Financial Statement Analysis
Chapter Exam Questions
Course Introduction
Financial Statement Analysis is a comprehensive course designed to equip students with the skills necessary to interpret and analyze the financial statements of corporations and other entities. Students will learn to assess an organizations financial health and performance through the examination of balance sheets, income statements, statements of cash flows, and shareholders' equity. The course covers key analytical techniques such as ratio analysis, trend analysis, and benchmarking, as well as considerations of accounting policies, earnings management, and the impact of external factors. By the end of the course, students will be able to critically evaluate financial information to support decision-making in investment, lending, and management contexts.
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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) 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) Additional disclosure requirements by the ASX for stock exchange listed companies are all of the following,except:
A) reporting of performance indicators such as return on shareholders' equity
B) a statement of ethical guidelines for employees and management
C) a requirement for the top 300 companies to have an audit committee
D) none of the above, i.e., all are additional requirements for ASX listed companies
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) The elements of financial statements,as outlined in the conceptual framework,are:
A) assets, liabilities, equity, income, expenses
B) balance sheet, income statement, cash flow statement
C) materiality, comparability, relevance, reliability
D) historical cost, current cost, net market value, constant purchasing power
Answer: A
Q2) What is one difficulty encountered with asking users of financial information what they want?
A) Cost-benefit constraint
B) Lack of available information
C) The decision making process is not the same for all decision makers.
D) Choice of information sources
Answer: C
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) Under the Framework,which of these is not an essential characteristic of an expense?
A) It must result in a decrease in equity
B) It must represent a flow
C) It must be associated with the earning of revenue
D) It must take the form of a decrease in an asset or an increase in a liability
Answer: C
Q2) Future economic benefits for assets come from:
A) value-in-utility
B) value-in-exchange
C) value-in-use
D) both B and C
Answer: D
Q3) The estimated current net market value of an asset in the ordinary course of business is known as:
A) opportunity cost
B) replacement cost
C) current cash equivalent
D) discounted value of future cash flows
Answer: C
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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) Explain the valuation premise and discuss how it is used,depending on what is identified as the highest and best use.
Q3) Which valuation technique considers replacement cost of an asset when determining fair value?
A) Income approach
B) Cost approach
C) Market approach
D) Lower-of-cost-or-market approach
Q4) What term describes the market with the greatest volume and level of activity for an asset or liability?
A) Secondary market
B) Principal market
C) Stock market
D) International exchange
Q5) List and give examples of the inputs of the fair value hierarchy.
Page 6
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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) Which of the following is not a time period considered in developing an accounting standard?
A) Convergence period
B) Harmonisation period
C) Deliberation period
D) Conceptual framework period
Q3) The treatment that is likely to lead to a higher reported net profit in the short term than otherwise would be the case is:
A) underestimating an increase in the provision for long-service leave
B) treating expenses as assets
C) failure to sufficiently provide for doubtful debts
D) the deferral of advertising costs until the next accounting period
Q4) Explain the meaning of creative accounting and discuss various factors that tend to limit its operation.
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Chapter 6: The Statement of Financial Position
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Q1) What does the presentation of investments in shares in the statement of financial position depend upon?
A) The relationship between the investee and the investor
B) The debt-to-equity ratio of the investor
C) The debt-to-asset ratio of the investor
D) The intent of the investor as to the future disposal of the shares
Q2) 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.
Q3) The accounting standard relating to the statement of financial position is:
A) AASB 103
B) AASB 101
C) AASB 140
D) AASB 111
Q4) Identify and discuss the requirements concerning the classification of liabilities contained in AASB 101.
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Chapter 7: Accounting for Current Assets
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Q1) 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
Q2) Choosing a cost flow assumption to be applied to inventory,such as FIFO or weighted average,is to solve the problem of:
A) determining the quantity of inventory on hand
B) determining the stock loss from theft or destruction
C) determining which costs to apply to sold and unsold inventory
D) determining net realisable value
Q3) Explain the concept of the lower of cost and net realisable value rule.
Q4) Explain and discuss the criteria contained in AASB 101 for distinguishing between current and non-current assets.
