Deck 16: Accounting Policy Choices

Question 1

Which of the following is NOT a reason that preparers of financial reports are obliged to make choices?

A) There is frequently a decision to be made as to whether to adjust the figures for something or to disclose it in the footnotes or other narrative material.
B) Directors have a responsibility to choose the accounting method that shows the highest profit.
C) Accrual accounting necessitates choices about accounting figures,notes and methods.
D) Governments and professional accounting standard setters have been reluctant to specify all solutions and require all enterprises to follow them.

Answer 1

B

Question 2

Which of the following is NOT normally a significant accounting estimate involved in financial measurement?

A) The amount of product warranty claims to be included in the balance sheet.
B) The portion of credit sales will be uncollectable.
C) How many financial periods will benefit from advertising.
D) The period a fixed asset is depreciated over.

Answer 2

C

Question 3

Which of the following is NOT an area in which large companies typically make policy choices?

A) How to value receivables in the balance sheet
B) Over what period to amortise intangible assets
C) Cash versus accrual accounting
D) Which product development expenditures should be expenses

Answer 3

C

Question 4

Select the income statement account(s)that would be affected by a policy choice at the same time as the allowance for doubtful debts balance sheet account.

A) Bad debts expense
B) Cost of goods sold expense
C) Depreciation expense
D) Various expense accounts

Question 5

Select the income statement account(s)that would be affected by a policy choice at the same time as the inventory balance sheet account.

A) Bad debts expense
B) Cost of goods sold expense
C) Depreciation or amortisation expense
D) Various expense accounts

Question 6

Select the balance sheet account(s)that would be affected by a policy choice at the same time as the cost of goods sold income statement account.

A) Accounts receivable
B) Inventories
C) Prepaid expenses
D) Property,plant and equipment

Question 7

Which of the following would be increased by an accounting policy change involving the declaration of a final dividend?

A) Expense
B) Revenue
C) Asset
D) There would be no effect on net profit

Question 8

Which of the following is NOT an accounting method that could be chosen by a company to help the current ratio look as high as possible?

A) Classifying short-term obligations as noncurrent liabilities
B) Optimistic estimation of the useful life of plant and equipment
C) Delaying the recording of credit purchases of inventory until the next accounting period
D) Neglecting to write off obsolete inventory

Question 9

Which of the following is NOT an area in which companies typically make policy accounting choices?

A) Whether the purchase of equipment is included in cash flow from investing or cash flow from financing
B) The amount of cost of goods sold reported
C) The amount of disclosure in the notes to the financial statements
D) When to recognise revenue

Question 10

In which of the following areas has choice largely been made by a standard-setting body,legislators or by accepted practice,so that companies are NOT free to make their own decisions?

A) Selection of depreciation method
B) How to determine allowance for doubtful debts
C) Inventory valuation method
D) Whether to include goodwill in the balance sheet

Question 11

Select the balance sheet account(s)that would be affected by a policy choice at the same time as the wages expense income statement account.

A) Accounts receivable
B) Accrued expenses
C) Prepaid expenses
D) Property,plant and equipment;intangible and leased assets

Question 12

Which of the following would be increased by an accounting policy change involving the recognition of accounts receivable sooner?

A) Revenue
B) Expense
C) Liability
D) Noncurrent assets

Question 13

Which of the following is NOT an accounting method that would increase the current ratio (currently 1.5:1)?

A) Understating the allowance for doubtful debts
B) Recognising unearned revenue as revenue
C) Not recognising accrued wages
D) Changing the method of depreciation

Question 14

Select the income statement account(s)that would be affected by a policy choice at the same time as the accrued expenses balance sheet account.

A) Bad debts expense
B) Cost of goods sold expense
C) Depreciation or amortisation expense
D) Various expense accounts

Question 15

Which of the following would NOT be affected by an accounting policy change involving the capitalisation of some repairs expenses?

A) Expense
B) Liabilities
C) Assets
D) Net profit

Question 16

Select the income statement account(s)that would be affected by a policy choice at the same time as the goodwill balance sheet account.

