Introduction to Accounting Exam Questions
Course Introduction
Introduction to Accounting provides students with a foundational understanding of the principles and practices of accounting. The course covers essential topics such as the accounting cycle, preparation and analysis of financial statements, recording financial transactions, and the roles of assets, liabilities, and equity. Emphasis is placed on understanding Generally Accepted Accounting Principles (GAAP) and their application in real-world scenarios. Through a combination of theoretical learning and practical exercises, students will gain the skills necessary to interpret financial information and make informed business decisions. This course is ideal for students new to accounting or those seeking to enhance their financial literacy.
Recommended Textbook Issues in Financial Accounting 16th Australia Edition by Scott Henderson
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Chapter 1: Institutional Arrangements for Setting Accounting Standards in Australia
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Q1) Which item listed indicates an effect of a 'legislative instrument'?
A) The making of a standard is to be notified in the Commonwealth of Australia Gazette.
B) Standards are to be tabled in the Commonwealth House of Representatives for 30 sitting days.
C) The ASIC votes to make a standard.
D) The Senate is given the final authority to approve accounting standards for application.
Answer: A
Q2) 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
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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 qualitative characteristic of financial information focuses on the inclusion of relevant information?
A) Faithful representation
B) Materiality
C) Comparability
D) Cost constraint
Answer: B
Q2) Explain the differences between verifiability and understandability of financial information.
Answer: Framework 2014 identifies verifiability as an enhancing qualitative characteristic.Verifiability helps to assure users that financial information faithfully represents the economic phenomena it purports to represent.Verifiability means that different knowledgeable and independent observers could reach consensus that a particular item in the financial statements is a faithful representation.Financial information is understandable when users of that information are able to comprehend its meaning.The understandability of financial information may be influenced by the amount of detail,the use of technical language,the format of the financial statements,the headings used and so on.
4
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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) Under the Framework,the purchase of inventory by an entity is:
A) an expense as it decreases equity
B) an expense as it arises from carrying out the major activities of the entity
C) an expense because it is a flow
D) not an expense
Answer: D
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
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Chapter 4: Fair Value Measurement
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Q1) Which use of a non-financial asset is being considered when zoning regulations are applicable?
A) Physically possible
B) Financially feasible
C) Fair value measurement
D) Legally permissible
Q2) At which date must an entity have access to the principal or most advantageous market?
A) Balance sheet date
B) Reporting date
C) Measurement date
D) The last date of the fiscal quarter
Q3) Which term describes the exit price of an asset at the measurement date?
A) Replacement cost
B) Current cost
C) Fair value
D) Historical cost
Q4) Explain the differences between the concept of unit of account and valuation premise.
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) Recent research on the manipulation of profit numbers by managers with a view to influencing share price has shown:
A) no evidence of manipulation
B) firms reporting continuous growth are priced at a discount to other firms
C) reporting of small losses is rare and reporting of small profits fairly common
D) none of the above
Q2) Describe and discuss how agency theory seeks to explain the choice of accounting methods by financial report preparers.
Q3) In relation to agency theory the statement that is not correct is:
A) The self-interest of various parties is often in conflict
B) It assumes that managers act opportunistically all of the time
C) It assumes that individuals act primarily to advance their own self-interest
D) None of the statements is incorrect, i.e., all are correct statements
Q4) The choice of accounting methods is made by:
A) Setters of accounting standards
B) Preparers of financial reports
C) Users of financial reports
D) Both A and B
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Chapter 6: The Statement of Financial Position
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Q1) Separate disclosure,on the face of the statement of financial position,is required under AASB 101 paragraph 54 for:
A) trade and other receivables
B) inventories
C) provisions
D) all of the above
Q2) At a minimum,how many statements of financial position are required when an entity applies an accounting policy retrospectively?
A) two
B) three
C) four
D) one
Q3) What structure(s)is considered a component of the financial structure of an entity?
A) Capital structure
B) Asset structure
C) Both A and B
D) Neither A nor B
Q4) 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 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.
