TEST BANK for Accounting: An Introduction. 8th Edition by Atrill, McLane, Hayrvey & Cong. ISBN-13 97

Atrill, Accounting 8e Chapter 1: Introduction to accounting LO 1.1 Explain the nature and role of accounting Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. Which of the following is the most important function of an accounting system?

A. provide information for decision-making, planning and control.

B. keep employees from embezzling funds.

C. prepare accounting reports D. collect and record data.

Answer: A Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 8 – Application of knowledge 2. The best description of the primary purpose of providing accounting information is: A. to allow the preparation of a taxation return.

B. to calculate the bank account balance.

C. to assist users in making informed decisions D. to enable the financial statements to be prepared.

Answer: C Difficulty: Basic Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 8 – Application of knowledge 3. The stages of an accounting system are: A. evaluation, processing, output.

B. identification, recording, analysis, reporting.

C. setting objectives, planning, analysis.

D. none of the above.

Answer: B Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Complex Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Analytical thinking 4. What are the four key qualities of accounting information?

A. relevance, materiality, comparability, and understandability.

B. identification, analysis, planning, and timeliness.

C. planning, control, comparability and analysis D. understandability, identification, analysis, and relevance.

Answer: A Difficulty: Complex Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 8 – Application of knowledge 5. The best explanation of relevance is: A. ensuring that information is useful for decision-making.

B. ensuring that information is expressed as clearly as possible.

C. ensuring the benefit of the information is greater than the cost of providing it.

D. ensuring that information is free from bias.

Answer: A Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 8 – Application of knowledge 6. The quality of accounting information that requires items that are basically the same to be treated in the same manner is: A. relevance.

B. timeliness.

C. understandability.

D. comparability.

Answer: D Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 8 – Application of knowledge 7. Which of these is a reason why achieving the maximum possible profit in a particular year may not be in the best interests of a business?

A. Concentrating on the short-term may have detrimental effects in the long-term.

B. It may be achieved by causing environmental problems, which give the business a bad reputation.

C. If it is achieved with high-risk strategies, such as excessive reliance on borrowings, it could lead to disaster in the longer term.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Analytical thinking 2 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

8. Which test determines if an item of accounting information is worthwhile collecting?

A. cost test.

B. cost/benefit test.

C. worthwhile test.

D. validation test.

Answer: B Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Analytical thinking 9. The characteristic of accounting information that requires financial reports to be expressed as clearly as possible and to be capable of being understood by those they are addressed to, is known as: A. understandability.

B. control.

C. cost versus benefit test.

D. relevance.

Answer: A Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 1 – Written and oral communication 10. The statement concerning the key qualities of accounting information that is untrue is: A. the qualities are frequently in conflict.

B. relevant information may help to predict future events or confirm past events.

C. relevant information often contains a degree of subjectivity.

D. None of the statements is untrue, i.e., all are true statements.

Answer: D Difficulty: Complex Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Analytical thinking 11. Which of these is not one of the key qualities of accounting information?

A. Timeliness.

B. Comparability.

C. Relevance .

D. Control.

Answer: D Difficulty: Complex Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Analytical thinking 12. Which statement concerned with establishing the costs and benefits of accounting information is true?

A. It is usually easier to establish benefits than costs.

B. It is normally easy to establish both the costs and the benefits.

C. Both the costs and benefits are normally difficult to assess.

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D. The costs and benefits should be ignored when deciding on what accounting information should be produced.

Answer: C Difficulty: Basic Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

13. When accounting information has the potential to change decision-making it is said to be understandable.

A. True B. False Answer: B Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

14. Briefly discuss how accounting information is relevant to managers of a business.

Answer: Student answers may vary, but may include some/all of the following: ● Help managers make decisions with regards to development/termination of new products or services; changing pricing or quantity of products; whether borrowing money may be required to finance the business; scaling up or down of businesses ; methods of purchasing, production or distribution.

Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 3 – Reflective Thinking 15. Briefly explain the meaning of each of the key qualitative characteristics of accounting information: relevance, comparability and understandability. Also explain how the cost/benefit test acts as a limit on the application of these characteristics.

Answer: Relevance means that accounting information should have the ability to influence decision-making. Relevance may refer to helping to confirm past events or assisting in the prediction of future events. If information is not relevant to decisionmaking, it is not useful and should not be produced.

Comparability means that valid comparisons can be made between accounting reports across a number of accounting periods. For comparisons to be valid, items which are basically the same must be consistently measured and presented in the same manner.

Understandability means that to be most useful, accounting reports should be expressed as clearly as possible and should be capable of being understood by the user groups they are prepared for.

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The cost/benefit test provides a limit on the production of relevant, comparable, and understandable accounting information as, even if the information has all four qualities, it only makes economic sense to produce it if the benefit of its being available is greater than the cost of providing it. A problem of applying the cost/benefit test is that, in practice, both the costs and the benefits of accounting information are difficult to identify with accuracy.

Difficulty: Moderate Learning Objective 1.1: Explain the nature and role of accounting A-Head: Nature and role of accounting AACSB: 1 – Written and oral communication

LO 1.2 List the main groups that use the accounting reports of a business entity, and summarise the different uses that can be made of accounting information Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

16. Which of these groups is a user of financial information?

A. Managers.

B. Lenders.

C. Owners.

D. All of the above Answer: D Difficulty: Basic Learning Objective 1.2: List the main groups that use the accounting reports of a business entity, and summarise the different uses that can be made of accounting information A-Head: Users of accounting information AACSB: 3 – Analytical thinking 17. Which group of users is most likely to require accounting information to assess the ability of a business to pay interest and repay a loan?

A. employees.

B. creditors.

C. customers.

D. taxation department.

Answer: B Difficulty: Basic Learning Objective 1.2: List the main groups that use the accounting reports of a business entity, and summarise the different uses that can be made of accounting information A-Head: Users of accounting information AACSB: 3 – Analytical thinking 18. The main source of information for shareholders is: 5 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. departmental reports.

B. management reports.

C. external reports.

D. internal reports.

Answer: C Difficulty: Basic Learning Objective 1.2: List the main groups that use the accounting reports of a business entity, and summarise the different uses that can be made of accounting information A-Head: Users of accounting information AACSB: 1 – Written and oral communication

LO 1.3 Compare and contrast financial and management accounting Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

19. What is the primary goal of management accounting?

A. To provide information that can be quantified in monetary terms.

B. To provide information to shareholders.

C. To provide information that conforms to the accounting regulations.

D. To provide information that improves the quality of managers' decisions.

Answer: D Difficulty: Basic Learning Objective1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 8 – Application of knowledge 20. Which statement is correct?

A. Financial reports are prepared for internal users whereas management reports are prepared for external users.

B. Financial reports are produced at more frequent intervals than management reports.

C. Financial reports reflect past performance whereas management reports are concerned with the future as well as the past.

D. Financial reports provide more forecast data than management reports.

Answer: C Difficulty: Complex Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 21. Standardised formats are most relevant to: A. departmental reports.

B. management reports.

C. external financial reports.

D. internal reports.

Answer: C 6 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Basic Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 22. Management reports, compared to financial reports, are: A. prepared less frequently.

B. prepared more frequently.

C. prepared with the same frequency.

D. prepared infrequently.

Answer: B Difficulty: Basic Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 23. Management reports, compared to financial reports, are: A. summarised.

B. aggregated.

C. standardised.

D. detailed.

Answer: D Difficulty: Basic Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 24. Which of t he statements concerning differences between financial and management accounting is false?

A. management accounting is less constrained than financial accounting.

B. managers have much more control over the form and content of their reports.

C. the distinction between the two areas, to some extent, reflects differences in access to financial information.

D. there is no overlap between management accounting and financial accounting.

Answer: D Difficulty: Moderate Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 3 – Analytical thinking 25. Which of the following are differences between management and financial accounting?

A. Nature of reports produced B. Frequency of reports C. Level of detail in reports D. All of the above Answer: D Difficulty: Moderate Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 26. Financial accounting reports, compared to management reports, tend to be: 7 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. general purpose.

B. qualitative.

C. unstructured.

D. detailed.

Answer: A Difficulty: Complex Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 27. How frequently is the set of financial reports made available for external publication by an entity typically produced?

A. fortnightly B. daily C. weekly D. yearly Answer: D Difficulty: Basic Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 28. Management accounting reports are principally used by managers to: A. report to shareholders.

B. reconcile with the financial accounting reports.

C. calculate the amount of taxation owed to the government.

D. control the operations of an entity on a regular basis.

Answer: D Difficulty: Basic Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 8 – Application of knowledge 29. Financial accounting reports concentrate on: A. current events.

B. current and future events.

C. past events.

D. future events.

Answer: C Difficulty: Moderate Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 1 – Written and oral communication 30. Management accounting reports tend to contain: A. both financial and non-financial information.

B. financial information only.

C. information that complies with the accounting standards.

D. non-financial information only.

Answer: A Difficulty: Moderate Learning Objective 1.3: Compare and contrast financial and management accounting 8 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: Financial and management accounting AACSB: 3 – Analytical thinking 31. Why do businesses tend to resist providing forecast data to those outside the organisation?

A. because it is too costly B. because of the fear of the loss of competitive advantage C. because the data is inaccurate D. because it is too difficult Answer: B Difficulty: Complex Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 3 – Analytical thinking Essay: Write your answer in the space provided or on a separate sheet of paper.

32. Briefly discuss the main differences between financial accounting and management accounting.

Answer: Student answers will vary but may include some/all of the following: ● The definitions of management accounting and financial accounting ● Reports that are produced and their respective detail ● Regulations ● Reporting interval ● Time that the reports reflect—performance to date versus expected performance ● Range of information provided Difficulty: Moderate Learning Objective 1.3: Compare and contrast financial and management accounting A-Head: Financial and management accounting AACSB: 3 – Analytical thinking

LO 1.4 Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk-return relationship Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

33. Which of the following best represents a possible objective of a business ?

A. financial survival.

B. maximise profit.

C. maximise sales.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 1.4: Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk-return relationship A-Head: What is the financial objective of a business?

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AACSB: 3 – Analytical thinking 34. The commonly accepted overall financial objective of business can best be summed up as: A. enhancing wealth.

B. promoting good corporate relations.

C. satisfying everyone within the organisation.

D. stabilising profit.

Answer: A Difficulty: Moderate Learning Objective 1.4: Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk-return relationship A-Head: What is the financial objective of a business?

AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

35. The goal of business in relation to profit is generally taken as profit maximisation.

A. True B. False Answer: A Difficulty: Basic Learning Objective 1.4: Identify the main purpose of a business (while recognising a range of other influences), and explain the traditional risk-return relationship A-Head: What is the financial objective of a business?

AACSB: 8 – Application of knowledge

LO 1.5 Provide an overview of the main financial reports prepared by the business Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

36. What does a statement of financial position show?

A. the details of how much profit was earned in the period B. the cash movements that took place over a particular period C. the financial position at the end of the period D. the change in financial position over a particular period Answer: C Difficulty: Moderate Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication 37. Another name for the statement of comprehensive income is: A. statement of financial position.

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B. balance sheet.

C. statement of change in owners' equity.

D. statement of financial performance.

Answer: D Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication 38. What is another name commonly used for the balance sheet?

A. profit and loss statement B. statement of financial position C. statement of financial performance D. statement of change in owners' equity.

Answer: B Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication 39. The accounting report that is specifically designed to answer the question, 'What cash movements took place over a particular period?' is: A. the statement of financial position.

B. the statement of cash flows.

C. the statement of comprehensive income.

D. all of the above.

Answer: B Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 3 – Analytical thinking 40. Which accounting report is specifically designed to answer the question, 'What profit was earned in a particular period?'

A. Statement of comprehensive income.

B. Statement of financial position.

C. Statement of cash flows.

D. All of the above.

Answer: A Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 3 – Analytical thinking 41. Which accounting report is prepared at a particular point of time rather than over a period of time?

A. Statement of comprehensive income.

B. Statement of change in owners' equity.

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C. Statement of financial position.

D. Both B and C. Answer: C Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication 42. Calculate the cash available at the end of the day if cash at the beginning is $650, receipts from customers are $5 00 and payments to suppliers are $300.

A. $(50).

B. $ 850.

C. $750.

D. $1,45 0.

Answer: B Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 3 – Analytical thinking 43. Paulo commenced business with $150 cash. He purchased goods for $75 that were later sold for $125. The statement of financial position, after the sale, would show a total business wealth of: A. $150.

B. $200.

C. $50.

D. $100.

Answer: B Difficulty: Complex Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 3 – Analytical thinking 44. Which financial reports comprise the ‘final accounts’?

A. statement of cash flows and statement of comprehensive income.

B. statement of comprehensive income and statement of financial position.

C. statement of comprehensive income, statement of financial position, statement of cash flows and statement of change in owners' equity.

D. statement of financial position, statement of cash flows and statement of comprehensive income.

Answer: C Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication 45. Which statement is true?

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A. The statement of cash flows explains the changes between the statement of comprehensive income and the statement of financial position.

B. The statement of financial position links two statements of comprehensive income.

C. The statement of cash flows summarises the movements in the bank account over an accounting period.

D. None of the statements is true.

Answer: C Difficulty: Complex Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication 46. Which accounting reports are concerned with measuring flows over a period of time?

A. statement of comprehensive income and statement of financial position.

B. statement of comprehensive income and statement of cash flows.

C. statement of cash flows and statement of financial position.

D. statement of comprehensive income, statement of cash flows and statement of financial position.

Answer: B Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 8 – Application of knowledge 47. The financial statement which shows all the changes in the owners' interest in the net assets of the business is: A. statement of changes in owners' equity.

B. statement of cash flows.

C. statement of comprehensive income.

D. none of the above.

Answer: A Difficulty: Basic Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication

Short answer: Write the word or phrase that best completes each statement or answers the question.

48. Calculate the cash available at the beginning of the day if cash at the end is $950, receipts from customers are $360 and payments to suppliers are $425.

Answer: $885 Difficulty: Moderate Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 3 – Analytical thinking 13 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Essay: Write your answer in the space provided or on a separate sheet of paper.

49. Set out the main purpose of each of the three main financial reports — the statement of comprehensive income, the statement of financial position, and the statement of cash flows — and briefly explain how each achieves its purpose.

Answer: The purpose of the statement of comprehensive income is to show how much profit was generated by the entity from its operating activities during a particular period.

This is achieved by recording all the income earned in the period and deducting from it all the expenses incurred in earning that income. If income exceeds expenses, a profit is earned. If income is less than expenses, there is a loss.

The purpose of the statement of financial position is to show the financial position of the entity at the end of an accounting period. This is achieved by listing the assets controlled by the entity on a particular date and deducting all amounts owed to parties other than the owner. Total assets held less liabilities owed is the amount of equity the owner has in the entity. Examples of assets owned are: cash at bank, inventory, land and buildings, equipment, motor vehicles. Examples of liabilities are amounts owing to creditors and lenders.

The purpose of the statement of cash flows is to show the change in the cash position over a particular period and the movements in cash that caused that change. This is achieved by listing all inflows and outflows of cash for the period. If inflows exceed outflows, there has been a net increase in cash. If the opposite is true, then there has been a net outflow of cash.

Difficulty: Complex Learning Objective 1.5: Provide an overview of the main financial reports prepared by the business A-Head: The main financial reports – an overview AACSB: 1 – Written and oral communication

LO 1.6 Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

50. The most complete description of the planning process for a business is: A. setting objectives and short-term plans.

B. setting long-term objectives and long-term plans.

C. setting objectives and detailed budgets.

D. setting objectives, long-term plans, and short-term plans.

Answer: D Difficulty: Basic Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting 14 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 51. The planning role within a company is principally undertaken by: A. consultants.

B. managers.

C. shareholders.

D. lenders.

Answer: B Difficulty: Basic Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge 52. Knowledge of the objectives or mission of a business will be most useful in assisting users of financial reports in understanding: A. the liquidity position of the business.

B. why it is taking longer than it should to collect money from accounts receivable.

C. the financial reporting cycle.

D. what the business is trying to achieve.

Answer: D Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 3 – Analytical thinking 53. Budgets are typically set for: A. one year.

B. a decade.

C. one month.

D. five years.

Answer: A Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 1 – Written and oral communication 54. Control is best defined as: A. making events conform to plan.

B. making the directors perform according to plan.

C. making the employees work harder.

D. giving orders.

Answer: A Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context 15 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: Business and accounting AACSB: 8 – Application of knowledge 55. The planning and control process within an entity means that: A. business can respond to variances between plans and actual performance.

B. business is only concerned with actual performance.

C. plans are followed rigidly at all times.

D. plans and actual performance do not vary.

Answer: A Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge 56. The term that describes differences between actual and budgeted results is: A. divergence.

B. discrepancy.

C. mistake.

D. variance.

Answer: D Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge 57. Which statement is incorrect?

A. A budget summarises past information.

B. A budget is expressed in monetary terms.

C. A budget is a short-term plan.

D. A budget defines precise targets, e.g., level of sales, levels of inventory.

Answer: A Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 1 – Written and oral communication 58. The three most common types of structures used by businesses in Australia are: A. partnership, limited company, association.

B. sole proprietor, partnership, limited company.

C. partnership, private company, trust.

D. sole proprietor, limited company, co-operative.

Answer: B Difficulty: Basic Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context 16 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: Business and accounting AACSB: 8 – Application of knowledge 59. A business that is not a legal entity, where there is one owner who is fully liable for all debts, is: A. a proprietary company.

B. a partnership.

C. a sole proprietorship.

D. none of the above.

Answer: C Difficulty: Basic Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 Application of knowledge 60. Which of these is an accounting entity?

A. Sole proprietor.

B. Partnership.

C. Company.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context.

A-Head: Business and accounting AACSB: 8 – Application of knowledge 61. The business most likely to operate as a sole proprietorship is: A. private hospital.

B. airline.

C. bank.

D. medical specialist.

Answer: D Difficulty: Basic Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge 62. The principle whereby each partner is responsible for the business actions of all other partners when the actions are carried out in the normal course of business, is known as: A. the rule in Garner versus Murray.