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Chapter 8: Accounting for Property, plant and Equipment
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Q1) 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.
Q2) A subsequent increase in the value of goodwill that has previously been written off as an impairment loss:
A) must not be reversed in subsequent periods
B) must be reversed in the period in which the value has changed
C) is allocated over the other assets in the cash generating unit in proportion to their carrying amounts
D) all of the above
Q3) Under AASB 123 'Borrowing Costs',a qualifying asset is defined as:
A) an asset that takes more than twelve months to complete
B) an asset that necessarily takes a substantial period of time to get ready for its intended use or sale
C) a long-term construction project for the construction of ships, dams, roads or buildings
D) an asset that necessarily takes more than two years to complete
Q4) 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) Compare and contrast the Tax Payable and Tax Allocation - Balance Sheet Approach methods of accounting for income tax.Which method is required under Australian Accounting Standards? Outline the main arguments for and against each of these methods.
Q2) AASB 112 requires that:
A) current and deferred tax expense are reported as one figure 'income tax expense'
B) current and deferred tax expense are disclosed separately
C) deferred tax expense is not identifiable in the financial reports
D) current tax expense is not identifiable in the financial reports
Q3) A temporary difference arises due to:
A) the timing difference between the end of the financial year and when the income tax payable is paid
B) a difference between the amounts of the accounting expenses and the tax deductions of a company which will be reversed in future periods
C) a difference between the amounts of the accounting expenses and the tax deductions of a company which will never be reversed
D) a difference in the amount of the deferred tax assets and the deferred tax liabilities
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Chapter 10: Accounting for Intangible Assets
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Q1) In AASB 138,an 'identifiable non-monetary asset without physical substance',is the definition of:
A) an intangible asset
B) cash at bank
C) goodwill
D) none of the above
Q2) AASB 138 permits two bases for measuring intangible assets,subsequent to initial recognition,the cost model and the revaluation model:
A) in practice the revaluation model is the one that is most commonly applied
B) the conditions for the use of the revaluation model will only be met on rare occasions
C) in practice the two models are applied about 50/50
D) none of the above
Q3) 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
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Chapter 11: Accounting for Leases
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Q1) Managers will often have strong incentives to favour operating leases over finance leases.This is because:
A) operating leases are recorded on the balance sheet. This results in an increased debt ratio and a lower return on total assets
B) finance leases are recorded on the balance sheet. This results in a decreased debt ratio and a lower return on total assets
C) finance leases are recorded on the balance sheet. This results in an increased debt ratio and a lower return on total assets
D) None of the above. Managers do not prefer operating leases
Q2) What are the main characteristics of a sale-and-leaseback agreement?
Q3) What are the two elements in identifying whether a contract contains a lease?
A) The type of lease and the identified asset
B) The identified asset and the minimum lease payments
C) Identified asset and the right to control the use of an identified asset
D) The type of lease and the minimum lease payments
Q4) How is a finance lease distinguished from an operating lease?
Q5) List and explain the different items set out in a typical lease agreement.
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Chapter 12: Accounting for Employee Benefits
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Q1) The method of accounting for superannuation costs based on the assumption that the trust that manages the superannuation plan is a separate legal entity to the employer and is responsible for the fund's obligations is:
A) the form method
B) the legal entity method
C) the net-worth method
D) none of the above
Q2) There are two types of risk associated with post-employment benefits,investment risk and actuarial risk.Explain these terms and describe the situations when these risks are borne by the employee and when they are borne by the employer (in accordance with AASB 119).
Q3) Which of the following is not a period of employment for long-service leave purposes?
A) Apprenticeship
B) Preconditional
C) Conditional
D) Unconditional
Q4) Discuss the three types of share-based payment transactions as outlined by AASB 2 'Share-based Payment'.
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Chapter 13: Accounting for Financial Instruments
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Q1) AASB 139 requires that,subsequent to initial recognition,financial liabilities other than those designated as at fair value through profit and loss must be measured at amortised cost using the:
A) effective interest method
B) nominal interest method
C) simple interest method
D) compound interest method
Q2) 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
Q3) SPI 200 futures contracts:
A) cease trading on the third Thursday of the contract month
B) are settled on the third Thursday of the contract month
C) may only be used by traders
D) all of the above
Q4) Discuss the disclosure requirements in AASB 7 Financial Instruments Disclosure and AASB 132 Financial Instruments Presentation.
