Financial Reporting and Analysis Practice Questions
Course Introduction
Financial Reporting and Analysis provides students with a comprehensive understanding of the principles and practices of corporate financial reporting. The course covers the preparation, interpretation, and analysis of financial statements in accordance with international accounting standards. Students will learn how to evaluate an organizations financial health, profitability, and cash flows through critical analysis of balance sheets, income statements, and cash flow statements. Emphasis is placed on the use of financial information for decision-making by internal and external stakeholders, as well as ethical considerations and the implications of accounting choices on reported results.
Recommended Textbook Issues in Financial Accounting 15th 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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Sample Questions
Q1) The most correct description of the stages in the development of AASB accounting standards is:
A) invitation to comment, exposure draft, discussion paper, approval of final standard
B) discussion paper, public comment, exposure draft, approval of final standard
C) discussion paper, exposure draft, approval of final standard, review
D) discussion paper, exposure draft, public comment, approval of final standard
Answer: D
Q2) Which statement concerning AASB Interpretations is not correct?
A) In 2006 the AASB decided to take over the role of the Urgent Issues Group
B) The AASB has set up an Interpretations Agenda Committee comprising the chairman and two other AASB members
C) Interpretations of IASB standards made by the IFRIC are not relevant in Australia
D) None of the above, i.e., all statements are correct
Answer: C
Q3) Explain and discuss the procedures currently operating in Australia for dealing with issues involving the development of AASB Interpretations.
Answer: Not Answer
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Page 3
Chapter 2: A Conceptual Framework: Scope, reporting
Entity and the Objective of Financial Report
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Q1) A major beneficiary from the development of a conceptual framework is expected to be:
A) governments
B) preparers of financial reports
C) accounting standard setters
D) managers
Answer: C
Q2) SAC2 defines the objective of general purpose financial reporting as:
A) to provide information to users that is useful for making and evaluating decisions about the allocation of scarce resources
B) to decide whether the reporting entity is achieving its objectives
C) to give a true and fair view of the financial position and performance of the entity
D) all of the above
Answer: A
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4
Chapter 3: A Conceptual Framework: the Fundamentals of
General Purpose Financial Reporting
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Sample Questions
Q1) The Framework defines assets as:
A) resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
B) probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
C) the service potential expected from resources controlled by the reporting entity as a result of past events
D) future economic benefits expected from resources controlled by the reporting entity as a result of past events
Answer: A
Q2) Under the Framework,a transport company does not regard the road outside its premises as an asset because:
A) it is not owned
B) it will not provide future economic benefits
C) the amount of future economic benefits is uncertain
D) it is not controlled
Answer: D
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Chapter 4: A Conceptual Framework: Recognition and
Measurement of the Elements of Financial Statements
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Q1) The amount that an entity would need to receive to compensate it for the loss of an asset is known as:
A) value-in-use
B) carrying value
C) deprival value
D) value-in-exchange
Q2) The correct statement is:
A) Value-in-use is lower than value-in-exchange for most assets
B) The value of an asset is the lower of its value-in-use and its value-in-exchange
C) If value-in-use is higher than value-in-exchange the asset should be offered for sale
D) The value of an asset is the higher of its value-in-use and its value-in-exchange
Q3) The Framework specifies that liabilities should be measured at:
A) historical cost
B) current replacement cost
C) current cash equivalent
D) The Framework does not specify how liabilities should be measured
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Chapter 5: The Choice of Accounting Methods
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Q1) During the ad hoc period of accounting standard setting in Australia in the 1970s and '80s,which of the following is not correct?
A) Arguments by business in relation to standards tended to be based on self-interest rather than sound theoretical considerations
B) The business community preferred standards which reduced choice
C) The business community preferred standards which maintained the status quo
D) Standard setters tended to produce standards that they knew were acceptability to the business community
Q2) If a firm has agreed to a debt covenant that specifies a maximum ratio of debt-to-total tangible assets,the probability of breaching the covenant is reduced if:
A) additional borrowing is undertaken
B) advertising is treated as an asset rather than as an expense
C) depreciation is charged at a higher rate
D) research and development costs are treated as an expense rather than as an asset
Q3) Describe and discuss how agency theory seeks to explain the choice of accounting methods by financial report preparers.
