Deck 1: Intermediate Accounting Volume 1

Question 1

The problem of information asymmetry can be reduced by

A)aggressive accounting.
B)accounting standards.
C)adverse selection.
D)only focusing on positive events.

Answer 1

B

Question 2

Financial accounting can be broadly defined as the area of accounting that prepares financial statements to be used

A)by parties internal to the business enterprise only.
B)by investors only.
C)by parties both internal and external to the business enterprise.
D)primarily by external users and Canada Revenue Agency.

Answer 2

C

Question 3

Which of the following is correct?

A)Reported accounting numbers do not affect the transfer of resources.
B)Credit rating agencies use accounting information to assess their assets.
C)Efficient capital markets promote productivity and encourage innovation.
D)Efficient capital markets promote productivity but do not encourage innovation.

Answer 3

C

Question 4

The "efficient markets hypothesis" proposes that

A)market prices reflect information known only to internal stakeholders.
B)market prices reflect all information about a company.
C)market prices reflect information known only to external stakeholders.
D)information asymmetry is required.

Question 5

The essential characteristic(s)of accounting is (are)

A)communication of financial information to interested internal parties only.
B)communication of economic information to external parties.
C)identification and measurement of financial information only.
D)identification, measurement, and communication of financial information.

Question 6

Management accounting can be broadly defined as the area of accounting that communicates financial information

A)to investors only.
B)to parties internal to the business enterprise only.
C)to parties both internal and external to the business enterprise.
D)primarily to external users and Canada Revenue Agency.

Question 7

Where information asymmetry exists, the capital market may attract the wrong kind of company.This is known as

A)moral hazard.
B)conservative accounting.
C)adverse selection.
D)an inefficient marketplace.

Question 8

The preparation by some companies of biased information is sometimes referred to as

A)conservative financial reporting.
B)full disclosure of all material facts.
C)aggressive financial reporting.
D)stewardship.

Question 9

Stakeholders who help in the efficient allocation of resources include

A)investors and creditors.
B)financial analysts and regulators.
C)creditors and auditors.
The Canadian Financial Reporting Environment 1 - 7
D)management and auditors.

Question 10

In Canada, the body that has the responsibility of overseeing the Accounting Standards Board (AcSB)is the

A)Accounting Standards Oversight Council (AcSOC).
B)International Accounting Standards Board (IASB).
C)Canadian Institute of Chartered Accountants (CICA).
D)Financial Accounting Standards Board (FASB).

Question 11

In the United States, the body that has the final authority over accounting standards is the

A)Financial Accounting Standards Board (FASB).
B)International Accounting Standards Board (IASB).
C)Securities Exchange Commission (SEC).
D)Accounting Standards Oversight Council (AcSOC).

Question 12

The widely publicized subprime lending crisis was NOT caused by

A)capital market participants who acted in their own self-interest.
B)a lack of transparency.
C)the practice of securitizing assets.
D)a lack of investor understanding of the investment's true risk.

Question 13

As of 2011, the responsibilities of the Accounting Standards Board (AcSB)in Canada relate to setting standards for

A)publicly accountable entities only.
B)both publicly accountable entities and private enterprises.
C)private enterprises, not-for-profit entities and pension plans.
D)not-for-profit entities and pension plans only.

Question 14

The auditor's primary responsibility is to

A)review financial statements and discuss them with management.
B)prepare financial statements.
C)report to Canada Revenue Agency.
D)report to standard setters.

Question 15

Objectives of financial reporting do NOT include

A)providing information that is useful to users in making resource allocation decisions.
B)providing information about the liquidation value of an enterprise.
C)providing information about an entity's economic resources, obligations, and equity/net
Assets.
D)providing information about changes in an entity's economic resources, obligations, and
Equity/net assets.

Question 16

In Canada, the body which is NOT instrumental in the development of financial reporting standards is the

A)Accounting Standards Board (AcSB).
B)Financial Accounting Standards Board (FASB).
C)International Accounting Standards Board (IASB).
D)American Institute of Certified Public Accountants.

Question 17

Financial accounting is concerned with the process that culminates in

A)the preparation of financial reports.
B)specialized reports for inventory management and control.
C)specialized reports for income tax calculation and recognition.
D)reports on changes in stock prices and future estimates of market position.

Question 18

Audited financial statements are prepared by

A)auditors.
B)financial analysts.
C)Canada Revenue Agency.
D)management.

Question 19

Which of the following does NOT describe a cause of management bias?

