Deck 5: The Choice of Accounting Methods

Question 1

What was a characteristic of the ad hoc period of setting accounting policies?

A) This period lasted approximately 30 years
B) Choices were largely political
C) Standards were issued and revised based on consistency
D) It began in 2002

Answer 1

B

Question 2

Which of these is not one of the ways AASB 108 'Accounting Policies' deals with the choice of accounting methods?

A) By establishing a hierarchy of authorities
B) By specifying particular policies to be used in certain situations
C) By specifying the qualitative characteristics that financial information should have
D) None of the above, i.e., all are ways in which AASB 108 deals with the choice of accounting methods

Answer 2

B

Question 3

Which item does not normally require accountants to exercise a significant degree of professional judgement to determine its amount?

A) Doubtful debts
B) Depreciation
C) Cost of goods sold
D) Interest

Answer 3

D

Question 4

Which of the following is not a reason preparers of financial statements need to make choices about which accounting policies to use?

A) Some aspects of financial reporting practice are not covered by specific accounting standards
B) Some standards have alternative policies with no clear indication of the proper criteria to be used
C) Judgements are to be made for certain issues, such as useful life, depreciation, and allowance for doubtful debts
D) The IASB is attempting to converge accounting policies with other worldwide accounting standards setters

Question 5

Which of the following is not a time period considered in developing an accounting standard?

A) Convergence period
B) Harmonisation period
C) Deliberation period
D) Conceptual framework period

Question 6

What is considered the 'foundation' of the convergence of accounting standards?

A) FASB standards
B) IASB standards
C) AASB standards
D) ASX pronouncements

Question 7

All of these are ways in which accountants may be 'creative' in the preparation and presentation of financial reports except:

A) by timing transactions within the limits of generally accepted accounting practice
B) by changing an accounting policy to achieve a desired outcome
C) by making estimates in a way biased towards achieving a desired outcome
D) none of the above, i.e., all are ways in which accountants may be 'creative'

Question 8

Explain the meaning of creative accounting and discuss various factors that tend to limit its operation.

Question 9

The AASB accounting standard(s)that deal(s)with the choice of accounting policy is/are?

A) AASB 118 and 181
B) AASB 181
C) AASB 118
D) AASB 108

Question 10

A situation where the choice of accounting policy is made to endure a desired impression by its preparers is known as

A) environmental accounting
B) creative accounting
C) imaginative accounting
D) bottom of the harbour accounting

Question 11

An example of legal form not reflecting economic substance is:

A) a legal document describing an accounts receivable as a debtor
B) a legal document describing a loan as an advance
C) a legal document describing a transaction as a lease when in fact it is a credit sale
D) all are examples of legal form not reflecting economic substance

Question 12

The order of preference set out in AASB 108 for reliance on authoritative pronouncements as a guide to selecting an accounting policy when there is no specific Australian standard is:

A) Related Australian Standards, International Accounting Standards, the Framework, accounting standards from other jurisdictions using a similar conceptual framework and accepted industry practices
B) Related Australian Accounting Standards, the definitions, recognition criteria in the Framework, accounting standards from other jurisdictions using a similar conceptual framework and accepted industry practices
C) Related Australian Standards and the Framework
D) None of the above

Question 13

A company decides to switch inventory costing methods to minimise income taxes paid.Which type of 'creative accounting' option was used by the company?

A) Timing of transactions
B) Disclosure of transactions or events
C) Choice of accounting policies
D) Estimates or predictions of future events

Question 14

Means by which accountants may be 'creative' in the preparation and presentation of accounting reports is/are:

A) by the way transactions are disclosed
B) by the way estimates and predictions are made
C) by the timing of transactions
D) all of the above

Question 15

An increase in reported net profit in the short term will occur from:

A) overestimating the useful life of a non-current asset
B) writing off supplies that are still on hand as an expense
C) underestimating the residual value of a depreciable asset
D) choosing the reducing balance rather than the straight-line method of depreciation

Question 16

Which of the following was a source of support for international harmonization of accounting standards and financial reporting in the mid-1990s?

A) Australian Securities Exchange (ASX)
B) International Accounting Standards Committee (IASC)
C) Neither A nor B is correct
D) Both A and B are correct

Question 17

AASB 108 requires that the choice of accounting policies should result in financial statements that contain relevant and reliable information and are ________ and ________.

