TEST BANK -Financial Accounting PDF

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TEST BANKFINANCIAL ACCOUNTING THEORY Which of the following statements regarding reversing entries is incorrect? a. Deferrals are generally entered in statement of financial position accounts, thus making reversing entries unnecessary. b. All accruals should be reversed. c. Adjusting entries for dep...

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TEST BANK FINANCIAL ACCOUNTING THEORY 1. Which of the following statements regarding reversing entries is incorrect? a. Deferrals are generally entered in statement of financial position accounts, thus making reversing entries unnecessary. b. All accruals should be reversed. c. Adjusting entries for depreciation and bad debts are never reversed. d. Reversing entries change amounts reported in the statement of financial position for the previous period. 2.As part of the objective of financial reporting, “assessing cash flow prospects” is interpreted to mean a. Cash basis accounting is preferred over accrual basis accounting. b. Information about the financial effects of cash receipts and cash payments is generally considered the best indicator of an entity’s present and continuing ability to generate favorable cash flows. c. Over the long run, trends in revenue and expenses are generally more meaningful than trends in cash receipts and disbursements. d. All of the choices are correct regarding “assessing cash flow prospects”. 3. Financial accounting standard-setting a. Can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic. b. Is based solely on research and empirical findings. c. Is a legalistic process based on rules promulgated by governmental agencies. d. Is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable. 4.Which of the following is not a benefit associated with the Conceptual Framework? a.

A conceptual framework should increase financial statement users' understanding and confidence in financial reporting. b. Practical problems should be more quickly solvable by reference to an existing conceptual framework. c. A coherent set of accounting standards and rules should result. d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply. 5. When classifying assets as current and noncurrent a. The amount at which current assets are carried and reported must reflect realizable cash value. b. Prepayments for items such as insurance are included in “other assets” rather than as current assets as they will ultimately be expensed. c. The time period by which current assets are distinguished from noncurrent assets is determined by the seasonal nature of the business. d. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the normal operating cycle. 6.Entities should separately report all of the following, except a. Assets and liabilities with different general liquidity characteristics. b. Assets and liabilities that have been financed with different type of instruments. c. Assets that differ in their expected function in the entity’s central operations. d. Liabilities that differ in their amounts, timing and nature.

Page 2 7. Which of the following components of other comprehensive income will be reclassified to profit or loss when specific conditions are met? a. Changes in revaluation surplus b. Remeasurements of defined benefit plan c. Gains and losses from investment in equity instruments measured at fair value through other comprehensive income d. The effective portion of gains and losses on hedging instruments in a cash flow hedge 8. Which of the following statements is incorrect regarding notes to financial statements? a. PFRS requires specific note disclosures including disaggregation of inventories into classifications such as merchandise, production supplies, work in process and finished goods. b. PFRS requires a maturity analysis for receivables. c. PFRS requires that all notes be clear, simple to understand and nontechnical in nature. d. All of the choices are correct regarding notes to financial statements. 9.The full disclosure principle is best described by which of the following? a. All information related to an entity's business and operating objectives is required to be disclosed in the financial statements. b. Information about each account balance appearing in the financial statements is to be included in the notes to financial statements. c. Enough information should be disclosed in the financial statements so a person wishing to invest in the shares of the entity can make a profitable decision. d. Disclosure of any financial facts significant enough to influence the judgment of an informed reader. 10. An entity deals extensively with foreign entities and the financial statements reflect these foreign currency transactions. Subsequent to the end of reporting period and before the issuance of the financial statements, there were abnormal fluctuations in foreign currency rates. How should the entity account for this event? a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in foreign exchange rate. b. Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in foreign exchange rate and not just adverse movements. c. Disclose the post-reporting period event as a nonadjusting event. d. Ignore the post-reporting period event. 11. Which of the following disclosures is not a mandated related party disclosure? a. Relationship between parent and subsidiaries irrespective of whether there have been transactions between those related parties. b. Names of all the associates that an entity has dealt with during the year. c. Name of the entity’s parent and, if different, the ultimate controlling party. d. If neither the entity’s parent nor the ultimate parent produces financial statements available for public use, then the name of the next most senior parent that does so. 12. Which of the following is a requirement for a component of an entity to be classified as a discontinued operation? a. b. c. d.