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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) AASB 101 allows preparers two options in the classification of items for the statement of comprehensive income statements.Discuss.
Q3) 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
Q4) Define income and explain how it differs from revenue.
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Chapter 15: Revenue
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Q1) Which of the following is not part of the five-step model for determining the recognition of revenue from contracts with customers:
A) Determine the transaction price
B) Identify the contract with the customer
C) Recognise revenue when a performance obligation is satisfied
D) Identify the schedule of payments in the contract
Q2) A vehicle and plot of land were purchased for $115 000. The fair value of the vehicle was $20 000,and the fair value of the land was $130 000 at the time of purchase. To the nearest dollar,what amount should be allocated to the vehicle?
A) $20 000
B) $57 500
C) $46 000
D) $15 333
Q3) Discuss the three types of repurchase agreements.
Q4) What is a possible indicator of revenue reversal?
A) The contract has a broad range of possible consideration amounts
B) The entity's experiences with similar types of contracts is limited
C) Both A and B are possible indicators
D) Neither A nor B is a possible indicator
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Chapter 16: The Statement of Cash Flows
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Q1) Activities described as relating to the acquisition and/or disposal of non-current assets under AASB 107 are classified as:
A) investing activities
B) financing activities
C) operating activities
D) none of the above
Q2) Discuss how an entity that reports an after tax profit may be unable to generate positive cash flows from operating activities.
Q3) Studies such as Bowen,Burgstahler and Daley (1986)and Cheng 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
Q4) Discuss the arguments for and against the presentation of the cash flow statement using the indirect approach rather than the direct approach.
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Chapter 17: Financial Reporting: Segment Reporting and Highlights Statements
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Q1) A company reports the following information on its year-end financial statements:
\[\begin{array} { l l }
\text { Cument assets } & \$ 300 \\
\text { Non-current assets } & 700 \\
\text { Current liabilities } & 150 \\
\text { Non-current liabilities } & 250
\end{array}\]
Shareholders' equity 600
What is the debt-to-equity ratio?
A) 50.0%
B) 66.7%
C) 40.0%
D) 33.3%
Q2) Which of the following is an efficiency ratio?
A) Current ratio
B) Rate of return on total assets
C) Debt-to-equity ratio
D) Times interest earned
Q3) Discuss the benefits of the 'management approach' adopted by AASB 8.
Page 19
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Chapter 18: Further Financial Reporting Issues
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Q1) The treatment of items that clearly belong to past reporting period is a long-standing problem.One way to handle this problem is to make adjustments to the retained earnings.The problem with this approach is that:
A) it could lead to manipulation of profit for the period
B) revenue and expenses are matched inappropriately
C) revenue and expenses are matched appropriately
D) none of the above
Q2) Which of the following events occurring after the reporting date may need to be disclosed in the financial statements of a business for that previous period?
A) The bankruptcy of a major debtor
B) A loss caused by fire or flood
C) The announcement of a business merger
D) All of the above may need to be disclosed
Q3) Which of the following is not classified as a prior period error according to AASB 108?
A) A mistake in estimating warranty costs
B) Fraud
C) Mistakes in applying accounting policies
D) Oversights or misinterpretations of facts
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Chapter 19: Accounting for Extractive Industry
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Q1) To calculate the value of the reserves,the following data are required:
A) an estimate of the current sales price per output unit
B) a discount rate
C) an estimate of the life of the fixed assets
D) an estimate of the cost of salvage per output unit
Q2) 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
Q3) 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.
Q4) Describe the activities involved in the pre-production phase in the production of minerals,oil and gas and the accounting treatments that might be allowed for costs arising from this phase.
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Chapter 20: Accounting for Agricultural Activity
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Q1) Australian Accounting Standard AASB '141 Agricultural Activity' requires disclosure of the following items of information EXCEPT:
A) cost of agricultural produce is its fair value less costs to sell at the point of harvest;
B) specific requirements for government grants related to a biological asset
C) specific disclosures in relation to biological assets
D) the method of calculating the replacement cost of biological assets
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
Q3) 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?
