Introduction to Financial Accounting
Midterm Exam
Course Introduction
Introduction to Financial Accounting provides students with an essential understanding of the principles and procedures involved in preparing and interpreting financial statements. The course covers foundational concepts such as the accounting cycle, double-entry bookkeeping, accrual versus cash accounting, and the preparation of balance sheets, income statements, and cash flow statements. Emphasis is placed on the role of accounting information in business decision-making, ethical considerations in financial reporting, and the impact of accounting standards on financial communication. Through real-world examples and practical exercises, students gain the skills necessary to analyze and communicate financial information effectively within a variety of organizational contexts.
Recommended Textbook
Financial Accounting and Reporting An International Approach 1st Edition by
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Craig Deegan
Chapter 1: An Overview of the International External Reporting Environment
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Q1) The publication of a standard,exposure draft or final IFRIC interpretation requires approval by:
A)the chairman of the IASB
B)a simple majority of the IASB's 14 members
C)nine of the IASB's 14 members
D)12 of the IASB's 14 members
Answer: C
Q2) In Europe International Financial Reporting Standards are adopted after being agreed by:
A)the Financial Reporting Council.
B)the European Union.
C)the Accounting Standards Review Board.
D)the Urgent Issues Task Force Group.
Answer: B
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Chapter 2: The Conceptual Framework of Accounting and Its Relevance
to Financial Reporting
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Q1) Which of the following statements most accurately reflects the qualitative characteristics of financial information in the IASB Conceptual Framework?
A)These attributes or qualities determine whether an entity is considered to be a reporting entity.
B)These are attributes or qualities that financial information should possess if it is to be useful for such decision making.
C)These attributes or qualities satisfy the definition of elements in the financial reports.
D)All of the given answers are correct.
Answer: B
Q2) The Conceptual Framework suggests that the relevance characteristic outweighs the faithfully represented characteristic if the financial statement is to be rendered useful.
A)True
B)False
Answer: False
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Chapter 3: Theories of Financial Accounting
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Q1) In the situation where a contractual arrangement has been negotiated that provides managers with a bonus based on the profits generated by the entity:
A)The efficiency perspective identifies this as a way of minimising agency costs by aligning the interests of the principal and the agent.
B)The opportunistic perspective predicts that managers will seek to adopt accounting methods that best reflect the performance of the organisation.
C)The underlying premise of PAT is that agents (managers) aim to act in the best interests of the organisation, so the bonus is recognition of those efforts.
D)The efficiency perspective identifies this as a way of minimising agency costs by aligning the interests of the principal and the agent and the opportunistic perspective predicts that managers will seek to adopt accounting methods that best reflect the performance of the organisation.
Answer: A
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Chapter 4: An Overview of Accounting for Assets
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Q1) Previously written-off assets are allowed to be reinstated under IAS 36 Impairment of Assets.
A)True
B)False
Q2) According to the IASB Conceptual Framework an asset should have a number of characteristics,including:
A)It must be owned by the entity.
B)It must be expected to provide future economic benefits to the entity.
C)The transaction giving rise to the ownership must have already occurred.
D)The future economic benefits must be very likely to eventuate.
Q3) Where the entity presents current assets separately from non-current assets and current liabilities separately from non-current liabilities,IAS 1 requires items to be disclosed on the face of the statement of financial position ,including:
A)total assets.
B)total liabilities.
C)total parent entity interest.
D)all of the given answers.
Q4) Discuss the approaches recommended by IAS 1 to present assets in the statement of financial position.
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Chapter 5: Depreciation of Property, Plant and Equipment
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Q1) How are gains or losses on sale of depreciable assets accounted for in accordance with IAS 18 Revenue?
Q2) When an asset has a defined life,and it is expected that it will be used uniformly,which depreciation policy is likely to be used?
A)sum-of-digits
B)straight-line rate
C)declining-balance
D)sum-of-digits or declining-balance
Q3) Which of the following statements is applicable to the declining-balance method of depreciation?
A)The expense is constant for the useful life of the asset.
B)The process is complex because you need to know the carrying amount, residual value and estimated useful life of the asset.
