Deck 3: Objectives of Company Reporting, Conceptual Elements and Terminology

Question 1

Which of the following statements is incorrect?

A)Under 'mark to market', financial instruments are revalued to their market price each reporting date
B)'Market value' usually means the net fair value of a financial asset or financial liability having the same risk profile
C)'Net present value' can be used to measure both assets and liabilities
D)'Current cash equivalent' is only applicable to current assets

Answer 1

D

Question 2

The following are quotations that concern a company's accounting policies.
I'I think this item will change the judgement of one or two people but not the judgement of a reasonable person.'
II'Different firms must disclose their accounting policies and methods because that makes the financial reports of those firms more useful to report users.'
III'When estimating the useful life of a piece of equipment one should use some caution in the estimation because of uncertainties that exist.'
IV'Under a contract of sale, one entity sold an asset to another entity and made a loss on sale.However, the vendor entity retained use of the asset and enjoys the benefits of ownership of the asset.'
Which one of the statements refers mainly to the comparability doctrine?

A)I
B)II
C)III
D)IV

Answer 2

B

Question 3

Which of the following are intangible assets under AASB 138?
IMasthead
IIDeferred tax asset
IIIGoodwill arising from a business combination
IVPatent

A)I, II, III and IV
B)I, III and IV
C)II and III
D)I and IV

Answer 3

D

Question 4

A monetary asset is an asset for which its value in use is:

A)reduced by increases in the inflation rate
B)unchanged by decreases in the inflation rate
C)unchanged by changes in the inflation rate
D)unchanged by increases in the inflation rate

Question 5

As a general rule, the directors of a large proprietary company that is a reporting entity:

A)need not prepare any financial reports for that entity
B)must ensure a financial report is prepared for that entity that gives a true and fair view only
C)must ensure that a special purpose financial report is prepared for that entity that gives a true and fair view
D)must ensure that a financial report is prepared, in accordance with AASB standards, that gives a true and fair view for that entity.

Question 6

The following are quotations that concern a company's accounting policies.
I'I think this item will change the judgement of one or two people but not the judgement of a reasonable person.'
II'Different firms must disclose their accounting policies and methods because that makes the financial reports of those firms more useful to report users.'
III'When estimating the useful life of a piece of equipment one should use some caution in the estimation because of uncertainties that exist.'
IV'Under a contract of sale, one entity sold an asset to another entity and made a loss on sale.However, the vendor entity retained use of the asset and enjoys the benefits of ownership of the asset.'
Which one of the statements refers mainly to the materiality doctrine?

A)I
B)II
C)III
D)IV

Question 7

For entities that have to prepare a financial report under the Corporations Act, that report must:
Show a true and fair view?
Comply with all AASB standards?

A)No Yes
B)No Maybe
C)Yes Maybe
D)Yes No

Question 8

Under financial capital maintenance a profit is considered earned when:

A)the financial amount of the net assets at the end of the period exceeds the financial amount of net assets at the beginning
B)the physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period
C)the net present value of future expected asset inflows exceeds the net present value of future expected liability outflows
D)the directors consider that sufficient assets are on hand to pay a dividend without affecting the ability to pay creditor commitments as and when they fall due

Question 9

Can an entity be a reporting entity and not be caught by the Corporations Act?

A)No, because the reporting entity concept is in the Corporations Act
B)Yes, because the reporting entity concept can be applicable to any type of entity
C)No, because the reporting entity concept is only relevant to companies
D)Yes, because the reporting entity concept is applicable only to companies and to unincorporated businesses

Question 10

The following are quotations that concern a company's accounting policies.
I'I think this item will change the judgement of one or two people but not the judgement of a reasonable person.'
II'Different firms must disclose their accounting policies and methods because that makes the financial reports of those firms more useful to report users.'
III'When estimating the useful life of a piece of equipment one should use some caution in the estimation because of uncertainties that exist.'
IV'Under a contract of sale, one entity sold an asset to another entity and made a loss on sale.However, the vendor entity retained use of the asset and enjoys the benefits of ownership of the asset.'
Which one of the statements refers mainly to the notion of substance over form?

A)I
B)II
C)III
D)IV

Question 11

During 20X4, a large shareholder of Seremban Ltd donated some inventory to Seremban Ltd with a fair value of $1 million.This $1 million is an asset and:

A)a liability to Seremban Ltd
B)a revenue to Seremban Ltd
C)a part of equity of Seremban Ltd
D)a contingent liability of Seremban Ltd

Question 12

Winston, a young accountant has determined that the definition of an asset as been satisfied for an item.He states that the item can now be recognised in the financial statements of the relevant entity.Winston's statement is:

A)Incorrect, because the recognition criteria also have to be satisfied
B)Incorrect, because control over the future benefits of the asset has to be determined beyond reasonable doubt first
C)Correct, because once the definition is satisfied the legal enforceability of the asset is satisfied an this automatically satisfies the recognition criteria
D)Correct, because once the definition is satisfied the legal enforceability and tangibility of the asset are established, which automatically satisfies the recognition criteria

Question 13

The Australian conceptual framework of accounting is presently composed of which documents?