Q4) Describe the sustained-yield method and the standard method of measuring forestry assets.
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Chapter 21: Accounting for Superannuation Entities
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Q1) The trustees of a superannuation fund can transfer their responsibility for the general conduct of the fund:
A) if it is non-contributory
B) if it provides portable benefits
C) if the fund is externally managed
D) in none of the above cases
Q2) Generally,insurance arrangements include which of the following?
A) offered to members, with the entity only acting as an agent
B) offered to members, with the entity accepting insurance risk
C) provided to defined benefit members in relation to their projected retirement benefit
D) all of the above
Q3) Discuss some of the major differences between the requirements of AAS 25 and AASB 1056.
Q4) Discuss the roles of APRA,Asic and the ATO in the regulation of the superannuation industry.
Q5) Explain the essential features of a defined benefit,externally managed,non-contributory superannuation plan whose benefits are not vested.
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Chapter 22: Accounting for Insurance
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Q1) Which disclosure requirement is to be presented in the statement of comprehensive income?
A) The component related to risk margin
B) Information regarding material non-insurance contracts
C) The amount of net claims incurred
D) The process used to determine risk margin
Q2) Which accounting standard covers accounting for the life insurance industry?
A) AASB 1023
B) AASB 1038
C) AASB 9
D) AASB 4
Q3) List and explain the three broad classes of assets insurers have.
Q4) Aside from details of income,expenses,assets,liabilities,and equity,what must life insurers disclose in financial statements?
A) Regulatory capital information
B) Disaggregated information
C) Managed funds
D) All of the above are correct
Q5) List and describe the five main types of traditional activities related to life insurance.
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Chapter 23: International Accounting Standards, harmonisation and Convergence
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Q1) The 'global harmonisation' approach to accounting standards,as set out in AASB Policy Statement No 1,means which of the following?
A) working to reduce the differences between Australian and other countries accounting standards
B) adopting accounting standards developed and adopted in other countries
C) developing local accounting standards based on an examination of accounting standards and practices adopted in other countries
D) none of the above
Q2) In 2005,the adoption of IFRSs had led to:
A) greater transparency and comparability in financial reporting
B) an increase in the cost of capital
C) less market liquidity and cross-border investment
D) an increase in equity
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) Explain how globalisation has impacted Australian accounting standards. What is the role of the various accounting governing bodies in harmonising the accounting standards?
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Chapter 24: Foreign Currency Translation
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Q1) 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
Q2) 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
Q3) Explain,using simple numerical example(s),how hedging a foreign currency transaction can remove uncertainty about the outcome of the transaction.
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) 'Enlightened self-interest' is usually defined as:
A) engaging in corporate philanthropy, such as by making donations to universities and public charitable institutions
B) incurring costs that promote benefits for society as a whole but which it is hoped will generate benefits for the company concerned that will exceed those costs
C) taking decisions that benefit consumers and the general community, as well as benefiting shareholders of the company concerned
D) taking decisions that benefit consumers and the general community
Q2) The major difficulty in implementing the full cost reporting approach to reporting a company's socially responsible activities is:
A) auditing the resulting cost-benefit report
B) calculating the cost of such activities
C) calculating the value of the benefits
D) all of the above
Q3) Explain the three components of the Emissions Reduction Fund (ERF).
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Chapter 26: Ethics in Accounting
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Q1) Where a conflict of interest arises for an accountant so that safeguarding the interest of one client may cause harm to another client,it is generally accepted that rules of professional ethical conduct require that:
A) the accountant should not continue to advise both clients
B) the accountant should ensure that information about either client is not made available by anyone to the other client
C) the accountant should ensure that information about either client is not made available by anyone to the client who might be harmed by the information
D) the accountant should not continue to advise either client
Q2) Reflecting on the rule of independence in setting ethical accounting standard,discuss the role of 'integrity' and 'objectivity' for auditors.
Q3) 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
Q4) Should accountants act ethically? Explain the reasons for your answer to this question.
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