Q2) Explain the concept of the lower of cost and net realisable value rule.
Q3) Under the inventory standard AASB 102,a new assessment of the net realisable value of inventory items is made:
A) in a general meeting
B) each period
C) weekly
D) every two years
Q4) 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
Q5) Discuss the disclosures relating to inventory required by AASB 102.Include a discussion on the disclosures required by not-for-profit entities.
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Chapter 8: Accounting for Property, plant and Equipment
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Q1) Under the provisions of AASB 116,concerning an asset that has been re-valued upward,which statement is correct?
A) If the asset is disposed of, the revaluation surplus can remain in the accounts after the disposal of the asset that created it
B) The amount of the revaluation increment is included in equity without being included in net profit
C) Neither of the statements is correct
D) Both of the statements are correct
Q2) Which statement concerning depreciation is correct?
A) Land is depreciated
B) Assets that have increased in value should still be depreciated
C) Charging depreciation provides cash for asset replacement
D) None of the statements is correct
Q3) What are defined as immovable public facilities that are necessary to sustain living standards and concerned with essential services?
A) Current assets
B) Heritage assets
C) Property, plant and, equipment
D) Infrastructure assets
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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) Discuss the results of empirical research that examines whether tax-effect accounting should continue to be required.
Q3) According to AASB 112,the prepayment of rent of $2000 that is claimed as a tax deduction immediately upon payment (assuming an income tax rate of 30%)will give rise to:
A) a Deferred Tax Liability of $600
B) a Deferred Tax Liability of $600 and a credit to Income Tax Payable of $600
C) a Deferred Tax Asset of $600
D) neither a Deferred Tax Liability nor a Deferred Tax Asset
Q4) 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
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Chapter 10: Accounting for Intangible Assets
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Q1) Discuss the accounting treatment for trademarks and brand names in accordance with AASB 138.
Q2) Purchased computer software should be:
A) recognised as an asset and recorded at cost
B) amortised over its useful life
C) subject to an impairment test
D) all 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
Q4) 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
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Chapter 11: Accounting for Leases
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Q1) How is the lessor required to classify each lease?
A) Operating lease
B) Finance lease
C) Either A or B is acceptable
D) Neither A nor B is acceptable
Q2) What are the main characteristics of a sale-and-leaseback agreement?
Q3) What is the result of the on-balance sheet treatment of a lease?
A) Increased return on total assets and decreased debt ratio
B) Increased earnings per share and decreased debt ratio
C) Increased return on total assets and increased debt ratio
D) Decreased return on total assets and increased debt ratio
Q4) What term is used to describe the right of the lessee to purchase the underlying asset when the option becomes exercisable at a price well below the estimated fair value at that time.
A) Bargain purchase option
B) Residual value guarantee
C) Unguaranteed residual value
D) Minimum lease payment
Q5) List and explain the different items set out in a typical lease agreement.
Q6) How is a finance lease distinguished from an operating lease?
Page 13
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Chapter 12: Accounting for Employee Benefits
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Q1) In Australia,the attractiveness of salary packaging is being reduced by which of the following factors?
A) Fringe benefits tax which taxes the employer on non-cash benefits paid to the employee
B) The decreasing difference between personal tax rates and the company tax rate
C) Non-cash salary being taxable in the hands of the employee
D) All of the above
Q2) Which of the following is not an objective related to disclosures of share-based payment transactions?
A) Disclosure of percentage of equity and cash payouts to employees
B) Highlights the effects of share-based payment transactions on a company's profit or loss
C) Allows users to understand how the fair value of equity instruments has been determined
D) Allows users to understand the nature and extend of share-based arrangements
Q3) Wages and salaries can be divided into which two parts?
A) Current and long-term
B) Monetary and non-monetary
C) Current and in arrears
D) Cash and short-term benefits
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Chapter 13: Accounting for Financial Instruments
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Q1) What condition must be present when a financial asset and a financial liability are to be offset?
