Deck 9: Additional Financial Reporting Issues

Question 1

Which method of dealing with inflation in financial reporting updates assets by applying inflation rates to historical costs?

A)current replacement cost method
B)current rate method
C)temporal method
D)general purchasing power method

Answer 1

D

Question 2

For the purpose of financial reporting under IASB standards,what is a "group?"

A)a parent corporation and all of its subsidiary corporations
B)any multinational corporation under the jurisdiction of the IASB
C)all countries that have adopted IASB standards
D)a company that is comprised of foreign corporations dissolved into one entity

Answer 2

A

Question 3

A representative market basket of products cost $250 at the beginning of the year,and the same collection of products costs $280 at the end of the year. What is the annual rate of inflation?

A)10.7%
B)12%
C)112%
D)-10.7%

Answer 3

B

Question 4

Which method most closely represents the requirement of IAS 29 for reporting financial statements of companies in hyperinflationary economies?

A)current replacement cost
B)general purchasing power
C)historical cost for non-monetary assets and current replacement cost for monetary assets
D)Companies have a choice between current replacement cost and general purchasing power methods.

Question 5

What issue of reporting effects of changing prices is addressed by IAS 29,issued by the International Accounting Standards Board in 1989?

A)choice between current replacement cost and general purchasing power method
B)making inflation-adjusted reporting optional or required
C)specifying the European Central Bank as the official source of inflation rates in the European Union
D)mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies

Question 6

How do multinational corporations combine operations?

A)The acquired firm is dissolved and is merged into the acquiring company.
B)One company acquires a majority of shares of another company,but both entities continue to exist.
C)Two or more entities dissolve their legal status and merge to create a new corporation.
D)All of the above.

Question 7

What is a "holding gain?"

A)the increase in owners' equity resulting from maintaining monetary assets during a period of inflation
B)the increase in income caused by the use of general purchasing power accounting during a period of inflation
C)the increase in owners' equity resulting from holding nonmonetary assets during a period of inflation
D)the increase in income caused by paying liabilities with cheaper dollars

Question 8

Which method of dealing with inflation in financial reporting reflects current replacement cost of specific assets?

A)current replacement cost method
B)general purchasing power method
C)temporal method
D)current rate method

Question 9

Which of the following is potentially a problem associated with historical cost-based financial statements in periods of inflation?

A)asset understatement
B)overpayment of income taxes
C)overstated income
D)All of the above are potential problems.

Question 10

Since 2003,what method for supplemental disclosure of inflation-adjusted financial statements is required of all companies affected by the IASB standards?

A)No rule is currently in place that generally requires inflation-adjusted financial statements.
B)General purchasing power method must be used.
C)Current replacement cost method must be used.
D)Companies have the option of using current cost or historical cost.

Question 11

Which of the following countries requires companies to use current replacement cost accounting to prepare primary financial statements?

A)the Netherlands
B)Mexico
C)Brazil
D)None of the above

Question 12

Why has inflation accounting NOT been required in the United States and the United Kingdom since the 1980s?

A)Accounting regulators in the U.S.and U.K.have not addressed the issue of inflation accounting in their pronouncements.
B)Inflation has not been a significant problem in the U.S.and the U.K.since the 1980's.
C)Accounting regulators could not agree on a method for adjusting financial statements for the effect of inflation.
D)Corporations in the U.S and U.K.voluntarily report inflation-adjusted financial statements,making the regulations unnecessary.

Question 13

Holding monetary assets during a period of inflation results in:

A)purchasing power gains.
B)purchasing power losses.
C)transaction gains.
D)translation losses.

Question 14

Holding monetary liabilities during a period of inflation results in:

A)purchasing power gains.
B)purchasing power losses.
C)transaction gains.
D)translation losses.

Question 15

Under general purchasing power accounting,how is the gain or loss in purchasing power reported?

A)as a prior period adjustment to Retained Earnings
B)as an element of accumulated comprehensive income on the Balance Sheet
C)as an element of income in the current year
D)All of the above methods are acceptable under general purchasing power accounting.

Question 16

According to IAS 27,how can effective control be achieved without owning more than 50% of another company's voting shares?

A)representation on the company's board of directors
B)being the primary entity exercising voting rights
C)through a contract between the entities
D)All of the above may result in control by one corporation over another.

Question 17

What does it mean to say that the inflation rate last year was 5%?

A)All prices are 5% more at the end of the year than they were at the beginning of the year.
B)The price of specific products increased 5% between the beginning and the end of the year.
C)On average,a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year.
D)The general purchasing power of the dollar has increased 5% between the beginning of the year and the end of the year.

Question 18

Prior to 2007,which method of accounting for inflation most closely represented the supplemental reporting required in Mexico?

A)Current replacement cost
B)Current cost
C)General purchasing power
D)Historical cost

Question 19

Which method of accounting for inflation must be used under U.S.GAAP?

A)Current Replacement Cost method
B)General Purchasing Power method
C)Both Current Replacement Cost and General Purchasing Power methods must be used
D)Neither method must be used since inflation accounting is not required under U.S.GAAP.

