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Intermediate Accounting Volume 1, 11th Canadian Edition by Donald E. Kieso – Test Bank

 

 

CHAPTER 1

 

THE CANADIAN FINANCIAL REPORTING ENVIRONMENT

CHAPTER STUDY OBJECTIVES

 

 

MULTIPLE CHOICE QUESTIONS

 

 

  1. The essential characteristic(s) of accounting is (are)
  2. a) communication of financial information to interested internal parties only.
  3. b) communication of economic information to external parties.
  4. c) identification and measurement of financial information only.
  5. d) identification, measurement, and communication of financial information.

 

 

 

 

 

 

 

 

 

 

  1. Financial accounting is concerned with the process that culminates in
  2. a) the preparation of financial reports.
  3. b) specialized reports for inventory management and control.
  4. c) specialized reports for income tax calculation and recognition.
  5. d) reports on changes in stock prices and future estimates of market position.

 

 

 

 

 

 

 

 

 

 

  1. Financial accounting can be broadly defined as the area of accounting that prepares financial statements to be used
  2. a) by parties internal to the business enterprise only.
  3. b) by investors only.
  4. c) by parties both internal and external to the business enterprise.
  5. d) primarily by external users and Canada Revenue Agency.

 

 

 

 

 

 

 

 

 

 

  1. Management accounting can be broadly defined as the area of accounting that communicates financial information
  2. a) to investors only.
  3. b) to parties internal to the business enterprise only.
  4. c) to parties both internal and external to the business enterprise.
  5. d) primarily to external users and Canada Revenue Agency.

 

 

 

 

 

 

 

 

 

 

 

  1. Whether a business is successful and thrives is determined by
  2. a) free enterprise or competition.
  3. b) competition and markets only.
  4. c) markets and competition only.
  5. d) markets, competition and free enterprise.

 

 

 

 

 

 

 

 

 

 

 

  1. Which of the following is correct?
  2. a) Reported accounting numbers do not affect the transfer of resources.
  3. b) Credit rating agencies use accounting information to assess their assets.
  4. c) Efficient capital markets promote productivity and encourage innovation.
  5. d) Efficient capital markets promote productivity but do not encourage innovation.

 

 

 

 

 

 

 

 

 

 

 

  1. Information provided by accounting is important because it enables investors and creditors to
  2. a) compare income and assets of companies.
  3. b) assess the relative risks and returns of investment opportunities.
  4. c) channel their resources more effectively.
  5. d) all of the above

 

 

 

 

 

 

 

 

 

 

 

  1. In Canada, the primary exchange mechanism(s) for allocating resources is (are)
  2. a) debt & equity markets.
  3. b) financial Institutions such as banks.
  4. c) government authorities such as the Canada Revenue Agency (CRA).
  5. d) both a & b

 

 

 

 

 

 

 

 

 

 

  1. Which of the following is/are major factors in the rapidly changing financial reporting environment in Canada?
  2. a) increased demand for accountants and the impact of technology
  3. b) globalization and the unethical actions of accountants
  4. c) the growing number of institutional investors who want more information regarding environmental and social issues
  5. d) increased use of the Internet

 

 

 

 

 

 

Learning Objective: Discuss some of the challenges and opportunities for accounting.

Section Reference: Challenges and Opportunities for the Accounting Profession

 

 

 

 

  1. Stakeholders who help in the efficient allocation of resources include
  2. a) investors and creditors.
  3. b) financial analysts and regulators.
  4. c) creditors and auditors.
  5. d) management and auditors.

 

 

 

 

 

 

  1. Audited financial statements are prepared by
  2. a) auditors.
  3. b) financial analysts.
  4. c) Canada Revenue Agency.
  5. d) management.

 

 

 

 

  1. The auditor’s primary responsibility is to
  2. a) review financial statements and discuss them with management.
  3. b) prepare financial statements.
  4. c) report to Canada Revenue Agency.
  5. d) report to standard setters.

 

 

 

 

  1. The widely publicized subprime lending crisis was NOT caused by
  2. a) capital market participants who acted in their own self-interest.
  3. b) a lack of transparency.
  4. c) the practice of securitizing assets.
  5. d) a lack of investor understanding of the investment’s true risk.