A) Sales revenue
B) Cost of goods sold expense
C) Amortisation expense
D) Various expense accounts

Question 17

Select the income statement account(s)that would be affected by a policy choice at the same time as the accounts receivable balance sheet account.

A) Revenue
B) Cost of goods sold expense
C) Depreciation or amortisation expense
D) Various expense accounts

Question 18

Which of the following is NOT an accounting method that could be chosen by a company to increase reported profits?

A) Understating allowance for doubtful debts
B) Classifying longer-term receivables as current assets
C) Changing estimates of the useful life of plant and equipment
D) Changing from the weighted average to the FIFO method of inventory valuation in a period of rising prices

Question 19

Which of the following would be increased by an accounting policy change involving the accrual of greater employee benefits expense?

A) Assets
B) Liabilities
C) Net profit
D) Shareholders' equity

Question 20

Which of the following is NOT an area in which companies typically make policy accounting choices?

A) When to recognise revenue
B) The method of depreciation to use
C) How to value inventories
D) Dividend policy

Question 21

See-Saw Ltd uses moving weighted average for its inventory,which is valued at $276 000.It is considering a change to FIFO,which would decrease the valuation to $245 000.

-Which of the following would be increased by the change?

A) Retained profits
B) Income tax payable
C) Cost of goods sold
D) Sales

Question 22

See-Saw Ltd uses moving weighted average for its inventory,which is valued at $276 000.It is considering a change to FIFO,which would decrease the valuation to $245 000.

-Which of the following would be decreased by the change?

A) Cash
B) Cost of goods sold
C) Net profit
D) No accounts would be decreased

Question 23

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes.Using the reducing balance method at the rate allowable for taxation purposes,the expense would be $1 020 000.If it changed to the straight-line method,depreciation expense would be $680 000.If the straight-line method were used instead of the reducing balance method,

-what would be the effect on net book value of assets?

A) $340 000 reduction
B) $340 000 increase
C) $217 600 reduction
D) $217 600 increase

Question 24

Changing the rate of depreciation affects:

A) cash.
B) accounts receivable.
C) net profit.
D) none of the answers provided.

Question 25

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes.Using the reducing balance method at the rate allowable for taxation purposes,the expense would be $1 020 000.If it changed to the straight-line method,depreciation expense would be $680 000.If the straight-line method were used instead of the reducing balance method,

-what would be the effect on depreciation expense?

A) $122 400 reduction
B) $217 600 reduction
C) $340 000 reduction
D) $217 600 increase

Question 26

Pottery Ltd is trying to decide whether to use straight-line or reducing balance depreciation for its assets for both accounting and tax purposes.If it used straight-line,the depreciation expense for the first year would be $750 000,but if it used reducing balance at the rate allowable for taxation purposes,the expense would be $1 125 000.The company's income tax rate is 30 per cent.

-What would be the effect on the net book value of assets if the reducing balance method were used rather than the straight-line method?

A) There would be a $375 000 reduction.
B) There would be a $262 500 reduction.
C) There would be a $150 000 reduction.
D) There would be no effect.

Question 27

Question Mark Ltd has an income tax rate of 30 per cent.The company makes it a practice to capitalise a portion of its research and development costs as a 'deferred asset' and to amortise them at 20 per cent per annum.The accountant has suggested to the financial controller that the policy of capitalising research and development should be discontinued because the economic benefit of the expenditure is not clearly determinable.The amount of research and development capitalised this year was $180 000.

-What effect would such policy change have on net profit after tax?

A) $144 000 overstated
B) $100 800 overstated
C) $43 200 overstated
D) No effect

Question 28

Plant Hire Ltd has been in business for one year.The company makes it a practice to capitalise a portion of its advertising costs as a 'deferred asset' and to amortise them at 25 per cent per annum.The accountant has suggested to the general manager that the amount should be expensed rather than capitalised because the economic benefit of the expenditures is not clearly determinable.The amount of advertising capitalised this year was $100 000.

-What effect would such a policy change have on cash flow from operations?

A) There would be a $75 000 reduction.
B) There would be a $45 000 reduction.
C) There would be a $30 000 reduction.
D) There would be no effect.