B. mutual agency.

C. unlimited liability.

D. perpetual life.

Answer: B Difficulty: Moderate 17 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge 63. An advantage of a partnership compared to a sole proprietorship is: A. mutual agency.

B. sharing of profits.

C. greater access to funds.

D. Both B and C. Answer: C Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge 64. In comparison to a company, a disadvantage of operating as a partnership is: A. unlimited liability.

B. limited life.

C. mutual agency.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge

Short answer: Write the word or phrase that best completes each statement or answers the question.

65. Explain the advantages of operating as a sole proprietor.

Answer: Student answers may vary but could include the fact that a sole proprietor has total control over all decisions regarding the business that he or she owns and also has low start-up costs.

Difficulty: Moderate Learning Objective 1.6: Outline the main types of business ownership, describe the way in which a business is typically organised and managed, and explain the importance of accounting in a business context A-Head: Business and accounting AACSB: 8 – Application of knowledge

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LO 1.7 Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

66. A common aspect of questionable figures in financial reports is: A. overstating figures for income and assets.

B. overstating figures for income and understating figures for assets.

C. understating figures for income and expenses.

D. overstating figures for expenses and liabilities.

Answer: A Difficulty: Complex Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business A-Head: The changing face of business and accounting AACSB: 2 – Ethical understanding and reasoning 67. Sustainability reporting focuses on: A. financial aspects.

B. environmental and social factors.

C. customer satisfaction.

D. Both A and C. Answer: B Difficulty: Moderate Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business A-Head: The changing face of business and accounting AACSB: 2 – Ethical understanding and reasoning 68. Which of the following is not one of the reasons for the increasing turbulence in the business environment?

A. the deregulation of domestic markets B. rapidly changing technology C. increasing volatility of financial markets D. the development of a more global economy Answer: C Difficulty: Basic Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business.

A-Head: The changing face of business and accounting AACSB 3: Analytical thinking 69. As a result of the new, more complex business environment, the accounting field needed to respond with a conceptual framework that clarifies: 19 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. types and content of financial accounting reports.

B. accounting rules that measure profit differently depending on the size of a business.

C. A and B. D. none of the above.

Answer: A Difficulty: Moderate Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business.

A-Head: The changing face of business and accounting AACSB: 3 - Analytical thinking 70. The causes of accounting scandals globally can often be attributed to failed: A. accounting rules and regulations.

B. financial reports for general purpose.

C. corporate governance.

D. investment decisions.

Answer: C Difficulty: Complex Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business.

A-Head: The changing face of business and accounting AACSB: 3 – Analytical thinking 71. The relationship between management accounting and big data analytics builds on: A. using accounting data to build a competitive advantage.

B. measuring and controlling costs by sophisticated methods.

C. big data analytics has no relationship to management accounting.

D. A and B. Answer: D Difficulty: Complex Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business.

A-Head: The changing face of business and accounting AACSB: 3 – Analytical thinking 72. Which of the following is not a principle in the IFAC’s International Code of Conducts for Professional Accountants?

A. objectivity.

B. confidentiality.

C. integrity.

D. transparency.

Answer: D Difficulty: Basic Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business.

A-Head: The changing face of business and accounting 20 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 73. In terms of business ethics, accounting plays an important role in: A. compliance.

B. measurement.

C. transparency.

D. none of the above.

Answer: A Difficulty: Complex Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business.

A-Head: The changing face of business and accounting AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

74. What issues have been highlighted by the global financial crisis and corporate scandals?

Answer: Answers may vary but may include the following: financial reporting regulations have loopholes; financial reporting practices can be inadequate; corporate executives can act out of greed; investors demand unrealistic profits; managers can provide misleading financial information.

Difficulty: Moderate Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business A-Head: The changing face of business and accounting AACSB: 1 – Communication 75. In the era of greater social awareness, the importance of ethical business practices is rising. Give an example of improvements that resulted from such ethical requirements.

Answer: Answers may vary but may include the following: more rigorous corporate governance, ethically based investments, ethical trading.

Difficulty: Moderate Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business A-Head: The changing face of business and accounting AACSB: 1 – Communication

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

76. In this growing digital era there is a vast array of data available to aid in making business decisions and obtaining competitive advantage. Therefore, there will be no need for accounting information for those purposes.

A. True 21 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

B. False Answer: B Difficulty: Moderate Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business A-Head: The changing face of business and accounting AACSB: 3 – Analytical thinking 77. Business ethics are influenced by both national and corporate cultures, businesses, the legal system, professional organisations and individuals.

A. True B. False Answer: A Difficulty: Basic Learning Objective 1.7: Identify ways in which business and accounting have been changing, together with some current issues confronting businesses and their associated reporting including current thinking on ethics and business A-Head: The changing face of business and accounting AACSB: 1 – Communication

LO 1.8 Explain why accounting information is generally considered to be useful, and why you need to know the basics of accounting Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

78. Which of the following is not an aspect of accounting and finance potential managers need to understand?

A. Reading and interpreting financial reports.

B. The design of the accounting information system.

C. How investment decisions are made.

D. How businesses are financed.

Answer: B Difficulty: Basic Learning Objective 1.8: Explain why accounting information is generally considered to be useful, and why you need to know the basics of accounting A-Head: How useful is accounting information?

AACSB: 7 – Reflective thinking 79. Which of the following is not a use of accounting information?

A. It can accurately predict future profits.

B. It reduces uncertainty about the business’s financial position.

C. It helps answer questions about availability of funds to meet the business’s obligations.

D. It helps uses make decisions relating to the business.

Answer: A 22 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 1.8: Explain why accounting information is generally considered to be useful, and why you need to know the basics of accounting A-Head: How useful is accounting information?

AACSB: 7 – Reflective thinking 80. Business managers, even if not accountants, need familiarity with basic accounting information to help with decisions about A. what products to sell.

B. whether or not to invest in certain projects.

C. whether to expand or cease operations.

D. All of the above are correct.

Answer: D Difficulty: Basic Learning Objective 1.8: Explain why accounting information is generally considered to be useful, and why you need to know the basics of accounting A-Head: How useful is accounting information?

AACSB: 8 – Application of knowledge

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Atrill, Accounting 8e Chapter 2: Measuring and reporting financial position LO 2.1 Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. What is the purpose of the statement of financial position?

A. to determine the cash inflows and outflows over a period of time.

B. to determine the profit earned over a period of time.

C. to list the assets of the business and the claims against the assets at a particular point of time.

D. all of the above.

Answer: C Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 1 – Written and oral communication 2. Which of these is not always a characteristic of an asset?

A. Legal ownership by the entity.

B. Exclusive control of the economic benefits.

C. Ability of the benefit to be measured in money terms.

D. Present economic resource that has potential future economic benefits.

Answer: A Difficulty: Complex Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 3 – Analytical thinking 3. Identify the asset.

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A. Bank overdraft.

B. Plant and equipment.

C. Loan from ABC Ltd. D. Accrued expenses.

Answer: B Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 4. Which of these is not an asset?

A. Accounts payable.

B. Loan to J Troja.

C. Accounts receivable.

D. Both A and B. Answer: A Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 5. Intangible assets have no physical substance but still provide expected future benefits. Which of the following is not an intangible asset?

A. Newspaper masthead.

B. Goodwill.

C. Patent.

D. None of the above, i.e., all are intangible assets.

Answer: D Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 6. Identify the intangible asset.

A. Inventory.

B. Loan.

C. Accounts payable.

D. Brand name.

Answer: D Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 7. In the accounting equation, claims on the business are of two broad types: A. bills payable and bills receivable.

B. liabilities and equity.

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C. loans to and loans from outsiders.

D. accounts receivable and accounts payable.

Answer: B Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 3 – Analytical thinking 8. 'A present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits,' is the generally acceptable definition of: A. an asset.

B. equity.

C. a liability.

D. an expense.

Answer: C Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 9. Which of the following is a liability?

A. Drawings.

B. Accounts payable.

C. Prepaid insurance.

D. Cash at bank.

Answer: B Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 10. The recognition criteria for liabilities includes: A. future obligation.

B. probability of occurrence.

C. reliability of measurement.

D. Both B and C. Answer: D Difficulty: Complex Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 3 – Analytical thinking 11. Which of these does not belong with the others?

A. Bank overdraft.

B. Prepaid wages.

C. Accounts payable.

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D. Mortgage loan.

Answer: B Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 12. Despite the uncertainty in relation to the exact amount to be paid and the actual timing of the payment, which of the following is still regarded as a liability?

A. Deposit on services received in advance.

B. Money borrowed from an associate company.

C. Accounts payable.

D. Provision for employee bonuses.

Answer: D Difficulty: Moderate Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 13. Which of the following is not necessarily a liability?

A. Provision for holiday pay.

B. Bank overdraft.

C. Loan to employee.

D. None of the above, i.e., all are necessarily liabilities.

Answer: C Difficulty: Complex Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge 14. Which statement concerning the reserves component of equity is not correct?

A. Reserves represent cash.

B. Retained profits and reserves are often classified under the general heading of reserves.

C. The higher the dividend paid by the company, the lower the reserves.

D. Many reserves arise as transfers from retained profits.

Answer: A Difficulty: Moderate Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: The classification of assets and claims AACSB: 3 – Analytical thinking 15. What is another name for accounts receivable?

A. debtors.

B. receivables.

C. accounts payable.

D. Both A and B. 4 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Answer: D Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: The classification of assets and claims AACSB: 8 – Application of knowledge 16. Which of these assets, which could be listed on a statement of financial position, is likely not to translate into future economic benefits?

A. Large inventories of spare parts.

B. Accounts receivable that have been outstanding for several months.

C. Inventory that has been on the shelves for over a year.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: The classification of assets and claims AACSB: 8 – Application of knowledge

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

17. A loan to a family member would appear in the equity section of the statement of financial position.

A. True B. False Answer: B Difficulty: Basic Learning Objective 2.1: Explain the nature and purpose of the statement of financial position (balance sheet) and its component parts A-Head: Nature and purpose of the statement of financial position AACSB: 8 – Application of knowledge

LO 2.2 Explain the accounting equation, and use it to build up a statement of financial position at the end of a period Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

18. Which of the following is the correct version of the accounting equation?

A. liabilities = assets + equity.

B. assets = equity + liabilities.

C. equity = assets + liabilities.

D. none of the above.

Answer: B Difficulty: Basic 5 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 3 – Analytical thinking 19. If liabilities are $56 ,000 and equity is $68,900, assets are: A. $ 124,900.

B. $ 12,900.

C. $113,900.

D. There isn’t sufficient information to calculate the assets.

Answer: A Difficulty: Basic Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 20. If liabilities are $55,000 and assets are $123,600, equity is: A. $178,400.

B. $68,600.

C. $178,600.

D. $68,400.

Answer: B Difficulty: Basic Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 21. If assets are $40 ,200 and equity is $13,600, liabilities are: A. $ 26,400.

B. $ 53,800.

C. $22,600.

D. There isn’t sufficient information to calculate the liabilities.

Answer: A Difficulty: Basic Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 22. Calculate the missing cash at bank account balance from these statement of financial position items. Equity $5,800; accounts receivable $890; accounts payable $450; inventory $360; loan to a business $1,400.

A. $4,900.

B. $5,400.

C. $3,600.

D. $6,300.

Answer: C Difficulty: Complex Learning Objective 2.2: Explain the accounting equation, and use it to build up a 6 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 23. What is the effect on the statement of financial position of a business buying supplies for cash?

A. increase asset supplies; increase asset bank.

B. increase asset supplies; decrease asset bank.

C. decrease asset supplies; increase asset bank.

D. decrease asset supplies; decrease asset bank.

Answer: B Difficulty: Basic Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 24. What is the effect on the statement of financial position when the business buys inventory on credit?

A. Increase asset inventory; increase liability creditor.

B. Increase asset inventory; increase equity.

C. Decrease asset inventory; decrease liability creditor.

D. Decrease asset inventory; increase liability creditor.

Answer: A Difficulty: Moderate Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 25. What is the effect on the statement of financial position when the business buys a car for $35,000, paying a deposit of $10,000 and promising to pay the balance within 60 days?

A. Increase asset vehicle by $5,000; decrease asset bank by $5,000.

B. Increase asset vehicle by $35,000; decrease asset bank by $10,000; increase liability accounts payable by $25,000.

C. Increase asset vehicle by $25,000; decrease asset bank by $5,000; increase liability accounts payable by $20,000.

D. None of the above.

Answer: B Difficulty: Complex Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 26. What is the effect on the statement of financial position when the business pays a creditor?

A. decrease asset creditor; decrease liability bank.

B. decrease asset bank; decrease equity.

C. decrease asset bank; decrease liability creditor.

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D. none of the above.

Answer: B Difficulty: Basic Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 27. The effect on the statement of financial position when a debtor pays the amount that is owed is: A. increase asset bank; decrease asset debtor; increase equity.

B. increase asset bank; increase equity.

C. increase asset bank; decrease asset debtor.

D. none of the above.

Answer: C Difficulty: Moderate Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 28. The effect on the statement of financial position when the owner withdraws money from the business is: A. decrease asset bank; decrease equity.

B. decrease drawings; decrease equity.

C. increase drawings; increase equity.

D. decrease asset bank; increase equity.

Answer: A Difficulty: Moderate Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 29. The effect on the statement of financial position when the owner contributes her private vehicle for the exclusive use of the business is: A. increase asset vehicle; increase equity.

B. increase asset vehicle; decrease equity.

C. increase asset vehicle; increase owner's drawings.

D. none of the above.

Answer: A Difficulty: Moderate Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 30. Calculate the profit for the year if capital at the beginning is $45,000, capital at the end is $40,000 and during the year the owner withdrew $15,000.

A. $5,000.

B. $15,000.

8 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

C. $10,000.

D. $20,000.

Answer: C Difficulty: Complex Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 31. What is the overall effect on the statement of financial position when the business sells inventory for a profit of $5,000?

A. Increase total assets $5,000; increase total equity $5,000.

B. Increase total assets $3,000; decrease total equity $3,000.

C. No change in total assets; no change in total equity.

D. None of the above.

Answer: A Difficulty: Moderate Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge 32. What is the effect on the statement of financial position when the business has cash sales of $15,000 of goods that were originally purchased for $10,000?

A. Increase asset bank $12,000; increase equity $12,000.

B. Increase asset bank $15,000; decrease asset inventory $10,000; increase equity $5,000.

C. Increase asset bank $4,000; increase equity $4,000.

D. None of the above.

Answer: B Difficulty: Complex Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge

Short answer: Write the word or phrase that best completes each statement or answers the question.

33. Calculate equity. Cash at bank $3,500; inventory $1,600; accounts receivable $3,500; accounts payable $1,700; loan from ABC bank $3,500. Show your work.

Answer: $3,500 cash + $1,600 inventory + $3,500 AR – $1,700 AP – $3,500 loan = $3,400 Difficulty: Moderate Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge

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Essay: Write your answer in the space provided or on a separate sheet of paper.

34. You are provided with the statement of financial position at the beginning of the period for a firm of accountants. You are also given four of the transactions that have occurred during the period.

REQUIRED: a) Complete the table to show how each transaction affects the accounts shown. b) Calculate the figures in the final column of the table from which the statement of financial position at the end of the period can be prepared.

Blank Assets Cash accounts receivabl e Plant & Equip Liabilities accounts payable

Beginning Transaction Transaction Transaction Transaction Balance 1 2 3 4 Sheet $ $ $ $ $ 10,000 Blank Blank Blank Blank Blank Blank Blank Blank

Ending Balance Sheet $ Blank Blank

5,500 50,000 65,000

Blank

Blank

Blank

Blank

Blank

Blank Blank Blank

Blank Blank Blank

Blank Blank Blank

Blank Blank Blank

Blank Blank Blank

6,000

Equity 59,500 Blank Blank Blank Blank Blank Blank 65,500 Blank Blank Blank Blank Blank Transactions for the period: 1. Collected $3,000 from debtors 2. Paid accounts payable $6,000 3. Owner paid in additional capital contribution of $10,000 4. Purchased on credit $2,000 of additional plant.

Answer: Beginning Transaction Transaction Transaction Transaction Ending Balance 1 2 3 4 Balance Blank Sheet Sheet Assets $ $ $ $ $ $ Cash 10,000 +3,000 -6,000 +10,000 Blank 17,000 accounts Blank Blank Blank receivabl e 5,500 -3,000 2,500 Plant & Blank Blank Equip 50,000 Blank +2,000 52,000 $65,500 Blank Blank Blank Blank $71,500 Liabilities Blank Blank Blank Blank Blank accounts Blank payable 6,000 -6,000 +2,000 2,000 Blank Equity 59,500 Blank Blank +10,000 Blank 69,500 10 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Blank 65,500 Blank Blank Blank Blank Difficulty: Complex Learning Objective 2.2: Explain the accounting equation, and use it to build up a statement of financial position at the end of a period A-Head: The accounting equation AACSB: 8 – Application of knowledge

$71,500

LO 2.3 Classify assets and claims Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

35. Identify the current asset.

A. Fixtures and fittings.

B. Delivery vehicle.

C. Inventory.

D. Loan to L Hardie repayable in 2 years.

Answer: C Difficulty: Basic Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 8 – Application of knowledge 36. Assets are classified as either current or non-current. Current assets are: A. goodwill.

B. expected to be turned into cash within 12 months.

C. the infrastructure assets.

D. all of the above.

Answer: B Difficulty: Moderate Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 3 – Analytical thinking 37. Which of the following is a non-current asset?

A. 5-year loan to Ti Finance.

B. Machinery.

C. Long-term investment.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 8 – Application of knowledge 38. What do non-current liabilities represent?

A. amounts due to the owner of the business which are not payable within 12 months.

B. amounts due to outsiders which are not payable within 12 months.

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C. amounts due and payable to outsiders within 12 months.

D. Both A and B. Answer: B Difficulty: Basic Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 3 – Analytical thinking 39. Identify the current liability.

A. Wages owing.

B. Loan from B Buy (due in 4 months).

C. Bill payable (due in 2 years).

D. Both A and B. Answer: D Difficulty: Basic Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 8 – Application of knowledge 40. Which of the following statements in relation to non-current assets is untrue?

