Deck 17: The Framework of Accounting

Question 1

Since 2005, the main influence on Australian accounting standards is:

A)International accounting standards.
B)British accounting standards.
C)U.S. accounting standards.
D)All of the above.

Answer 1

A

Question 2

Due process in standard setting involves public consultation with all interested parties.

Answer 2

True

Question 3

According to the IASB and adopted by the AASB, the primary objective of financial reporting is to provide information:

A)to the Federal government.
B)about the profitability of the business.
C)that is useful for decision making, particularly for investors and lenders.
D)regarding the cash flows of the business.

Answer 3

C

Question 4

Accounting principles initially drew their authority from acceptance by the business community.

Question 5

AASB stands for Australian Accounting Standards Board.

Question 6

Accounting principles:

A)explain financial phenomena.
B)are similar to natural laws, like the law of gravity.
C)apply only to large business organisations.
D)should be accepted by people and organisations who need financial information to make decisions.

Question 7

Australia adopted international accounting standards from 2005.

Question 8

The objective of financial reporting is to provide useful information to investors, creditors and others to aid in making and evaluating decisions about the allocation of scarce resources.

Question 9

The Financial Reporting Council (FRC)was established by the Federal government to oversee the Australian standard- setting process.

Question 10

The authority responsible for enforcing accounting and other corporate rules for companies in Australia is:

A)the AASB.
B)the FRC.
C)the ASIC.
D)both A and C

Question 11

The body that is responsible for the issue of accounting standards in Australia is the:

A)Institute of Chartered Accountants in Australia.
B)CPA Australia.
C)Australian Securities and Investments Commission.
D)Australian Accounting Standards Board.

Question 12

The Australian Accounting Standards Board produce Australian accounting standards based on international standards.

Question 13

Which of the following parties is NOT a frequent contributor in the consultation phase of the standard setting process?

A)Industry groups
B)The professional accounting bodies, CPAA and ICAA
C)Academics
D)ASIC

Question 14

A system of due process is neccesary in standard setting to ensure a wider range of choices in accounting procedures.

Question 15

Which of the following is not a characteristic used to judge whether an entity is a reporting entity that should prepare general purpose financial reports?

A)Whether the entity has economic or political importance.
B)The size or indebtedness of the entity.
C)The structure of the entity, e.g. whether it is a sole trader or a company.
D)Whether ownership and management are separate.

Question 16

Describe the essential characteristic(s)of a reporting entity and detail what specific obligation(s)it must meet.

Question 17

Currently the Australian Accounting Research Foundation (AARF)is primarily responsible for issuing accounting standards in Australia.

Question 18

SAC 2 is titled:

A)Objective of General Purpose Financial Reporting.
B)Qualitative Characteristics of Financial Information.
C)Definition and Recognition of the Elements of Financial Statements.
D)Definition of the Reporting Entity.

Question 19

A conceptual framework of accounting is intended to eliminate the need for detailed accounting standards.

Question 20

Accounting standards in the USA are issued by:

A)the Financial Accounting Standards Board.
B)Congress.
C)the Accounting Principles Board.
D)the Securities and Exchange Commission.

Question 21

The comparability principle applies both to comparing businesses to one another and to comparing different periods for the same business.

Question 22

Under the AASB Framework, income includes both revenue and gains.

Question 23

The pair of general principles of reporting that often result in a trade off are:

A)timeliness and reliability.
B)materiality and relevance.
C)understandability and reliability.
D)comparability and materiality.

Question 24

Management relies much more on special purpose reports rather than the general- purpose information needed by external users.

Question 25

Three of the qualitative characteristics listed in the AASB Framework are:

A)optimism, availability, relevance.
B)readability, timeliness, reasonability.
C)reliability, comparability, relevance.
D)conservatism, availability, relevance.

Question 26

Inventory has a cost of $475 000 and a current selling price of $435 000. What amount should be reported on the financial statements and what concept or principle applies?

A)$475 000, going concern
B)$435 000, going concern
C)$475 000, cost
D)$435 000, conservatism

Question 27

The Global Reporting Initiative (GRI)is a worldwide, network- based organisation that produces a comprehensive sustainability reporting framework that is widely used globally.