Question 20

Under IAS 27,how is "control" defined?

A)ownership of 50% of more of the voting shares of another entity
B)representation on another entity's board of directors
C)the power to govern financial and operating policies of an entity
D)ownership of 30% or more of the voting shares of another entity

Question 21

Since 2001,which method of accounting for a business combination is required under U.S.GAAP?

A)pooling
B)purchase
C)Both purchase and pooling are allowed.
D)Purchase is required for transnational combinations,but pooling is allowed for domestic combinations.

Question 22

How does U.S.GAAP differ from IFRS with respect to presenting consolidated financial statements?

A)U)S.GAAP requires all controlled subsidiaries to be consolidated,whereas IFRS allows for optional consolidated financial statements.
B)IFRS excludes subsidiaries acquired for disposal within one year from the consolidation requirement,whereas U.S.GAAP requires all controlled subsidiaries to be consolidated.
C)U)S.GAAP allows a company to exclude subsidiaries it is holding for sale from the consolidation process.
D)IFRS requires the parent company to own 50% of the voting shares of the subsidiary before consolidation is allowed.

Question 23

Under IFRS 3,which concept must be used to report the assets and liabilities of an acquired company on the parent company financial statements?

A)parent company concept
B)equity concept
C)entity concept
D)historical cost concept

Question 24

Mega Corporation acquired 65% of the voting shares of Forko Ltd for €10 billion and used the purchase method of accounting for the merger. Mega Corporation's interest in Forko Ltd had a restated value of €950 million. How should Mega account for the difference?

A)as Gain from Acquisition on the current period income statement
B)as Goodwill on the consolidated balance sheet
C)as a Loss from Merger on the current period income statement
D)as Additional Paid-in Capital on the consolidated balance sheet

Question 25

Canto Ltd,a Spanish corporation,acquired 100% interest in Bevo,Inc.,a U.S.corporation for $50,000,000. The net assets of Bevo had a book value of $35,000,000 and a fair value of $46,000,000. How should Canto record the business combination?

A)Entry A
B)Entry B
C)Entry C
D)Entry D

Question 26

According to IFRS 3,how should companies account for Goodwill arising from business combinations?

A)It is capitalized and amortized over a period of no more than 40 years.
B)It is expensed in the year the subsidiary is acquired.
C)It is capitalized and written down when its fair value become less than its carrying value.
D)It is amortized over between 5 and 40 years.

Question 27

Canto Ltd,a Spanish corporation,acquired 100% interest in Bevo,Inc.,a U.S.corporation for $50,000,000. The net assets of Bevo had a book value of $35,000,000 and a fair value of $56,000,000. How should Canto record the business combination?

A)Entry A
B)Entry B
C)Entry C
D)Entry D

Question 28

Mega Corporation acquired 65% of the voting shares of Forko Ltd and consolidated its accounts by restating assets and liabilities of the subsidiary at fair value on the date the shares were acquired. What method of accounting for the business combination is Mega Corporation using?

A)Purchase method
B)Fair value method
C)Pooling method
D)Current replacement cost method

Question 29

What term is used to refer to presenting the financial statements for a group of enterprises as if it was a single entity?

A)harmonization
B)translation
C)consolidation
D)transformation

Question 30

Under U.S.GAAP and IASB standards,the threshold for determining "significant influence" in an associate enterprise is:

A)50% ownership of voting shares
B)5% ownership of voting shares
C)20% ownership of voting shares
D)10% ownership of voting shares

Question 31

What term does IAS 31 use for "a contractual arrangement whereby two or more parties undertake an activity which is subject to joint control?"

A)merger
B)consolidation
C)joint venture
D)business combination

Question 32

How are IASB requirements to account for joint ventures different from U.S.GAAP?

A)International standards require the equity method,but U.S.GAAP allows for flexibility in accounting for joint ventures.
B)U)S.GAAP requires the equity method,whereas the international standards allow for proportionate consolidation.
C)IASB standards and U.S.GAAP are essentially the same for accounting for joint ventures.
D)IASB standards do not specify which methods are allowed to account for joint ventures,whereas U.S.GAAP requires proportional consolidation.

Question 33

IFRS 3,issued in 2004,eliminated the use of which concept for reporting assets and liabilities of an acquired company on the parent company's consolidated financial statements?

A)parent company concept
B)economic concept
C)entity concept
D)All of the above

Question 34

Under ARB 51,"controlling financial interest "is:

A)not defined.
B)defined as 50% ownership of another entity's voting shares.
C)the direct or indirect ability to make decisions about another entity's activities.
D)the right to receive the expected residual returns of another entity if they occur.

Question 35

In January 2003,the FASB released Interpretation 46,"Consolidation of Variable Interest Entities," which:

A)re-emphasized the need for 50% stock ownership to exert effective control.
B)expanded U.S.GAAP to consider effective control rather than legal control for consolidated financial statements.
C)took a "form-over-substance" approach to define control in determining requirements for consolidated financial statements.
D)defined effective control as ownership of 30% or more of another entity's voting shares.