 

 

 

 

 

  1. Management’s primary responsibility with respect to financial statements is to
  2. a) prepare them, as they have the best insight and know what should be included.
  3. b) audit them, as they are distant enough from daily operations.
  4. c) rely on them to make decisions.
  5. d) None of the above are true.

 

 

 

 

 

 

  1. The primary responsibility of security and exchange commissions with respect to financial statements is to
  2. a) set generally accepted accounting principles (GAAP), which must be followed in their preparation.
  3. b) review accounting choices made by companies in their financial statements to ensure decision-making logic is sound.
  4. c) monitor financial statements to ensure full and plain disclosure of material information thus maintaining compliance with listing requirements.
  5. d) monitor and analyze the information looking for signs of an improved or weakened financial condition.

 

 

 

 

  1. Objectives of financial reporting do NOT include
  2. a) providing information that is useful to users in making resource allocation decisions.
  3. b) providing information about the liquidation value of an enterprise.
  4. c) providing information about an entity’s economic resources, obligations, and equity/net assets.
  5. d) providing information about changes in an entity’s economic resources, obligations, and equity/net assets.

 

 

 

 

  1. As part of the objective of general-purpose financial reporting, which of the following perspectives are considered appropriate?
  2. a) proprietary perspective
  3. b) entity perspective
  4. c) stakeholder perspective
  5. d) None of the above perspectives are considered appropriate.

 

 

 

  1. Which of the following is NOT true regarding accrual-basis accounting?
  2. a) A company records events that change its financial statements in the periods in which the events occur.
  3. b) Revenues and expenses are recognized in the periods in which the company receives or pays cash.
  4. c) It has greater potential to depict meaningful trends in revenues and expenses.
  5. d) Revenues and expenses can be more easily related to the economic environment of the period in which they occurred.

 

 

 

  1. The preparation by some companies of biased information is sometimes referred to as
  2. a) conservative financial reporting.
  3. b) full disclosure of all material facts.
  4. c) aggressive financial reporting.
  5. d) stewardship.

 

 

 

 

 

  1. Where information asymmetry exists, the capital market may attract the wrong kind of company. This is known as
  2. a) moral hazard.
  3. b) conservative accounting.
  4. c) adverse selection.
  5. d) an inefficient marketplace.

 

 

  1. The “efficient markets hypothesis” proposes that
  2. a) market prices reflect information known only to internal stakeholders.
  3. b) market prices reflect all information about a company.
  4. c) market prices reflect information known only to external stakeholders.
  5. d) information asymmetry is required.

 

 

 

 

  1. Which of the following does NOT describe a cause of management bias?
  2. a) the need to comply with contracts, such as debt covenants
  3. b) the desire to meet financial analysts’ expectations
  4. c) the tendency to downplay negative events
  5. d) the desire for all stakeholders to have access to all information

 

 

 

  1. Where people think that no one is watching, they will often shirk their responsibilities. This is known as
  2. a) moral hazard.
  3. b) conservative accounting.
  4. c) adverse selection.
  5. d) an inefficient marketplace.

 

 

 

  1. Conservative accounting refers to
  2. a) a manager’s tendency to shirk his stewardship responsibilities.
  3. b) a manager’s engagement in greater risk taking.
  4. c) a decision to downplay the negative and focus on the positive.
  5. d) a decision to downplay the positive and focus on the negative.

 

 

  1. The problem of information asymmetry can be reduced by
  2. a) aggressive accounting.
  3. b) accounting standards.
  4. c) adverse selection.
  5. d) only focusing on positive events.

 

 

 

 

  1. Which of the following sources of generally accepted accounting principles (GAAP) are NOT developed by the Canadian Accounting Standards Board (AcSB)?
  2. a) Accounting Standards for Private Enterprises (ASPE)
  3. b) International Financial Reporting Standards (IFRS)
  4. c) GAAP for Pension Plans
  5. d) GAAP for Not-for-Profit entities

 

 

 

  1. Before 1900, which of the following accurately describes financial reports?
  2. a) They emphasized the need for standardized and increased corporate disclosures.
  3. b) They were for widespread use and distribution.
  4. c) They emphasized solvency and liquidity.
  5. d) None of the above accurately describe financial reports pre-1900.