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Chapter 6: The Balance Sheet: an Overview
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Q1) The accounting standard relating to the statement of financial position is:
A) AASB 103
B) AASB 101
C) AASB 140
D) AASB 111
Q2) 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
Q3) 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
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Chapter 7: Accounting for Current Assets
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Q1) The inventory valuation rule 'the lower of cost and net realisable value' cannot be used with which of these methods?
A) Perpetual inventory method
B) Periodic inventory method
C) Last-in-first-out method
D) None of the above, i.e., it can be used with all of the methods
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) 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
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Page 9
Chapter 8: Accounting for Property, plant and Equipment
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Q1) Under AASB 116 the statement that is correct is:
A) subsequent to initial recognition, items of property, plant and equipment must be measured using either the cost model or the revaluation model
B) all items of property, plant and equipment must be measured using the cost model, except if they are qualifying assets
C) assets of the same class of property, plant and equipment can be measured using different models
D) all of the statements are correct
Q2) Which statement is correct?
A) A change between the cost model and the revaluation model may be made only if the change is material
B) A change between the cost model and the revaluation model may be made only if the change results in financial information that is more relevant and reliable as per AASB 108
C) For existing assets a new selection can be made each year between the cost model and the revaluation model
D) A change between the cost model and the revaluation model is never permitted
Q3) Explain and discuss how donated assets should be recorded in the accounts.
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Chapter 9: Accounting for Company Income Tax
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Q1) Permanent differences (between revenues and expenses for accounting and tax purposes):
A) can cause Deferred Tax Liabilities but not Deferred Tax Liabilities to arise
B) can cause both Deferred Tax Assets and Deferred Tax Liabilities to arise
C) can cause Deferred Tax Assets but not Deferred Tax Liabilities to arise
D) can cause neither Deferred Tax Assets nor Deferred Tax Liabilities to arise
Q2) Deferred tax assets and deferred tax liabilities:
A) may be offset for presentation in the financial statements
B) cannot both arise in the one business
C) usually offset one another in amount
D) must always be disclosed separately in the financial statements
Q3) McDougall Ltd shows a deferred tax liability of $25 000 in its financial reports.This could have arisen from:
A) making a payment of interest in advance in respect of the following financial year
B) making a provision for doubtful debts when the debts have not yet been written off
C) an unexpected gain from the sale of land owned by the Company
D) an under-statement of income tax payable in a prior year
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Chapter 10: Accounting for Investments
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Q1) The AASB standard which covers the treatment of shares held as a current investment is:
A) AASB 128
B) AASB 139
C) AASB 101
D) AASB 102
Q2) Where an inter-corporate investment is carried at acquisition cost plus or minus the investor's share of post-acquisition profits or losses of the investee,and asset revaluations by the investee are ignored,the method of equity accounting that is being applied is the:
A) hybrid equity method
B) cost-based equity method
C) pure equity method
D) mixed equity method
Q3) Companies purchase shares in other companies:
A) to acquire control over the other company's operations
B) to be held as a long-term investment
C) to make use of surplus cash
D) for all of the above reasons
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Page 12
Chapter 11: Accounting for Intangible Assets
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Q1) The initial patent period granted by the Australian Government and the potential legal life of trademarks and brand names,are respectively:
A) 10 years; unlimited, provided they continue to be registered
B) 16 years; unlimited, provided they continue to be registered
C) 20 years; 16 years
D) 7 years; 7 years
Q2) The statement concerning the requirements of AASB 138 in relation to goodwill that is incorrect is:
A) it prohibits the recognition of internally generated goodwill
B) it distinguished between identifiable intangible assets and goodwill
C) it requires goodwill to be tested for impairment at least every 5 years
D) none of the requirements is incorrect
Q3) Internally generated goodwill:
A) is not recognised because it does not provide future economic benefits
B) is not recognised because of the difficulty of valuing it reliably
C) is recognised because it provides a future economic benefit
D) A and B are incorrect
Q4) Compare the costs likely to be recorded for internally developed patents with those associated with a patent purchased in an arm's length transaction.