A. May vary in classification according to the nature of the business.

B. They may be tangible or intangible.

C. They are held for sale or consumption.

D. They are generally held for generating wealth.

Answer: C Difficulty: Basic Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 3 – Analytical thinking 41. If current assets are $15,200, current liabilities are $3,100, non-current liabilities are $45,000 and equity is $70,000, non-current assets are: A. $108,100 B. $102,900 C. $92,900 D. $48,100 Answer: B Difficulty: Basic Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 8 – Application of knowledge

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

42. A copyright is a tangible asset.

A. True B. False Answer: B Difficulty: Basic Learning Objective 2.3: Classify assets and claims 12 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: The classification of assets and claims AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

43. Complete the following table concerning the classification of items in the statement of financial position.

ACCOUNT ELEMENTS CLASSIFICATION (Asset, Liability, Equity) (Current, Non-current) e.g Cash on hand Asset Current e.g Land and buildings Asset Non-current 1 Inventory Blank Blank 2 Accounts receivable Blank Blank 3 Bank overdraft Blank Blank 4 Prepaid insurance Blank Blank 5 Share capital Blank Blank 6 Retained profits Blank Blank 7 Accounts payable Blank Blank 8 Goodwill Blank Blank 9 Plant and equipment Blank Blank 10 Franchise Blank Blank 11 Loan from Eagle Finance (5 Blank Blank years) Difficulty: Basic Learning Objective 2.3: Classify assets and claims A-Head: The classification of assets and claims AACSB: 8 – Application of knowledge

LO 2.4 Apply the different possible formats for the statement of financial position Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

44. In recent years, the more common format of layout for the financial statement of position is A. Horizontal format.

B. Parallel format.

C. ‘T’ format.

D. Vertical or narrative format.

Answer: D Difficulty: Moderate Learning Objective 2.4: Apply the different possible formats for the statement of financial position 13 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: Formats for statements of financial position AACSB: 1 – Written and oral communication 45. What are the possible approaches to presenting a narrative statement of financial position?

A. Entity.

B. Proprietary.

C. Horizontal.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 2.4: Apply the different possible formats for the statement of financial position A-Head: Formats for statements of financial position AACSB: 1 – Written and oral communication

LO 2.5 Identify the main factors that influence the content and values in a statement of financial position Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

46. The accounting convention that means only those transactions that are capable of being expressed in monetary terms are recorded, is the: A. money measurement convention.

B. historical cost convention.

C. conservatism convention.

D. reliability convention.

Answer: A Difficulty: Basic Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of the financial reports AACSB: 3 – Analytical thinking 47. The accounting convention that requires the activities of the business to be kept separate from the activities of the owner is the: A. dual aspect convention.

B. accounting period convention.

C. conservatism convention.

D. business entity convention Answer: D Difficulty: Basic Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of the financial reports AACSB: 3 – Analytical thinking 14 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

48. Which accounting convention has the effect that the employees will not appear as an asset on the entity's statement of financial position?

A. Money measurement convention.

B. Accounting period convention.

C. Stable monetary unit convention.

D. Entity convention.

Answer: A Difficulty: Moderate Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of the financial reports AACSB: 3 – Analytical thinking 49. Without the business entity convention, which item in the statement of financial position would not exist?

A. Assets.

B. Equity.

C. Liabilities.

D. Cash at bank.

Answer: B Difficulty: Moderate Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of the financial reports AACSB: 3 – Analytical thinking 50. The accounting convention that states that every transaction has at least two effects on the accounting equation, so that after the transaction is processed, the equation remains in balance is the: A. going concern/continuity convention.

B. objectivity/reliability convention.

C. conservatism/prudence convention.

D. dual aspect convention.

Answer: D Difficulty: Moderate Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of the financial reports AACSB: 3 – Analytical thinking 51. The accounting convention that requires items in the statement of financial position to be valued at their acquisition cost is the: A. matching convention.

B. realisation convention.

C. money measurement convention.

D. historic cost convention.

Answer: D Difficulty: Basic Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports 15 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 52. The accounting convention that calls for financial reports to err on the side of caution is the: A. accounting period convention.

B. stable monetary unit convention.

C. objectivity convention.

D. conservatism (prudence) convention.

Answer: D Difficulty: Basic Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 53. The accounting convention which results in the anticipation of losses but not of profits is: A. matching.

B. prudence (conservatism).

C. going concern.

D. none of the above.

Answer: B Difficulty: Moderate Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 8 – Application of knowledge 54. If the prudence (conservatism) convention conflicts with another convention, which will normally prevail?

A. Prudence (conservatism).

B. The other convention.

C. 50% of the time prudence and 50% of the time the other convention.

D. Conventions never conflict so the issue does not arise.

Answer: A Difficulty: Complex Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 55. Under the accounting standards, which alternative measure of value is not permitted to be used for valuing assets?

A. Historical cost.

B. Net realisable value.

C. Fair value.

D. None of the above. i.e., all are permitted methods in some circumstances.

Answer: D Difficulty: Complex Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position 16 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 56. An example of where the prudence assumption leads to a reduction in the valuation of an asset is: A. development expenditure capitalised as an asset rather than written off as an expense.

B. taking an upward revaluation of an asset to a reserve rather than including it in the profit calculation.

C. valuing inventory at the lower of cost and net realisable value.

D. All are examples.

Answer: C Difficulty: Complex Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 57. Which statement about current value is true?

A. Current value can only be defined one way.

B. An accounting system could be produced based on current value rather than historical cost.

C. The second-hand sale value of an asset is not an example of current value.

D. Current values are based on transactions.

Answer: B Difficulty: Complex Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 58. The accounting convention that the objectivity principle provides support for is: A. relevance.

B. prudence (conservatism).

C. historic cost.

D. accounting period.

Answer: C Difficulty: Complex Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 59. There is a growing tendency for many non-current assets to be valued on the basis of market values. The item which is most likely to be valued at market value is: A. the assets of a life insurer.

B. goodwill.

C. motor vehicles.

D. accounts receivable.

Answer: A Difficulty: Complex 17 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 8 – Application of knowledge 60. The assumption that means accountants ignore inflation is: A. the prudence assumption.

B. the going concern assumption.

C. the monetary assumption.

D. the stable monetary unit assumption.

Answer: D Difficulty: Basic Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 61. Application of the (prudence) conservatism assumption can produce: A. higher profits.

B. higher values for assets.

C. higher amounts for liabilities.

D. lower amounts for expenses.

Answer: C Difficulty: Basic Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 62. Which of the following conventions dictates that a sole owner's personal transactions should not be included in the records of the business?

A. Accounting period.

B. Business entity.

C. Prudence.

D. Historic cost.

Answer: B Difficulty: Complex Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking 63. The accounting assumption that a business will continue to operate into the foreseeable future is the: A. entity assumption.

B. going concern assumption.

C. accounting period assumption.

D. historical cost assumption.

Answer: B Difficulty: Basic Learning Objective 2.5: Identify the main factors that influence the content and values in a 18 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

64. Explain what will happen to profits in later years if reported profits are reduced by $6,000 in year one because of the operation of conservatism.

Answer: Profits in later years will be $6,000 higher.

Difficulty: Complex Learning Objective 2.5: Identify the main factors that influence the content and values in a statement of financial position A-Head: Factors influencing the form and content of financial reports AACSB: 8 – Application of knowledge

LO 2.6 Explain the main ways in which the statement of financial position can be useful for users of accounting information Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

65. Which aspect of business performance does the statement of financial position directly provide insight into?

A. The relative proportions of funds contributed by owners and outsiders.

B. Profitability.

C. Share price.

D. Cash flows.

Answer: A Difficulty: Basic Learning Objective 2.6: Explain the main ways in which the statement of financial position can be useful for users of accounting information A-Head: Usefulness of the statement of financial position AACSB: 7 – Reflective thinking 66. The statement of financial position assists users in terms of: A. Assessing the value of a business.

B. Determining the liquidity of a business.

C. The effectiveness of wealth generation.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 2.6: Explain the main ways in which the statement of financial position can be useful for users of accounting information A-Head: Usefulness of the statement of financial position AACSB: 7 – Reflective thinking 19 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

67. The statement of financial position provides insight into the liquidity of the business.

This means that A. the ability of the business to pay its long-term debts.

B. the ability of the business to pay dividends.

C. the ability of the business to pay its short-term obligations with current assets.

D. the ability of the business to purchase new long-term assets.

Answer: C Difficulty: Moderate Learning Objective 2.6: Explain the main ways in which the statement of financial position can be useful for users of accounting information A-Head: Usefulness of the statement of financial position AACSB: 3 – Analytical thinking 68. Which of the following is not a reason that the relationship between current and noncurrent assets important?

A. Firms having too much funds tied up in non-current assets can lead to business failure.

B. In case of financial difficulty, non-current assets are often difficult to sell.

C. It shows the ability of the business to pay long-term obligations.

D. Converting non-current assets to cash often results in a loss to the business.

Answer: C Difficulty: Moderate Learning Objective 2.6: Explain the main ways in which the statement of financial position can be useful for users of accounting information A-Head: Usefulness of the statement of financial position AACSB: 3 – Analytical thinking

LO 2.7 Identify the main deficiencies or limitations in the statement of financial position.

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

69. Which of the following is not a potential conflict in the statement of financial position?

A. The statement of financial position is generally only determined annually.

B. In reality, a country’s money may not be ‘a stable monetary unit’.

C. Relevant information is not always entirely reliable.

D. Australian dollars in 2005 may not have the same purchasing power in 2018.

Answer: A Difficulty: Moderate Learning Objective 2.7: Identify the main deficiencies or limitations in the statement of financial position A-Head: Statement of financial position deficiencies AACSB: 3 – Analytical thinking 70. Which of the following is an example of an expenditure that could be recognized as either an immediate asset or an expense?

A. Purchase of a new plant (factory) 20 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

B. Payment of an account payable C. Purchase of a 12 month insurance policy D. Payment of wages Answer: C Difficulty: Moderate Learning Objective 2.7: Identify the main deficiencies or limitations in the statement of financial position A-Head: Statement of financial position deficiencies AACSB: 3 – Analytical thinking 71. A limitation of the statement of financial position in portraying the financial position of an entity is: A. items which cannot be measured in money are not included.

B. the historical cost approach means that assets are not shown at their estimated market values.

C. there is no adjustment to values for inflation.

D. All of the above are limitations.

Answer: D Difficulty: Moderate Learning Objective 2.7: Identify the main deficiencies or limitations in the statement of financial position A-Head: Statement of financial position deficiencies AACSB: 3 – Analytical thinking 72. Which of the following is not considered a deficiency of the statement of financial position?

A. The amount of discretion in recording some transactions.

B. The lack of recognition of inflation.

C. The disclosure of assets and the claims against such assets.

D. The conflict between relevant and reliable information.

Answer: C Difficulty: Moderate Learning Objective 2.7: Identify the main deficiencies or limitations in the statement of financial position A-Head: Statement of financial position deficiencies AACSB: 3 – Analytical thinking

21 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Atrill, Accounting: An Introduction 8e Chapter 3: Measuring and reporting financial performance LO 3.1 Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. To measure and report on how much profit an entity is making, which accounting statement would be most appropriate?

A. The statement of cash flows.

B. The statement of financial position.

C. The statement of financial performance.

D. All of the above.

Answer: C Difficulty: Basic Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 1 -Written and oral communication.

2. Within accrual accounting, how is profit measured?

A. Sales minus cost of sales.

B. Assets minus liabilities.

C. Income minus expenses.

D. Cash sales minus payments for expenses.

Answer: C Difficulty: Basic Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 3 – Analytical thinking 3. Under accrual accounting, income is the inflow of assets or the reduction in liabilities that arises as a result of trading operations.

A. True B. False Answer: A Difficulty: Basic Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 3 – Analytical thinking 4. Which type of business would call its main source of income sales?

A. Financial adviser.

B. Accounting firm.

C. Bank.

D. Retailer.

Answer: D Difficulty: Basic Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 8 – Application of knowledge 5. Which statement is not correct?

A. A loss is incurred when expenses > income.

B. A profit is earned when income > expenses.

C. A loss is incurred when income < expenses.

2 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

D. A profit is earned when income < expenses.

Answer: D Difficulty: Moderate Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 3 – Analytical thinking 6. What is the expense in the statement of financial performance which represents the purchase price of the goods that have been sold?

A. payments for stock.

B. cost of sales.

C. sales.

D. merchandise.

Answer: B Difficulty: Basic Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 8 – Application of knowledge 7. Of the following, which outgoing could not appear in the statement of financial performance?

A. Interest paid.

B. Wages and salaries.

C. Purchase of flowers for the waiting room.

D. Repayment of loan.

Answer: D Difficulty: Basic Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 8 – Application of knowledge 8. Which is the best description of the relationship between the statement of financial performance and the statement of financial position?

3 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. There is no direct relationship between the statement of comprehensive income and the statement of financial position.

B. The opening statement of financial position plus the profit equals the closing statement of financial position.

C. The statement of financial position is the link between two statement of comprehensive incomes.

D. The statement of financial performance explains the change in equity that arises from operating activities.

Answer: D Difficulty: Moderate Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 3 – Analytical thinking 9. If equity at the beginning of the period is $170,000, profit for the period is $80,000 and $35,000 is withdrawn by the owner during the period, equity at the end of the period is: A. $135,000.

B. $215,000.

C. $250,000.

D. cannot be calculated from the information provided.

Answer: B Difficulty: Moderate Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 8 – Application of knowledge 10. If equity at the beginning of the period is $65,000 and at the end of the period is $46,000 and $30,000 is withdrawn by the owner during the period, calculate profit. (Use the stock approach.)

A. $19,000.

B. $81,000.

C. $49,000.

D. $11,000.

Answer: D Difficulty: Complex 4 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 8 – Application of knowledge 11. If equity at the beginning of the period is $100,000 and at the end of the period is $100,000 and additional capital of $20,000 is paid into the business by the owner during the period, profit or loss is: A. profit $10,000.

B. loss $30,000.

C. loss $20,000.

D. profit $30,000.

Answer: C Difficulty: Basic Learning Objective 3.1: Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position A-Head: The statement of financial performance-its nature and purpose, and its relationship with the statement of financial position.

AACSB: 8 – Application of knowledge

LO 3.2: Understand the layout of a typical statement of financial performance, and describe its component parts Multiple choice: Choose the one alternative that best completes the statement or answers the question.

12.If a business decided to classify its expenses under the headings 'Selling and Distribution,' 'General and Administrative' and 'Financial,' into which groupings would 1. depreciation of sales staff's motor vehicles and 2. bad debts written off, fall?

A. 1. general and administrative; 2. financial.

B. 1. financial; 2. selling and distribution.

C. 1. selling and distribution; 2. financial.

D. 1. selling and distribution; 2. general and administrative.

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Answer: C Difficulty: Moderate Learning Objective 3.2: Understand the layout of a typical statement of financial performance, and describe its component parts A-Head: The format of the income statement AACSB: 8 – Application of knowledge 13. Which of the following would be a suitable format for the statement of financial performance for a medium size furniture store operation as a partnership?

A. income - expenses = profit B. sales - cost of sales = gross profit - expenses = profit C. income + expenses = profit D. sales - cost of sales = gross profit Answer: B Difficulty: Moderate Learning Objective 3.2: Understand the layout of a typical statement of financial performance, and describe its component parts A-Head: The format of the income statement AACSB: 1 – Written and oral communication 14. Which of these are not alternative names for the same thing?

A. Gross profit; profit.

B. Cost of sales; cost of goods sold.

C. Statement of comprehensive income; profit and loss statement: statement of financial performance.

D. None of the above, i.e., all are alternative names for the same thing.

Answer: A Difficulty: Basic Learning Objective 3.2: Understand the layout of a typical statement of financial performance, and describe its component parts A-Head: The format of the income statement AACSB: 3 – Analytical thinking 15. Which statement about net profit is not true?

A. Net profit increases equity.

B. Net profit is a measure of achievement or productive effort.

C. Net profit normally represents the amount of cash generated from operations for the period.

D. None of the statements, i.e., all are true.

Answer: C Difficulty: Complex 6 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 3.2: Understand the layout of a typical statement of financial performance, and describe its component parts A-Head: The format of the income statement AACSB: 3 – Analytical thinking

LO 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement Multiple choice: Choose the one alternative that best completes the statement or answers the question.

16. When is income considered to have been earned?

A. it is probable that any income owing will be received and any outstanding expenses, such as warranty claims, can be identified.

B. the activities necessary to generate the income are substantially complete.

C. the amount of income generated can be reliably measured.

D. all of the above.

Answer: D Difficulty: Complex Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenues and expenses AACSB: 3 – Analytical thinking 17. What recognition criteria must be satisfied under the Conceptual Framework for income to be included in the profit report?

A. Probable that the inflow of resources has occurred.

B. Inflow of resources able to be reliably measured.

C. Income must be matched with expenses.

D. Both A and B. Answer: D Difficulty: Complex Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenues and expenses 7 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 18. Under the accrual accounting approach, at which stage of the operating cycle would income be recognised by a timber yard from the sale of timber on credit?

A. Money received from customer.

B. Goods delivered to and accepted by customer.

C. Money banked by business.

D. Order received from customer.

Answer: B Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenues and expenses AACSB: 3 – Analytical thinking 19. When thinking about recognition and realisation of income, which of the following statements is correct?

A. Recognition of income means including it in the income statement as part of the profit calculation.

B. Income from a credit sale is normally recognised in the statement of financial performance when the cash is received.

C. The realisation convention has replaced the income recognition criteria contained in the Conceptual Framework.

D. All of the statements are correct.

Answer: A Difficulty: Complex Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenues and expenses AACSB: 3 – Analytical thinking 20. The recognition criteria that must be satisfied under the Conceptual Framework for an expense to be included in the income statement is: A. Probable that the outflow of resources has occurred.

B. Outflow of resources able to be reliably measured.

C. Outflow of resources virtually certain.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement 8 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking 21. Where the amount of cash paid for office expenses during the year is less than the amount of office expenses recognised in the statement of financial performance under the accrual accounting approach, the difference is recorded in the statement of financial position as: A. prepaid office expenses (asset).