C)A company subject to political costs is more likely to select this depreciation method.
D)Assumes that the consumption of the asset is a function of time.
Q4) In accordance with IAS 16,how should a company treat additions,major repairs and improvements and replacements?
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Chapter 6: Revaluations and Impairment Testing of
Non-Current Assets
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Q1) The process of discounting future cash flows in calculating the recoverable amount of an asset will result in a higher recoverable amount than if the cash flows are not discounted.
A)True
B)False
Q2) IAS 38 will permit some intangible assets to be revalued upwards only when there is an 'active market' for the asset.
A)True
B)False
Q3) A sale of property plant and equipment requires the derecognition of the carrying amount of the asset and any cost of replacement part capitalised.
A)True
B)False
Q4) An entity that elects the revaluation model to measure a class of asset is permitted to revert back to the cost model provided that this will provide more relevant and reliable information.
A)True
B)False
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Q5) Discuss the process for the reversal of revaluation decrements and increments.
Chapter 7: Inventory
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Q1) IAS 2 require that inventories be reinstated to the extent that the new carrying amount does not:
A)exceed the net realisable value in the previous period.
B)exceed the lower of the original cost.
C)exceed the net realisable value in the current period.
D)exceed the lower of the original cost or the net realisable value in the current period.
Q2) Some biological assets may be covered by IAS 2 Inventories.
A)True
B)False
Q3) Discuss why LIFO cost-flow method is not permitted under IAS 2 when it is supported in the US in periods of rising prices.
Q4) Discuss the relative merits of using FIFO and LIFO as basis of cost of inventories during periods of rising prices.
Q5) IAS 2 requires that fixed manufacturing costs be excluded from the cost of inventories,as they cannot be allocated accurately. A)True
B)False
Q6) Identify and discuss the items included as inventory cost.
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Chapter 8: Accounting for Intangibles
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Q1) An active market is defined in the standards as a market that has:
A)willing buyers and sellers.
B)prices are publicly available.
C)items traded are homogeneous.
D)All of the given answers are necessary.
Q2) Which of the following statement(s)in regard to goodwill is/are correct in accordance with IAS 36 Impairment of Assets?
A)An impairment loss must be recognised when the carrying amount of a cash-generating unit exceeds its recoverable amount.
B)An impairment loss recognised for goodwill shall not be reversed in a subsequent period.
C)Value in use is the present value of future cash flows expected to be derived from a cash-generating unit.
D)All of the given statements are correct.
Q3) After initial recognition,the acquirer shall recognise goodwill at:
A)historical cost.
B)fair value.
C)cost less accumulated amortisation.
D)cost less accumulated impairment losses.
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Chapter 9: An Overview of Accounting for Liabilities
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Q1) The present obligation component of a liability must be based on:
A)a legal obligation only.
B)a social obligation.
C)a contractual obligation.
D)none of the given answers.
Q2) Entities are only required to record a liability if there has been a past transaction that has created a present obligation to another entity that is expected to result in an outflow of future economic benefits.
A)True
B)False
Q3) The market will only pay a premium for debentures if the par value of those debentures is lower than the market interest rate.
A)True
B)False
Q4) Explain,in the context of Positive Accounting Theory,the implications of making professional judgments in respect to recognising and measuring liabilities.
Q5) Explain in what situations,and why,some provisions should be measured at present values.
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Chapter 10: Accounting for Leases
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Q1) An owner of an asset may sell it and then lease it back from the new owner.Where this lease meets the conditions to be classified as a finance lease,the profit or loss on the sale of the asset recorded by the lessee should be classified as a finance item in the statement of comprehensive income in the year of the sale.
A)True
B)False
Q2) Under IAS 17,operating leases require the following disclosures by lessees:
A)the total of future minimum sublease payments expected to be received under non-cancellable subleases at the statement of financial position date.
B)a general description of the lessee's significant leasing arrangements.
C)No disclosures are required as operating leases are expensed each year.
D)the total of future minimum sublease payments expected to be received under non-cancellable subleases at the statement of financial position date and a general description of the lessee's significant leasing arrangements.
Q3) Describe how a lessee would account for the depreciation (amortisation)of a leased asset.