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Chapter 12: Accounting for Leases
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Q1) A 'sale-and-leaseback' transaction:
A) can be classified as neither a finance lease nor an operating lease
B) is always classified as a finance lease
C) can be classified as either a finance lease or an operating lease
D) is always classified as an operating lease
Q2) Consider the following statements concerning an instalment sale of goods:
(a)Ownership of the goods passes to the buyer when the agreement is signed
(b)It has the same legal effect as a sale by hire-purchase
(c)The seller's rights are limited to those of a creditor
(d)It is recorded as a sale when the final instalment is paid
A) Only (a) and (c) are correct
B) Only (b) and (d) are correct
C) None is correct
D) All are correct
Q3) Which of the following is not a typical characteristic of an operating lease?
A) It can be used for almost any type of asset
B) It is essentially a rental agreement
C) It is similar to a leveraged lease
D) It is cancellable by the lessee at little or no cost
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Page 14
Chapter 13: Accounting for Employee Benefits
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Q1) Leopard Ltd has a defined benefit superannuation plan where the present value of the accrued benefits on 1 January 20X6 was $850 000 and on 31 December 20X6 was $910 000.During 20X6 Leopard Ltd paid $80 000 to the plan.On 1 January 20X6 the net market value of the plans assets was $365 000 and on 31 December 20X6 was $468 000.Under the net-worth method the superannuation expense for the year ended 31 December 20X6 to be shown in Leopard's accounts is:
A) $80 000
B) $60 000
C) $37 000
D) $53 000
Q2) Under AASB 119,non-monetary benefits paid to employees are measured by the employer at:
A) the replacement cost of the benefit
B) the net marginal cost to the employer
C) the market cost of the benefit
D) none of the above
Q3) Discuss the measurement issues associated with accounting for short-term and long-term employee benefits.
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Chapter 14: 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) 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?
Q3) 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
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Page 16
Chapter 15: Equity
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Q1) The three broad components of equity for a company are:
A) public equity, contributed equity, government equity
B) ordinary shares, preference shares, options
C) share capital, retained earnings, reserves
D) ordinary shares, preference shares, reserves
Q2) Which approach to accounting for convertible notes is required in AASB 132 'Presentation and Disclosure of Financial Instruments'?
A) Recognise according to the application of the framework criteria for the definition and recognition of liabilities and equity
B) Separate into their equity and debt components
C) Recognise as a liability in accordance with their legal form
D) None of the above
Q3) A scheme where a company provides employees with options to acquire shares in the company where the primary aim of the scheme is to reduce conflict between owners and employees is known as:
A) a compensatory plan
B) a non-compensatory plan
C) an employee plan
D) none of the above
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Chapter 16: The Income Statement
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Q1) The expense example that is a classification by nature rather than by function is:
A) depreciation expense
B) administrative expenses
C) marketing expenses
D) occupancy expenses
Q2) Under AASB 101,the nature and amount of which type of items should be disclosed separately?
A) Extraordinary items
B) Significant items
C) Material items
D) None of the above
Q3) The Australian Accounting Standards Board changed the name 'statement of financial performance' to 'statement of profit and loss and other comprehensive income':
A) to be consistent with the Corporations Act
B) to be consistent with international accounting standards
C) to be consistent with US accounting standards
D) because of the development of accounting standards that are applicable to both the private and public sectors
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Page 18
Chapter 17: The Cash Flow Statement
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Q1) The first institution in Australia to require certain companies to include a funds statement in their published reports was:
A) the Australian Accounting Standards Board
B) the Australian Accounting Research Foundation
C) the Australian Stock Exchange
D) none of the above
Q2) Studies such as Bowen,Burgstahler and Daley (1986)and Cleng 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
Q3) AASB 107 provides for which method of reporting cash flows from operating activities?