A)the need to comply with contracts, such as debt covenants
B)the desire to meet financial analysts' expectations
C)the tendency to downplay negative events
D)the desire for all stakeholders to have access to all information

Question 20

Whether a business is successful and thrives is determined by

A)free enterprise or competition.
B)competition and markets only.
C)markets and competition only.
D)markets, competition and free enterprise.

Question 21

Under ASPE, the primary sources of GAAP include

A)accounting textbooks and journals.
B)International Financial Reporting Standards.
C)the CICA Handbook and appendices.
D)research studies.

Question 22

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.

Question 23

Which of the following statements does NOT describe the activities and authority of the Ontario Securities Commission (OSC)?

A)The OSC reviews and monitors the financial statements of companies whose shares are
Listed on the Toronto Stock Exchange
B)The OSC issues its own disclosure requirements for listed companies.
C)The OSC has the ability to fine or delist companies.
D)The OSC issues financial accounting standards for Canadian companies.

Question 24

Which of the following does NOT support the use of Accounting Standards for Private Enterprises (ASPE)?

A)Private enterprises usually have less complex business models.
B)Private enterprises that are "going public."
C)Private enterprises usually have fewer users.
D)Private enterprises' financial statement users tend to have first-hand information.

Question 25

Which of the following is NOT part of the conceptual framework for financial reporting?

A)Elements of financial statements
B)Qualitative characteristics of accounting information
C)Notes to financial statements
D)Foundational principles

Question 26

The exercise of professional judgement does NOT involve

A)the use of knowledge gained through education.
B)the application of knowledge gained through experience.
C)the use of ethical decision making.
D)aggressive accounting.

Question 27

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

Question 28

Which of the following does NOT describe a step in the IASB's standard setting process?

A)appointing trustees to the IFRS Foundation
B)development of an Exposure Draft
C)provision of strategic advice by the IFRS Advisory Council
D)public consultation

Question 29

User Needs The Canadian Financial Reporting Environment 1 - 13 Explain why providing information to users is a challenging task.

Question 30

Role of Securities Commissions and Stock Exchanges Explain the role of securities commissions and stock exchanges in financial reporting.

Question 31

Effective capital allocation Explain the advantages of an effective capital allocation process.

Question 32

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

Question 33

Which of the following is/are major factors in the rapidly changing financial reporting environment in Canada?

A)increased demand for accountants and the impact of technology
B)globalization and the unethical actions of accountants
C)the growing number of institutional investors who want more information regarding
Environmental and social issues
D)increased use of the Internet

Question 34

The adoption of International Financial Reporting Standards in Canada is an example of

A)the impact of technology on user's needs.
B)the impact of globalization on capital markets.
C)ethical behaviour.
The Canadian Financial Reporting Environment 1 - 9
D)the desire of most private companies to expand internationally.

Question 35

In a rules-based approach (such as U.S.GAAP), compared to a principles-based approach (such as Canadian GAAP),

A)the body of knowledge is smaller.
B)the importance of communicating the best information to users is emphasized.
C)since it is more prescriptive, it may be easier to defend how to account for a particular
Item.
D)companies frequently do not interpret the rules literally.

Question 36

Which of the following is likely to be an advantage of the advancement of technology on financial reporting?

A)Users of financial information will have access to more information.
B)The quality and reliability of the information may be compromised.
C)Equal and fair access may be at issue.
D)Internet reporting will increase costs.

Question 37

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.

Question 38

The Sarbanes-Oxley Act (SOX)was NOT enacted to

A)help prevent fraud and poor financial reporting practices.
B)ensure the act was applied internationally.
C)enable the SEC to increase its policing efforts.
D)introduce new independence rules for auditors.

Question 39

Which of the following is NOT an objective of financial reporting?

A)To provide information about an entity's economic resources, obligations and equity/net
Assets
B)To provide information that is useful to investors and creditors and other users in making
Resource allocation decisions and/or assessing management stewardship
C)To provide information that is useful in assessing the economic performance of the entity
D)To provide the most useful information possible even if the costs exceed the benefits

Question 40

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.

Question 41

Under IFRS, "other comprehensive income" does NOT include

A)unrealized holding gains and losses on certain securities.
B)gains and losses on disposal of property, plant and equipment.
C)gains and losses related to certain types of hedges.
D)certain gains and losses related to foreign exchange transactions.

