Deck 2: Accounting Judgements

Question 1

Under the productive capacity capital maintenance approach, a profit is assumed to have been earned only if enough financial capital has been recovered by the end of the year to enable the business to operate at the same level as at the beginning of the year.

Answer 1

True

Question 2

Revenues must ultimately lead to cash flows in order to be recognized.

Answer 2

True

Question 3

Assuming that the continuity assumption is valid, accrual accounting income and cash based income would be expected to "even out" over the long term.

Answer 3

True

Question 4

The first step in choosing an accounting policy is to understand a company's primary reporting objectives.

Question 5

The use of fair value rather than historical cost increases both the relevance and verifiability of the financial statements.

Question 6

The use of historical cost, rather than liquidation value, is supported by the continuity assumption.

Question 7

The separate entity assumption has more validity for a larger corporation than it would for a sole proprietorship.

Question 8

The time period concept dictates that the reporting period or fiscal period of an entity must be for 12 months.

Question 9

The goal of maximizing shareholder wealth is consistent with the entity concept.

Question 10

Recognition requires the measurement of an item for inclusion in the financial statements.

Question 11

The continuity assumption assumes that a company will have a perpetual life.

Question 12

Deferrals are required when cash flows are received before they affect the income statement, while accruals affect the income statement prior to cash being exchanged.

Question 13

Predictive value is a component of representational faithfulness.

Question 14

The continuity assumption holds that a business will carry on indefinitely.

Question 15

The qualitative characteristics follow the same hierarchy under both the IFRS and ASPE Conceptual Frameworks.

Question 16

Legally, as well as for accounting statement purposes, a corporation is treated as a separate entity apart from its stockholders, whereas a partnership is treated as one entity including the owners.

Question 17

The unit of measure assumption holds that all aspects of a company's business operations can be readily quantified.

Question 18

The use of deferrals and accruals in accounting relates to the Time Period Assumption.

Question 19

"Substance over form" effectively refers to Representational Faithfulness in the conceptual framework.

Question 20

Equity is a residual and as such is not specifically defined in the IFRS Conceptual Framework.

Question 21

An example of the full disclosure principle would be a firm signing a major contract in November to construct custom machinery for a client. Work in the current year is nil, yet the notes to the firm's financial statements discuss the nature and dollar amount of the contract.

Question 22

Under ASPE, capital maintenance can be said to be achieved if a company has maintained or increased its productive capacity.

Question 23

Accounting transactions must always be realized prior to being recognized.

Question 24

To Recording periodic depreciation on assets such as buildings or machinery is an application of the matching principle.

Question 25

One of the objectives of financial reporting is to help users assess the amounts, timing and uncertainty of prospective cash flows of the enterprise.

Question 26

The constant dollar capital maintenance approach adjusts for the decline in the asset's productive capacity when reporting earnings.

Question 27

Under IFRS, Level 1 amounts refer to quoted prices or directly observable amounts.

Question 28

The understandability concept states that the information contained in financial statements should be understandable to persons who have a reasonable understanding of business and economic conditions and are willing to study the information with reasonable diligence.

Question 29

The nominal dollar capital maintenance approach implicitly recognizes that inflation is under control, and thus ignores inflation in the preparation of financial statements.

Question 30

Relevance is of primary importance in financial reporting, whereas comparability is of secondary importance.

Question 31

Information is reliable when it is in agreement with the actual underlying transactions and events, the agreement is capable of independent verification and the information is reasonably free from error and bias.

Question 32

The going concern principal does not apply if a company is expected to be liquidated in the next 24 months.

Question 33

Accounting should provide information that is useful in assessing the "value" of an entity; however, accounting information does not necessarily report the actual "value" of the entity.

Question 34

The matching concept is the name applied to the process of associating expenses with revenues.

Question 35

Information is neutral when it is free from bias that would lead users towards making decisions that are influenced by the way the information is measured or presented.

Question 36

At times, reliability must be sacrificed in order to enhance the relevance of accounting information.

Question 37

The continuity assumption holds that the entity will continue in business for the foreseeable future but it does not mean that it will be a going concern forever.

Question 38

The nominal dollar capital maintenance approach is the mostly widely used application of the stable currency assumption in North American practice.

