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FINANCIAL ACCOUNTING THEORY - TEST BANK80102016 - 1 Which of the following is true regarding the comparison of managerial and financial accounting? a. Managerial accounting is generally more precise. b. Managerial accounting need not follow generally accepted accounting principles while financial ac...

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FINANCIAL ACCOUNTING THEORY - TEST BANK 80102016 - 1 1. Which of the following is true regarding the comparison of managerial and financial accounting? a. Managerial accounting is generally more precise. b. c. Managerial accounting has a future focus. d. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness. 2. The information provided by financial reporting pertains to a. Individual business enterprises, industries and an economy as a whole, rather than to members of society as consumers b. Individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. c. Individual business enterprises and an economy as a whole, rather than to industries or to members of society as consumers d. Individual business enterprises and industries, rather than to an economy as a whole or to members of society as consumers 3. Which of the following relates to both relevance and faithful representation? a. Timeliness b. Predictive value c. Completeness d. Neutrality 4. Which of the following violates the concept of faithful representation? a. Financial statements included property with a carrying amount increased to management estimate of market value b. Financial statements were issued nine months late c. Report data on segments having the same expected risks and growth rates to analysts estimating future profit d. Management reports to shareholders regularly refer to new projects undertaken but the financial statements never report project results 5. Comprehensive income excludes changes in equity resulting from which of the following? a. Unrealized loss on securities classified as available for sale b. Purchase of treasury shares c. Loss from discontinued operations d. Prior period error correction 6. Earnings a. Include certain gains that are excluded from comprehensive income b. Are the same as comprehensive income c. Exclude certain gains and losses that are included in comprehensive income d. Include certain losses that are excluded from comprehensive income 7. An entity records all sales using the installment method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the end of reporting period should be reported in the a. Current asset section as a contra account b. Noncurrent liability section as deferred revenue c. Noncurrent asset section as a contra account d. Current liability section as a deferred revenue

Page 2 8. Which of the following is a deferred cost that should be amortized over the periods benefited? a. Advance from customer to be returned when sale is completed b. Prepayment of three-year insurance premiums on machinery c. Property tax for this year payable next year d. Security deposit representing two months rent on leased office space 9. Magazine subscriptions collected in advance should be reported as a. A contra account to magazine subscriptions receivable b. Deferred revenue in the liability section c. Magazine subscription revenue in the period collected. d. Deferred revenue in the shareholders equit section 10. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the sellers financial statements before the performance? a. Unearned revenue to the extent of related costs expended b. Revenue to the extent of related costs expended c. Unearned revenue for the entire proceeds d. Revenue for the entire proceeds. 11. An entity received royalties from the assignment of patent to other entities. In the period in which the royalties are earned, the royalties should be a. Netted against patent amortization expense b. Amortized to income over the remaining useful life of the patent c. Subtracted from the capitalizable cost of the patent d. Reported as revenue 12. Under what condition is it proper to recognize revenue prior to the sale of the merchandise? a. When management has a long-established policy to do so. b. When the revenue is to be reported as an installment sale c. When the ultimate sale of the goods is at an assured sales price d. When the concept of internal consistency of amounts of revenue must be complied with. 13. How should an entity treat organization costs in the financial statements? a. Never amortized b. Amortized over forty years c. Expensed immediately d. Amortized over sixty months 14. Which of the following is allowable for financial reporting under IFRS? a. Completed contract method b. Extraordinary items c. LIFO d. Lower of cost or net realizable value 15. The effects of a change in accounting principle should be recorded on a prospective basis when the change is from the a. The correction of an error in the determination of the last ears inventor b. Straight line method of depreciation to the double declining balance method. c. Cost recovery method of accounting to the percentage of completion method. d. Presentation of statements of individual entities in consolidated statements. 16. A change in the residual value of an asset depreciated on a straight-line basis arising because additional information has been obtained is a. A correction of an error b. Not an accounting change c. An accounting change that should be reflected in the period of change and future periods if the change affects both

d. An accounting change that should be reported by restating the financial statements of all prior periods presented.