Question 42

Representational faithfulness includes

A)completeness, neutrality and comparability.
B)neutrality, completeness, and understandability.
C)relevance, completeness and freedom from material error.
D)neutrality, completeness and freedom from material error.

Question 43

Equitable obligations arise due to

A)statutory requirements.
B)contractual obligations.
C)moral or ethical considerations.
D)union agreements.

Question 44

The costs of providing useful information do NOT include

A)collecting, processing and distributing information.
B)auditing financial statements.
Conceptual Framework Underlying Financial Reporting 2 - 9
C)disclosure to competitors.
D)users' allocation of resources.

Question 45

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?

A)increasing the number of disclosures
B)changing the timing of when revenues are recognized
C)increasing the frequency of statements from annually to quarterly
D)decreasing the useful life of property, plant and equipment from ten years to five

Question 46

Timeliness is increased by

A)quarterly reporting.
B)comparative financial statements.
C)representational faithfulness.
D)annual reporting.

Question 47

Which of the following does NOT relate to the concept of relevance?

A)The information must be capable of making a difference in a decision.
B)Both material and immaterial information is important.
C)The information has predictive value.
D)The information has feedback/confirmatory value.

Question 48

The common characteristic of both assets and liabilities is that they BOTH

A)provide an economic benefit.
B)result from a past transaction or event.
C)represent a present responsibility.
D)represent contractual or other rights.

Question 49

The overriding criterion by which accounting information can be judged is that of

A)usefulness for decision making.
B)freedom from bias.
C)timeliness.
D)comparability.

Question 50

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

A)full disclosure principle.
B)periodicity assumption.
C)going concern assumption.
D)economic entity assumption.

Question 51

Gains are defined as

A)increases in economic resources resulting from an entity's ordinary activities.
B)decreases in economic resources resulting from an entity's ordinary activities.
C)the residual interest remaining after liabilities are deducted from assets.
D)increases in equity resulting from an entity's peripheral or incidental transactions.

Question 52

Financial statements prepared under ASPE include a

A)statement of comprehensive income.
B)statement of cash flows and a statement of changes in shareholders' equity.
C)balance sheet and a statement of retained earnings.
D)statement of retained earnings and a statement of comprehensive income.

Question 53

Which of the following elements of financial statements is NOT a component of comprehensive income?

A)Revenues
B)Distributions to owners
C)Losses
D)Expenses

Question 54

Generally, revenue from sales should be recognized at a point when

A)management decides it is appropriate to do so.
B)the product is available for sale.
C)an exchange has taken place and the earnings process is substantially complete.
D)the entire amount receivable has been collected from the customer and there remains
No further warranty liability.

Question 55

Sunbury 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 Sunbury's financial statements?

A)The restatement of its financial statements from Canadian GAAP to US GAAP for its
American investors.
B)The preparation of monthly financial statements.
C)The introduction of a policy that specifies how Sunbury's capital assets should be
Depreciated.
D)The use of U.S.-trained accountants.

Question 56

Fundamental qualitative characteristics include

A)relevance and comparability.
B)representational faithfulness and timeliness.
C)relevance and representational faithfulness.
D)verifiability and relevance.

Question 57

Comparability allows any financial statement user to

A)make timely decisions.
B)understand all the information presented.
C)verify all the data provided.
D)identify the real similarities and differences in economic phenomena.

Question 58

Accounting information is considered to be relevant when it

A)can be depended on to represent the economic conditions and events that it is intended
To represent.
B)is capable of making a difference in a decision.
C)is understandable by reasonably informed users of accounting information.
D)is verifiable and neutral.

Question 59

Which statement is correct regarding enhancing qualitative characteristics?

A)Full discussion of the information presented is a substitute for comparable information.
B)Numbers that are easily verifiable with a reasonable degree of accuracy are called soft
Numbers.
C)Information must be available before it loses its ability to influence users' decisions.
D)Financial information must be of sufficient quality and clarity that even uninformed
Readers can understand it.

Question 60

Under IFRS, equity does NOT include

A)long term leases.
B)common and/or preferred shares.
C)accumulated other comprehensive income.
D)retained earnings.

Question 61

The assumption that a business enterprise will NOT be sold or liquidated in the near future is known as the

A)economic entity assumption.
B)monetary unit assumption.
C)fair value principle.
D)going concern assumption.

Question 62

Management Discussion and Analysis (MD&A)does NOT include

A)notes to the financial statements.
B)key performance drivers.
C)the company's vision and strategy.
D)the company's capabilities (capital and other resources).

