Financial Reporting
Question Bank
Course Introduction
Financial Reporting is a foundational course that explores the principles, standards, and practices involved in the preparation, presentation, and analysis of financial statements. The course covers essential topics such as the accounting cycle, recognition and measurement of assets and liabilities, revenue and expense recognition, and the regulatory environment governing financial reporting. Students will learn how to interpret and analyze balance sheets, income statements, statements of cash flows, and shareholders equity to assess the financial health of organizations. Emphasis is placed on the application of International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), ethical considerations, and the use of financial information by various stakeholders for decision-making purposes.
Recommended Textbook
Intermediate Accounting 2nd Edition Volume I by Kin Lo George Fisher
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Page 2
Chapter 1: Fundamentals of Financial Accounting Theory
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Sample Questions
Q1) Explain the meaning of publicly accountable enterprises, efficient securities market (semi-strong form), and efficient securities market (strong form).
Answer: Publicly accountable enterprises: Firms with equity, debt, or other securities traded in public markets.
Efficient securities market (semi-strong form): A market in which the prices of securities traded in that market at all times properly reflect all information that is publicly known about those securities.
A market that is strong form efficient has prices that reflect all information, whether publicly or privately known.
Q2) Explain how earnings management may arise.
Answer: Insiders have many incentives to manage earnings: to influence share price, to lower the cost of financing, to meet contractual and regulatory requirements, to increase management compensation, to lower political costs, to gain regulatory protection. Most often, the incentives lead to an upward bias in earnings and net assets, but sometimes the incentives lead to a downward bias.
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Chapter 2: Conceptual Frameworks for Financial Reporting
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Sample Questions
Q1) Which statement best explains the concept of "representational faithfulness"?
A)Transactions should be recorded in accordance with their substance rather than their legal form.
B)Transactions should be recorded in accordance with their legal form rather than their substance.
C)Transactions should be recorded accurately and completely to be useful to financial statement users.
D)Transactions should be recorded using the rules and guidelines provided in the accounting standards.
Answer: A
Q2) What is not an information need of users of financial information under the IFRS Framework?
A)Information on the amount of cash flows.
B)Information about the timing of future cash flows.
C)Information on the uncertainty of cash flows.
D)Information about the amount of past cash flows.
Answer: D
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Chapter 3: Accrual Accounting
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Sample Questions
Q1) Which statement is correct about expenses in the income statement?
A)The nature of expense format classifies expenses based on their source.
B)Some nature of expense categories are cost of sales, administration or warehouse.
C)Expenses must be classified by their function.
D)Expenses should be classified in decreasing order of magnitude.
Answer: A
Q2) What is meant by the phrase "true and fair view" of financial reporting?
A)The financial statements provide a true representation of the company's economic conditions and performance.
B)The financial statements provide an unbiased representation of the company's economic conditions and performance.
C)The financial statements provide a fair representation of the company's economic conditions and performance.
D)The financial statements provide an accurate representation of the company's economic conditions and performance.
Answer: C
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Chapter 4: Revenue Recognition
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Sample Questions
Q1) Which statement is correct about multiple deliverable sales arrangements?
A)The revenue recognition criteria no longer apply to these transactions.
B)The revenue must be allocated to the components of the sale evenly over the life of the contract.
C)The revenue must be recognized evenly over the life of the contract.
D)Identifying the different sources of revenue increases the representational faithfulness.
Q2) What disclosures are required under IFRS for construction contracts?
A)Method used to determine the percentage complete in the period.
B)Contract revenue recognized in the period.
C)Method of revenue recognition.
D)All of the above are required.
Q3) In July, Telly-Rental sells a home theatre for $1,000 on an installment basis.
Telly-Rental generally earns a gross margin of 25%. The customer pays $500 in December. How much revenue is recorded by Telly-Rental in December?
A)$0
B)$125
C)$250
D)$500
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Chapter 5: Cash and Receivables
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Q1) Which statement best describes the gross method of accounting for cash discounts?
A)Records receivables at their present value amount.
B)Records any discounts forfeited as income.
C)Records any discounts taken as a reduction in revenue.
D)Records any discounts taken as an expense.
Q2) Medical Machines reported credit sales of $800,000, cash collections of $550,000 and bad debt write-offs of $15,000 for last year. Accounts receivable had a balance of $1,000,000 at the beginning of the year. What was the ending balance in the accounts receivable account?
A)$450,000
B)$1,235,000
C)$1,250,000
D)$1,800,000
Q3) Which statement best describes the net method of accounting for cash discounts?
A)Records receivables at their face value.
B)Records any discounts forfeited as income.