B. accrued office expenses (asset).

C. prepaid office expenses (liability).

D. accrued office expenses (liability).

Answer: D Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking 22. What are accrued expenses classified as in the statement of financial position?

A. Current liability.

B. Non-current asset.

C. Non-current liability.

D. Current asset.

Answer: A Difficulty: Basic Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking 23. At year-end a $3,000 expense was mistakenly not accrued. What will this result in?

A. An understatement of assets, profit, and equity.

B. An understatement of liabilities and an overstatement of profit and equity.

C. An overstatement of liabilities and an understatement of profit and equity.

D. An overstatement of assets, profit, and equity.

Answer: B Difficulty: Complex Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking

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24. The amount of interest paid in cash for the period May to August is $2,000. However, the financial reports show interest expense for the period as $1,500. In the statement of financial position, how is this difference recorded?

A. prepaid interest (asset).

B. accrued interest (liability).

C. accrued interest (asset).

D. prepaid interest (liability).

Answer: A Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking 25. A driver started a business on 1st of January 2021, hiring out his limousine for special occasions. Current regulations require the business to purchase a license that will expire after two years. The cost of the license is $24,000. Calculate the amount of license expense to be included in the income statement for the 6 months ended 30 June 2021.

A. $6,000.

B. $4,000.

C. $3,000.

D. $12,000.

Answer: A Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 8 – Application of knowledge 26. Prepaid expenses are classified as what in the statement of financial position?

A. non-current asset.

B. current asset.

C. non-current liability.

D. current liability.

Answer: B Difficulty: Basic Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking

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27. At year-end, it was forgotten to adjust the asset prepaid rent for the $7,000 rent expense used-up during the year. This will result in an: A. understatement of assets and an overstatement of profit and equity.

B. understatement of assets, profit, and equity.

C. overstatement of liabilities and an understatement of profit and equity.

D. overstatement of assets, profit, and equity.

Answer: D Difficulty: Complex Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3– Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

28. Define accrual accounting.

Answer: Accrual accounting recognises expenses when they have been incurred (economic benefits used up), regardless of whether the cash has or hasn't been paid.

Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking 29. Employees have worked for the full year and have received total wages of $305,000 in cash.

However, they must wait until the next payday to be paid for the last three days of the year they have worked. The amount owing is $6,500. Wages expense in the statement of financial performance and accrued wages in the statement of financial position would be?

Answer: $311,500 and $6,500.

Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 8 – Application of knowledge

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30. On 1 July 2020, LMZ Traders paid $12,000 in insurance premiums for coverage for the next three years. The insurance expense that will appear in the income statement and the amount of prepaid insurance in the statement of financial position for the year ended 30 June 2021, respectively, will be?

Answer: $4,000 and $8,000.

Difficulty: Moderate Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 8 – Application of knowledge 31. Under accrual accounting, in practice, at what point is most income recognised?

Answer: When the goods are delivered.

Difficulty: Basic Learning Objective 3.3: Demonstrate an understanding of income and expenses in relation to definition, recognition, classification and measurement A-Head: Profit measurement and the recognition of revenue and expenses AACSB: 3 – Analytical thinking

LO 3.4: Explain the concept of depreciation and its impact on the financial statements Multiple choice: Choose the one alternative that best completes the statement or answers the question.

32. The cost associated with the purchase of a new machine that will be included in the cost of the machine is: A. invoice price.

B. installation costs.

C. delivery charges.

D. all of the above.

Answer: D Difficulty: Moderate

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Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 33. Which asset is not depreciated?

A. motor vehicles.

B. buildings.

C. land.

D. premises.

Answer: C Difficulty: Basic Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 34. Which of the following is considered to be the life of an asset when calculating depreciation?

A. Physical life.

B. Legal life.

C. Useful life.

D. Technological life.

Answer: C Difficulty: Moderate Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 35. What is the estimated residual value of an asset?

A. its estimated disposal value at the end of its useful life.

B. its carrying value.

C. its historical cost.

D. its book value.

Answer: A Difficulty: Basic Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking

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36. Which statement best describes the straight-line method of depreciation?

A. Depreciation is a fixed percentage of the carrying value of the asset.

B. Depreciation is allocated equally over each year of the asset's life.

C. Depreciation expense is greater at the beginning of the asset's life.

D. Both A and C. Answer: B Difficulty: Moderate Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 37. A forklift had a purchase price of $18,000, delivery costs of $2,000, a physical life of 6 years and a useful life of 4 years. Estimated residual value is zero. The annual depreciation charge using the straight-line method is: A. $1,667.

B. $5,000.

C. $2,500.

D. $3,000.

Answer: B Difficulty: Moderate Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 8 – Application of knowledge 38. On 31 December 2020, a new motor vehicle with a useful life of five years and an estimated residual value of $5,000 was purchased by a business at a cost of $35,000. The amount of depreciation expense charged for the six months ended 30 June 2021, using the straight-line method, is: A. nil.

B. $3,000.

C. $25,000.

D. $4,000.

Answer: B Difficulty: Moderate Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 8 – Application of knowledge

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39. Which statement best describes the way the reducing balance method charges depreciation?

A. Yearly depreciation is lower at the beginning of the asset's life.

B. Yearly depreciation is greater at the beginning of the asset's life.

C. Yearly depreciation is the same in each year of the asset's life.

D. Yearly depreciation expense is greater at the end of the asset's life.

Answer: B Difficulty: Basic Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 40. On 31 December 2018, a new machine with a useful life of 6 years and an estimated residual value of zero was purchased by a business at a cost of $36,000. The amount of depreciation expense charged for the year ended 31 December 2020, using the reducing-balance method at a rate of 30% per annum, is: A. $6,300.

B. $7,560.

C. $9,820.

D. $1,800.

Answer: B Difficulty: Complex Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 8 – Application of knowledge 41. Which depreciation method best matches the pattern by which 1. a building and 2. a motor vehicle, contribute to income?

A. 1. reducing-balance; 2. straight-line B. 1. reducing-balance; 2. reducing-balance C. 1. straight-line; 2. reducing-balance D. 1. straight-line; 2. straight-line Answer: C Difficulty: Moderate Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 42. Choose the statement about depreciation that is correct.

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A. Yearly depreciation will always be higher using the straight-line method.

B. At the end of the asset's useful life, total depreciation charged will be the same whichever depreciation method is used.

C. Yearly depreciation will always be lower using the units of use method.

D. Yearly depreciation will always be higher using the reducing-balance method.

Answer: B Difficulty: Complex Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 43. What type of account is accumulated depreciation?

A. A liability account.

B. An expense account.

C. A contra asset account.

D. An equity account.

Answer: C Difficulty: Basic Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking 44. Which of these is not an area where judgement must normally be applied in order to calculate depreciation expense?

A. Determining the residual or disposal value of the asset.

B. Determining the expected useful life of the asset.

C. Choosing a depreciation method.

D. None of the above.

Answer: D Difficulty: Moderate Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking

Short Answer: Write your answer on a separate sheet of paper.

45. What is the major purpose of depreciation?

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Answer: The major purpose of depreciation is to spread the cost of the asset over its useful life so that the cost of using up the asset is matched against income earned.

Difficulty: Moderate Learning Objective 3.4: Explain the concept of depreciation and its impact on the financial statements A-Head: Profit measurement and the calculation of depreciation AACSB: 3 – Analytical thinking

LO 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position Multiple choice: Choose the one alternative that best completes the statement or answers the question.

46. Which of these is not part of inventory for a manufacturing firm?

A. Partly completed goods (work in process).

B. Raw materials.

C. Finished goods.

D. They are all part of inventory.

Answer: D Difficulty: Moderate Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AASCB: 3 – Analytical thinking 47. The method of inventory valuation that assumes the earliest inventory acquired is the first to be sold is the: A. lower of cost and net realisable value method.

B. FIFO method.

C. average cost method D. LIFO method.

Answer: B Difficulty: Basic 17 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking 48. The method of inventory valuation that assumes earliest inventory acquired comprises the stock of inventory at the end of the period is the: A. reducing-balance method.

B. FIFO method.

C. average cost method.

D. LIFO method.

Answer: D Difficulty: Moderate Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking 49. Choose the statement which is correct. Assume that inventory prices are rising.

A. The LIFO method gives the highest closing inventory figure in the statement of financial position.

B. The FIFO method gives the highest closing inventory figure in the statement of financial position.

C. The FIFO method gives the lowest closing inventory figure in the statement of financial position.

D. The LIFO method gives the lowest figure for cost of sales.

Answer: B Difficulty: Complex Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking 50. Choose the statement that best describes the effects of the LIFO inventory valuation method compared to FIFO or average cost.

A. During periods of falling prices, LIFO gives the highest gross profit and the lowest closing inventory value.

B. During periods of rising prices, LIFO gives the highest gross profit and the lowest closing inventory value.

C. During periods of rising prices, LIFO gives the lowest gross profit and the lowest closing inventory value.

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D. None of the above.

Answer: C Difficulty: Complex Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking 51. Calculate cost of sales if stock at start is $2,450, purchases are $19,000 and stock at end is $1,000.

A. $21,450.

B. $20,450.

C. $22,550.

D. $22,450.

Answer: B Difficulty: Basic Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 8 – Application of knowledge 52. Calculate the goods available for sale if sales are $7,000, inventory at beginning is $3,400, inventory at end is $2,100 and purchases of inventory are $5,600.

A. $6,900.

B. $18,100.

C. $12,500.

D. $9,000.

Answer: D Difficulty: Moderate Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 8 – Application of knowledge 53. The accounting principle underpinning the inventory valuation rule 'the lower of cost and net realisable value' is: A. prudence (conservatism).

B. historical cost.

C. matching costs with revenue.

D. going concern.

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Answer: A Difficulty: Basic Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking 54. An item of inventory costing $750 can now only be sold at auction for $200. Auction costs of $50 will be incurred to make the sale. The net realisable value of the inventory is: A. $700.

B. $150.

C. $750.

D. $200.

Answer: B Difficulty: Moderate Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 8 – Application of knowledge 55. If inventory item X has a cost of $49,000 and a net realisable value of $60,000 while inventory item Y has a cost of $2,000 and a net realisable value of $500, closing inventory will be valued at: A. $60,000.

B. $62,000.

C. $51,000.

D. $49,500.

Answer: D Difficulty: Moderate Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 8 – Application of knowledge 56. The accounting principle that requires the same depreciation method or inventory valuation method to be used over consecutive accounting periods is: A. conservatism.

B. historical cost.

C. reliability.

D. consistency.

Answer: D 20 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking 57. Which of these occurrences could account for a difference between the total value of inventory in the accounting records and the total value of inventory as per the stocktake?

A. Cost of sales transactions not recorded in the accounting records.

B. Inventory stolen from the storeroom.

C. Some inventory items not counted in the stocktake.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

58. Calculate gross profit if sales are $90,000, inventory at beginning is $5,600, purchases of inventory are $30,500 and inventory at end is $4,900.

Answer: $58,800 Difficulty: Moderate Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 8 – Application of knowledge

59. Cost of sales is a major expense for a retailer. What does ‘cost of sales’ mean?

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Answer: The cost of the goods sold during the period.

Difficulty: Basic Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 3 – Analytical thinking

Essay: Write your answer on a separate sheet of paper.

60. LTT had stock on hand on the 1st January 2018 of 100 heaters valued at $50 each.

The following transactions occurred during January: Jan

7 15 30

bought 110 heaters at $52 each sold 60 heaters at $80 each (selling price) sold 70 heaters at $80 each (selling price)

REQUIRED: 1. Calculate cost of sales and closing stock at the end of the month from the above information using: 1.1. the FIFO method of valuation, 1.2. the LIFO method of valuation, and 1.3. the average cost method of valuation.

2. Prepare a statement of comprehensive income for the month ended 31 January under each method assuming no stock loss (use a columnar approach).

3.

3.1. Which method produces the most favourable profit result for LTT? 3.2. Comment on why the differences in profit have occurred under the 3 methods.

Answer: 1.

1.1. FIFO Cost of sales 100 × $50 = $5,000 30 × $52 = 1,560 130 $6,560

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Stock at end 80 × $52 = $4,160 1.2. LIFO Cost of sales 110 × $52 = $5,720 20 × $50 = 1,000 130 $6,720 Stock at end 80 × $50 = $4,000 1.3. Average cost Workings = Total cost/Total units = *$10,720/210 heaters = $51.05 each *100 × $50 = $5,000 110 × $52 = $5,720 210 $10,720 Cost of sales 130 × $51.05 = $6,636 Stock at end 80 × $51.05 =

$4,084

2. LTT Statement of comprehensive income for the month ended 31st January, 2021 FIFO $ Sales 8,800 Less Cost of sales 6,560 Gross profit $ 2,240

LIFO $ 8,800 6,720 $ 2,080

AVERAGE COST $ 8,800 6,636 $2,164

3.

3.1. FIFO produces the most favourable profit result.

3.2. The physical amount of closing stock is the same, but the value is different depending on the assumption used - FIFO, LIFO or Average cost.

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• • •

Under FIFO, profit is higher because the cost of sales is lower. COS is lower as it is assumed to consist of the earliest, cheapest goods purchased.

Under LIFO, profit is lower as cost of sales is higher. COS is higher as it is assumed to consist of the most recent goods purchased at the higher prices.

Under the average cost approach, profit is between LIFO and FIFO because it uses an averaging approach.

The reason that, in this example, the above statements are true is that prices of stock purchased are rising. If prices were falling, the reverse would be true.

General rule: In periods of rising prices, the use of FIFO will give higher profits than will the use of LIFO. NOTE: Neither the Taxation Department nor the accounting standards will accept the use of LIFO in Australia.

Difficulty: Complex Learning Objective 3.5: Identify the main issues relating to inventory in the context of the income statement and the statement of financial position A-Head: Profit measurement and the valuation of inventory AACSB: 8 – Application of knowledge

LO 3.6 Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position Multiple choice: Choose the one alternative that best completes the statement or answers the question.

61. The writing off of a debtor's account as a bad debt when no allowance for doubtful debts has been made will see: A. no effect.

B. a decrease in the asset accounts receivable, decrease in equity.

C. a decrease in the asset accounts receivable, increase in the liability provision for doubtful debts.

D. a decrease in the asset bank, decrease in the asset accounts receivable.

Answer: B Difficulty: Moderate

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Learning Objective 3.6: Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position A-Head: Profit measurement and the problem of bad and doubtful debts AACSB: 3 – Analytical thinking 62. The accounting principle underpinning the practice of providing for bad and doubtful debts is the: A. matching convention.

B. dual aspect convention.

C. historical cost convention.

D. going concern convention.

Answer: A Difficulty: Basic Learning Objective 3.6: Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position A-Head: Profit measurement and the problem of bad and doubtful debts AACSB: 3 – Analytical thinking 63. All of the statements concerning bad and doubtful debts are correct, except which of the following?

A. Doubtful debts relate to amounts unlikely to be received from accounts receivable but where the business is still trying to collect the sum owed.

B. Bad debts written off is an expense that relates to situations where there is a high degree of certainty that the amount owed will never be paid, e.g., the bankruptcy of the debtor.

C. The account, doubtful debts expense, is a contra asset account deducted from accounts receivable in the statement of financial position.

D. Doubtful debts can be estimated by applying a given percentage to credit sales.

Answer: C Difficulty: Complex Learning Objective 3.6: Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position A-Head: Profit measurement and the problem of bad and doubtful debts AACSB: 3 – Analytical thinking 64. If accounting reports of the current year didn’t take into account a bad debt, what would the effect be?

A. To overstate the asset accounts receivable.

B. To overstate profit.

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C. Both A and B. D. Neither A nor B. Answer: C Difficulty: Moderate Learning Objective 3.6: Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position A-Head: Profit measurement and the problem of bad and doubtful debts AACSB: 3 – Analytical thinking 65. Which of the following statements best represents the meaning for bad debts?

A. There are sales where the customer has returned the goods.

B. Bad debt is when debtors do not pay their accounts.

C. Bad debts is equivalent to doubtful debts.

D. All of the above represent bad debts.

Answer: B Difficulty: Moderate Learning Objective 3.6: Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position A-Head: Profit measurement and the problem of bad and doubtful debts AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

66. To allow for debts that might prove bad in the future, a business will recognise doubtful debts as an expense in the income statement.

A. True B. False Answer: A Difficulty: Basic Learning Objective 3.6: Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position A-Head: Profit measurement and the problem of bad and doubtful debts AACSB: 3 – Analytical thinking

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Short answer: Write the word or phrase that best completes each statement or answers the question.

67. If doubtful debts are overestimated, what would this mean for the profit of the business?

Answer: Profit for following years will be overstated.

Difficulty: Complex Learning Objective 3.6: Identify the main issues regarding receivables in terms of revenue and expense recognition, and explain their impact on the income statement and the statement of financial position A-Head: Profit measurement and the problem of bad and doubtful debts AACSB: 3 – Analytical thinking

LO 3.7: Prepare a simple income statement from relevant financial information Essay: Write your answer on a separate sheet of paper.

68. The following information was prepared for Xi Services as at 30 June 2021.

Assets Expenses

Liabilities

Owner's Bank Prepaid insurance Accounts payable Secretarial expenses Mortgage loan payable 1 Aug 2020 Salaries expense Land and buildings Capital Xi 1 July 2016 Accounts receivable Income

$ 10,000 4,000

Equity Income $ 15,000

35,000 210,000 55,000 420,000 200,000 52,000 217,000 27

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Equipment Accumulated depreciation equipment

90,000 ________ $666,000

24,000 $666,000

Additional information available at 30 June 2021: 1.

2.

3.

4.

Interest expense outstanding is $4,500.

An allowance for doubtful debts is to be created for $1,500.

Depreciation of equipment is at the rate of 15% p.a. using the reducing-balance method. $2,500 of the prepaid insurance has been used-up during the year

REQUIRED: Incorporating all the above information, prepare: 1. an Income Statement for the year ended 30 June 2021.