 

 

  1. As of 2011, the responsibilities of the Accounting Standards Board (AcSB) in Canada relate to setting standards for
  2. a) publicly accountable entities only.
  3. b) both publicly accountable entities and private enterprises.
  4. c) private enterprises, not-for-profit entities and pension plans.
  5. d) not-for-profit entities and pension plans only.

 

 

  1. In Canada, the body that has the responsibility of overseeing the Accounting Standards Board (AcSB) is the
  2. a) Accounting Standards Oversight Council (AcSOC).
  3. b) International Accounting Standards Board (IASB).
  4. c) Canadian Institute of Chartered Accountants (CICA).
  5. d) Financial Accounting Standards Board (FASB).

 

 

 

  1. In the United States, the body that has the final authority over accounting standards is the
  2. a) Financial Accounting Standards Board (FASB).
  3. b) International Accounting Standards Board (IASB).
  4. c) Securities Exchange Commission (SEC).
  5. d) Accounting Standards Oversight Council (AcSOC).

 

 

  1. In Canada, the body which is NOT instrumental in the development of financial reporting standards is the
  2. a) Accounting Standards Board (AcSB).
  3. b) Financial Accounting Standards Board (FASB).
  4. c) International Accounting Standards Board (IASB).
  5. d) American Institute of Certified Public Accountants.

 

 

 

 

  1. The adoption of International Financial Reporting Standards in Canada is an example of
  2. a) the impact of technology on user’s needs.
  3. b) the impact of globalization on capital markets.
  4. c) ethical behaviour.
  5. d) the desire of most private companies to expand internationally.

 

 

 

  1. Which of the following statements does NOT describe the activities and authority of the Ontario Securities Commission (OSC)?
  2. a) The OSC reviews and monitors the financial statements of companies whose shares are listed on the Toronto Stock Exchange.
  3. b) The OSC issues its own disclosure requirements for listed companies.
  4. c) The OSC has the ability to fine or delist companies.
  5. d) The OSC issues financial accounting standards for Canadian companies.

 

 

 

 

  1. Which of the following does NOT support the use of Accounting Standards for Private Enterprises (ASPE)?
  2. a) Private enterprises usually have less complex business models.
  3. b) Private enterprises that are “going public.”
  4. c) Private enterprises usually have fewer users.
  5. d) Private enterprises’ financial statement users tend to have first-hand information.

 

 

 

  1. Which of the following does NOT describe a step in the IASB’s standard setting process?
  2. a) appointing trustees to the IFRS Foundation
  3. b) development of an exposure draft
  4. c) provision of strategic advice by the IFRS Advisory Council
  5. d) public consultation

 

 

 

  1. Under ASPE, the primary sources of GAAP include
  2. a) accounting textbooks and journals.
  3. b) International Financial Reporting Standards.
  4. c) the CICA Handbook and appendices.
  5. d) research studies.

 

 

 

  1. Under ASPE, the other (as opposed to primary) sources of GAAP include
  2. a) the CICA Handbook and appendices.
  3. b) Accounting Guidelines, including appendices.
  4. c) pronouncements by accounting standard-setting bodes in other jurisdictions.
  5. d) All of these are primary sources of GAAP.

 

 

 

 

 

  1. The exercise of professional judgement does NOT involve
  2. a) the use of knowledge gained through education.
  3. b) the application of knowledge gained through experience.
  4. c) the use of ethical decision making.
  5. d) aggressive accounting.

 

 

  1. In a rules-based approach (such as U.S. GAAP), compared to a principles-based approach (such as Canadian GAAP),
  2. a) the body of knowledge is smaller.
  3. b) the importance of communicating the best information to users is emphasized.
  4. c) since it is more prescriptive, it may be easier to defend how to account for a particular item.
  5. d) companies frequently do not interpret the rules literally.

 

 

 

  1. In a principles-based standard-setting system (such as Canadian GAAP), compared to a rules-based approach (such as U.S. GAAP),
  2. a) since it is more prescriptive, it may be easier to defend how to account for a particular item.
  3. b) there is a rule for every situation.
  4. c) accountants either apply specific standards based on the conceptual framework, or, professional judgement consistent with the framework.
  5. d) it is expected that professional accountants might encounter situations where they are unable to apply the principles appropriately.