Question 36

How is Goodwill resulting from business combinations treated under Japanese GAAP?

A)It is capitalized and amortized over a period of no more than 40 years.
B)It may be expensed in the year the subsidiary is acquired.
C)It is capitalized and written down when its fair value becomes less than its carrying value.
D)It is amortized over between 5 and 40 years.

Question 37

How is negative goodwill accounted for under U.S.GAAP?

A)There is no rule for negative goodwill,because there is no such thing.
B)It should be capitalized and amortized over a period of no more than 40 years.
C)It should be treated as an extraordinary loss on the consolidated income statement.
D)It should be treated as an extraordinary gain on the consolidated income statement.

Question 38

According to IFRS 3,how should companies account for negative goodwill arising from business combinations?

A)It should be capitalized and amortized over a period of no more than 40 years.
B)It should be treated as a loss on the consolidated income statement.
C)It should be treated as a gain on the consolidated income statement.
D)There is no rule for negative goodwill,because there is no such thing.

Question 39

How must Goodwill resulting from business combinations be treated under U.S.GAAP?

A)It must be amortized over a period of no more than 40 years.
B)It must be expensed when it is acquired.
C)It must be written down when its fair value is less than its carrying value.
D)It must be written down in no less than 5 years and no more than 40 years.

Question 40

How is accounting for a pooling of interests different from a purchase when business entities combine?

A)Assets and liabilities are not revalued when the pooling of interests is used.
B)Goodwill arises only when the pooling of interests method is used for business combinations.
C)Pooling of interests is used for international consolidations but never for domestic consolidations.
D)The purchase method is used only when less than 100% of an entity's voting shares are acquired.

Question 41

One difference that exists between IFRS 8 and U.S.GAAP is:

A)There are no differences as the two pronouncements represent total convergence in segment reporting.
B)U)S.GAAP says that segment assets must be 5% or greater of the total combined assets to be separately disclosed.
C)U)S.GAAP does not require reporting of segment liabilities.
D)U)S.GAAP explicitly includes intangibles in the definition of long-lived assets for geographic disclosures.

Question 42

Which of the following is NOT a characteristic which is indicative of hyperinflation under IAS 29?

A)The cumulative inflation rate over a three-year period is 75% or higher.
B)Interest rates are linked to a price index.
C)The price of credit sales includes a "buffer" to compensate for the expected loss in purchasing power over the credit period.
D)The general population thinks about prices in terms of a stable foreign currency,and prices may actually be quoted in that currency.

Question 43

IFRS 8 adopts which approach to report segmented financial information?

A)geographic approach
B)business lines approach
C)management approach
D)asset test approach

Question 44

In addition to requiring separate reporting for operating segments,U.S.GAAP requires companies to report:

A)operating income for each country in which a material amount of revenue is derived.
B)revenues from external customers and long-lived assets for all foreign countries where it has assets or derives revenue.
C)revenues and long-lived assets for each country that constitutes 10% of more of the combined revenues or assets.
D)operating income adjusted for inflation for each country where it has significant operations.

Question 45

What is a term often used to describe the equity method of accounting?

A)the 20% rule
B)one-line consolidation
C)significant influence
D)disaggregated consolidation

Question 46

Under both IFRS and U.S.GAAP,how should an investing entity report nonconsolidated subsidiaries?

A)equity method
B)fair value
C)proportionate consolidation
D)parent concept

Question 47

Under both IFRS 8 and U.S.GAAP which of the following entity-wide disclosures is NOT required?

A)information about products and services
B)information about intersegmental transfer pricing
C)information about major customers
D)information about geographic areas

Question 48

Which of the following are reasons to report segmented accounting information for multinational enterprises?

A)There are different risks in different parts of the world that a reader may need to know about.
B)Different lines of business have different levels of risk that may affect business success.
C)Growth opportunities differ from one nation to another that could affect share value.
D)All of the above are reasons for segmented reporting.

Question 49

According to both IFRS 8 and U.S.GAAP,which of the following information should be disclosed for each separate reportable operating segment?

A)the factors used to identify operating segments
B)total liabilities for each operating segment
C)total compensation expense for each operating segment
D)total rent expense for each operating segment

Question 50

Under IFRS 8,which of the following criteria is NOT considered by all segments that are considered reportable business segments?

A)The segment must have revenue that is one-tenth or more of combined revenue.
B)The segment must have profit that is 10% or more of combined profit of all segments with profit.
C)The segment must have revenue that is more than half from external sources.
D)The segment must have assets that are 10% or more of combined segment assets.

Question 51

Why do financial analysts and other readers of financial statements want segmented information?

A)Consolidation obscures facts that may be important for evaluating financial statements.
B)More information is always preferred to less information.
C)to ensure that illegal business combinations are not taking place
D)Models for economic forecasting have not been developed using consolidated financial statement information.