2. a statement of financial position as at 30 June 2021.

Answer: a) Xi Services Income Statement for the year ended 30 June 2021 $ $ Income 217,000 Less Expenses: Insurance expense 2,500 Doubtful debts expense 1,500 Interest 4,500 Depreciation of equipment1 9,900 Secretarial expenses 35,000 Salaries 55,000 108,400 Profit $108,600 Depreciation = 15% × $($90,000 - $24,000) = $9,900 b) Statement of financial position at 30 June 2021 Current Assets Cash at bank Prepaid insurance Accounts receivable Less Allowance for doubtful debts Non Current Assets Land and buildings

10,000 1,500 52,000 1,500

50,500

62,000

420,000 28

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Equipment 90,000 Less Accumulated deprec. Equipment (33,900) Current Liabilities Accounts payable Accrued interest Non-current Liabilities Mortgage loan Equity Capital Plus Profit

56,100

476,100 $538,100

15,000 4,500

19,500 210,000

200,000 108,600

308,600 $538,100

Difficulty: Complex Learning Objective 3.7: Prepare a simple income statement from relevant financial information A-Head: Preparing an income statement from relevant financial information AACSB: 8 – Application of knowledge

LO 3.8 Review and interpret the income statement Multiple choice: Choose the one alternative that best completes the statement or answers the question.

69. The statement of financial performance provides information on: A. how successful the business was in generating wealth.

B. the financial position of the business.

C. the financial structure of the business.

D. cash inflows and outflows for the accounting period.

Answer: A Difficulty: Moderate Learning Objective 3.8: Review and interpret the income statement A-Head: Uses and usefulness of the income statement AACSB: 1 – Written and oral communication 70) Which of the following is a measure of wealth created for owners?

A. Operating profit.

B. Gross profit.

29 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

C. Net profit.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 3.8: Review and interpret the income statement A-Head: Uses and usefulness of the income statement AACSB: 3 – Analytical thinking

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Atrill, Accounting 8e Chapter 4: Introduction to limited companies LO 4.1 Identify and discuss the main features of companies.

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. Which of these is not a consequence of the status of a company as a separate legal entity?

A. The right to retain profits.

B. The obligation to pay taxation.

C. The right to enter into contracts in its own name.

D. None of the above, i.e., all are consequences of the status of a company as a separate legal entity.

Answer: D Difficulty: Moderate Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 2. Limited liability means: A. the liability of shareholders for company debts is normally limited to the amount they have paid for their shares.

B. the liability of directors for company debts is limited.

C. if the company fails, the creditors may have to bear greater losses than if they were dealing with a non-company.

D. Both A and C. Answer: D Difficulty: Moderate Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 3. Which feature is not a characteristic of a company?

A. limited liability.

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B. perpetual life.

C. legal entity.

D. less government regulation than other types of entities.

Answer: D Difficulty: Basic Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 4. Which of the following is a legal entity?

A. company.

B. partnership.

C. sole proprietorship.

D. all of the above.

Answer: A Difficulty: Basic Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 5. Which of these is not an advantage of a private company compared to a partnership?

A. Mutual agency B. Easier transfer of ownership C. Limited liability D. Perpetual life Answer: A Difficulty: Basic Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 6. Which is the highest level of control in a company?

A. board of directors.

B. chief financial officer.

C. executive officer.

D. chief accountant.

Answer: A Difficulty: Basic Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 7. The shareholders that are eligible to vote for the board of directors of a company are: A. all shareholders holding more than 1,000 shares.

B. all shareholders who attend the annual general meeting.

C. all shareholders holding voting shares.

D. all preference shareholders.

Answer: C Difficulty: Basic Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 2 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

8. Which statement is untrue for private (Pty Ltd) companies?

A. They tend to be associated with smaller businesses.

B. There are fewer private companies in Australia than public companies.

C. They are less regulated than public companies.

D. The shareholders are often family members.

Answer: B Difficulty: Complex Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 9. The company 'Raider Limited' must be: A. a proprietary company.

B. a public company.

C. a private company.

D. none of the above.

Answer: B Difficulty: Basic Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 8 – Application of knowledge 10. Which type of company has the right to raise money from the general public?

A. proprietary company.

B. public company.

C. private company.

D. all of the above.

Answer: B Difficulty: Moderate Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 11. Which type of company operating under the Corporations Act 2001 must have the words Proprietary Limited (Pty Ltd. after its name?

A. Company listed on the stock exchange.

B. No liability company.

C. Proprietary company.

D. Public company.

Answer: C Difficulty: Basic Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 12. Small proprietary companies are relieved of many of the reporting requirements to which public companies are subject. A company is deemed to be 'small' if it satisfies two of three specified criteria. Which of the following is not one of the criteria?

A. It has consolidated gross profits of less than $50 million.

B. Its consolidated gross assets at the end of the financial year are less than $ 25 million.

C. It employs fewer than 50 employees at the end of the financial year.

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D. It has consolidated gross revenue of less than $50 million Answer: A Difficulty: Complex Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3- Analytical thinking 13. What is the main stock exchange in Australia?

A. NASDAQ. B. ASIC. C. DAX. D. ASX. Answer: D Difficulty: Complex Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 14. Which of the following is not a rule in the framework used for monitoring and controlling the behaviour of company directors?

A. Subjectivity.

B. Disclosure.

C. Fairness.

D. Accountability.

Answer: A Difficulty: Moderate Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 = Analytical thinking 15. The disadvantages of a company business structure include all of the following except: A. extensive regulatory requirements.

B. more expensive to establish.

C. less management flexibility.

D. mutual agency.

Answer: D Difficulty: Moderate Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 16. Additional regulations that may apply to limited companies (depending on their classification) do not include requirements relating to: A. a limited number of employees.

B. the audit of annual reports by a registered auditor.

C. the submission of annual reports to ASIC. D. preparation of annual reports in accordance with accounting standards.

Answer: A Difficulty: Complex Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking 4 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

17. Under the Corporations Act 2001, a proprietary (Pty Ltd) company is restricted to a maximum of 50 shareholders.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

18. Jane and Jarrod have been employed by two different firms of photographers. They decide they should get together and establish their own business, called JJ Photographers. Each has decided to contribute $20,000 in cash to buy equipment, and they will rent premises in the local shopping centre. Both will work full time in the business and share profits and losses equally. They are not sure whether they should set up as a partnership or as a private company and have come to you for advice.

REQUIRED: Explain to Jane and Jarrod the advantages and disadvantages of a partnership versus a private company structure for their new venture.

Answer: Advantages of a partnership (disadvantages of a company) 1. A partnership is easier to form than a company. It can be as simple as a verbal agreement, although it is recommended that there is a written partnership agreement.

There is a lot more paperwork involved in setting up a company 2. Because it is easy to establish, it is cheap to form a partnership. The costs to organise a company are greater, and there are higher ongoing costs as well to maintain the structure.

Disadvantages of a partnership (advantages of a company) 1. A partnership has a limited life, as it ceases upon any change in the number of partners. A company, by contrast, has a perpetual life at law and will continue indefinitely independent of changes in shareholders or directors.

2. A disadvantage of a partnership compared to a company is that the partners have unlimited liability. This means they are liable to the full extent of their private assets for all partnership debts. With a company, the owners (shareholders) are liable only for what they have contributed to the business as share capital, i.e., they have limited liability. If Jane and Jarrod anticipate substantial credit purchases such as extra equipment or supplies, borrowing money or incurring other sorts of credit obligations, they need to think seriously about limited liability. However, in practice the protection offered is not as good as it sounds as substantial lenders, such as banks or finance companies, require personal guarantees from owners, which negates limited liability.

Forming a company would provide some relief to Jane and Jarrod in the case of smaller credit debts, if the business were to get into serious financial difficulties.

3. Transfer or extension of ownership is not as easy with a partnership as with a company. Companies, through the issue of shares, provide a mechanism for the sale of an ownership interest or the introduction of new capital. This means that if, at some

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later stage, either Jane or Jarrod want to sell their share of the business or need to source extra funds, it would be easier with a company structure.

4. There is less scope for tax minimisation and tax planning with a partnership than with a company. However, in practice, when starting up a business which initially has low levels of profit, a good accountant should be able to ensure that the tax paid is similar regardless of the type of structure.

In summary, on the points raised, it seems that Jane and Jarrod will have to decide on the trade-off between the greater costs of setting up and running a company structure versus the advantages of limited liability. The issue of ease of transfer of ownership is probably not an immediate one. As Jane and Jarrod are starting out on a small scale, they may prefer to avoid high establishment costs and begin as a partnership. The decision on business structure is not irrevocable. Many businesses start off as a partnership and as they grow, take the step to incorporate.

Difficulty: Complex Learning Objective 4.1: Identify and discuss the main features of companies.

A-Head: The main features of companies AACSB: 1 – Written and oral communication

LO 4.2 Explain equity and borrowings in a company context Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

19. A company issued 500,000 ordinary shares to the public, priced at $1. The shares were payable 50 cents on 1 July 2021 and 50 cents was uncalled. How much cash was due to the company on 1 July from the issue? a. $150,000. b. $300,000. c. $100,000. d. $250,000.

Answer: D Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge 20. A company issued 120,000 fully paid, 5% preference shares priced at $2 each. The dividend to be paid on the shares for a financial year is: a. $5,000. b. $10,000. c. $20,000. d. $12,000.

Answer: D Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge

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21. Which item(s) can be a component of shareholders' equity? a. Retained profits. b. Share capital. c. Reserves. d. All of the above.

Answer: D Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge 22. Which statement relating to preference shares is not correct? a. They are often non-voting shares. b. They normally have a fixed rate of dividend attached. c. They are entitled to receive a dividend before the ordinary shareholders. d. They are generally more risky for shareholders to own than ordinary shares.

Answer: D Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 23. A company needs $3,000,000 for expansion. They decide to raise the capital by issuing new shares. How many shares does the company need to sell to raise the amount, if the last share issue was at a price of $1 each and the current market price for the company's shares is $1.50 per share? a. 500,000 shares b. 100,000 shares. c. 1 million shares. d. 2 million shares.

Answer: D Difficulty: Complex Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge 24. In a company statement of financial position, the balance of retained profit at the end of the period is equal to: a. profit for the period. b. retained profit at the beginning of the period plus profit minus dividends declared. c. profit less losses. d. retained profit at the beginning of the period plus profit.

Answer: B Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 25. If the retained profit figure in a company statement of financial position increases from the beginning of the year to the end of the year, it is most probable that: a. profit for the year is more than dividends declared. b. bonus shares have been issued.

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c. additional capital has been raised during the year. d. profit for the year is less than dividends declared.

Answer: A Difficulty: Complex Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 26. The largest source of new finance for Australian companies is: a. retained profits. b. share issues. c. bank loans. d. revaluations.

Answer: A Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 27. A shareholder in Company C owns 2,000 shares bought for $1 each. The company decides to make a bonus issue of one new share for every two existing shares held.

How many shares does the shareholder now have in Company C? a. 3,000 shares. b. 1,500 shares. c. 500 shares. d. 1,000 shares.

Answer: A Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge 28. A bonus issue of shares by a company will: a. increase total shareholders' equity. b. sometimes increase shareholders' equity and sometimes leave it unchanged. c. reduce total shareholders' equity. d. leave total shareholders' equity unchanged.

Answer: D Difficulty: Complex Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 29. An investor invests in Canta Ltd by purchasing 2,000 shares for $2.50 each. In the following year, the company distributes a 1 for 1 share dividend (bonus issue). After the issue, the number of shares held by the investor: a. will increase by 200 and the market price of the shares will fall. b. will increase by 2,000 and the market price of the shares will remain the same. c. will increase by 2,000 and the market price of the shares will rise. d. will increase by 2,000 and the market price of the shares will fall.

Answer: D Difficulty: Basic 8 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge 30. A share issue where the company gives existing shareholders the first right of refusal of the issue is: a. an ordinary issue. b. a bonus issue. c. a rights issue. d. a preference issue.

Answer: C Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 31. If a company issues 25,000 ordinary shares which are sold at $4 per share, the effect on the accounting equation is: a. increase cash $100,000; decrease in shareholders' equity $80,000. b. increase cash $100,000; increase in liabilities $80,000. c. increase cash $100,000; increase in shareholders' equity $100,000. d. none of the above.

Answer: C Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge 32. Which statement concerning a rights issue is true? a. The issue is often made to ensure that new shareholders are brought into the company. b. The shares are generally offered at above the current market price of the existing shares. c. The cost of the issue tends to be less than making a share issue to the general public. d. Both A and C. Answer: C Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 33. The offer of new shares to existing shareholders at no cost, in proportion to the amount of their current holding, is known as: a. a preference issue. b. an option. c. a bonus issue. d. a rights issue.

Answer: C Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context 9 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 34. A bonus issue of shares will result in: a. an increase in cash at bank. b. an increase in the number of issued shares. c. an increase in shareholders' equity. d. all of the above.

Answer: B Difficulty: Complex Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 35. Which of the following is not a reason for a company making a bonus issue of shares? a. To use cash. b. As a signal to the market of the company's confidence in its future. c. To reduce its share price when it has become too high. d. None of the above, i.e., all are reasons for making a bonus issue.

Answer: A Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 36. Shareholders who exercise their entitlement to a bonus issue of shares, in theory, will: a. reduce their proportional ownership in the company. b. leave their wealth unchanged. c. increase their wealth. d. reduce their wealth.

Answer: B Difficulty: Complex Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 37. A public issue of shares where the investor must state in advance the amount they are willing to pay for the shares is called a: a. tender issue. b. private issue. c. share purchase plan. d. venture share issue.

Answer: A Difficulty: Complex Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 38. Sovereign Ltd has an issued capital of 300,000,000 shares sold at $2 each. Aman holds 9,000 shares. If Sovereign Ltd makes a 1 for 3 bonus issue, how many bonus shares will Aman acquire? a. 3,000 shares. b. 1,800 shares.

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c. 2,000 shares. d. 9,000 shares.

Answer: A Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge 39. Which is the main government regulator of companies in Australia?

A. The Australian Securities and Investments Commission.

B. The Auditors Board.

C. The Australian Securities Exchange.

D. The Australian Accounting Standards Board.

Answer: A Difficulty: Moderate Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: The main features of companies AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

40. What are bonus shares?

Answer: Shares issued at no cost to shareholders.

Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 3 – Analytical thinking 41. If a company has a share capital of $150,000, revenue reserves of $25,000 and retained profits of $50,000, what is the maximum amount it can legally distribute as cash dividends?

Answer: $75,000 Difficulty: Basic Learning Objective 4.2: Explain equity and borrowings in a company context A-Head: Equity and borrowing in a company context AACSB: 8 – Application of knowledge

LO 4.3 Explain the restrictions on the rights of shareholders regarding drawings or reductions in capital.

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

42. The part of shareholders’ equity that may not be used to pay cash dividends is: 11 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

a. Retained profits. b. Share capital. c. Revenue reserves. d. Both A and B. Answer: B Difficulty: Basic Learning Objective 4.3: Explain the restrictions on the rights of shareholders regarding drawings or reductions in capital.

A-Head: Restrictions on the rights of shareholders to make drawings or reductions in capital AACSB: 3 – Analytical thinking 43. Which of the following factors does not influence a firm's dividend decision? a. Wanting to reduce paid-up capital. b. Cash available to pay a dividend. c. A desire to have good investor relations. d. The need for finance for an investment.

Answer: A Difficulty: Basic Learning Objective 4.3: Explain the restrictions on the rights of shareholders regarding drawings or reductions in capital.

A-Head: Restrictions on the rights of shareholders to make drawings or reductions in capital AACSB: 3 – Analytical thinking 44. Why is a company required to retain a specific part of its capital? a. protect the company's creditors. b. enable the payment of future dividends. c. facilitate a non-current asset replacement plan. d. use as security for future loans.

Answer: A Difficulty: Moderate Learning Objective 4.3: Explain the restrictions on the rights of shareholders regarding drawings or reductions in capital.

A-Head: Restrictions on the rights of shareholders to make drawings or reductions in capital AACSB: - Analytical thinking 45. Which of the following is correct regarding r edeemable preference shares?

A. They are the same as bonus shares.

B. They can be exchanged for ordinary shares.

C. They allow the holders full voting rights.

D. They can be repurchased by the company.

Answer: D Difficulty: Moderate Learning Objective 4.3: Explain the restrictions on the rights of shareholders regarding drawings or reductions in capital.

A-Head: Restrictions on the rights of shareholders to make drawings or reductions in capital AACSB: 3- Analytical thinking 46. Which of the following statements is correct?

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A. Most companies see retained profits as the least likely source of finance.

B. The law quite clearly specifies the size of the non-distributable portion of capital a firm must hold back.

C. Preference capital redeemed by a company is always held in retained profits.

D. A company is not allowed to acquire and hold its own shares.

Answer: D Difficulty: Moderate Learning Objective 4.3: Explain the restrictions on the rights of shareholders regarding drawings or reductions in capital.

A-Head: Restrictions on the rights of shareholders to make drawings or reduction in capital AACSB: 3 – Analytical thinking

LO 4.4 Explain and discuss the main financial statements prepared by a limited company.

47. Which report is specifically designed to provide an assessment of the credibility and reliability of the financial statements a company issues for external use?

A. audit report.

B. director's statement.

C. director's report.

D. trustee statement.

Answer: A Difficulty: Basic Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 2 – Ethical understanding and reasoning 48. Which of these is a disadvantage of a country adopting international accounting standards compared to the country developing its own standards?

A. Standards by their nature must be general and involve compromises.

B. It will increase accounting and reporting costs for multinational companies.

C. It will reduce the comparability of different countries' financial reports.

D. All are disadvantages.

Answer: A Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 2 – Ethical understanding and reasoning 49. What is the main difference between the financial statements prepared for a sole proprietorship and those prepared for a company?

A. the detail in the reports.

B. the number of statements that must be prepared.

C. sole proprietorship's reports are always prepared at the end of December.

D. companies do not have to prepare a cash flow statement.

Answer: A Difficulty: Basic 13 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking 50. The shareholders' equity section in a statement of financial position may include which of the following accounts?