A) neutral, verifiable
B) faithfully represented, timely
C) comparable, understandable
D) neutral, timely

Question 18

The treatment that is likely to lead to a higher reported net profit in the short term than otherwise would be the case is:

A) underestimating an increase in the provision for long-service leave
B) treating expenses as assets
C) failure to sufficiently provide for doubtful debts
D) the deferral of advertising costs until the next accounting period

Question 19

The choice of accounting methods is made by:

A) Setters of accounting standards
B) Preparers of financial reports
C) Users of financial reports
D) Both A and B

Question 20

Which accounting topic was the source of strong opposition by the business community during the conceptual framework period?

A) Goodwill
B) Interest on long-term loans
C) Comprehensive income
D) Equity classification

Question 21

What is not considered an earnings benchmark?

A) Sustaining a smooth income stream
B) Meeting analysts' forecasts of earnings
C) Avoiding losses
D) Mimimising taxes

Question 22

In agency relationships between owners,managers and debt-holders,it can normally be assumed,in relation to debt contracts,that:

A) Managers will align their interests with those of debt-holders
B) Debt-holders will align their interests with those of owners
C) Managers will align their interests with those of owners
D) None of the above

Question 23

If a firm has agreed to a debt covenant that specifies a maximum ratio of debt-to-total tangible assets,the probability of breaching the covenant is reduced if:

A) additional borrowing is undertaken
B) advertising is treated as an asset rather than as an expense
C) depreciation is charged at a higher rate
D) research and development costs are treated as an expense rather than as an asset

Question 24

The statement concerning agency relationships between owners and managers that is incorrect is:

A) One way to reduce potential conflicts between owners and managers is to include bonuses based on profits in managers' remuneration packages
B) Monitoring is an activity undertaken by or on behalf of management
C) Owners may want cash dividends from the business but managers may prefer to retain cash for expansion
D) None of the above is incorrect, i.e., all are correct

Question 25

All of these are typical examples of provisions in Australian trust deeds for public issues of debt except:

A) restrictions on the sale of assets
B) specifying which accounting policies are to be employed in preparing the accounting reports
C) limitations on the issue of further debt
D) a minimum debt/equity ratio

Question 26

Costs incurred to reduce opportunistic behaviour plus the costs of opportunistic behaviour that it is not economic to eliminate are known as:

A) political costs
B) bonding costs
C) agency costs
D) opportunity costs

Question 27

Describe and discuss how agency theory seeks to explain the choice of accounting methods by financial report preparers.

Question 28

The income-or-profit smoothing hypothesis suggests that:

A) a variable income stream supports a lower level of dividends and raises the perceived riskiness of the firm compared to a stable income stream
B) a variable income stream supports a higher level of dividends and raises the perceived riskiness of the firm compared to a stable income stream
C) a variable income stream supports a higher level of dividends and lowers the perceived riskiness of the firm compared to a stable income stream
D) none of the above

Question 29

Research suggests that post-Enron,Chief Financial Officers:

A) are reluctant to use accounting policy choices to manipulate earnings
B) prefer not to smooth earnings
C) are more likely to use accounting policy choices to smooth earnings
D) use volatile earnings to signal low risk prospects

Question 30

Explain the income smoothing hypothesis.In your answer discuss the reluctance of Chief Financial Officers to use accounting policy choice to achieve income smoothing post-Enron.

Question 31

Recent research on the manipulation of profit numbers by managers with a view to influencing share price has shown:

A) no evidence of manipulation
B) firms reporting continuous growth are priced at a discount to other firms
C) reporting of small losses is rare and reporting of small profits fairly common
D) none of the above

Question 32

'Most creative accounting techniques do not lead to permanent increases in profits and assets and therefore achieve little.' Using at least three specific examples,explain what is meant by this statement and discuss whether or not you agree with it.

Question 33

In relation to agency theory the statement that is not correct is:

A) The self-interest of various parties is often in conflict
B) It assumes that managers act opportunistically all of the time
C) It assumes that individuals act primarily to advance their own self-interest
D) None of the statements is incorrect, i.e., all are correct statements