Page 3 17. Presenting consolidated financial statements this year when statements of individual entities were presented last year is a. An accounting change that should be reported by restating the financial statements of all prior periods presented. b. An accounting change that should be reported prospectively c. Not an accounting change d. A correction of an error 18. During the current year, the entity voluntarily changed its accounting method because the new method will provide more reliable and relevant information. The entity can estimate the effects of the change. How should the entity treat the change in accounting policy? a. On a prospective basis b. By restating the financial statements c. By a cumulative adjustment on the income statement d. On a retrospective basis 19. An entity changed from an accounting principle that is not generally accepted to one that is generally accepted. The effect of the change should be reported, net of tax, in the current a. Retained earnings statement as an adjustment of the opening balance b. Retained earnings statement after net income but before dividends c. Income statement after extraordinary items d. Income statement after income from continuing operations 20. Which of the following describes a change in reporting entity? a. A manufacturing entity expands its market from regional to nationwide. b. An entity presents consolidated financial statements in place of individual financial statements. c. An entity acquires additional shares of an investee and changes to the equity method of accounting d. An entity discontinues a product line 21. In which of the following situations should an entity report a prior period adjustment? a. The correction of a mathematical error in the calculation of prior ears depreciation b. A change in the estimated useful life of property, plant and equipment purchased in prior years c. A switch from the straight line to double declining balance method of depreciation d. The scrapping of an asset prior to the end of the expected useful life 22. Under IFRS, changes in accounting policies may occur a. Either when a change is required by an IFRS or when it provides reliable and more relevant information b. Neither when a change is required by an IFRS nor when it provides reliable and more relevant information c. Only when a change is required by an IFRS d. Only when a change provides reliable and more relevant information 23. Under IFRS, a change in accounting estimate is accounted for a. Retrospectively b. As a cumulative effect of an accounting change in the income statement c. Currently in the financial statements. d. Prospectively in the period of change and future periods. 24. When an investor uses the equity method to account for an investment in ordinary shares and the fair value option of reporting financial assets is not elected after the date of acquisition. the investment account of the investor would a. Be increased by its share of the earnings of the investee but would not be affected by its share of the losses of the investee. b. Be increased by its share of the earnings of the investee and decreased by its share of the losses of the investee.

c. Not be affected by its share of the earnings or losses of the investee. d. Not be affected by its share of the earnings of the investee but would be decreased by its share of the losses of the investee.

Page 4 25. An entity purchased shares of another entity and classified the investment as trading securities. The entity should report these trading securities at a. Lower of cost or market with holding gains included in earnings only to the extent of previously recognized holding losses. b. Lower of cost or market with holding gains and losses included in earnings. c. Fair value, with holding gains and losses included in earnings. d. Fair value with holding gains included in earnings only to the extent of previously recognized holding losses. 26. An investor uses the equity method to account for investments in ordinary shares. The purchase price implies a fair value of the investees depreciable asset in excess of the investees net asset carrying amounts. The investors amortiation of the excess a. Decreases the investment account b. Decreases the goodwill account c. Does not affect the investment account d. Increases the investment revenue account 27. The composite depreciation method a. Does not recognize gain or loss on the retirement of single asset in the group b. Does not subtract residual value from the base of the depreciation calculation c. Is an accelerated method of depreciation d. Is applied to a group of homogenous assets 28. Which depreciation method is computed in the same way as depletion? a. Productive output b. Sum of the ears digits c. Straight line d. Double declining balance 29. What valuation model should an entity use to value property, plant and equipment? a. The revaluation model or the fair value model b. The cost model or the revaluation model c. The cost model or the fair value through profit or loss model d. The cost model or the fair value model 30. An asset is being constructed for an entits own use. The asset has been financed with a specific new borrowing. The interest cost incurred during the construction period is a. A part of the historical cost of acquiring the asset to be written off over the estimated useful life of the asset b. A prepaid asset to be written off over the estimated useful life of the asset c. A part of the cost of the asset to be written off over the term of the borrowing d. Interest expense in the construction period 31. When should a long-lived asset be tested for recoverability? a. When external financial statements are being prepared. b. When events indicate that carrying amount may not be recoverable. c. When the assets carring amount is less than fair value. d. When the assets fair value has decreased and the decrease is judged to be permanent. 32. Which of the following conditions must exist in order for an impairment loss to be recognized? a. The carrying amount of the asset is less than fair value. b. The carrying amount of the asset is not recoverable. c. The carrying amount of the asset is less than value in use. d. The carrying amount of the asset is less than recoverable amount. 33. The required disclosures for the impairment of long-lived assets include all, except a. The business segment affected, if applicable

b. The amount of the impairment loss and how fair value was determined c. The recommendation of the auditor, signed and dated as of the date of discovery d. The facts and circumstances leading to the impairment