A. Retained profits.

B. Share capital.

C. Reserves.

D. All of the above.

Answer: D Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking 51. In what order do the following items appear in a company's statement of financial performance? Place in order.

1. Tax expense 2. Revenue 3. Gross profit 4. Operating profit 5. Cost of sales Answer: The items appear in the following order: 2 (revenue), 5 (cost of sales), 3 (gross profit), 4 (operating profit) and 1 (tax expense).

Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 1 – Written and oral communication 52. Assume the balance in the retained profit account 03/06/2020 is $55,000. The profit for 2020/21 is $35,000 and dividends declared are $40,000. What is the balance in retained profits 03/06/2021?

A. $49,000.

B. $89,000.

C. $50,000.

D. None of the above.

Answer: C Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 8 – Application of knowledge 53. If the tax rate is 30%, interest expense is $15,000 and operating profit is $82,000, what is the profit for the year?

A. $63,000.

B. $46,900 C. $44,100.

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D. None of the above.

Answer: B Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 8 – Application of knowledge 54. Which of the following is unlikely to be a reserve found in a company's statement of financial position?

A. Asset replacement.

B. Foreign currency.

C. Acquisition.

D. All of the above are likely to be found.

Answer: D Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking 55. How are dividends that have been declared and authorized but remain unpaid at the end of the year, recorded in the statement of financial position?

A. as a current asset.

B. as a current liability.

C. as a non-current liability.

D. as a non-current asset.

Answer: B Difficulty: Basic Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking 56. If operating profit is $131,000, tax expense is $39,000 and profit for the year is $82,000, what is the interest expense?

A. $43,000.

B. $49,000.

C. $10,000.

D. Unable to be calculated.

Answer: C Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 8 – Application of knowledge 57. Which of the following equations relating to a company's statements of financial performance is incorrect?

A. Gross profit - Tax expense - Interest expense = Operating profit.

B. Revenues - Cost of sales = Gross profit.

C. Profit before tax - Tax expense = Profit for the period.

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D. Operating profit - Interest = Profit before tax.

Answer: A Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking 58. Which of the following statements in relation to dividends is true?

A. Dividends represent drawings by the owners (shareholders) of the company.

B. Dividends can be paid out of any equity account.

C. Shareholders must be paid an annual dividend regardless of the type of share they hold.

D. A company cannot declare both an interim and a final dividend.

Answer: A Difficulty: Basic Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking 59. Which general standard of reporting must financial accounts prepared by companies under the Corporations Act 2001 meet?

A. Accurate.

B. Satisfactory.

C. True and fair.

D. Beyond a reasonable doubt.

Answer: C Difficulty: Moderate Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main features of companies AACSB: 2 – Ethical understanding and reasoning

True/False. Write 'T' if the statement is true and 'F' if the statement is false.

60. It is more likely that an audit fee expense will be found in the statement of financial performance for a partnership than in the statement of financial performance for a company.

A. True B. False Answer: B Difficulty: Moderate Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking

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Essay: Write your answer in the space provided or on a separate sheet of paper.

61. The shareholders are the owners of a company. The shareholders' equity of Adventure Travel Agency Pty Ltd is set out below. (Note that all shares were issued when the company was originally set up and there have been no subsequent issues.)

Adventure Travel Agency Pty Ltd Statement of Financial Position (extract) as at 30 June 2021 Shareholders equity Share Capital – 60,000 ordinary shares sold for $10 each $600,000 Retained profits 20,000 General reserve 12,000 Asset revaluation reserve 180,000 Total equity $812,000 REQUIRED: a) Briefly explain the meaning of each of the four components of shareholders' equity, giving an example of how each might have arisen. b) Indicate which of the four components are legally available for the payments of cash dividends.

Answer: a) Share capital is the cash contributed by the people who established Adventure Travel Agency Pty Ltd. Each of these individuals has used their money to buy units of ownership in the company, of equal value, known as shares. In all, 60,000 shares have been sold at a price of $10 each, giving a total contributed capital of $600,000.

Shareholders can receive dividends on their shares from profits earned. Ordinary shares normally carry an entitlement to vote for the Board of Directors who will oversee the management of the company.

Retained profits of $20,000 represent all the profits that have been earned (minus losses) since incorporation, less any dividends that have been paid out to the shareholders and less any amounts that have been transferred to reserves such as the general reserve.

Retained profits tend to be accompanied by cash flowing into the company but they themselves do not specifically represent cash, rather they are represented by all the assets of the business in their various forms, e.g., stock, accounts receivable and fixed assets as well as cash.

The general reserve is a subgroup of retained profits. It represents a transfer from retained profits which is made through an accounting entry to indicate that the current intention of the company is to plough these profits back into the business, rather than have them available for the payment of dividends to shareholders. Dividends can legally be paid from revenue reserves like the general reserve but, by renaming a portion of retained profits to general reserve, the directors are signalling that it is not their current intention to use these profits for dividends.

The asset revaluation reserve is not a reserve that is a subcategory of retained profits, but it arises from the revaluation of assets. For example, Adventure Travel Agency Pty Ltd might have bought land and buildings a number of years ago for, say $400,000, but over time the estimated market value of the property will have increased. To reflect the opinion that there has been a permanent increase in the value of the property, it can be revalued upwards in the statement of financial position through an increase in the value of land and buildings, and the creation of an asset revaluation reserve that increases shareholders' equity. b) ● The share capital is not legally available for the payment of cash dividends.

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● Cash dividends can be legally paid from retained profits. ● Dividends can be legally paid from revenue reserves like the general reserve. ● The estimated capital gain represented by the $180,000 in the Asset Revaluation Reserve is not legally available for the payment of cash dividends to the shareholders as, at this stage, it is an unrealised gain.

The asset revaluation reserve is sometimes used for the payment of a non-cash dividend which is satisfied by the issue of bonus shares.

Difficulty: Complex Learning Objective 4.4: Explain and discuss the main financial statements prepared by a limited company.

A-Head: The main financial statements AACSB: 3 – Analytical thinking

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Atrill, Accounting 8e Chapter 5: Regulatory Framework for Companies LO 5.1 Explain the importance of company law in relation to the directors’ duty to account, and discuss the role of the auditor in this process Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. An audit report that contains the opinion that the financial statements are true and fair and comply with the accounting standards is described as: A. an unqualified report.

B. an authorised report.

C. a quantified report.

D. a qualified report.

Answer: A Difficulty: Complex Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking 2. Which of the following is a responsibility of the directors of a public company?

A. to maintain an internal control system within the company.

B. to ensure financial statements are prepared showing a true and fair view of an organisation's financial situation.

C. to organise for financial reports to be audited.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 2 – Ethical understanding and reasoning

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3. For information in financial reports to be material, it must: A. be prepared on a timely basis.

B. affect the discharge of accountability by management of the reporting entity.

C. influence the decisions of users of that information.

D. Both B and C. Answer: D Difficulty: Moderate Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking 4. Which of the following should be contained within the annual report of a public company?

A. an audit report.

B. a directors' declaration.

C. a directors' report.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 1 – Written and oral communication 5. Which of the following is not included in an audit report?

A. An audit opinion on whether or not the financial statements are 'true and fair.'

B. Identification of the financial reports audited.

C. A statement that the financial reports were prepared in accordance with accounting standards.

D. A statement on the sustainable strategies of the reporting entity.

Answer: D Difficulty: Moderate Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking 6. Financial reports for a reporting entity should fairly reflect each of the following except: A. capital budget.

B. liquidity of the firm.

C. financial performance.

D. financial position.

Answer: A Difficulty: Complex Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 1 – Written and oral communication 7. To whom do auditor’s report?

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A. shareholders.

B. directors.

C. Both A and B. D. Australian Tax Office.

Answer: A Difficulty: Moderate Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking 8. Which of the following may be voluntarily disclosed in the annual report?

A. Human resource strategies B. Environmental initiatives C. Community contributions D. All of the above Answer: D Difficulty: Complex Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking 9. An auditor's report does not provide the users of the report with: A. a check on the credibility of the report.

B. a guarantee of no misstatements in the financial statements.

C. an opinion on the reliability of the financial statements.

D. an assurance on whether the financial statements comply with accounting standards.

Answer: B Difficulty: Complex Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking 10. The directors' report in the annual report contains each of the following except: A. a summary of all share issues.

B. a listing of all directors.

C. a review of the current operations.

D. details of any significant changes in the company's affairs.

Answer: A Difficulty: Moderate Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking

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True/False: Write 'T' if the statement is true and 'F' if the statement is false.

11. A public company is both a reporting entity and a disclosing entity.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

12. Three key groups associated with companies are directors, shareholders and auditors. a. Explain the relationship between these three groups. b. Define a reporting entity and a disclosing entity.

Answer: a. The directors are appointed by the shareholders to manage the company on the shareholders' behalf. The directors are required to report each year to the shareholders, principally by means of financial statements, on the company's performance and position. To lend greater credibility to the financial statements, the shareholders also appoint auditors to investigate the statements and to express an opinion on their reliability. b. A reporting entity has users who rely on general-purpose financial statements for their information relating to that entity.

A disclosing entity issues securities that are quoted on a stock exchange or made to the public via a prospectus.

Difficulty: Moderate Learning Objective 5.1: Explain the importance of company law in relation to the directors' duty to account, and discuss the role of the auditor in this process.

A-Head: The directors’ duty to account – the role of company law (Corporations Act) AACSB: 1 – Written and oral communication

LO 5.2 Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

13. Which set of accounting standards did Australia adopt in recent years?

A. AAS standards.

B. International accounting standards.

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C. GAAP. D. US standards.

Answer: B Difficulty: Moderate Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 14. The harmonisation of accounting standards in Australia refers to: A. the modification of accounting standards to meet the concerns of business.

B. the blending of company accounting standards and standards for other entities.

C. the development of a conceptual framework for accounting standards.

D. the process of adapting international accounting standards for use in Australia.

Answer: D Difficulty: Moderate Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 15. The organisation that is currently the sole standard-setting body in Australia is the: A. Australian Accounting Standards Board.

B. Institute of Chartered Accountants in Australia.

C. CPA Australia.

D. Australian Securities Exchange.

Answer: A Difficulty: Moderate Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 16. Organised stock exchanges provide which of the following benefits?

A. Facility for companies to raise new capital.

B. Allows shareholders to easily sell their shares.

C. Increases the amount of regulation for the listed company.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation 5 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 17. Which statement in relation to a company is not correct?

A. If the accounts are required to be audited, the auditors are appointed by the directors.

B. The directors are appointed by the shareholders.

C. The directors are required to report to the shareholders by means of financial statements.

D. None of the above, i.e., all are correct statements.

Answer: A Difficulty: Complex Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 18. Which of these is a reason why companies are more heavily regulated than sole proprietorships or partnerships?

A. The owners (shareholders) are often removed from the day-to-day running of the business.

B. As companies have limited liability, there is a greater need to protect creditors from financial loss.

C. The members of a company operate under the mutual agency principle.

D. Both A and B. Answer: D Difficulty: Complex Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 19. Additional regulations set down for companies by the ASX, include the provision of: A. interim reports.

B. takeover information.

C. changes to staff.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 20.

If the management of a company believes that in complying with the accounting standards, the financial reports would not show a true and fair representation, they: 6

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A. are not legally required to comply with the standards.

B. just have to disclose that they have not used the standard.

C. do not have to adhere to the standards in this situation.

D. must comply with the standards and have the option of including a note in the report.

Answer: D Difficulty: Complex Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 21. The global set of standards established for financial reporting cover each of the following aspects except: A. information disclosure.

B. asset valuation.

C. valuation of shares.

D. measurement of profit.

Answer: C Difficulty: Complex Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 22. Which of the following statements relating to the ASX Corporate Governance Principles is incorrect?

A. Risk oversight and internal control are not necessarily areas companies can manage.

B. Companies should actively promote lawful, ethical and responsible decisionmaking.

C. Companies should promote timely and balanced disclosure of all material matters concerning the company.

D. The audit committee should be structured so that it consists only of non-executive directors.

Answer: A Difficulty: Complex Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 23.

Currently worldwide, most major economies have either adopted IFRSs or: A. are moving towards the adoption of such.

7

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B. have elected never to use IFRSs. C. have set timelines to converge with IFRSs. D. Both A and C. Answer: D Difficulty: Basic Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 24. Which of the following are sources of regulation applicable to publicly listed companies in Australia?

A. ASX rules.

B. Company law.

C. International accounting standards.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 25. What is the system by which businesses are controlled and directed?

A. auditing.

B. general management.

C. corporate governance.

D. business directing.

Answer: C Difficulty: Moderate Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking 26. Which of the following statements is incorrect? Under ASX Listing Rules, companies must: A. disclose if a disclosure is specifically required under a Rule.

B. identify reasons for not following the recommendations.

C. disclose if a recommendation is not met.

D. attempt to follow best practice recommendations only if it is convenient.

Answer: D Difficulty: Moderate Learning Objective 5.2: Explain why there is a need for accounting rules, identify the main sources of accounting rules, and outline the role of the Australian Securities Exchange 8 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

with regard to company reporting and management, with particular reference to corporate governance.

A-Head: Sources of rules and regulation AACSB: 3 – Analytical thinking

LO 5.3 Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

27. If you were asked to loan money to a company that you feared may be getting into financial difficulties, which of these courses of action would provide you with the most protection from default on the loan?

A. Rely on the principle of limited liability.

B. Require a mortgage over a specific asset of the company.

C. Require the accounts of the company to be audited.

D. Specify a particular accounting method to be used.

Answer: B Difficulty: Moderate Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 8 – Application of knowledge 28. Which of the following statements is true about the order of repayment for a company in liquidation?

A. wages owing to employees rank last.

B. ordinary shareholders rank before preference shareholders.

C. creditors rank before ordinary shareholders.

D. All of the statements are true.

Answer: C Difficulty: Moderate Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 3 – Analytical thinking 29. Under AASB 101, in the statement of financial position, companies are normally required to distinguish between: A. cash on hand and cash at bank.

B. property and plant.

C. current and non-current liabilities.

D. current profit and retained profits.

Answer: C Difficulty: Complex Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

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A-Head: Presentation of published financial statements AACSB: 3 – Analytical thinking 30. Which of the following organisations would be most likely to elect to order their assets on the statement of financial position according to liquidity?

A. Retailer.

B. Credit union.

C. Manufacturer.

D. Builder.

Answer: B Difficulty: Complex Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 8 – Application of knowledge 31. How does the statement of comprehensive income differ from a traditional statement of financial performance?

A. it does not show a gross profit.

B. it only shows realised gains and losses.

C. it shows all realised and unrealised gains and losses.

D. it does not show financial expenses.

Answer: C Difficulty: Moderate Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 1 – Written and oral communication 32. Calculate the total comprehensive income for the year if operating profit is $556,000, the tax rate is 30%, finance charges are $88,700 and other comprehensive income for the year (net of tax) is $195,000.

A. $522,110 B. $452,460 C. $426,000 D. $562,800 Answer: A Difficulty: Complex Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 8 – Application of knowledge 33. Which of the following would be regarded as 'other comprehensive income'?

A. Foreign exchange gains.

B. Cash flow hedges.

C. Revaluation of property.

D. All of the above.

Answer: D Difficulty: Complex Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

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A-Head: Presentation of published financial statements AACSB: 8 – Application of knowledge 34. Which of the following is included in the statement of changes in equity?

A. share issues.

B. changes to reserves.

C. changes to retained profits.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 3 – Analytical thinking 35. How would trade debtors normally be classified in a statement of financial position?

A. as a current liability.

B. as a current asset.

C. as a non-current liability.

D. as a reserve.

Answer: B Difficulty: Basic Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 1 – Written and oral communication 36. Which of the following comments in relation to the statement of cash flows is incorrect? The statement of cash flows: A. allows the user of the report to determine where cash has been generated.

B. is essentially a formal statement of all transactions affecting the cash account.

C. highlights where cash has been spent.

D. is a duplication of information already provided in the other financial statements.

Answer: D Difficulty: Moderate Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 3 – Analytical thinking 37. Which of the following financial statements does not have to be prepared by a publicly listed company?

A. Statement of comprehensive income.

B. Statement of changes in equity.

C. Statement of cash flows.

D. All of the above must be prepared.

Answer: D Difficulty: Basic Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 1 – Written and oral communication 11 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

38. In a statement of financial position, subclassifications such as reserves, provisions and inventories are generally reported: A. in the financial statement itself.

B. as notes to the main financial statements.

C. in the director's report.

D. These items do not have to be reported at all.

Answer: B Difficulty: Complex Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 1 – Written and oral communication 39. Which of the following is not typically included in the notes to the financial statements?

A. all insignificant disclosures.

B. explanations of measuring bases used.

C. details of asset subclassifications.

D. confirmation that accounting standards have been adhered to.

Answer: A Difficulty: Moderate Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 1 – Written and oral communication

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

40. Information if by its omission, misstatement or non-disclosure has the potential to influence economic decision-making, is regarded as objective.

A. True B. False Answer: B Difficulty: Moderate Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: The Directors’ Duty to Account – The Role of Company Law (Corporations Act) AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

41. Use the following data to calculate MNB Ltd's share issue made in 2021.

Equity balance (01/07/2021) - $700,000 Equity balance (30/06/2022) - $1,070,000 Retained Earnings (30/06/2022) - $230,000 There were no dividends declared in the current year and no other reserve accounts.

Answer: $140,000 12 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Complex Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 8 – Application of knowledge 42. Assume the opening balance of equity (01/07/2021) is $1,500,000. During 2021/22, there was a share issue of $540,000, dividends declared of $280,000 and a profit for the year of $75,000, What is the equity balance on the 30/06/2022? Show your work.

Answer: $1,500,000 balance + $540,000 share issue – $280,000 dividend + $75,000 profit = $1,835,000 Difficulty: Complex Learning Objective 5.3: Identify the main requirements relating to the published annual report, including all of the financial and ancillary statements.

A-Head: Presentation of published financial statements AACSB: 8 – Application of knowledge

LO 5.4 Explain the concept of group or consolidated accounts.

