exchange
C) calculating the gains and losses made by futures traders
D) all of the above
Q2) Which of the following is considered a compound financial instrument?
A) Convertible notes
B) Loan receivable
C) Loan payable
D) Ordinary share
Q3) According to AASB 132,which amounts are recognised in the statement of comprehensive income?
A) Dividends paid and dividend revenue
B) Printing costs and interest expense
C) Interest revenue and dividend revenue
D) Registration and advisory fees
Q4) 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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Chapter 14: The Statement of Comprehensive Income
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Q1) The standard that requires the disclosure of auditor's remuneration and executives' remuneration in the published reports is:
A) AASB 1031
B) AASB 101
C) AASB 118
D) No accounting standard requires the disclosure of auditor's remuneration and executives' remuneration
Q2) Benefits attributed to the comprehensive income approach include:
A) the statements of comprehensive income is determined conceptually
B) no items that satisfy the definition and recognition for income or expense bypass the statement of comprehensive income
C) the statement of comprehensive income is more reliable than its predecessor
D) all of the above
Q3) Which of the following is considered a disadvantage of the statement of value added?
A) Could cause confusion with the statement of comprehensive income
B) Costs may exceed benefits
C) May be regarded as a preferable way of describing performance
D) All answers are correct
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Page 17
Chapter 15: Revenue
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Q1) What arises when an entity performs under the contract by transferring goods or services to the customer before the consideration has been paid or is due?
A) Contract asset
B) Contract liability
C) Contract modification
D) Performance measure
Q2) Which of the following method(s)could estimate a stand-alone price?
A) An approach based on observable prices for similar goods or services
B) An expected cost plus margin approach
C) A residual approach
D) All of the listed methods could estimate a stand-alone price
Q3) What factors are considered when evaluating the collectability of an amount of consideration?
A) Ability and intention
B) Payment terms and ability
C) Intention and financial statement analysis
D) Rights and obligations
Q4) Distinguish the differences between a contract asset and a contract liability.
Q5) Discuss the three types of repurchase agreements.
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Chapter 16: The Statement of Cash Flows
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Q1) Although various types of financial statements related to cash flows began appearing in the early 20<sup>th</sup> century,what year introduced the first accounting standard related to this issue?
A) 1971
B) 1972
C) 1960
D) 1963
Q2) What is a rationale for preparing a statement of cash flows,according to AASB 107?
A) Assessing the ability of an entity to generate cash and cash equivalents
B) Needs of the entity to utilise cash flows
C) Both A and B are rationales for preparing a statement of cash flows
D) Neither A nor B is considered a rationale related to the statement of cash flows
Q3) 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) Which of the following is not a likely benefit of including a highlights statement in the annual report of a business?
A) It provides unskilled readers of the report with a simple summary of key financial indicators
B) The statement is regarded by many readers as being highly informative
C) Performance indicators can be calculated and then clearly set out in the highlights statement
D) Management can select what items are to be included in the report
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
Q3) 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
Page 20
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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
Type 2 \(\quad \) Those that relate to new conditions arising after the reportingdate
Which of the following statements is correct?
A) Only type 1 events will affect the contents of the full annual report of the previous period
B) Only type 2 events will affect the contents of the full annual report of the previous period
C) Both type 1 and type 2 events will affect the contents of the full annual report of the previous period
D) Neither type 1 nor type 2 events will affect contents of the full annual report of the previous period
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
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Chapter 19: Accounting for Extractive Industry
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Q1) Under the Australian Accounting Standard AASB 6 'Exploration for and Evaluation of Mineral Resources',the area-of-interest method in accounting for pre-production costs of a mining operation is a special form of the:
A) expense-and-reinstatement method
B) successful-efforts method
C) expense (costs written-off) method
D) full-cost method
Q2) The full-cost method of accounting for exploration and evaluation costs in the extractive industries:
A) requires that all such costs be recognised as expenses
B) requires that all such costs be recognised as assets
C) allows more timely disclosure of the costs of unsuccessful exploration activities
D) gives asset values closely approximating the value of mineral deposits that are discovered
Q3) Describe the units-of-production method of amortizing pre-production costs that have been capitalized.
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22
Chapter 20: Accounting for Agricultural Activity
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Q1) Which of the following statements about a growing crop expected to be sold within the next reporting cycle is not true?
A) It should never be classified as inventory
B) It should always be classified as a current asset
C) It should always be classified as inventory
D) It is in the process of production
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
Q3) Describe the sustained-yield method and the standard method of measuring forestry assets.
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Page 23
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) The inclusion of a report of the trustees of a superannuation plan is:
A) required by AAS 25
B) the same as an actuarial report
C) recommended by the ASFA
D) not relevant for a self-managed plan
Q3) 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
Q4) Explain the essential features of a defined benefit,externally managed,non-contributory superannuation plan whose benefits are not vested.
Q5) Discuss some of the changes to MS Plan's Income Statement under the AASB 1056 requirements.
Q6) Discuss some of the major differences between the requirements of AAS 25 and AASB 1056.
Page 24
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Chapter 22: Accounting for Insurance
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Q1) 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
Q2) What term describes the process of reinsurers themselves reinsuring in order to reduce risk?
A) Superannuation
B) Reinsurance
C) Retrocession
D) Underwriting
Q3) Which two users of information are addressed by life insurance activities?
A) Underwriters and policyholders
B) Shareholders and policyholders
C) Insurance agents and underwriters
D) Shareholders and underwriters
Q4) List and explain the three broad classes of assets insurers have.
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) The case against principles-based standards is that they 'typically require preparers and auditors to exercise judgement in accounting for transactions and events without providing a ____________ to frame that judgement.
A) insufficient structure
B) sufficient structure
C) insufficient information
D) sufficient information
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
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26
Chapter 24: Foreign Currency Translation
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Q1) 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
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) The 'spot' rate of exchange for foreign currencies is:
A) the rate at which currencies can be exchanged in a particular place (e.g., in Sydney or in New York)
B) the rate of exchange between the Australian dollar and the US dollar
C) the rate at which currencies can be exchanged on the New York foreign exchange market
D) the rate at which currencies can be exchanged immediately
Q4) Explain,using simple numerical example(s),how hedging a foreign currency transaction can remove uncertainty about the outcome of the transaction.
Q5) 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) Businesses are most likely to act in a socially responsible manner because:
A) their shareholders demand that they act in this way
B) competitors are acting in a socially responsible manner
C) the Corporations Law requires them to report in relation to any significant environmental regulation to which they are subject
D) consumers demand that they act in this way
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) Normative ethical theories are:
A) derived from common law rules of behaviour
B) descriptions of how people actually behave
C) beliefs about how people should behave
D) beliefs about how people actually behave
Q3) Ethical issues pertain primarily to
A) individuals.
B) those in the financial industry.
C) licensed professionals.
D) communities.
Q4) Should accountants act ethically? Explain the reasons for your answer to this question.
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