Question 28

According to the IASB Framework, accounting information should meet all of the following qualitative characteristics, except:

A)comparability.
B)reasonableness.
C)reliability.
D)relevance.

Question 29

State the basic objective of financial reporting and explain which groups might benefit if this objective is met.

Question 30

Information is regarded as material if its omission or misstatement could influence the economic decisions made by users of financial reports.

Question 31

Which of the following statements is false?

A)Owner opinions are one source of objective evidence.
B)An independent valuation is usually considered reliable.
C)Reliable data is usually supported by objective evidence.
D)Reliable data are verifiable.

Question 32

Since Freda's Alterations has very few transactions each year, financial statements are only prepared for the bank every alternate year. This violates the reliability principle.

Question 33

The principle that accountants do not have to account for every last item in strict accordance with the accounting rules is known as the:

A)relevance principle.
B)materiality principle.
C)cost principle.
D)going- concern principle.

Question 34

Under the AASB Framework which of the following is NOT a primary qualitative characteristic of financial reporting?

A)conservatism
B)understandability
C)reliability
D)relevance

Question 35

In most businesses profit is recognised at the point of sale.

Question 36

The materiality principle requires that financial statements should tend to understate rather than overstate net assets in the face of uncertainty.

Question 37

Financial information is considered more reliable if it is verified by sources outside the business.

Question 38

The qualitative characteristic of comparability states that a business should report consistent information in its financial statements to enable outsiders to make knowledgeable decisions concerning that business.

Question 39

Timeliness means reporting information without undue delay.

Question 40

Information that is free from error and bias has the quality of:

A)comparability.
B)reliability.
C)usefulness.
D)relevance.

Question 41

AASB 101 requires a summary of significant accounting policies to be included in the director's report which accompanies the financial statements.

Question 42

Under the percentage of completion method, which is used to record profit on assets that take several years to construct, profit is reported as the instalments of contract income that are received.

Question 43

Luke's Construction receives a contract to build a bridge for $6 000 000, with an estimated cost of $4 000 000. Over the three- year construction period, the costs are estimated to be $500 000 in Year 1, $3 200 000 in Year 2 and $300 000 in Year 3. How much construction revenue would be reported in Year 2 using the percentage of completion method?

A)$4 800 000
B)$3 200 000
C)$2 800 000
D)$2 300 000

Question 44

Which business would be most likely to use the percentage of completion method to record income?

A)grocery store
B)construction firm
C)plumber
D)accountant

Question 45

Under AASB 108 a change in the useful life of a fixed asset which affects the depreciation charge is regarded as a change in accounting policy, not a change in an accounting estimate.

Question 46

Which type of business would be most likely to use the instalment method to record revenue?

A)pharmacy
B)medical practitioner
C)construction firm
D)real estate developer

Question 47

Professionals such as solicitors may use the to record income if the receipt of fees is regarded as very uncertain.

A)percentage of completion method
B)collection method
C)instalment method
D)sales method

Question 48

AASB 101 requires that accounting policy changes be disclosed in a note to the financial statements. A business bought new equipment and thought it would have a six- year useful life. After two years, the business decided that the equipment would be useful for only three more years. This would be considered a:

A)contingency.
B)change in accounting policy.
C)change in accounting estimate.
D)recording error.

Question 49

The term 'revenue recognition' means the recording of revenue in the accounting records and its reporting in the income statement.

Question 50

Under AASB 101, which of the following is not required to be disclosed in the annual reports of stock exchange listed companies?

A)information on executives' remuneration
B)comparative figures for the previous financial year
C)provision for doubtful debts deducted from debtors
D)None of the above, i.e. all are required to be disclosed.

Question 51

When a $100 000 sale of a yacht is made by accepting a $10 000 down payment and nine future yearly payments of $10 000 each, profit will most likely be recognised using the:

A)completed contract method.
B)instalment method.
C)percentage of completion method.
D)none of the above

Question 52

On 1 April, 2013 Babies Unlimited sold a crib with accessories, which cost $1 000, for $1 500. It was sold for 10% deposit, with the balance to be paid in 6 equal payments beginning on 1 May, 2013. How much sales revenue is recognised in the calendar year 2013 under the instalment method?

A)$1 500
B)$150
C)$1 350
D)$300

Question 53

List the four methods commonly used to recognise profit and briefly describe their main features.