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

43. A company partly owned and controlled by another is known as a: A. parent company.

B. subsidiary company.

C. a limited company.

D. a private company.

Answer: B Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking 44. River Ltd pays $5,500,000 for a 70% share in Stream Ltd. The net assets acquired in Stream Ltd are valued at $5,000,000. The $500,000 difference will appear in River Ltd's statement of financial position as: A. long-term investment.

B. mortgage payable.

C. goodwill on consolidation.

D. acquisition reserve.

Answer: C Difficulty: Basic Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking

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45. If a company's investment in another company is between 20% and 50%, the company invested in is typically known as a/an: A. subsidiary company.

B. associate company.

C. parent company.

D. holding company.

Answer: B Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking 46. Which of the following statements is incorrect?

A. An associate company is another name for a subsidiary company.

B. A takeover is when a company buys a controlling interest in another company.

C. A non-controlling interest is also known as a minority interest.

D. A parent company holds a majority interest in a subsidiary company.

Answer: A Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking 47. Which of the following is not a reason for acquiring a controlling interest in another company?

A. Possible economies of scale.

B. Reducing business risk.

C. Increasing competition.

D. Safeguarding supply resources.

Answer: C Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking 48. DBC Ltd recently paid $4,000,000 for 60% of JKL Ltd's equity. JKL Ltd had total assets of $6,500,000 and liabilities of $1,300,000. What amount of goodwill on consolidation will DBC Ltd record?

A. $2,700,000 B. $880,000 C. $1,200,000.

D. $100,000.

Answer: B Difficulty: Complex Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 8 – Application of knowledge 49. In relation to associate companies, which of the following investor's share does not have to be recorded in the consolidated accounts?

A. Fixed assets.

B. Attributable tax.

14 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

C. Retained profits.

D. Profit or loss.

Answer: A Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 1 – Written and oral communication 50. Which of the following statements is correct? Consolidated statements: A. show all the financial details of the subsidiary companies.

B. only show the financial position and performance of the parent company.

C. eliminate all transactions between the companies within the group.

D. do not show the minority interests.

Answer: C Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 1 – Written and oral communication 51. Goodwill on consolidation is classified in the statement of financial position as a/an: A. current asset.

B. tangible asset.

C. intangible asset.

D. non-current liability.

Answer: C Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

52. What are consolidated accounts?

Answer: Consolidated accounts are an amalgamation of a set of accounts for a group of companies as if the group was a single entity and are prepared by the parent company for a group of companies.

Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 1 – Written and oral communication 53. What is the main difference between a subsidiary and an associate company?

Answer: Student answers may vary but should include information relating to the level of control the parent company has.

Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking 15 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

54. Why might a subsidiary company retain its own identity?

Answer: Answers may vary but should include at least one of the following: to maintain its market identity, to enable the parent company to retain a limited liability status, and to allow its staff to remain autonomous.

Difficulty: Moderate Learning Objective 5.4: Explain the concept of group or consolidated accounts.

A-Head: Accounting for groups of companies AACSB: 3 – Analytical thinking

16 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Atrill, Accounting 8e Chapter 6: Measuring and reporting cash flows LO 6.1 Explain why cash and cash flows are important to the reporting entity Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. Which of the following statements is not true?

A. Cash is the pre-eminent asset as it is the medium with which claims are normally settled.

B. The concept of cash underpinning the statement of cash flows is 'cash and cash equivalents.'

C. A bank overdraft is an example of a 'cash equivalent.'

D. If a firm is operating profitably, it will automatically have plenty of cash.

Answer: D Difficulty: Moderate Learning Objective 6.1: Explain why cash and cash flows are important to the reporting entity A-Head: The importance of cash and cash flow AACSB: 3 – Analytical thinking 2. The cash flow statement was added to reporting requirements because it was believed that the income statement and statement of financial position didn’t concentrate enough on A. profitability.

B. liquidity.

C. depreciation.

D. bad debt.

Answer: B Difficulty: Moderate Learning Objective 6.1: Explain why cash and cash flows are important to the reporting entity A-Head: The importance of cash and cash flow AACSB: 3 – Analytical thinking Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

3. Why does the income statement tend to obscure cash movements?

A. It is only produced annually.

B. It is accrual based.

C. It is cash based.

D. It is not audited.

Answer: B Difficulty: Moderate Learning Objective 6.1: Explain why cash and cash flows are important to the reporting entity A-Head: The importance of cash and cash flow AACSB: 3 – Analytical thinking

LO 6.2 Explain the nature, purpose and layout of the statement of cash flows Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

4. What is the report prepared to summarise the entity’s cash transactions for the period?

A. statement of comprehensive income.

B. statement of changes in equity.

C. statement of cash flows.

D. statement of financial position.

Answer: C Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 5. Which statement is correct?

A. The statement of financial position is accrual based and the income and statement of cash flows are cash based.

B. The statement of comprehensive income, statement of financial position and statement of cash flows are all accrual based.

C. The statement of comprehensive income and statement of financial position are accrual based and the statement of cash flows is cash based.

D. None of the statements is correct.

Answer: C Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 6. In the statement of cash flows, the total of net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities for the period equals: 2 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. the cash balances at the beginning of the period.

B. the cash balances at the end of the period.

C. profit.

D. total net increase or decrease in cash held for the period.

Answer: D Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 7. With what are operating activities concerned?

A. borrowing or lending.

B. the sale or disposal of non-current assets.

C. the trading and/or service operations of the business.

D. none of the above.

Answer: C Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 8. Which of the following are not operating cash flows?

A. income tax paid.

B. interest received.

C. payments to suppliers.

D. dividends paid to shareholders.

Answer: D Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 9. The item that would not be included in the operating section of a statement of cash flows is: A. Cash interest received.

B. Cash received from the sale of surplus machinery.

C. Cash received from sales.

D. Cash payment of expenses.

Answer: B Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 10. Cash inflows and outflows associated with changes in non-current liabilities and equity, not arising from profit, are included in which section of the statement of cash flows?

A. Non-current.

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B. Operating.

C. Financing.

D. Investing.

Answer: C Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 11. Depreciation of plant and equipment will appear in which section of the statement of cash flows?

A. Operating activities section.

B. Financing activities section.

C. Does not appear in the statement.

D. Investing activities section.

Answer: C Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 12. Which item is not classified as a cash flow from investing activities?

A. payment for shares to be held as an investment.

B. cash purchase of office furniture.

C. receipt from the sale of premises.

D. dividends paid to investors.

Answer: D Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 13. Cash received from the issue of shares will appear in which section of the statement of cash flows?

A. Investing activities section.

B. Does not appear in the statement.

C. Operating activities section.

D. Financing activities section.

Answer: D Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 14. How would these items be classified in a statement of cash flows prepared for a hairdressing franchise? i. Payment of $600 for hairdressing supplies. ii. Takings from customers for the month.

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iii. Capital paid into the business by the owner.

A. i.

Operating outflow. ii. Operating inflow. iii. Financing inflow.receipt from the sale of premises.

B. i.

Investing outflow. ii. Operating inflow. iii. Financing inflow.

C. i.

Operating outflow. ii. Operating inflow. iii. Does not appear in the statement of cash flows.

D. i.

Operating outflow. ii. Operating inflow. iii. Investing inflow.

Answer: A Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 8 – Application of knowledge 15. Which transaction would not appear in the body of a statement of cash flows?

A. Acquisition of assets by means of a share issue.

B. Purchase of a building by incurring a mortgage to the seller.

C. Conversion of a liability to equity.

D. All of the above.

Answer: D Difficulty: Complex Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 16. The difference between operating profit or loss after tax and net cash provided by operating activities is due to: A. changes in non-current liabilities.

B. changes in non-current assets.

C. changes in working capital items.

D. changes in equity items.

Answer: C Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 17. In a growing business that keeps its asset base up-to-date, total cash flow from investing activities will normally be: A. negative.

B. more than cash flow from operations.

C. positive.

D. none of the above.

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Answer: A Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 18. Which of these items will appear in a statement of cash flows?

A. Carrying value of an asset sold.

B. Adjustment in the balance of an asset account caused by a revaluation.

C. Proceeds from the sale of a fixed asset.

D. All of the above.

Answer: C Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 19. What is the effect on profit and cash of a firm paying a trade creditor?

A. Decrease in profit and decrease in cash.

B. Decrease in profit and no effect on cash.

C. No effect on profit and no effect on cash.

D. No effect on profit and decrease in cash.

Answer: D Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 20. State the effect on profit and cash of depreciating a non-current asset.

A. decrease in profit and decrease in cash.

B. no effect on profit and decrease in cash.

C. no effect on profit and no effect on cash.

D. no effect on profit and no effect on cash.

Answer: D Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 21. Which of these is a reason why a statement of cash flows could show a negative cash flow from operating activities even though the statement of comprehensive income showed a profit?

A. An increase in the amount of inventory held.

B. A decrease in the amount owing by debtors.

C. An increase in the amount owing by creditors.

D. An increase in depreciation charged.

Answer: A Difficulty: Complex 6 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 22. Which of the following would not appear in a statement of cash flows?

A. the creation of an allowance for doubtful debts.

B. the upward revaluation of an asset.

C. a bonus issue of shares.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 23. Which of the three main financial statements was chronologically the last to be required to be included as part of the external financial reports?

A. Statement of comprehensive income.

B. Statement of financial position.

C. Statement of cash flows.

D. None, all three reports have always been required to be included in external financial reports.

Answer: C Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 24. Company W received $10,000 in cash in repayment of a loan made to B Free. In the statement of cash flows of Company W, the $10,000 would appear as: A. an investing outflow.

B. an investing inflow.

C. a financing outflow.

D. a financing inflow.

Answer: B Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 25. Which of the following is an example of a non-cash investing or financing transaction?

A. the purchase of a building paid for by an issue of shares direct to the vendor.

B. sale of a parcel of shares.

C. repayment of a loan.

D. charging depreciation.

Answer: A Difficulty: Basic 7 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 26. Which of the following is a cash transaction?

A. declaration of a divided from a general reserve.

B. payment of a dividend to shareholders.

C. transfer from retained earnings to a general reserve.

D. all of the above.

Answer: B Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking 27. If 'other expenses' in the profit and loss report is $35,000 including $8,000 of depreciation, accrued 'other expenses' at the beginning of the year is $1,000 and $0 at the end of the year, the figure for 'other expenses' that will appear in the statement of cash flows for the year is: A. $25,000.

B. $28,000.

C. $32,000.

D. $33,000.

Answer: B Difficulty: Moderate Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

28. The purpose of the statement of cash flows is to provide information on profits.

A. True B. False Answer: B Difficulty: Basic Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking

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Short answer: Write the word or phrase that best completes each statement or answers the question.

29. Oriole Company had a long-term debt of $1,500,000. To extinguish this debt the company issued $1,500,000 of fully paid shares to the lender. What impact would this transaction have on the statement of cash flows?

Answer: This transaction would have nil impact.

Difficulty: Complex Learning Objective 6.2: Explain the nature, purpose and layout of the statement of cash flows A-Head: The statement of cash flows AACSB: 3 – Analytical thinking

LO 6.3 Prepare a simple statement of cash flows using the direct method Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

30. From the following information calculate the cash received from customers.

Accounts receivable opening balance $20,000 Credit Sales $860,000 Accounts receivable closing balance $40,000 A. $880,000.

B. $900,000.

C. $840,000.

D. $820,000.

Answer: C Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 31. If $90,000 is owed by customers at the beginning of the year, $75,000 is owed at the end and credit sales are $120,000, the cash received from customers is: A. $120,000.

B. $135,000.

C. $125,000.

D. $80,000.

Answer: B Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 32. Calculate net cash flow from operating activities if: Statement of financial performance (extract) Sales (credit) $80,000 Less Expenses (cash) $48,000 9 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Profit Ledger account (extract) Start of Period

$32,000 End of Period

Accounts Receivable $6,000 $9,000 A. $19,000.

B. $29,000.

C. $25,000.

D. $22,000.

Answer: B Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 33. H Company's accounting records show: $ Credit sales for the year 650,000 Discounts provided for early payment 15,000 Opening balance of accounts receivable 100,000 Closing balance of accounts receivable 90,000 The cash received from customers is: A. $595,000.

B. $590,000.

C. $645,000.

D. $610,000.

Answer: C Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 34. Under accrual accounting, the receipt of cash from a trade debtor will: A. have no impact on profit and increase cash.

B. increase profit and increase cash.

C. decrease profit and decrease cash.

D. none of the above.

Answer: A Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 3 – Analytical thinking 35. All purchases of inventory are for cash. If inventory at the beginning of the year is $63,000 and at the end $88,000 and the cost of sales is $200,000, the cash paid for inventory purchased for the year is: A. $175,000.

B. $225,000.

C. $200,000.

D. none of the above.

10 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Answer: B Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 36. Indulgence Chocolates has provided the following information: Cost of sales for the year $190,000 Opening balance of accounts payable $50,000 Closing balance of accounts payable $60,000 Opening balance of inventory $20,000 Closing balance of inventory $36,000 The cash payments made to suppliers during the year total: A. $184,000.

B. $164,000.

C. $196,000.

D. $200,000.

Answer: C Difficulty: Complex Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 37. GG Pty Ltd's accounting records show: Beginning Balance Ending Balance '000 '000 $ $ Accounts payable 12 8 Inventory 25 21 Cost of sales 50 Determine the amount of cash paid for inventory for the period.

A. $42,000.

B. $48,000.

C. $58,000.

D. $50,000.

Answer: D Difficulty: Complex Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 38. What does the tax payment appearing in the statement of cash flows of a company reflect?

A. a prepayment for next year's tax liability.

B. this year's tax liability.

C. last year's tax liability (due to the lag in payment to tax office).

D. an estimate of this year's tax liability.

Answer: C Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example 11 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 8 – Application of knowledge 39. An extract from the trial balance of RRR Pty Ltd as at 30 June 2021 shows: Income tax expense $20,000 If the income tax provided for at the end 2020 was $12,000 and taxation is paid in arrears in a lump sum, what amount will appear in the statement of cash flows for taxation paid by RRR Pty Ltd for the year ended 30 June 2021?

A. $20,000.

B. $12,000.

C. $16,000.

D. Nil. Answer: B Difficulty: Basic Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 3 – Analytical thinking 40. Generally, the dividend payment appearing in the financing section of the statement of cash flows represents: A. interim dividends declared in the current year.

B. proposed dividends from last year that have been paid, plus any interim dividends declared and paid in the current year.

C. proposed dividends from last year.

D. current year's dividend.

Answer: B Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 3 – Analytical thinking 41. If prepaid interest at the beginning of the period was zero and at the end of the period was $4,000 and interest expense appears in the statement of comprehensive income for the year as $17,300, how much was paid out in cash for interest during the year?

A. $13,300.

B. $17,300.

C. $21,300.

D. $4,000.

Answer: C Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 42. If the opening balance of rent accrued at the beginning of the year was $1,000, rent expense for the year was $20,000 and the closing balance of rent accrued at the end of the year was $1,200, the amount paid in cash for rent during the year is: A. $22,200.

B. $21,000.

C. $20,200.

D. $19,800.

Answer: D Difficulty: Complex 12 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 43. University Press showed wage and salary expenses of $250,000 on its 2020 statement of comprehensive income but reported cash paid to employees of $215,000 on its statement of cash flows. If the beginning balance of accrued wages and salaries payable was $18,000, the ending balance is: A. $53,000.

B. $45,000.

C. $35,000.

D. $17,000.

Answer: A Difficulty: Complex Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge 44. What is the rule for converting credit sales to cash received from debtors?

A. income - accounts receivable at the beginning + accounts receivable at the end = cash received.

B. income + accounts receivable at the beginning - accounts receivable at the end = cash received.

C. income + or - accounts receivable at the beginning + or - accounts receivable at the end = cash received.

D. none of the above.

Answer: B Difficulty: Basic Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

45. $54,000 is owed to suppliers for inventory purchases at the beginning of the year and $44,000 is owed at the end of the year. If annual credit purchases of inventory are $180,000, the cash paid to suppliers for the year is how much?

Answer: $190,000 Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge

46. Wages expense in the income statement is $58,250 with the statement of financial position at the end of the year showing accrued wages of $2,000. If there were no

13 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

accrued wages at the beginning of the period, how much was paid out in cash for wages during the year?

Answer: $56,250 Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge

Essay: Write your answer in the space provided or on a separate sheet of paper.

47. Cameron's Screensavers Ltd Statement of financial position as at 31 December 2021 (Extracts) 2020 2021 $ $ Shareholders' Equity Share capital ($1 shares) 250,000 360,000 Revaluation reserve 20,000 60,000 General reserve 150,000 100,000 Retained profits 66,000 76,000 $486,000 $596,000 Additional information: • There was a bonus issue of 1 bonus share for every 5 existing shares held.

• Land and buildings was revalued by $40,000.

• A profit of $17,000 was earned during the year.

• Dividends of $6,000 were paid during the year that had been provided for in the prior year and $7,000 was provided as a final dividend at the end of the current year.

REQUIRED: Show the financing section of the statement of cash flows for Cameron Screensavers for the year ended 31 December 2021.

Answer: Cameron's Screensavers Ltd Statement of cash flows for year ended 31 December 2021 (Extract) $ $ Cash flows from Financing Activities Share issue 60,000 Dividends paid (6,000) $54,000 Difficulty: Moderate Learning Objective 6.3: Prepare a simple statement of cash flows using the direct method A-Head: Preparation of the statement of cash flows – a simple example AACSB: 8 – Application of knowledge

14 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

LO 6.4 Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

48. The statement of cash flows must include a note reconciling: A. opening equity with closing equity.

B. the business bank balance with the bank statement balance.

C. accrual accounting and historical cost accounting.

D. profit and cash flow from operations.

Answer: D Difficulty: Moderate Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 1 – Written and oral communication 49. Calculate the cash from operating activities using the following information: Profit $142,000.

Depreciation $46,000.

Accounts receivable increased by $10,000.

Accrued expense increased by $12,000.

Inventory increased by $14,000.

A. $165,000.

B. $186,000.

C. $176,000.

D. $200,000.

Answer: C Difficulty: Complex Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 8 – Application of knowledge 50. From the following information, calculate net cash flow from operating activities.