Question 39

Interperiod comparability is significantly enhanced when two similar companies use the same accounting methods during a single reporting period.

Question 40

The nominal dollar capital maintenance approach adjusts for the replacement cost of the assets when reporting earnings.

Question 41

A furniture builder accepts a purchase order from a client to build a customized dresser. The acceptance of this contract on that date is executory in nature and the builder must thus record a liability on that date.

Question 42

Under IFRS, a change in accounting policy must result in information that is more reliable and relevant.

Question 43

The cost-benefit trade-off is a persuasive constraint under both IFRS and ASPE.

Question 44

No revenue whatsoever from the performance of a service can be recognized until all of the service has been performed.

Question 45

Materiality is a component of representational faithfulness under IFRS.

Question 46

In order to recognize sales revenue, collection of cash from the buyer is not necessary; however, collection must be reasonably assured.

Question 47

The full disclosure principle asserts that the financial reports of a business enterprise should disclose all reliable information relating to its economic affairs.

Question 48

Warranty expense on goods sold should be recognized in the period of the sale, even though the costs to fulfill warranty claims will not be incurred until two or three years later.

Question 49

In classifying the elements of financial statements, the primary distinction between revenues and gains is the materiality of the amounts involved.

Question 50

The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is relevance.

Question 51

Comparability is sometimes sacrificed for consistency.

Question 52

Relevance and representation faithfulness are the fundamental qualities under IFRS.

Question 53

Under IFRS 13, Level 3 inputs are deemed to be more reliable than Level 2 inputs.

Question 54

Verifiability focuses on the correct application of a basis of measurement rather than its appropriateness.

Question 55

Under IFRS 13, a publicly quoted share price would be an example of a Level 1 Input.

Question 56

Revenue is recognized when service is rendered and collection is probable.

Question 57

Materiality is one of the underlying constraints in the application of the IFRS conceptual framework.

Question 58

Comparability is an enhancing quality under IFRS and ASPE.

Question 59

The separate entity assumption applies only to legally separate entities such as corporations; it does not apply to proprietorships or other unincorporated businesses.

Question 60

Under IFRS and ASPE, both assets and liabilities are mostly arises from past events.

Question 61

S Corporation offered to issue 5,000 shares of its no par value common shares to another company in exchange for a building at a time when there were 1,000,000 shares already outstanding and were selling for $4.00 per share at the time. The owner of the building had the opportunity to sell it to a competing buyer for $26,000. However, because the seller wanted the S Corporation shares, S's offer was accepted. At what amount should the building be reported in S's financial statements?

A) $26,000
B) $10,000
C) $20,000
D) $16,000

Question 62

Predictive value is an ingredient of the qualitative criteria of $$\begin{array} { | l | l |l | } \hline &\text { Relevance}&\text { Reliabiliy } \\\hline 1& \text { Yes } & \text { No } \\\hline 2& \text { Yes } & \text { Yes } \\\hline 3& \text { No } & \text { No } \\\hline 4& \text { No } & \text { Yes } \\\hline\end{array}$$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 63

Timeliness is an ingredient of the qualitative criteria of $\begin{array}{|l|l|l|}\hline &\text { Relevance }&\text {Reliabilly } \\\hline 1&\text { Yes } & \text { Yes } \\\hline 2&\text { No } & \text { Yes } \\\hline 3&\text { Yes } & \text { No } \\\hline 4&\text { No } & \text { No } \\\hline\end{array}$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 64

Verifiability is an ingredient of the qualitative criteria of $$\begin{array} { | l | l |l | } \hline &\text { Relevance}&\text {Reliabiliy } \\\hline 1& \text { Yes } & \text { No } \\\hline 2& \text { Yes } & \text { Yes } \\\hline 3& \text { No } & \text { No } \\\hline 4& \text { No } & \text { Yes } \\\hline\end{array}$$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 65

The objective of financial reporting is:

A) To provide the market value of a firm at a point in time.
B) To provide the total market value of its common stock.
C) To provide information useful for decision making by investors and creditors.
D) To require all companies to comply with GAAP.