Question 54

Which of the following is not a condition that must be met under AASB 118 'Revenue,' before revenue from the sale of goods is recorded?

A)The cash for the sale has been received.
B)The amount of revenue and related costs can be measured reliably.
C)The seller has effectively transferred ownership to the buyer
D)All of the above are conditions that must be met.

Question 55

Which profit recognition method is the most conservative?

A)collection (receipt of cash)method
B)percentage of completion method
C)instalment method
D)sales method

Question 56

In 2013, Amana sold 10 washing machines, which cost $700 each, for a price of $1 300 each. All sales are made on credit and $7 000 was collected in 2013. Using the sales method, how much gross profit will Amana recognise in 2013?

A)$6 000
B)$7 000
C)$6 800
D)$13 000

Question 57

Accounting standard AASB 101 requires that a summary of accounting policies should be included:

A)on the first page of the annual report.
B)in a schedule attached to the annual report.
C)in the initial section of the notes to the financial statements.
D)as a footnote to the balance sheet.

Question 58

The total contract price to build an office building is $4 200 000, with estimated costs of $2 800 000. The construction firm's costs for Year 1 were $800 000. Under the percentage of completion method, gross profit reported in Year 1 is:

A)$2 200 000.
B)$400 000.
C)$1 200 000.
D)none of the above

Question 59

In 2013, Amana sold 10 refrigerators that cost $825 each, for a price of $1 285 each. Payments are made in 10 equal instalments, with no down payment. During 2014, Amana collected $10 285 on the 2013 sales. Using the instalment method and assuming an interest rate of 10%, how much gross profit will Amana recognise in 2014?

A)$129
B)$460
C)$790
D)None; it is all recognised in 2013.

Question 60

Wilson Hardware sells on the instalment plan. Sales- related figures for Saunders Hardware for 2013 were as follows: Sales, $600 000; down payments on the sales, $60 000; collections on instalments, $250 000; beginning inventory, $90 000; ending inventory $60 000; and purchases, $400 000. What is Saunders Hardware's gross profit using the sales method of income recognition?

A)$260 000
B)$200 000
C)$190 000
D)$170 000

Question 61

AASB 110 refers to subsequent events that relate to new matters that have arisen after balance date. Which of the following occurrences after balance date is not an example of a new event?

A)becoming a party to a legal action
B)a major fire or flood loss
C)substantial borrowings or share issues
D)specific information on the size of a bad debt that had previously been considered doubtful

Question 62

Accountants generally make no adjustments for changes in the value of the dollar.

Question 63

A specific exception to the use of historical cost to value assets is if the net realisable value of inventories falls below cost. In this case the justification for the use of market value rather than cost relies on the:

A)materiality principle.
B)comparability principle.
C)cost versus benefit principle.
D)conservatism principle.

Question 64

In Australia, in recent years, there has been a move to show some assets at current cost rather than at historical cost. This is because the need for relevancy sometimes outweighs the requirement for reliability.

Question 65

AASB 110 refers to subsequent events that provide evidence about conditions that existed at reporting date. Such events:

A)require adjustments to the figures in the financial statements.
B)do not have any effect on the accounts until the next financial period.
C)must be referred to in the auditor's report.
D)must be disclosed in a footnote to the financial statements.

Question 66

AASB 110 refers to subsequent events that relate to conditions that have arisen after the reporting date. Such events, if they could influence decision making:

A)must be disclosed in a footnote to the financial statements.
B)need not be accounted for.
C)must be referred to in a special mail- out to shareholders.
D)require adjustments to the figures in the financial statements.

Question 67

The underlying basis for the use of historical cost is the:

A)relevance principle.
B)matching principle.
C)comparability principle.
D)reliability principle.

Question 68

Which of the following is not a type of 'value'?

A)current cost
B)historical cost
C)selling price
D)None of the above, i.e. all are types of 'value.'

Question 69

The Australian Accounting Standard dealing with hyperinflation is:

A)AASB 2000.
B)AASB 101.
C)AASB 129.
D)There is no Australian accounting standard dealing with hyperinflation.

Question 70

Which of these items must be disclosed in general purpose financial reports under AASB 101?

A)interest on borrowings
B)comparative figures
C)different categories of receivables
D)all of the above