A) The entity has a legally enforceable right to set off the recognised amount
B) The entity intends to either settle on a net basis or realise the asset and settle the liability simultaneously
C) Either A or B may be present
D) Both A and B must be present
Q2) Which of the following statements is correct?
A) The writer (seller) of a call option on shares receives a fee from the buyer of the option
B) The writer (seller) of a call option on shares may or may not have to sell the shares to the buyer of the option
C) The writer (seller) of a call option on shares has an obligation to sell the shares at a future time to the buyer of the option
D) All of the above are correct
Q3) 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) Define income and explain how it differs from revenue.
Q2) Under AASB 101,which of these items need not be disclosed separately on the face of the 'statement of profit or loss and other comprehensive income'?
A) Income tax expense
B) Bad and doubtful debts
C) Finance costs
D) None of the above, i.e., all must be disclosed separately on the face of the income statement
Q3) When items are required to be classified as extraordinary,which of the following is/are not true?
A) Users of financial statements are able to make more accurate predictions of future performance
B) Management is able to classify gains as operating income and losses as extraordinary items
C) It allows managers to misclassify expenses as extraordinary
D) None; all are true
Q4) AASB 101 allows preparers two options in the classification of items for the statement of comprehensive income statements.Discuss.
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Chapter 15: Revenue
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Q1) Which type of contract with customers is exempt from Paragraph 5 of AASB 15 'Revenue from Contracts with Customers'?
A) Lease contracts covered by AASB 117 'Leases'
B) Installment sales
C) Both A and B
D) Neither A nor B
Q2) How is the transaction price to be measured by the entity when receiving non-cash consideration from a customer?
A) Fair value of the goods and/or services transferred to the customer
B) Present value of future cash flows
C) Fair value of the non-cash consideration received from the customer
D) Book value of the non-cash consideration received from the customer
Q3) What term describes the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer,excluding amounts collected on behalf of third parties?
A) Settlement price
B) Contract price
C) Fair value
D) Transaction price
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Chapter 16: The Statement of Cash Flows
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Q1) Distinguish between the three concepts of funds which can be used to construct a cash flow statement: cash,working capital and total resources.Which concept do you think provides the most useful information for decision making?
Q2) 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
Q3) Under AASB 107,dividends paid by a company to its shareholders are classified as:
A) investing outflows
B) financing outflows
C) operating inflows
D) none of the above
Q4) Discuss how an entity that reports an after tax profit may be unable to generate positive cash flows from operating activities.
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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 quantitative threshold for reporting segment information?
A) Revenue
B) Investments
C) Profit
D) Assets
Q2) A company reports the following in relation to its latest financial year:
\[\begin{array} { l l }
\text { Net profit } & \$ 12000 \\
\text { Number of ordinary shares issued } & 5000
\end{array}\]
Number of preference shares issued
\[\text { \{paying an annual dividend of } 50 \text { cents per share\} }\]
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 19
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Chapter 18: Further Financial Reporting Issues
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Q1) 'Continuous reporting' requirements in Australia involve:
A) promptly notifying the Australian Securities Exchange (ASX) and shareholders of any information likely to affect a listed company's share price
B) promptly notifying the ASX and shareholders of any information likely to affect a listed company's profits
C) promptly notifying the ASX of any information likely to affect a listed company's share price
D) promptly notifying the ASX of any information likely to affect a listed company's profits
Q2) 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
Q3) Discuss the importance of discrete reporting. What changes have been made AASB 134 and AASB 136 to improve 'Impairment of Assets'?
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Chapter 19: Accounting for Extractive Industry
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Q1) Bigspill Gas & Oil Ltd began operations on 1 July 20X1.During the year ended 30 June 20X2,Bigspill explored five different areas of interest and spent $200 000 in each area.The exploration results indicated that three areas were likely to be productive and Bigspill acquired leases over the three areas at costs of $400 000,$720 000 and $480 000 respectively.Under the expense method of accounting for exploration and evaluation costs in the extractive industries,Bigspill would include which of the following amounts in its statement of financial position as at 30 June 20X2 for Exploration and Evaluation Costs?