C)Records any discounts taken as an expense.
D)Records any discounts taken as a reduction in revenue.
Q4) Explain two problems associated with the direct write-off method.
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Chapter 6: Inventories
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Sample Questions
Q1) Which statement best explains the difference between the retail inventory and gross margin methods?
A)The gross margin method estimates cost of goods sold by applying an average gross margin to the amount of sales recorded for the period.
B)The gross margin method estimates ending inventory cost using retail prices and an average gross margin.
C)The retail inventory method estimates cost of goods sold by applying an average gross margin to the amount of sales recorded for the period.
D)The retail inventory method estimates ending inventory cost using purchase prices and an average gross margin.
Q2) Explain what problems are created for the auditor by the use of the absorption costing method under GAAP.
Q3) Explain the meaning of net realizable value and when raw materials, work in progress and finished goods inventories need to be written down.
Q4) Explain how manufacturing companies can manipulate earnings through its production process. What should an auditor or financial statement user do to detect this type of manipulation?
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Chapter 7: Financial Assets
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Sample Questions
Q1) Which statement is not correct about "control"?
A)Control is presumed when an entity has more than 50% of the voting power of the investee.
B)Having control allows the entity to direct the strategic operations of the investee.
C)Control is presumed when an entity owns more than 50% of the investee.
D)Consolidation is used when an entity has control over the investee.
Q2) What is a financial asset?
A)An asset that has a fixed or determinable cash flow.
B)Assets such as land and buildings that generate future cash flows.
C)An asset arising from contractual agreements on future cash flows.
D)An asset that does not generate future cash flows.
Q3) A bond has a maturity value of $750,000 payable in 3 years. These bonds have a 5% coupon rate payable annually, and the market yield was 2% when the bonds were purchased.
Required:
a. Is this a discount bond or a premium bond?
b. Compute the amount required to purchase this bond at the beginning of the 3-year period
Q4) Explain the meaning of the "effective interest method."
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Chapter 8: Property, Plant, and Equipment
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Sample Questions
Q1) Ontario Ltd. purchased a machine on Jan 1, 2010 for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2013 for $200,000. What was the gain/loss on disposal of the machine?
A)$10,000 loss.
B)$10,000 gain.
C)$50,000 loss.
D)$50,000 gain.
Q2) What costs should not be capitalized to "building"?
A)Demolition of old structures
B)Engineering surveys
C)Interest during construction
D)Construction permits
Q3) What costs should not be capitalized to "equipment"?
A)Non-refundable sales tax
B)Refundable sales tax
C)Interest during construction of equipment
D)Transportation and delivery
Q4) Explain derecognition of property, plant or equipment.
Page 10
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Chapter 9: Intangible Assets, Goodwill, Mineral Resources, and
Government Grants
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Q1) Which statement is correct?
A)Under IFRS, research costs must fulfill six specific criteria.
B)Under IFRS, all research costs must be expensed as incurred.
C)Development activities must be technically feasible.
D)Adequate financial resources must exist to complete research activities.
Q2) Which statement is correct?
A)Costs can continue to be capitalized in the post development phase.
B)The project must meet IAS 38 criteria before development costs can be capitalized.
C)The development phase includes generating new ideas or searching for new materials.
D)The research phase includes designing, constructing or testing a prototype.
Q3) Which of the following is NOT a "class" of intangible assets?
A)Industrial designs.
B)Raw materials.
C)Patents.
D)Computer software.
Q4) Explain the accounting for assets in the mineral resource exploration industry.
Q5) Explain how earnings can be manipulated through choices made in the estimated useful lives for intangible assets.
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Chapter 10: Applications of Fair Value to Non-Current Assets
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Q1) Which of the following is correct with respect to the accounting for "investment properties"?
A)Under ASPE, either the cost or fair value model may be used.
B)Under IFRS, either the cost or fair value model may be used.
C)Under ASPE, either the revaluation or fair value model may be used.
D)Under IFRS, either the revaluation or fair value model may be used.
Q2) What is "value in use"?
A)The present value of the future cash flows expected to be derived from an asset.
B)The amount obtainable from the sale of an asset in an arm's-length transaction less the costs of disposal.
C)The higher of an asset's fair value less costs to sell and its value in use.
D)The lower of an asset's fair value less costs to sell and its value in use.
Q3) Which statement is correct?
A)Vines are biological assets until they are converted to juice.
B)Vines are biological assets until they are converted to wine.
C)Trees are biological assets until they are converted to logs.
D)Trees are biological assets until they are converted to lumber.
Q4) Explain when a non-current asset is impaired.
Q5) Explain the accounting for assets related to the agricultural industry.
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