Its activities must cease permanently prior to the issue of the financial statements. It must comprise a separate reportable segment. Its assets must have been classified as held for sale in the previous financial statements. It must have been a cash-generating unit while being held for use

Page 3 13. Which of the following is the best explanation why accounting changes are classified into different categories? a. The materiality of the changes involved. b. Each category involves different method of recognizing changes in the financial statements. c. The fact that some treatments are considered GAAP and some are not. d. A survey of managers and their need to provide a favorable profit picture. 14. Which is the reason why entities are permitted to change accounting policy? a. The change would allow the entity to present a more favorable profit picture. b. The change would result in the financial statements providing more reliable and relevant information about an entity’s financial position, financial performance and cash flows. c. The change is made by the internal auditor. d. The change will be long-term. 15. Why is retrospective treatment of changes in accounting estimate prohibited? a. Changes in estimate are normal recurring corrections and adjustments which are the natural result of the accounting process. b. The retrospective treatment for any type of presentation is not allowed. c. Retrospective treatment of changes in accounting estimate is prohibited because PFRS requires it. d. The PFRS does not prohibit retrospective treatment of changes in accounting estimate but is silent on this issue. 16. Which of the following statements is true concerning the 75% overall size test for operating segments? a. The total external and internal revenue of all reportable segments is 75% or more of the entity’s external revenue. b. The total external revenue of all reportable segments is 75% or more of the entity’s total external and internal revenue. c. The total external revenue of all reportable segments is 75% or more of the entity’s external revenue. d. The total internal revenue of all reportable segments is 75% or more of the entity’s internal revenue. 17. Interim financial reports should include as a minimum a. b. c. d.

A complete set of financial statements. A condensed set of financial statements and selected notes. A statement of financial position and income statement only. A condensed statement of financial position, income statement and statement of cash flows.

18.A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amount of cash and a. Is acceptable as a means to pay current liabilities. b. Has a current market value that is greater than original cost c. Bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation. d. Is so near maturity that it presents insignificant risk of change in interest rate. 19. Which of the following methods of determining bad debt expense does not properly match expense and revenue? a. Charging bad debts with a percentage of sales under the allowance method. b. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method. c. Charging bad debts with an amount derived from aging accounts receivable under the

allowance method. d. Charging bad debts as accounts are written off as uncollectible.

Page 4 20. Which of the following statements is true about factoring of accounts receivable without recourse? a. The transaction may be accounted for either as a secured borrowing or as a sale. b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables. d. The financing cost should be recognized ratably over the collection period of the receivables. 21. PFRS requires all of the following when classifying receivables, except a. b. c. d.

Indicate the receivables classified as current and noncurrent. Disclose any receivables pledged as collateral. Disclose all significant concentrations of credit risk arising from receivables. All of the choices are required by PFRS when classifying receivables.

22.When the cost of goods sold method is used to record inventory at net realizable value a. There is a direct reduction in the selling price of the product that results in a loss being recorded in the income statement prior to the sale. b. A loss is recorded by debiting loss on inventory decline and crediting directly the inventory account c. Only the portion of the loss attributable to inventory sold during the period is recorded. d. The net realizable value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold. 23.Which of the following statements is true regarding inventory writedown and recovery of writedown? a. b. c. d.

Recovery of inventory writedown is prohibited under PFRS. PFRS requires separate reporting of reversal of inventory writedown. PFRS requires entities to record writedown in a separate loss account. All of the choices are correct.

24. An entity had a plantation forest that is likely to be harvested and sold in 30 years. How should income be accounted for? a. No income should reported annually until first harvest and sale in 30 years. b. Income should be measured annually and reported using a fair value approach that recognizes and measures biological growth. c. The eventual sale proceeds should be estimated over the 30-year period. d. The plantation forest should be valued every five years and the increase in value should be reported as component of other comprehensive income. 25. Which of the following information should be disclosed in relation to biological asset and agricultural produce? a.

Separate disclosure of the gain or loss relating to biological asset and agricultural produce. b. The aggregate gain or loss arising on the initial recognition of biological assets and agricultural produce and from the change in fair value less estimated cost of disposal of biological asset. c. The total gain or loss from biological asset, agricultural produce, and from change in fair value less estimated costs of disposal of biological asset. d. There is no requirement to disclose separately any gain or losses. 26. When activities involve production through natural growth or aging of biological asset, revenue is earned as the plant or living animal grows. a. Completion of production basis b. Percentage of completion approach

c. Accretion approach d. Zero-profit approach

Page 5 27. The criteria for recognition of revenue at the completion of production of precious metals include which of the following? a. b. c. d.

Sale price is reasonably assured. No significant costs are involved in distributing the product. Units are interchangeable. All of these are required for revenue recognition at the completion of production

28.PFRS requires entities to measure financial assets based on all of the following, except a. b. c. d.

The business model for managing financial assets. Whether the financial asset is a debt or an equity investment. The contractual cash flow characteristics of the financial asset. All of the choices are PFRS requirements.