A) $2 200 000
B) $1 600 000
C) $2 600 000
D) $ Nil
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
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Chapter 20: Accounting for Agricultural Activity
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Q1) In what ways is agricultural activity different from other forms of assets? In what ways are they similar to other forms of assets? How do these differences,and similarities,affect accounting for agricultural activity?
Q2) AASB 141 requires that biological assets be measured at net realisable value that is:
A) fair value less estimated point of sale costs
B) fair value less point of sales costs
C) fair value
D) none of the above
Q3) 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
Q4) Applying fair value to agricultural activity is assumed on the basis that it can be measured reliably.What do you think could potentially cause an asset's measurement to be unreliable,and why? How detailed should be the disclosure of any inherent unreliability?
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Chapter 21: Accounting for Superannuation Entities
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Q1) Superannuation-specific disclosures include which of the following?
A) disaggregated information when it is necessary to explain the risks and benefit arrangements relating to different categories of members
B) the main features of specific contractual or statutory arrangements in place between a superannuation entity and any relevant employer-sponsor(s)
C) qualitative and quantitative information that provides a basis for understanding the amount, timing and uncertainty of future cash flows relating to insurance liabilities and assets
D) all of the above
Q2) The general purpose financial statements of a superannuation plan should answer the following question(s):
A) Is the plan solvent?
B) Will the plan remain solvent?
C) Are the trustees diligently performing their duties?
D) All of the above
Q3) Discuss some of the major differences between the requirements of AAS 25 and AASB 1056.
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Chapter 22: Accounting for Insurance
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Q1) Which of the following is the correct measurement of assets and liabilities,according to AASB 1038?
A) Assets Liabilities Net present value Fair value
B) Assets Liabilities Fair value Net present value
C) Assets Liabilities Fair value Fair value
D) Assets Liabilities Net present value Net present value
Q2) Underwriting and investment are the two activities of ________.
A) Fixed-fee service contracts
B) Life insurance
C) General insurance
D) All insurance categories
Q3) Explain the solvency requirements as outlined by the Insurance Act of 1973 and Prudential Standard GPS 110 'Capital Adequacy'.
Q4) Which of the following is an obligation arising from past events?
A) Claims have been received but not been settled
B) Claims that have been received but for which the amount of the obligation is uncertain
C) Both A and B are correct
D) Neither A nor B are correct
Q5) List and explain the three broad classes of assets insurers have.
Page 24
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Chapter 23: International Accounting Standards, harmonisation and Convergence
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Q1) 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
Q2) Australia adopted international accounting standards
A) on 30 June 2005.
B) on 31 December 2005.
C) on 15 January 2005.
D) on 1 January 2005
Q3) 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
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) Which of the following methods have been suggested for translating foreign currency financial statements:
A) historical method
B) closing-return method
C) current-return method
D) all of the above
Q2) AASB 121 requires that non-monetary items are measured,subsequent to their initial recognition,at:
A) the exchange rate at the date of transaction
B) the exchange rate at the date of that the fair value was determined
C) an average exchange rate at the end of the reporting period
D) both A and B can apply
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.
Q5) There are four methods suggested for translating foreign currency financial statements.Identify these four methods and explain the translation methods used under each.
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Chapter 25: Accounting for Corporate
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Q1) When an entity's net emissions are less than the permits they hold,at the end of the year they:
A) must forfeit the excess credits
B) can sell the excess credits to other entities
C) can bank the excess credits for future use
D) B and C above
Q2) The term used to describe any group or individual who can be affected by or is affected by the achievement of the organisation's objectives is:
A) shareholder
B) entity
C) stakeholder
D) lobby group
Q3) 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
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) Ethical issues pertain primarily to
A) individuals.
B) those in the financial industry.
C) licensed professionals.
D) communities.
Q2) 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
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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