A) Either the direct or the indirect method
B) The direct method
C) The indirect method
D) The working capital method
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Page 19
Chapter
Statements and
Financial Information
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Q1) AASB 8 'Operating Segments' requires entities to report:
A) segments that correspond to internal management reports
B) segment information that is more consistent with other parts of their annual reports
C) more segment information in their interim financial statements
D) all of the above
Q2) A company reports the following in relation to its latest financial year:
\[\begin{array} { l r }
\text { Net profit } & \$ 12000 \\
\text { Number of ordinary shares issued } & 5000 \\
\text { Number of preference shares issued } & \\
\text { (paying an annual dividend of } 50 \text { cents per share) } & 500 \end{array}\]
The company's basic earnings per share figure is:
A) $2.00
B) $2.20
C) $2.10
D) $2.35
Q3) Discuss the benefits of the 'management approach' adopted by AASB 8.
Page 20
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Chapter 19: Further Financial Reporting Issues
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Q1) A small proprietory 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
Q2) Where a business makes a change in an accounting policy,it must disclose:
A) only the nature of the change and the reasons for it
B) the nature of the change, the reasons for it and the financial effects of the change if it will affect the results of future periods
C) the nature of the change, the reasons for it and the financial effects of the change if it has affected the current period's results or may affect the results of future periods
D) the nature of the change, the reasons for it and the financial effects of the change if it has affected the current period's results
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.
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21
Chapter 20: Accounting for the Extractive Industries
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Q1) Australian Accounting Standard AASB 6 Exploration for and Evaluation of Mineral Resources does not identify which of the following phases in the exploitation of mineral,oil or gas deposits?
A) Production
B) Restoration
C) Construction
D) Evaluation
Q2) AASB 6 is an activity based standard; as such it does not fully cover other areas of extractive industries.Make a list and briefly explain the other relevant standards that a mining company has to consider in producing its financial statements under the new regime.
Q3) 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 21: Accounting for Real Estate Development and Construction Contracts
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Q1) In what circumstances should borrowing costs incurred in relation to real estate developments not be included as part of the cost of a development? Explain the reason(s)for not including borrowing costs for each of the circumstances you have listed.
Q2) 'To recognise assets and liabilities when a firm construction contract is signed would be inconsistent with the requirements of AASB 111'.Discuss this statement in reference to the framework.
Q3) Where possible when allocating the costs carried forward to individual components of a property development the following method should be used:
A) specific identification method
B) area method
C) value method
D) none of the above
Q4) The 'area' method of allocating the costs of real estate developments to individual lots:
A) should be used where lots with the same area have similar expected values
B) should be used where all lots have the same, or very similar areas
C) is always the preferred method
D) should always be used for industrial land
Page 23
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Chapter 22: Accounting for Agricultural Activity
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Q1) 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 .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:
\[\$ 850000\]
A) $400 000 Profit
B) $(400 000) Loss
C) $350 000 Profit
D) $700 000 Profit
Q2) Agricultural activity under the heading of Biological assets such as animals is most appropriately measured for accounting purposes at:
A) standard value
B) net realisable value
C) discounted market value
D) historical cost
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Chapter 23: Accounting for Superannuation Plans
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Q1) The definition of the accrued benefits of the members of a superannuation plan as 'the present value of expected future payments arising from membership of the plan up to the measurement date' is relevant for:
A) externally managed plans
B) all superannuation plans
C) defined benefit plans
D) defined contribution plans
Q2) 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
Q3) Discuss the differences between the requirements of ED179 and AAS 25.
Q4) Discuss the roles of APRA,Asic and the ATO in the regulation of the superannuation industry.