Question 66

The list price of a new van was $30,000 at a local car dealership. However, a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would be recognized by the dealer as a result of the sale using the constant dollar financial capital maintenance approach is:

A) $10,000
B) $4,000
C) $5,000
D) $9,000

Question 67

The sales manager of a firm has the use of a blue company-owned automobile to use to visit potential customers. The sales manager also owns her own identical car except that it is red. The manager paid for the red car with funds earned from her employment as sales manager. The firm will report the cost of the blue auto in its balance sheet, but not the red auto. This is an example of:

A) Reliability
B) Matching
C) Separate entity
D) Going concern
E) None of these answers are correct.

Question 68

The list price of a new van was $30,000 at a local car dealership. However, a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would be recognized by the dealer as a result of the sale using the physical capital maintenance approach is:

A) $1,000
B) $2,500
C) $5,000
D) $6,000

Question 69

Which of the following accounting concepts best justifies the use of accruals and deferrals?

A) Cost/benefit constraint
B) Unit-of-measure assumption
C) Continuity assumption
D) Materiality constraint

Question 70

Preparation of financial statements with adequate notes is primarily based on the:

A) separate entity assumption.
B) full-disclosure principle.
C) cost principle.
D) cost/benefit constraint.
E) reliability quality.

Question 71

C Corporation exchanged 20,000 shares of its nonconvertible preferred shares for land owned by B Corporation. A competing buyer previously had offered $150,000 cash for the land. Because of tax consequences, the cash offer was not accepted and the lot was exchanged for the shares. C Corporation previously had sold only 100 shares of its preferred shares at $9 per share several months ago. Based on the cost principle, at what amount should the land be reported on C's financial statements?

A) $180,000
B) $165,000
C) $150,000
D) $160,000

Question 72

A firm's accounting policy is to immediately expense the cost of metal wastebaskets it purchases for use by its employees at their desks. The total cost of wastebaskets in any year is $1,000 and the firm has $6 billion in total assets. The firm expects the wastebaskets to last indefinitely. The firm

A) Is violating GAAP
B) Is invoking the materiality constraint
C) Is invoking the conservatism constraint
D) Is violating the relevance principle
E) None of these answers are correct.

Question 73

The organization created to develop accounting standards in Canada, the AcSB, is LEAST concerned with:

A) reported cash flows.
B) reported earnings.
C) reported comparability of results.
D) reporting financial position.
E) all of these answers are correct.

Question 74

The list price of a new van was $30,000 at a local car dealership. However, a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would be recognized by the dealer as a result of the sale using the nominal dollar approach is:

A) $10,000
B) $2,500
C) $5,000
D) $6,000

Question 75

The continuity assumption is the basis for the rule that:

A) the income statement should not include material gains and losses that are both unusual and infrequent.
B) treasury stock should not be reported in the balance sheet as an asset.
C) the cost of installing a machine should not be included in the recorded cost of the machine, but rather expensed immediately.
D) the cost of operational assets should be allocated to expense systematically and rationally over their useful lives.

Question 76

The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is

A) relevance.
B) reliability.
C) verifiability.
D) neutrality.
E) None of these answers are correct.

Question 77

The going concern or continuity assumption is critical to financial accounting. The assumption

A) Is always maintained for all firms for all years.
B) Supports the use of historical cost valuation for assets rather than market values.
C) Means that a corporation has a definite ending date.
D) Requires that we immediately expense prepaid accounts because they do not represent a future cash inflow.

Question 78

Neutrality is an ingredient of the qualitative criteria of $\begin{array}{|l|l|l|}\hline &\text { Relevance}&\text{reliabiliy } \\\hline 1&\text { Yes } & \text { Yes } \\\hline 2&\text { No } & \text { Yes } \\\hline 3&\text { Yes } & \text { No } \\\hline 4&\text { No } & \text { No } \\\hline\end{array}$

A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question 79

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 to a decision-maker.
C) is understandable by reasonably informed users of accounting information.
D) is verifiable and neutral.

Question 80

Accounting traditionally has been influenced by conservatism because of the:

A) probability of undetected errors in the financial statements.
B) difficulty in measuring net income on the accrual basis.
C) inherent uncertainties of many accounting measurements.
D) difficulty in making certain calculations.
E) large number of transactions recorded in any one period.