Q4) Discuss the presentation and disclosure requirements of operating leases under IAS 17.
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Page 12
Chapter 11: Share Capital, Reserves and Share Options
Employee Bonus Schemes
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Q1) The total market capitalisation of a company after a bonus issue is likely to:
A)be lower than it was before the bonus issue.
B)be greater than it was before the bonus issue.
C)be less than it was before the bonus issue.
D)There will be no change.
Q2) Discuss the primary role of the statement of changes in equity,and what is included in such a statement.
Q3) If a company is listed in the London Stock Exchange and shareholders fail to pay the amount due on allotment,the shares forfeited must be refunded in full to defaulting investors.
A)True
B)False
Q4) IAS 1 Presentation of Financial Statements requires an entity to disclose a description of the nature and purpose of each reserve within equity.
A)True
B)False
Q5) Ordinary shares receive low dividends because they do not perform very well.
A)True
B)False
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Chapter 12: Accounting for Financial Instruments
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Q1) The exercise price of an option:
A)varies with changes in the market price of an underlying share
B)remains fixed for the duration of the option.
C)is always at a price below market price when issued.
D)All of the given answers are correct.
Q2) Which of the following ratios are used as an indicator of the inherent risk in investing in an entity?
A)quick
B)current
C)leverage
D)gross profit
Q3) For a designated cash flow hedge,IAS 39 Financial Instruments: Recognition and Measurement requires the gain or loss on the hedging instrument to be transferred initially to equity and subsequently to profit or loss to offset the gains or losses on the hedged item.
A)True
B)False
Q4) Derivatives are sometimes called 'secondary' financial instruments.
A)True
B)False
Page 14
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Chapter 13: Revenue Recognition Issues
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Q1) If the borrower prepays interest,the inflow of future economic benefits represented by the prepayment would not constitute an item of revenue to the lender because the lender has a present obligation to the borrower to provide finance for the period to which the prepayment relates.
A)True
B)False
Q2) Revenues may be generated by:
A)holding and disposing of inventory in the normal course of business.
B)having a liability forgiven.
C)receiving a donation.
D)all of the given answers.
Q3) Where the percentage-of-completion method is based on costs,costs that relate to the contract activity generally and are not normally related to specific contracts,such as finance costs,should be allocated across the projects currently in progress.
A)True
B)False
Q4) Describe,with examples,how the recognition of revenue,at the time of sale,is affected when products require transportation.
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Chapter 14: The Statement of Comprehensive Income and Statement of Changes in Equity
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Q1) A statement of comprehensive income that includes revenue,cost of sales,selling expenses,financial expenses would have been prepared using the:
A)nature of expense method.
B)narrative method.
C)revenues and gains approach.
D)function of expense approach.
Q2) Discuss the components required to be disclosed in the statement of changes in equity as prescribed in IAS 1 Presentation of Financial Statements.
Q3) Extraordinary items will be included in the statement of comprehensive income:
A)when they are material and need to be disclosed separately.
B)when an item of revenue or expense is attributable to an event outside the ordinary course of business.
C)when an expense or revenue is of a non-recurring nature.
D)None of the given answers are correct.
Q4) Discuss the impact changes in accounting policies can have on users of the financial statements.
Q5) How does IAS1 define 'extraordinary items'?
Discuss the current arrangements for accounting for such items.
Page 16
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Chapter 15: Accounting for Income Taxes
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Q1) There are two types of temporary differences between the carrying value of assets and liabilities and the tax base-assessable temporary differences and neutral temporary differences.
A)True
B)False
Q2) Which of the following statements is correct with respect to IAS 12 Income Taxes when the government increase tax rates?
A)The entity applies a prospective application to deferred tax assets and deferred tax liabilities initially recognised subsequent to the announcement of the tax change.
B)Expense is recognised if the entity has deferred tax liabilities only.
C)Income is recognised if the entity has deferred tax liabilities only.
D)Expense is recognised if the entity has deferred tax assets only.