 

 

 

  1. The Sarbanes-Oxley Act (SOX) was NOT enacted to
  2. a) help prevent fraud and poor financial reporting practices.
  3. b) ensure the act was applied internationally.
  4. c) enable the SEC to increase its policing efforts.
  5. d) introduce new independence rules for auditors.

 

 

  1. Which of the following is likely to be an advantage of the advancement of technology on financial reporting?
  2. a) Users of financial information will have access to more information.
  3. b) The quality and reliability of the information may be compromised.
  4. c) Equal and fair access may be at issue.
  5. d) Internet reporting will increase costs.

 

 

  1. One political factor influencing the standard setting process is how the standard-setting bodies are financed. Which of the following is NOT an IASB principle regarding the nature and amount of funding?
  2. a) Closed-loop: Financial commitments for funding should be contingent upon particular outcomes.
  3. b) Broad-based: It should not rely on one or a few sources.
  4. c) Compelling: Constituents should not be allowed to benefit from the standards without contributing to the process of standard setting.
  5. d) Country-specific: Funding should be shared by the major economies on a proportionate basis.

 

 

 

  1. Which of the following is an argument in favour of a GAAP body of knowledge that is more prescriptive, or rules-based?
  2. a) It always emphasizes communicating the best information for users.
  3. b) The body of knowledge becomes significantly smaller and therefore easier to manage.
  4. c) It may be easier to defend how to account for a particular item.
  5. d) There is a tendency for companies to interpret guidelines loosely, and thus account for items inconsistently.

 

 

Exercises

 

 

Ex. 1-45 Effective capital allocation

Explain the advantages of an effective capital allocation process.

 

 

 

Ex 1-46 Financial statements in practice and theory

What are the four most frequently provided financial statements? Provide two terminologies used to refer to each statement.

 

 

 

Ex. 1-47 Stakeholders in the financial reporting environment

Briefly describe the much-publicized subprime lending crisis in the United States, and identify the stakeholders and how they were affected.

 

 

 

Ex. 1-48 Sources of capital and stages of company growth

Briefly describe how the sources of capital a company relies upon for funding might vary according to their stage of growth.

 

 

Ex. 1-49 Objectives of financial reporting

What are the objectives of financial reporting by business enterprises?

 

 

Ex 1-50 Traditional users vs. others

Beyond users relying directly on financial information for resource allocation, such as investors and creditor, identify at least two categories of stakeholders included in the broader definition of users who help in the efficient allocation of resources. For each category, indicate what is at stake.

 

 

 

Ex. 1-51 Imperfection of the stakeholder ecosystem

The stakeholder ecosystem (depicted in Illustration 1-3) provides checks and balances to ensure that the people with capital—investors and creditors—have good information to use when deciding where best to invest and allocate capital. The system does not always work, however. Explain why this is the case.

 

 

 

Ex. 1-52 Entity vs. proprietary perspective

Explain the difference between the entity perspective and the proprietary perspective.

 

 

Ex. 1-53 User needs

Explain why providing information to users is a challenging task.

 

 

 

Ex. 1-54 The decision-usefulness approach to financial reporting

Explain what is meant by the “decision-usefulness” approach to financial reporting. Who will this information be useful to, and why?

 

 

Ex. 1-55 Merits of accrual- vs. cash-basis accounting

Investors are interested in assessing a company’s ability to generate net cash inflows, as well as its ability to protect and enhance capital investments. Briefly explain how each of the accrual- and cash-basis methods, respectively, might enhance these objectives.

 

 

 

Ex. 1-56 Information asymmetry

In markets where information asymmetry exists, there can be adverse selection and moral hazard. Explain what these terms mean.

 

 

 

Ex. 1-57 Maintaining competitive advantage

In the most efficient and effective marketplace possible, all stakeholders would have equal access to all relevant information. However, a company may feel that complete disclosure may hurt their competitive advantage or position. Offer an example of a circumstance where this may be the case. What do you think the company should do?

 

 

 

Ex. 1-58 Management bias in financial statement presentation

There are many reasons why management may present biased information in the financial statements. Identify at least three (3) such motivations.

 

Ex. 1-59 Role of securities commissions and stock exchanges

Explain the role of securities commissions and stock exchanges in financial reporting.

 

 

 

Ex. 1-60 Standard setting

Explain the relationship between Canadian GAAP and International Financial Reporting Standards (IFRS).