A)SAC 1, SAC 2 and the Framework
B)SAC 1, SAC 2, SAC 3, SAC 4 and the Framework
C)SAC 1, SAC 2, SAC 3 and SAC 4
D)The Framework

Question 14

Which of the following statements about AASB 1031 Materiality is/are correct?
IQualitative factors may be the primary reason that an item is classified as material.
IIMateriality means that accounting standards only have to be applied to an item if the amount of the item is greater than or equal to 10 per cent of the relevant base amount.
IIIAn accounting standard's provisions may have to be applied to an item even when that item is less than 1 per cent of the relevant base amount.
IVMateriality applies to accounting measurement and policies but not to disclosure.

A)III only
B)I and II only
C)I and III only
D)I, III and IV only

Question 15

Sumo Pty Ltd makes submarines for coastal holiday resorts.The small submarines hold around ten passengers and one driver and are used for diving up to ten metres to examine reefs and sea life.Sumo Pty Ltd exports the submarines around the world and last years total revenue was $45 million.This year, revenue is expected to be $80 million with about 70% export revenue.Sumo Pty Ltd is owned jointly by two brothers Harry and Barry Jones.They employ 85 full time staff from their single factory outside Noosa on the Sunshine Coast of Queensland.Sumo Pty Ltd is likely to be a:

A)non-reporting entity because there is little separation of ownership from management
B)reporting entity because of its financial and economic importance
C)non-reporting entity because of its lack of political importance
D)reporting entity because of its large percentage of export revenue to total revenue

Question 16

The qualitative characteristics of comparability refers to being able to compare:

A)The financial report of an entity with its reports for previous periods - Yes The financial report of an entity with the report of another entity - No
B)The financial report of an entity with its reports for previous periods - No The financial report of an entity with the report of another entity - No
C)The financial report of an entity with its reports for previous periods - Yes The financial report of an entity with the report of another entity - Yes
D)The financial report of an entity with its reports for previous periods - No The financial report of an entity with the report of another entity - Yes

Question 17

Which of the following is not a possible characteristic of current assets as defined by AASB 101?

A)a current asset is expected to be realised in, or is intended for sale or consumption in, the entity's normal operating cycle
B)a current asset is held primarily for the purpose of being traded
C)a current asset is expected to be realised within 12 months after the reporting date
D)a current asset is cash, excluding long term cash equivalents

Question 18

Which entities covered by the Corporations Act must apply the provisions in all AASB accounting standards when preparing the annual financial reports (assuming materiality)?

A)only reporting entities
B)only disclosing entities
C)only public companies that are reporting entities
D)only disclosing entities and reporting entities

Question 19

Sara and Clara form a proprietary company called Slara Pty Ltd, to incorporate their small haberdashery business.Sara and Clara hold 51% of the shares and issue the remaining 49% to 30 different friends and acquaintances.Slara Pty Ltd is most likely to be classified as a reporting entity based on:

A)Economic importance or significance
B)Political importance or significance
C)Financial characteristics
D)Separation of management from economic interest

Question 20

In the Framework, recognition means including the financial effect of an item:

A)in one of the financial statements
B)in the notes only
C)in one of the financial statements or in the notes
D)only in either the income statement or the balance sheet

Question 21

The net realisable value concept was first developed to measure changes in the scrap value of non-current assets.

Question 22

A reporting entity is defined by SAC 1 as:
...all entities ...in respect of which it is reasonable to expect the existence of users dependent on special purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources.(SAC 1.40)

Question 23

In the period up until the 1890s, the main objective of audits was the prevention of fraud and error.

Question 24

The Corporations Act itself gives little guidance about how to give a true and fair view of financial statements.

Question 25

Expenses and losses are not clearly distinguished in the Framework.

Question 26

'Income' is a headline term, but is not distinguished clearly from revenue or gains.

Question 27

The Net Realisable Value of an asset is the amount it could be sold for in its present state only.

Question 28

The Australian conceptual framework of accounting has been identical to the IASB's conceptual framework since the two were harmonised in 1997.

Question 29

The Framework was first produced by the AASB and AARF.

Question 30

Current cost accounting is a method of measuring asset values based on historical costs that do not change over time.