Q3) A deferred tax asset arises if:
A)the carrying amount of an asset is greater than its tax base
B)the carrying amount of a liability is greater than its tax base
C)the carrying amount of a liability is less than its tax base
D)the carrying amount of an asset is greater than its tax base and the carrying amount of a liability is less than its tax base
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Chapter 16: The Statement of Cash Flows
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Q1) IAS 7 requires that a note to the accounts shall disclose a reconciliation of cash flows from operating activities to operating profit or loss after income tax as reported in the statement of comprehensive income.The correct adjustments to the operating profit/loss after tax include:
A)add; depreciation expense, gain on sale of plant and equipment, increase in interest payable, increase in inventories.
B)subtract; increase in future income tax benefit, increase in accounts receivable, loss on sale of plant and equipment.
C)add; increase in accounts payable, increase in income taxes payable, increase in deferred taxes payable.
D)subtract; amortisation expense, increase in future income benefit, increase in interest payable.
Q2) To calculate the cash flow from the issue of debentures,the face value of the debentures would have to be adjusted by deducting any premium or adding any discount on issue.
A)True
B)False
Q3) Discuss the potential limitations of the statement of cash flows.
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Chapter 17: Events Occurring After the Reporting Date
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Q1) What is a 'non-adjusting event' in accordance with IAS 10? Provide examples.
Q2) Bonus payments that are part of an existing agreement with employees determined after the reporting date is an example of an adjusting event.
A)True
B)False
Q3) Harrier Plc has borrowed substantially using foreign currency loans.An unexpected major downturn in the French economy after reporting date has substantially weakened the euro,increasing the size of the debt materially.According to IAS 10,how should this event be reported in the financial statements?
A)The foreign currency debt should be restated at the new exchange rates and the loss recognised.
B)No reporting is required.
C)Harrier Plc's bank and/or debenture trustees should be notified of the potential that the company may break its debt covenant.
D)A note disclosure of the event should be made.
Q4) Discuss the two types of events after the reporting period.
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Chapter 18: Related-Party Disclosures
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Q1) The definition of control adopted in IAS 24 relies on the power to:
A)agree.
B)govern.
C)vote.
D)manage.
Q2) Which of the following is not a related party within the provisions of IAS 24 Related Party Disclosures?
A)associates
B)non-executive directors
C)executive personnel
D)bankers
Q3) In accordance with IAS 24,the categories of compensation to key management personnel required to be disclosed include:
A)short-term employee benefits.
B)post-employment benefits.
C)termination benefits
D)all of the given answers.
Q4) IAS 24 requires an entity to disclose total compensation of key management personnel.What items are included in key management personnel's remuneration/compensation?
Page 20
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Chapter 19: Earnings Per Share
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Q1) Under IAS 33 an entity is not required to disclose earnings per share where a loss has been made for the period.
A)True
B)False
Q2) According to IAS 33 for shares to be considered as being issued for no consideration,the price paid for the shares would need to be:
A)greater than the market price.
B)greater than the issued price.
C)less than the market price.
D)less than the issued price.
Q3) Gimlet Plc has earnings after tax of £930 000 for the year ended 30 June 2015.At the beginning of the period Gimlet had 250 000 fully paid-up ordinary shares on issue.On 30 December 2014 the company made a one-for-six bonus issue.The last sale price of the shares immediately prior to the bonus issue was £1.35 each.What are the earnings per share taking into account the bonus issue?
A)£3.72
B)£4.13
C)£4.34
D)£3.19
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Chapter 21: Further Consolidation Issues I: Accounting for
Intragroup Transactions
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Q1) IFRS 10 Consolidated Financial Statements prescribes that intragroup balances,transactions,income and expenses be eliminated in full on consolidation even where the parent entity holds only a fraction of the issued equity.
A)True
B)False
Q2) Intragroup profits are eliminated in consolidation to reduce consolidated profits.
A)True
B)False
Q3) Lilo Plc sells inventory items to its subsidiary Stitch Plc.If during the financial year 2013,the unrealised profits in ending inventory in Stitch Plc exceeds that of its unrealised profits in beginning inventory,which of the following statements is correct with respect to Lilo Plc's consolidated financial statements after considering these transactions only?
A)Consolidated profit will decrease.