 

 

Ex. 1-61 Purpose of accounting standards

Accounting professions in various countries have tried to develop a set of standards that are generally accepted and universally practised. Explain the motivation for creating such a set of standards.

 

 

Ex. 1-62 ASPE vs. IFRS

Accounting standards for Private Enterprises (ASPE) are geared towards fewer users who have access to additional information about the company. The need for common language and comparability as facilitated by IFRS less necessary among private enterprises. Explain why, despite this, a private company might choose to voluntarily adopt IFRS.

 

 

Ex. 1-63 Sources of GAAP

International Financial Reporting Standards (IFRS) are the primary source of GAAP for public enterprises in Canada. They are, however, insufficient to address all of the accounting issues facing accountants. Explain why this is so and outline some other sources of GAAP that accountants use.

 

 

Ex. 1-64 Sources of GAAP

The Canadian Principles-based GAAP does not offer specific standards for every transition. When specific guidance cannot be found in primary sources such as the Handbook and Accounting guidelines, what process should the accountant follow in their consultation of other sources?

 

 

Ex. 1-65 Professional judgement

Explain the principle of professional judgement. When or why might it be necessary to employ professional judgement, even in a rules-based system?

 

 

Ex. 1-66 SOX and standard setting

After several highly-publicized accounting scandals in the U.S. such as Enron, Sunbeam, and WorldCom, all of whom, coincidentally, were clients of the now basically defunct public accounting firm of Arthur Andersen, the U.S. regulators enacted the Sarbanes-Oxley Act (SOX). Pressure was put on Canada to follow a similar course. Explain what Canada has done to make public companies more accountable.

 

 

Ex. 1-67 Challenges facing financial reporting

In North America, the financial reporting environment is changing at a very rapid pace. Briefly describe four challenges facing the accounting profession today.

 

 

Ex. 1-68 Role of executives and management in a post-SOX world

SOX introduced sweeping changes to the institutional structure of the accounting profession. What key provision was introduced relating to the role of management and executive officers, and their relationship to financial reporting? Why?

 

 

Ex. 1-69 Technology and financial information

Explain how technology impacts the accountants’ role as providers of information.

CHAPTER 2

 

CONCEPTUAL FRAMEWORK UNDERLYING

FINANCIAL REPORTING

 

MULTIPLE CHOICE QUESTIONS

 

 

  1. Which of the following is NOT part of the conceptual framework for financial reporting?
  2. a) elements of financial statements
  3. b) qualitative characteristics of accounting information
  4. c) notes to financial statements
  5. d) foundational principles

 

 

 

  1. Which of the following is NOT an objective of financial reporting?
  2. a) to provide information about an entity’s economic resources, obligations and equity/net assets
  3. b) to provide information that is useful to investors and creditors and other users in making resource allocation decisions and/or assessing management stewardship
  4. c) to provide information that is useful in assessing the economic performance of the entity
  5. d) to provide the most useful information possible even if the costs exceed the benefits

 

 

 

  1. Which of the following is NOT a component of a conceptual framework for financial reporting?
  2. a) accounting’s goals and purposes
  3. b) qualitative characteristics of accounting information
  4. c) foundational principles
  5. d) All of the above are components of a conceptual framework.

 

 

  1. Which of the following best describes why a conceptual framework is necessary?
  2. a) to build all standards and rules upon a common foundation and increase financial statement users’ understanding and confidence
  3. b) to make financial statement preparation an automated process requiring no human intervention
  4. c) to completely eliminate the potential for companies to exercise professional judgement in preparation of financial information
  5. d) to decrease the comparability of different companies’ financial statements

 

Bloomcode: Knowledge

 

 

  1. Fundamental qualitative characteristics include
  2. a) relevance and comparability.
  3. b) representational faithfulness and timeliness.
  4. c) relevance and representational faithfulness.
  5. d) verifiability and relevance.

 

 

  1. Which of the following does NOT relate to the concept of relevance?
  2. a) The information must be capable of making a difference in a decision.
  3. b) Both material and immaterial information is important.
  4. c) The information has predictive value.
  5. d) The information has feedback/confirmatory value.