Question 63

The matching principle is best demonstrated by

A)not recognizing any expense unless some revenue is realized.
B)associating effort (expense)with accomplishment (revenue).
C)recognizing prepaid rent received as revenue.
D)measuring expenses correctly.

Question 64

Fair value (of an asset)is

A)an entry price.
B)an entity-specific measure.
C)an exit price.
D)not used when following IFRS.

Question 65

The operations of a resource company's oil sands operations results in environmental damage.While the extent of the damage cannot be determined at this time, the situation is disclosed in its financial statements.This BEST demonstrates

A)the application of professional judgement.
B)the full disclosure principle.
C)representational faithfulness.
D)good management stewardship.

Question 66

Which of the following statements does NOT apply to the historical cost principle?

A)Historical cost represents a value at a point in time.
B)The principle does not apply to financial instruments.
C)Historical cost results from a reciprocal or two-way exchange.
D)Over time, historical cost becomes irrelevant in terms of predictive value.

Question 67

The economic entity assumption

A)is inapplicable to unincorporated businesses.
B)recognizes the legal aspects of business organizations.
C)requires periodic income measurement.
D)is applicable to all forms of business organizations.

Question 68

Use of an allowance for doubtful accounts is an application of the

A)matching principle.
B)revenue recognition principle.
C)historical cost principle.
D)full disclosure principle.

Question 69

During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with the

A)full disclosure principle.
B)periodicity assumption.
C)going concern assumption.
D)economic entity assumption.
Conceptual Framework Underlying Financial Reporting 2 - 11

Question 70

Valuing assets at their liquidation values rather than their cost is inconsistent with the

A)periodicity assumption.
B)historical cost principle.
C)matching principle.
D)economic entity assumption.

Question 71

Application of the full disclosure principle

A)is theoretically desirable but not practical because the costs of complete disclosure
Exceed the benefits.
B)is violated when important financial information is buried in the notes to the financial
Statements.
C)is demonstrated by the inclusion of information such as information about contingencies.
D)requires that the financial statements be consistent and comparable.

Question 72

Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of

A)the economic entity assumption.
B)the matching principle.
C)comparability.
D)reliability.

Question 73

Which of the following situations does NOT demonstrate an attempt at financial engineering?

A)creating complex legal arrangements and financial instruments
B)structuring debt financing so that it meets the GAAP definition of equity rather than debt
C)accounting for bona fide business transactions in a transparent manner
D)aggressively interpreting GAAP so that the impact on critical ratios is minimized

Question 74

Management Discussion and Analysis (MD&A)is

A)notes on meetings between management and auditors.
B)internal documents not released to shareholders.
C)supplementary information included in the annual report.
D)supplementary information included in the notes to the financial statements.
Conceptual Framework Underlying Financial Reporting 2 - 13

Question 75

Where there is a significant uncertainty with respect to the measurement of an item,

A)do not record anything in the financial statements.
B)recognize the item in the financial statements and disclose the measurement uncertainty
In the notes to the financial statements.
C)do not record anything in the financial statements but disclose the measurement
Uncertainty in the notes to the financial statements.
D)record the maximum amount in the financial statements.

Question 76

When deciding whether to recognize a financial statement element (or not), and how to measure it, the accountant should

A)always use estimates.
B)record "hard" numbers and ignore "soft" numbers.
C)determine an acceptable level of uncertainty.
D)recognize a financial statement element even if it cannot be measured.

Question 77

Fraudulent financial reporting is a business reality.While it cannot be eliminated, the risk of fraudulent reporting can be decreased.Which of the following considerations is LEAST likely to lessen that risk?

A)an independent audit committee
B)an internal audit function
C)vigilant management
D)an increased focus on tying bonuses to short-term company performance

Question 78

Which of the following serves as the justification for the periodic recording of depreciation expense?

A)association of efforts (expense)with accomplishments (revenue)
B)minimization of income tax liability
C)immediate recognition of an expense
D)systematic and rational allocation of cost over the periods benefited

Question 79

Which of the following is NOT a good example of the matching principle?

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.
B)The entire amount of a two-year insurance premium is expensed in the first year.
C)An uncollectible receivable is written off in the year that the sale was made.
D)Recognition of revenue for which associated expenses cannot yet be determined is
Delayed until such determination can be made.

Question 80

Principles-based GAAP is sometimes criticized for being

A)too inflexible.
B)too flexible.
C)too inconsistent.
D)too difficult for the reader to understand.