Question 29

Which of the following would be increased by an accounting policy change involving use of the reducing balance method of depreciation in place of the straight-line method,leading to an increase in depreciation expense?

A) Assets
B) Net profit
C) Retained profits
D) Expenses

Question 30

Which of the following would be decreased by an accounting policy change involving writing off obsolete inventories?

A) Expense
B) Revenue
C) Liabilities
D) Net profit

Question 31

Pottery Ltd is trying to decide whether to use straight-line or reducing balance depreciation for its assets for both accounting and tax purposes.If it used straight-line,the depreciation expense for the first year would be $750 000,but if it used reducing balance at the rate allowable for taxation purposes,the expense would be $1 125 000.The company's income tax rate is 30 per cent.

-What would be the effect on depreciation expense if the reducing balance method were used rather than the straight-line method?

A) There would be a $375 000 increase.
B) There would be a $375 000 reduction.
C) There would be a $262 500 increase.
D) There would be a $262 500 reduction.

Question 32

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes.Using the reducing balance method at the rate allowable for taxation purposes,the expense would be $1 020 000.If it changed to the straight-line method,depreciation expense would be $680 000.If the straight-line method were used instead of the reducing balance method,

-which of the following is NOT affected?

A) net profit.
B) cash flow from operations.
C) income tax liability.
D) amortisation expense.

Question 33

Trainer Ltd is trying to decide whether to change from the reducing balance method of depreciation to the straight-line method for both accounting and tax purposes.Using the reducing balance method at the rate allowable for taxation purposes,the expense would be $1 020 000.If it changed to the straight-line method,depreciation expense would be $680 000.If the straight-line method were used instead of the reducing balance method,

-what would be the effect on cash from operations?

A) $340 000 reduction
B) $217 600 increase
C) $217 600 reduction
D) no effect

Question 34

Question Mark Ltd has an income tax rate of 30 per cent.The company makes it a practice to capitalise a portion of its research and development costs as a 'deferred asset' and to amortise them at 20 per cent per annum.The accountant has suggested to the financial controller that the policy of capitalising research and development should be discontinued because the economic benefit of the expenditure is not clearly determinable.The amount of research and development capitalised this year was $180 000.

-What effect would such policy change have on assets?

A) $180 000 overstated
B) $144 000 overstated
C) $124 000 overstated
D) No effect

Question 35

Swing Ltd uses FIFO for its inventory,which is valued at $21 000.It is considering a change to moving weighted average,which would change the valuation of inventory to $22 500.Which of the following would be decreased by the change?

A) Cost of goods sold
B) Sales
C) Liabilities
D) Retained profits

Question 36

Which of the following would be increased by an accounting policy change involving transfer from retained profits to general reserve?

A) Shareholders' equity
B) Liabilities
C) Net profit
D) None of the answers provided

Question 37

Plant Hire Ltd has been in business for one year.The company makes it a practice to capitalise a portion of its advertising costs as a 'deferred asset' and to amortise them at 25 per cent per annum.The accountant has suggested to the general manager that the amount should be expensed rather than capitalised because the economic benefit of the expenditures is not clearly determinable.The amount of advertising capitalised this year was $100 000.

-What effect would such a policy change have on net profit before tax?

A) There would be a $75 000 reduction.
B) There would be a $45 000 reduction.
C) There would be a $30 000 reduction.
D) There would be no effect.

Question 38

Changing the rate of depreciation does NOT affect:

A) the net book value of noncurrent assets.
B) cash.
C) net profit.
D) retained profits.

Question 39

Pottery Ltd is trying to decide whether to use straight-line or reducing balance depreciation for its assets for both accounting and tax purposes.If it used straight-line,the depreciation expense for the first year would be $750 000,but if it used reducing balance at the rate allowable for taxation purposes,the expense would be $1 125 000.The company's income tax rate is 30 per cent.

-What would be the effect on net profit after tax if the reducing balance method were used rather than the straight-line method?

A) There would be a $375 000 increase.
B) There would be a $375 000 reduction.
C) There would be a $262 500 increase.
D) There would be a $262 500 reduction.