B)Consolidated deferred tax liability will increase.
C)Consolidated ending inventory will decrease.
D)Consolidated sales will be unaffected.
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Chapter 22: Further Consolidation Issues II: Accounting for
Non-Controlling Interests
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Q1) Acquirer Plc purchased 75 per cent of Subby Plc for 45 000.The fair value of identifiable assets was 95 000,and the fair value of liabilities and contingent liabilities amounted to 47 000.According to IFRS 10,what would be the amount of 'goodwill allocated to non-controlling interests of Subby Plc'?
A) 3000
B) 9000
C) 12 000
D)( 3000)
Q2) Discuss how the share capital and reserves of a non-controlling asset are determined at the date of the acquisition and post-acquisition changes in share capital and reserves.
Q3) IAS 1 Presentation of Financial Statements requires an entity to disclose separately in the statement of comprehensive income,profit or loss for the period attributable to non-controlling interests and owners of the parent.
A)True
B)False
Q4) Discuss the three elements considered when calculating non-controlling interests.
Q5) Describe the two options in measuring the non-controlling interest.
Page 23
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Chapter 23: Further Consolidation Issues III: Accounting for
Indirect Ownership Interest
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Q1) When a parent acquires its interest in an intermediate subsidiary after the intermediate subsidiary acquires an interest its own subsidiary,this is referred to as a non-sequential acquisition.
A)True
B)False
Q2) In calculating indirect non-controlling interests,intragroup transactions need not be eliminated.
A)True
B)False
Q3) Control means the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
A)True
B)False
Q4) Describe a non-sequential acquisition and explain the process of consolidation for this type of business combination.
Q5) Discuss how it is possible for one entity to control another entity without any direct ownership interest.
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Chapter 24: Accounting for Foreign Currency Transactions
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Q1) IAS 21 requires foreign currency transactions to be recorded,on initial recognition in the presentation currency,by applying to the foreign currency amount the spot exchange rate between the presentation currency and the foreign currency at the date of the transaction.
A)True
B)False
Q2) Examples of monetary items that may be denominated in foreign currencies include:
A)accounts payable and receivable, inventory, bank overdrafts.
B)interest receivable and payable, loans, accounts payable.
C)inventory, interest receivable, supplies, accounts payable.
D)prepayments, loans, accounts payable, debentures payable.
Q3) To classify an arrangement as a hedge,and therefore to apply 'hedge accounting',IAS 32 requires a set of strict conditions be met.
A)True
B)False
Q4) Describe,with examples,the two tests of hedge effectiveness.
Q5) What are presentation and functional currencies? How do they differ?
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Chapter 25: Translating the Financial Statements of Foreign Operations
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Q1) The foreign exchange exposure of the parent entity in relation to its foreign operation relates to the net cash flows of the investment in the operation.
A)True
B)False
Q2) IAS 21 specifies that post-acquisition movements in equity other than retained profits or accumulated losses are translated at:
A)the spot rate.
B)the forward rate.
C)the market rate.
D)none of the given answers.
Q3) When a parent entity has an overseas subsidiary the first task before consolidation is to:
A)translate the financial statements from the functional currency to the presentation currency.
B)translate the financial statements from the presentation currency to the functional currency.
C)determine the functional currency of the overseas subsidiary.
D)determine the functional currency of the parent entity.
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Chapter 26: Accounting for Corporate Social Responsibility
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Q1) The Global Reporting Initiative has suggested alternative views of the application of the materiality concept in social and environmental accounting,including:
A)Materiality thresholds (e.g.10 per cent) should be lowered in relation to social and environmental costs because of the difficulty in measuring them.
B)Liabilities for social and environmental costs should not be discounted before they are evaluated for materiality and therefore inclusion in the accounts.
C)Contingent liabilities related to environmental and social issues should be disclosed regardless of whether they are considered 'material' or not according to traditional financial accounting approaches to materiality measurement.
D)Materiality measures should reflect the nature and circumstances as well as the scale or magnitude of the item or event.
Q2) The mission of the Global Reporting Initiative is to make sustainability reporting standard practice by providing guidance and support to organisations.
A)True
B)False
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