Page 5 34. When the fair value is determinable, a nonreciprocal transfer of a nonmonetary asset to another entity should be recorded at the a. Recorded amount of the asset transferred b. Recorded amount of the asset received c. Fair value of the asset transferred and a gain or loss should be recognized on the disposition of the asset d. Fair value of the asset received but no gain or loss should be recognized on the disposition of the asset 35. Which of the following statements describes the proper accounting for loss when nonmonetary asset is exchanged for other nonmonetary asset? a. A loss can occur only when asset is sold or disposed of in a monetary transaction b. A loss which is unrelated to the determination of the amount of the asset received should be recorded c. A loss is deferred so that the asset received in the exchange is properly valued d. A loss is recognized immediately because asset received should not be valued at more than the cash equivalent price. 36. Which of the following accurately describes the appropriate accounting for goodwill acquired through a business combination? a. It should be recorded at cost and amortized over 40-year period b. It should be recorded at cost and amortized over a 10-year period c. It should be recorded at cost and tested for impairment every three years d. It should be recorded at cost and tested for impairment on an annual basis and more often if certain events occur 37. Which of the following statements is correct concerning start up costs? a. Costs of start up activities including organization costs should be expensed as incurred b. Costs of start up activities including organization costs should be capitalized and amortized on a straight-line basis over the economic life of the entity c. Costs of start up activities including organization costs should be capitalized and expensed only if an impairment exists d. Costs of start up activities should be capitalized and amortized on a straight-line basis over the economic life of the entity while organization costs should be expensed as incurred. 38. Goodwill should be tested for impairment at which of the following levels? a. Each reporting unit b. Each acquisition unit c. Each identifiable long-term asset d. Entire business as a whole 39. Which of the following is an example of activities that would typically be excluded from research and development costs? a. Quality control during commercial production including routine testing of products b. Laboratory research aimed at discovery of new knowledge c. Design, construction and testing of production prototypes and models d. Testing in search for or valuation of product or process alternatives 40. An activity that would be expensed currently as research and development costs is the a. Engineering follow-through in an early phase of commercial production b. Legal work in connection with patent application and the licensing of patent c. Testing in search for or evaluation of product or process alternatives d. Adaptation of an existing capability to a particular requirement or customer need as a part of continuing commercial activity. 41. Which of the following is a research and development cost? a. Research and development performed under contract for others

b. Development or improvement of techniques and processes c. Offshore oil exploration that is the primary activity of an entity d. Market research related to a major product for the entity

Page 6 42. Which of the following describes the appropriate accounting for intangible asset with finite useful life? a. The cost of the asset is not amortized but is periodically tested for impairment b. The cost of the asset is amortized over the useful life and the asset is never tested for impairment c. The cost of the asset is amortized over 40 years. d. The cost of the asset is amortized over the useful life and the asset is periodically tested for impairment 43. What valuation methods are used for intangible assets? a. The cost model and the fair value model b. The revaluation model and the fair value model c. The cost model and the fair value through profit or loss model d. The cost model and the revaluation model 44. An entity has investment property that leases to another entity. The entity uses the fair value model to report investment property. Which of the following statements is true? a. The entity should value the equipment at cost less accumulated depreciation and less accumulated impairment losses. b. The entity should report the increase in fair value in other comprehensive income for the period. c. The entity depreciates the equipment using normal depreciation method. d. The entity does not record depreciation on the investment property 45. An entity purchased land for future use and appropriately classifies the land as investment property. What valuation model may be used to report the land? a. Fair value model or revaluation model b. Fair value through other comprehensive income or revaluation model c. Cost model or fair value model d. Cost model or revaluation model 46. When practicable to estimate, an entity must disclose the value of financial instruments at a. Historical cost b. Net realizable value c. Fair value d. Carrying amount 47. Which of the following provides the holder the right to sell at an exercise or strike price anytime during a specified period a gain accrues to the holder as the market price of the underlying falls below the strike price? a. Forward contract b. Put option c. Swaption d. Call option 48. Which of the following instruments is not considered a derivative financial instrument? a. Currency futures b. Stock index option c. Bank certificate of deposit d. Interest rate swap 49. A derivative financial instrument is best described as a. A contract that conveys to a second entity a right to future collections on accounts receivable from a first entity b. Evidence of an ownership interest in an entity such as ordinary shares c. A contract that has its settlement value tied to an underlying and a notional amount...