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Chapter 24: Accounting for Financial Institutions
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Q1) 'Reinsurance' occurs when:
A) a person insures property with several different insurers
B) an insurer insures their own risks with other insurers
C) a person reinstates their insurance policy after making a claim
D) an insurer accepts a claim and writes a new policy for the same customer
Q2) Explain what is meant by reinsurance.In your answer,discuss inwards and outwards reinsurance.
Q3) 'Long-tail business' and 'short-tail business' are terms usually associated with companies involved in:
A) investment banking
B) life insurance
C) general banking
D) general insurance
Q4) The Income statement of a bank should show its assets:
A) all listed in order of liquidity
B) divided under the headings of current assets and non-current assets
C) all as current assets
D) all as current assets except for property, plant and equipment
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Chapter 25: Financial Reporting in the Public Sector
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Q1) Government departments should be classified as 'reporting entities' in accordance with Statement of Accounting Concepts SAC 1:
A) because the Auditor-general requires that they prepare financial reports
B) because individual Members of Parliament rely on the financial reports for information to help them carry out their responsibilities
C) because individual government departments require financial reports for internal management purposes
D) for all of the above reasons
Q2) Compare government financial statistics with the general purpose GAAP reporting models.
Q3) When the legislation that creates a public sector entity also specifies particular accounting methods to be used or disclosures to be made,these requirements:
A) are in addition to those required by AASB's
B) allow the government entity to select the method that best reflects the economic circumstances
C) are superceded by the requirements of AASB standards
D) may be disregarded if the requirements of AASB 101 are met
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Chapter 26: 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) Australia adopted international accounting standards:
A) on 30 June 2005
B) on 31 December 2005
C) on 1 January 2005
D) on 31 March 2005
Q3) Describe and explain the strategies adopted by the AASB in order to achieve the objective of international harmonisation of accounting standards in Australia.
Q4) Discuss the significance of the Norwalk Agreement and the relationship between the IASB and various national standard setters.
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Chapter 27: Foreign Currency Translation
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Q1) A way in which a foreign currency transaction can be hedged is:
A) Buy (or sell) foreign currency at the date of the initial transaction
B) Enter into a forward rate agreement to fix the cost of the currency at a fixed date in the future
C) Enter into a transaction which neutralises the risk (e.g., have accounts receivable and accounts payable in the same currency with the same payment dates)
D) All of the above
Q2) The 'functional currency' of a business is:
A) the currency of the country in which the business is incorporated
B) the currency of the primary economic environment in which the company operates
C) the currency in which the business presents its financial reports
D) the currency of the country in which the majority of the shareholders of the business are located
Q3) The 'forward' rate of exchange for foreign currencies is:
A) the rate of exchange between the Australian dollar and the US dollar
B) the rate applicable to funds to be forwarded to an overseas country
C) the rate at which currencies can be exchanged at some future date
D) the rate at which currencies can be exchanged immediately
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Chapter 28: Accounting for Corporate Social Responsibilities
Available Study Resources on Quizplus for this Chatper
21 Verified Questions
21 Flashcards
Source URL: https://quizplus.com/quiz/71413
Sample Questions
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) 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 that have call centres in countries such as India or major Australian supermarkets that import goods from China when they are readily available in Australia.
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Page 30
Chapter 29: Ethics in Accounting
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/71412
Sample Questions
Q1) It is true that the principle of 'professional behaviour' in the Code of Ethics for Professional Accountants:
A) requires a member to avoid any action or omission that may bring discredit to the profession
B) is, in sense, a catch all provision that covers unethical behaviour not included elsewhere in the code
C) covers accountants behaviour outside their professional role
D) all of the above
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) Briefly describe three classes of deontological theories that have been used to examine ethical behaviour.
Q4) Should accountants act ethically? Explain the reasons for your answer to this question.
Q5) Briefly describe the classes of teleological theories that have been used to examine ethical behaviour.
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