29. What is the effective interest rate of a debt instrument measured at amortized cost? a. The stated rate of the debt instrument. b. The interest rate currently charged by the entity or by others for similar debt instrument. c. The interest rate that exactly discounts estimated future cash payments through the expected life of the debt instrument to the net carrying amount of the instrument. d. The basic, risk-free interest rate. 30.When an entity holds between 20% and 50% of the outstanding ordinary shares of an investee, which of the following statements applies? a. The investor should always use the equity method to account for the investment. b. The investor should use the equity method to account for the investment unless circumstances indicate that it is unable to exercise significant influence over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise significant influence over the investee. d. The investor should always use the fair value method to account for the investment. 31. How is the impairment test carried out for an investment in associate? a. The goodwill is separated from the rest of the investment and is impairment tested individually. b. The entire carrying amount of the investment is tested for impairment by comparing the recoverable amount with the carrying amount. c. The carrying amount of the investment should be compared with the market value. d. The recoverable amounts of all investments in associates should be assessed together to determine whether there has been an impairment on all investments. 32. Which of the following instruments would not be classified as a financial liability? a. A preference share that will be redeemed by the issuer for cash at a future date. b. A contract for the delivery of as many of the entity’s ordinary shares as are equal in value to a fixed amount at a future date. c. A written call option that gives the holder the right to purchase a fixed number of the entity’s ordinary shares in return for a fixed price. d. An issued perpetual debt instrument 33. What are the conditions for offsetting of financial assets and financial liabilities? a. A legal right of set-off. b. A legal right of set-off and an intention to settle net or simultaneously. c. The existence of a clearing mechanism or other market mechanism for net settlement and an expectation of net settlement. d. A netting agreement and an expectation of net settlement.

Page 6 34. In which of the following circumstances is derecognition of a financial asset not appropriate? a. b.

The contractual rights to the cash flows of the financial asset have expired. The financial asset has been transferred and substantially all of the risks and rewards of ownership of the transferred asset have also been transferred. c. The financial asset has been transferred and the entity has retained substantially all of the risks and rewards of ownership of the transferred asset. d. The financial asset has been transferred and the entity has lost control of the transferred asset.

35. Which of the following is not a relevant consideration when evaluating whether to derecognize a financial liability? a. b. c. d.

Whether the obligation has been discharged. Whether the obligation has been canceled. Whether the obligation has expired. Whether substantially all of the risks and rewards of the obligation transferred.

have been

36. Which embedded derivative should not be accounted for separately? a. An investment in a convertible bond that is designated as at fair value through other comprehensive income. b. An investment in a bond whose interest payments are linked to the price of gold and the bond is designated as at fair value through other comprehensive income. c. An investment in a bond whose interest payments are linked to the price of silver and the bond is classified as at fair value through profit or loss. d. A call option in an investment in an equity instrument that allows the issuer to repurchase the instrument. 37.Which of the following nonmonetary exchange transactions has commercial substance? a. Exchange of assets with no difference in future cash flows. b. Exchange of products by entities in the same line of business with no difference in future cash flows. c. Exchange of assets with a difference in future cash flows. d. Exchange of an equivalent interest in similar productive assets that causes the entities involved to remain in essentially the same economic position. 38.In accounting for plant assets, which of the following outlays made subsequent to acquisition should be fully expensed in the period the expenditure is made? a. Expenditure made to increase the efficiency or effectiveness of an existing asset b. Expenditure made to extend the useful life of an existing asset beyond the time frame originally anticipated c. Expenditure made to maintain an existing asset so that it can function in the manner intended d. Expenditure made for major replacement 39.An expenditure made in connection with a machine being used should be a. Expensed immediately if it merely extends the useful life but does not improve the quality. b. Expensed immediately if it merely improves the quality but does not extend the useful life. c. Capitalized if it maintains the machine in normal operating condition. d. Capitalized if it increases the quantity of units produced by the machine.

Page 7 40. Borrowing costs can be capitalized as part of the cost of an asset when a. The asset is a qualifying asset b. The asset is a qualifying asset and it is not probable that the borrowing costs will result in future economic benefits to the entity c. The asset is a qualifying asset and it is probable that the borrowing costs will result in future economic benefits to the entity but the costs cannot be measured reliably. d. The asset is a qualifying asset and it is probable that the borrowing costs will result in future economic benefits to the entity and the costs can be measured reliably. 41. Which of the following assets could be treated as qualifying asset for the purpose of capitalizing interest costs? a. Investment property b. Investments in financial instruments c. Inventories that are manufactured or produced in large quantity on a repetitive basis and take a substantial period of time to get ready for use or sale d. Biological assets 42. Which of the following statements is true regarding capitalization of interest? a. Interest cost in connection with the purchase of land to be used as a building site should be debited to the land account. b. The amount of interest cost capitalized during the period should not exceed the actual interest cost incurred. c. When excess borrowed funds not immediately needed for construction are temporarily invested, any interest earned should be recorded as interest revenue. d. The minimum amount of interest to be capitalized is determin...