 

 

  1. Accounting information is considered to be relevant when it
  2. a) can be depended on to represent the economic conditions and events that it is intended to represent.
  3. b) is capable of making a difference in a decision.
  4. c) is understandable by reasonably informed users of accounting information.
  5. d) is verifiable and neutral.

 

 

  1. Materiality refers to
  2. a) the tangible nature of an item.
  3. b) representational faithfulness.
  4. c) the decision-making relevance of a piece of information.
  5. d) None of these describe materiality.

 

 

  1. Which of the following is true about understandability as a qualitative characteristic of financial statements?
  2. a) The onus to prepare understandable statements and to be able to understand them lies with the preparer.
  3. b) Where the underlying transactions or economic events are more complex, the user is expected to understand them without the assistance of an advisor.
  4. c) The onus to prepare understandable statements and to be able to understand them lies with the preparer and the user.
  5. d) Users with no knowledge of business and financial accounting matters are expected to understand the financial statements.

 

  1. Representational faithfulness includes
  2. a) completeness, neutrality and comparability.
  3. b) neutrality, completeness, and understandability.
  4. c) relevance, completeness and freedom from material error.
  5. d) neutrality, completeness and freedom from material error.

 

  1. The overriding criterion by which accounting information can be judged is that of
  2. a) usefulness for decision making.
  3. b) freedom from bias.
  4. c) timeliness.
  5. d) comparability.

 

 

  1. Which statement is correct regarding enhancing qualitative characteristics?
  2. a) Full discussion of the information presented is a substitute for comparable information.
  3. b) Numbers that are easily verifiable with a reasonable degree of accuracy are called soft numbers.
  4. c) Information must be available before it loses its ability to influence users’ decisions.
  5. d) Financial information must be of sufficient quality and clarity that even uninformed readers can understand it.

 

 

  1. Comparability allows any financial statement user to
  2. a) make timely decisions.
  3. b) understand all the information presented.
  4. c) verify all the data provided.
  5. d) identify the real similarities and differences in economic phenomena.

 

 

  1. Timeliness is increased by
  2. a) quarterly reporting.
  3. b) comparative financial statements.
  4. c) representational faithfulness.
  5. d) annual reporting.

 

 

  1. Burton Ltd. operates in both Canada and the United States. The company wants to improve the qualitative characteristics of its financial statements. Which of the following would most likely improve the comparability of Burton’s financial statements?
  2. a) the restatement of its financial statements from Canadian GAAP to US GAAP for its American investors
  3. b) the preparation of monthly financial statements
  4. c) the introduction of a policy that specifies how Sunbury’s capital assets should be depreciated
  5. d) the use of U.S.-trained accountants

 

 

  1. You want to improve the qualitative characteristics of your firm’s financial statements. Which of the following options would most likely improve the timeliness of your company’s financial statements?
  2. a) increasing the number of disclosures
  3. b) changing the timing of when revenues are recognized
  4. c) increasing the frequency of statements from annually to quarterly
  5. d) decreasing the useful life of property, plant and equipment from ten years to five

 

 

 

  1. The costs of providing useful information do NOT include
  2. a) collecting, processing and distributing information.
  3. b) auditing financial statements.
  4. c) disclosure to competitors.
  5. d) users’ allocation of resources.

 

 

  1. The common characteristic of both assets and liabilities is that they both
  2. a) provide an economic benefit.
  3. b) result from a past transaction or event.
  4. c) represent a present responsibility.
  5. d) represent contractual or other rights.

 

  1. Which of the following does NOT represent an essential characteristic of an asset?
  2. a) There is some economic benefit to the entity.
  3. b) The entity is able to transfer the economic benefit if it so chooses.
  4. c) The entity has control over the economic benefit.
  5. d) The benefits result from a past transaction or event.

 

 

  1. Which of the following statements regarding liabilities is true?
  2. a) They must arise through a contractual obligation.
  3. b) They may be attributable to a future transaction or event.
  4. c) The duty or responsibility obligates the entity.
  5. d) The entity often has reasonable discretion to avoid the obligation.

 

 

  1. Equitable obligations arise due to
  2. a) statutory requirements.
  3. b) contractual obligations.
  4. c) moral or ethical considerations.
  5. d) union agreements.

 

 

  1. Under IFRS, equity does NOT include
  2. a) long term leases.
  3. b) common and/or preferred shares.
  4. c) accumulated other comprehensive income.
  5. d) retained earnings.

 

  1. Gains are defined as
  2. a) increases in economic resources resulting from an entity’s ordinary activities.
  3. b) decreases in economic resources resulting from an entity’s ordinary activities.
  4. c) the residual interest remaining after liabilities are deducted from assets.
  5. d) increases in equity resulting from an entity’s peripheral or incidental transactions.

 

  1. Under IFRS, “other comprehensive income” does NOT include
  2. a) unrealized holding gains and losses on certain securities.
  3. b) gains and losses on disposal of property, plant and equipment.
  4. c) gains and losses related to certain types of hedges.
  5. d) certain gains and losses related to foreign exchange transactions.

 

  1. Financial statements prepared under ASPE include a
  2. a) statement of comprehensive income.
  3. b) statement of cash flows and a statement of changes in shareholders’ equity.
  4. c) balance sheet and a statement of retained earnings.
  5. d) statement of retained earnings and a statement of comprehensive income.

 

 

  1. Which of the following elements of financial statements is NOT a component of comprehensive income?
  2. a) Revenues
  3. b) Distributions to owners
  4. c) Losses
  5. d) Expenses

 

 

  1. A local businessman owns several different companies. His accountant prepares separate financial statements for each of these businesses. This is an application of the
  2. a) full disclosure principle.
  3. b) periodicity assumption.
  4. c) going concern assumption.
  5. d) economic entity assumption.

 

 

  1. Generally, under ASPE, revenue from sales should be recognized at a point when
  2. a) management decides it is appropriate to do so.
  3. b) the product is available for sale.
  4. c) an exchange has taken place and the earnings process is substantially complete.
  5. d) the entire amount receivable has been collected from the customer and there remains no further warranty liability.

 

 

  1. During a major renovation project of its head office, a worker was seriously injured. While the company believes that it was not at fault, it does include the incident in the notes to its financial statements. This is consistent with the
  2. a) full disclosure principle.
  3. b) periodicity assumption.
  4. c) going concern assumption.
  5. d) economic entity assumption.

 

 

  1. The economic entity assumption
  2. a) is inapplicable to unincorporated businesses.
  3. b) recognizes the legal aspects of business organizations.
  4. c) requires periodic income measurement.
  5. d) is applicable to all forms of business organizations.

 

  1. When deciding whether to recognize a financial statement element (or not), and how to measure it, the accountant should
  2. a) always use estimates.
  3. b) record “hard” numbers and ignore “soft” numbers.
  4. c) determine an acceptable level of uncertainty.
  5. d) recognize a financial statement element even if it cannot be measured.

 

 

 

  1. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with the
  2. a) full disclosure principle.
  3. b) periodicity assumption.
  4. c) going concern assumption.
  5. d) economic entity assumption.

 

  1. The assumption that a business enterprise will NOT be sold or liquidated in the near future is known as the
  2. a) economic entity assumption.
  3. b) monetary unit assumption.
  4. c) fair value principle.
  5. d) going concern assumption.

 

 

 

  1. Valuing assets at their liquidation values rather than their cost is inconsistent with the
  2. a) periodicity assumption.
  3. b) historical cost principle.
  4. c) matching principle.
  5. d) economic entity assumption.

 

  1. Which of the following is NOT a good example of the matching principle?
  2. a) A machine that produces certain goods is depreciated over its useful life. The depreciation expense is matched with the proceeds from the sale of those goods.
  3. b) The entire amount of a two-year insurance premium is expensed in the first year.
  4. c) An uncollectible receivable is written off in the year that the sale was made.
  5. d) Recognition of revenue for which associated expenses cannot yet be determined is delayed until such determination can be made.

 

 

  1. Use of an allowance for doubtful accounts is an application of the
  2. a) matching principle.
  3. b) revenue recognition principle.
  4. c) historical cost principle.
  5. d) full disclosure principle.

 

 

  1. Which of the following statements does NOT apply to the historical cost principle?
  2. a) Historical cost represents a value at a point in time.
  3. b) The principle does not apply to financial instruments.
  4. c) Historical cost results from a reciprocal or two-way exchange.
  5. d) Over time, historical cost becomes irrelevant in terms of predictive value.