Sales $185,000 Less Salaries $40,000 Depreciation $13,000 Other expenses $10,000 Interest expense $5,000 $68,000 Profit $117,000 Statement of financial position extract Start of End of Period Period $ $ 15 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Accounts payable 11,000 14,000 Interest expense owing 1,000 A. $134,000.

B. $115,000.

C. $128,000.

D. $126,000.

Answer: A Difficulty: Complex Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 8- Application of knowledge 51. If credit sales for the year are $120,000 and the accounts receivable balance has increased by $10,500 over the year, how much cash was received from accounts receivable during the year?

A. $130,500.

B. $109,500.

C. $120,000.

D. $10,500.

Answer: B Difficulty: Basic Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 8 – Application of knowledge 52. Calculate cash from operating activities using the following information: Profit $148,000.

Depreciation $40,000.

Inventory increased by $10,000.

A. $148,000.

B. $178,000.

C. $188,000.

D. $98,000.

Answer: B Difficulty: Moderate Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 8 – Application of knowledge 53. When reconciling profit with net cash flow from operating activities: A. subtract increases in current assets and add increases in current liabilities.

B. add increases in current assets and subtract increases in current liabilities.

C. add increases in current assets and add increases in current liabilities.

D. none of the above.

Answer: A 16 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Complex Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 3 – Analytical thinking 54. Which of these factors could cause operating profit to be more than cash flow from operations?

A. An increase in the balance of accounts receivable over the period.

B. An increase in the balance of inventory over the period.

C. An increase in the balance of accounts payable over the period.

D. Both A and B. Answer: D Difficulty: Complex Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 3 – Analytical thinking 55. Which of these correctly shows the effect of charging depreciation on equipment for the period?

A. Increase in accumulated depreciation; decrease in the carrying value of equipment.

B. Increase in accumulated depreciation; increase in the carrying value of equipment.

C. Decrease in accumulated depreciation; decrease in the carrying value of equipment.

D. None of the above.

Answer: A Difficulty: Moderate Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 3 – Analytical thinking 56. When preparing the note attached to the statement of cash flows reconciling operating profit with cash flow from operations, which statement is not true?

A. An increase in current assets is deducted from profit.

B. A decrease current assets is added to profit.

C. An increase in current liabilities is deducted from profit.

D. All of the above are true.

Answer: D Difficulty: Moderate Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 3 – Analytical thinking

17 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

57. In the reconciliation attached to the statement of cash flows, operating cash flow is reconciled to operating profit after tax.

A. True B. False Answer: A Difficulty: Basic Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

58. The following information is produced on an accrual basis and relates to Emily's Superior Photo Framers.

Statement of comprehensive income for the year ended 31 December 2018 Income $80,880 Less Photo framing supplies used 14,500 66,380 Less Other Expenses Advertising $250 Salaries 18,250 Vehicle expenses 5,300 Office expenses 3,500 Rent of premises 20,000 Interest expenses 2,000 Depreciation of equipment 3,600 52,900 Profit $13,480 Statement of financial position as at 31 December 2018 2017 2018 Current Assets $ $ Cash at bank 20,500 4,030 Accounts receivable 1,500 1,650 Stock of photo framing supplies 5,500 3,500 27,500 9,180 Fixed Assets Photo Framing Equipment 55,700 65,000 Less Accumulated Depreciation 11,200 44,500 14,800 50,200 $72,000 $59,380 Current Liabilities Creditor owed for vehicle expenses 1,900 Long Term Liabilities Loan Finance Co, repayable by 2020 18,000 15,000 18,000 16,900 Equity 18 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Capital - Emily Current account Emily

34,000 20,000 54,000 $72,000

34,000 8,480 42,480 $59,380

Additional Information: • Emily withdrew $25,000 through the year for her own use.

• No photo framing equipment was sold during the year.

REQUIRED: a) Prepare a classified statement of cash flows for the year ended 31 December 2018 from the above information. Show all workings. b) Prepare a statement reconciling profit with cash flow from operating activities. c) Comment on what the statement of cash flows reveals about the cash situation of Emily's Superior Photo Framers.

Answer: Workings a) Cash received from customers Accounts receivable start 1,500 Add income earned 80,880 82,380 Less Accounts receivable end 1,650 Cash received $80,730 Photo framing supplies purchased Supplies used $14,500 Less stock of supplies at start 5,500 $9,000 Add stock of supplies at end 3,500 $12,500 Payments for other expenses Total other expenses $52,900 Less accounts payable owing for vehicle exp.

1,900 Less depreciation equipment 3,600 $47,400 Emily's Superior Photo Framers Statement of cash flows for year ended 31 December 2018 $ $ Cash flows from Operating Activities Receipts from customers 80,730 Payments for photo framing supplies (12,500) Payments for other expenses (47,400) 20,830 Cash flows from Investing Activities Purchases of photo framing equipment (9,300) Cash flows from Financing Activities Repayment Loan Finance Co. (3,000) Drawings (25,000) (28,000) Net decrease in cash held $(16,470) Cash at beginning of year 20,500 Cash at end of year $4,030 b) Reconciliation of profit with cash provided by operating activities Profit $13,480 Add back non-cash depreciation 3,600 + Less increase in accounts receivable 150 19 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Add decrease in photographic supplies 2,000 + Add increase in accounts payable 1,900 + Cash provided by operating activities $20,830 c) Decrease in bank balance Over the year, the cash position has decreased by $16,470. This has left cash reserves depleted and now only $4,030 remains in the bank.

Cash flow from operating activities is more than profit The cash flow from operating activities is $7,350 more than profit. The main reasons are the $2,000 reduction in the stock of photo framing supplies and the build up of $1,900 in vehicle expense accounts payable. Both of these are one-off factors but don't represent desirable occurrences.

High level of equipment purchase in relation to size of profit Investing and financing activities show that $9,300 of additional equipment was purchased during the year and that $3,000 has been repaid from the loan taken out. The expenditure on equipment in relation to the level of profit is high, though presumably the investment is intended to increase future profits.

Excessive drawings When the equipment and the loan payments are deducted from the operating cash inflow, there is a surplus of $8,530, but drawings are $25,000 with the balance of $16,500 being financed by the reduction in the bank balance. It is obvious that this amount of drawings is excessive and must be reduced, as it is bleeding the business dry of cash Potential difficulty in repaying the loan There is still $15,000 of the loan to be repaid fully in three years, which is going to be difficult to achieve. Necessary steps will be to cut back on purchases of new equipment and to slash drawings. Ways also need to be found to improve operating cash flows. The new equipment should help in this regard.

Difficulty: Complex Learning Objective 6.4: Prepare a simple statement of cash flows from operating activities using the indirect method, effectively a reconciliation of profit with cash flow from operating activities, and explain how useful this is in decision-making A-Head: Indirect Method AACSB: 8 – Application of knowledge <BLANK>

LO 6.5 Identify some of the potential complexities that arise with statements of cash flows Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

59. Xi Co provides you with the following information about its equipment account: Opening balance of equipment $300,000 Closing balance of equipment $550,000 If machinery that originally cost $100,000 was sold during the year, what was the value of new equipment purchased?

A. $250,000.

B. $150,000.

20 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

C. $550,000.

D. $350,000.

Answer: D Difficulty: Basic Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge 60. Royal Plastics provides the following information about its moulding machinery: Opening balance of machinery account $500,000 Closing balance of machinery account $650,000 Depreciation expense for the year $50,000 Depreciation charged on machinery sold $130,000 Profit on sale of machinery $20,000 Carrying value of machinery sold $90,000 How much cash was received from the disposal of machinery?

A. $100,000.

B. $20,000.

C. $110,000.

D. $90,000.

Answer: C Difficulty: Complex Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge 61. Royal Plastics provides the following information about its moulding machinery: Opening balance of machinery account $500,000 Closing balance of machinery account $650,000 Depreciation expense for the year $50,000 Depreciation charged on machinery sold $130,000 Profit on sale of machinery $20,000 Carrying value of machinery sold $90,000 What is the total cost of machinery purchased during the year?

A. $370,000.

B. $200,000.

C. $280,000.

D. $300,000.

Answer: A Difficulty: Complex Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge 62. A motor vehicle was purchased for $25,000, depreciated using the reducing-balance method for 3 years at 20% p.a. and was then sold for a price that was $1,600 more than the carrying amount of the vehicle. The cash received on the sale of the motor vehicle was: 21 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. $12,800.

B. $14,400.

C. $11,200.

D. $11,600.

Answer: B Difficulty: Complex Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge 63. If the opening balance of equity is $45,000, the closing balance is $60,000 and profit is $27,000, calculate the amount of dividends paid (assume all dividends declared have been paid) which will appear as a financing outflow in the statement of cash flows.

A. $15,000.

B. $42,000.

C. $12,000.

D. Nil. Answer: C Difficulty: Moderate Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge 64. Motor vehicles are shown in the statement of financial position of Yong Ltd as: Dec. 31, 2020 Dec. 31, 2021 Motor Vehicles at Cost $83,000 $95,000 Less Accumulated Depreciation $10,000 $15,000 Carrying Value $73,000 $80,000 Assuming that no vehicles were sold, the value of vehicles purchased during 2021 was: A. $7,000.

B. $12,000.

C. $5,000.

D. $17,000.

Answer: B Difficulty: Basic Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge 65. In 2021, G Co repaid $45,000 to the bank on a mortgage loan. $35,000 was interest on the mortgage and $10,000 was repayment of the principal. The repayment would appear in the statement of cash flows as: A. operating outflow $45,000.

B. operating outflow $35,000; investing outflow $10,000.

C. financing inflow $45,000.

22 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

D. operating outflow $35,000; financing outflow $10,000.

Answer: D Difficulty: Basic Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 3 – Analytical thinking Short answer: Write the word or phrase that best completes each statement or answers the question.

66. If the balance of the share capital account is $300,000 at the beginning of the year and $410,000 at the end of the year, and there has been a 1 for 6 bonus issue of shares at the start of the year, what is the amount that will appear in the statement of cash flows for proceeds from the issue of shares?

Answer: $60,000 Difficulty: Moderate Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge 67. The Book Co’s share capital increased by $200,000 in total over a year in which there was a bonus issue of 20,000 new shares at $2 per share. What is the cash flow from the issue of shares?

Answer: $160,000 Difficulty: Moderate Learning Objective 6.5: Identify some of the potential complexities that arise with statements of cash flows A-Head: Some complexities in statement preparation AACSB: 8 – Application of knowledge

LO 6.6 Explain what the statement tells us, and illustrate how the statement of cash flows can be useful for identifying cash flow management strengths, weaknesses and opportunities, both historically and in forecasting and planning Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

68. In a healthy business, cash flow from operations will normally be: A. negative.

B. positive.

C. less than the profit.

D. none of the above.

Answer: B 23 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 6.6: Explain what the statement tells us, and illustrate how the statement of cash flows can be useful for identifying cash flow management strengths, weaknesses and opportunities, both historically and in forecasting and planning A-Head: What does the statement of cash flows tell us?

AACSB: 3 – Analytical thinking 69. What does the statement of cash flows allow management to assess?

A. efficiency in earning profit.

B. efficiency in controlling expenses.

C. efficiency in managing cash flows.

D. efficiency in managing industrial relations.

Answer: C Difficulty: Moderate Learning Objective 6.6: Explain what the statement tells us, and illustrate how the statement of cash flows can be useful for identifying cash flow management strengths, weaknesses and opportunities, both historically and in forecasting and planning A-Head: What does the statement of cash flows tell us?

AACSB: 3 – Analytical thinking 70. Which of the following is a warning sign of problems in managing cash flows?

A. proceeds of borrowing that are continually greater than repayments of borrowings.

B. dividends paid to shareholders that are greater than profit.

C. cash flow from operating activities that is significantly lower than profit.

D. all of the above.

Answer: D Difficulty: Complex Learning Objective 6.6: Explain what the statement tells us, and illustrate how the statement of cash flows can be useful for identifying cash flow management strengths, weaknesses and opportunities, both historically and in forecasting and planning A-Head: What does the statement of cash flows tell us?

AACSB: 3 – Analytical thinking

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Atrill, Accounting 8e Chapter 7: Corporate social responsibility and sustainability reporting LO 7.1 Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. What is the collective term for any individual or group with an interest in the activities of an entity?

A. creditor.

B. shareholder.

C. manager.

D. stakeholder.

Answer: D Difficulty: Basic Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 2. Which of these groups is recognised by stakeholder theory as having a legitimate interest in the business?

A. Customers.

B. Government.

C. Shareholders.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

3. The total impact of business actions on society at large is known as: A. corporate governance.

B. risk.

C. social responsibility.

D. economic impact.

Answer: C Difficulty: Moderate Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 4. The principle of 'stewardship' means that the main focus of accounting is on providing information to: A. employees.

B. shareholders.

C. accounts payable.

D. none of the above.

Answer: B Difficulty: Basic Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 5. What is the approach to accounting that focuses mainly on providing information that enables owners to make money?

A. triple bottom line approach.

B. the stakeholder approach.

C. the sustainability approach.

D. the stewardship approach.

Answer: D Difficulty: Moderate Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 6. Which of the following statements is not correct?

A. Social and environmental concerns now have to be taken seriously by business.

B. It is no longer sufficient for business to be focused solely on the maximisation of wealth.

C. All businesses currently accept that sustainability is the primary goal.

D. There is increasing pressure for management to address a much broader range of issues than in the past.

Answer: C Difficulty: Basic Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 2 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

7. Which of these is a way in which sustainable reports should be similar to current financial reports?

A. Degree of auditability of reports.

B. Reliance on monetary measures.

C. Scope of report.

D. Comparability.

Answer: D Difficulty: Moderate Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 8. Which of the following statements is incorrect?

A. Some stakeholders have legitimate interests in only a part of a business.

B. All stakeholders have an equal interest in a business.

C. Environmentalists are seen as relatively 'new' stakeholders in business.

D. All of the above are incorrect.

Answer: B Difficulty: Basic Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 9. For a business to be seen as socially responsible, the business must: A. assess the social costs and benefits of the actions it takes.

B. develop and implement policies and practices in the area of social responsibility.

C. ensure the media is aware that it takes social responsibility seriously, even though there may be no real indicators.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 10.

Aspects of corporate social responsibility are: A. impact on employment and job creation.

B. health and safety.

C. pollution.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking 11. Listed companies should disclose to the ASX whether they have material exposure to: A. environmental risk.

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B. social risk.

C. profitability risk.

D. A and B. Answer: D Difficulty: Basic Learning Objective 7.1: Outline and discuss a range of social and environmental issues, and the way in which accounting can contribute A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking

LO 7.2 Explain what is meant by corporate social responsibility and sustainable development Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

12. Reasons why a business might engage in activities that are less profitable to itself but which are beneficial to society are: A. because of expectations of future legislation.

B. to market itself as a good citizen.

C. to improve liquidity.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking 13. A way to encourage more socially responsible behavior by companies is: A. Market the 'good citizen' concept.

B. Make breaches of behaviour more costly.

C. Government action such as legislation.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking 14. The main work carried out by Ceres in recent years relates to: A. corporate environmental reporting.

B. climate change.

C. reduction and disposal of wastes.

D. all of the above.

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Answer: D Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking 15. An argument against corporate social responsibility is: A. It is too costly.

B. It is too difficult.

C. Business is about building wealth for its shareholders, not helping society.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking 16. What is the most common area of voluntary social responsibility reporting in Australia?

A. human resources (health and safety, working conditions, etc.).

B. nuclear waste.

C. philanthropy.

D. none of the above.

Answer: A Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking 17. Which of these is an example of an environmental disclosure in an annual report?

A. Implementation of tree planting schemes.

B. Introduction of environmental audits.

C. Sponsoring environmental achievement awards.

D. All are examples.

Answer: D Difficulty: Basic Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 8 – Application of knowledge 18. Meeting society's need for goods and services without destroying natural or social capital is known as: A. the greening of Australia.

B. sustainable value creation.

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C. ethical living.

D. none of the above.

Answer: B Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 19. On what does sustainability reporting tend to report?

A. social sustainability.

B. issues impacting on the environment.

C. Both A and B. D. Neither A nor B. Answer: C Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking 20. Why do organisations find corporate social responsibility (CSR) such a challenge?

A. The public view of CSR continues to change.

B. There is no real definition of CSR. C. There is no CSR 'checklist' for businesses to tick off.

D. Both A and C. Answer: D Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

21. The ten-point code of environmental conduct is known as the Ceres Principles.

A. True B. False Answer: A Difficulty: Basic Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking

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Short answer: Write the word or phrase that best completes each statement or answers the question.

22. Define corporate social responsibility.

Answer: Corporate social responsibility is how companies manage the business process to produce an overall positive impact on society.

Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Corporate social responsibility (csr) and sustainable development—what do they mean?

AACSB: 3 – Analytical thinking 23. Explain why a business might engage in activities that are less profitable to itself but are beneficial to society.

Answer: Answers may vary but should include at least one of the following: because of expectations of future legislation, because of enlightened self-interest, and to publish the results and put pressure on competitors.

Difficulty: Moderate Learning Objective 7.2: Explain what is meant by corporate social responsibility and sustainable development A-Head: Social and environmental issues in accounting AACSB: 3 – Analytical thinking

LO 7.3 Explain the development of reporting for corporate social responsibility and sustainable development Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

24. What has been found in recent world studies on voluntary social responsibility reporting?

A. reporting was mainly of a quantitative nature.

B. disclosure was greatest in Australia.

C. reporting was done principally by the largest companies.

D. companies tended to provide 'bad news' as well as 'good news.'

Answer: C Difficulty: Moderate Learning Objective 7.3: Explain the development of reporting for corporate social responsibility and sustainable development A-Head: Development of reporting for corporate social responsibility and sustainable development AACSB: 3 – Analytical thinking

25. Australia: A. has most companies reporting on social responsibilities.

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B. has some companies who report on social responsibilities.

C. has no companies who report on social responsibilities.

D. none of the above.

Answer: B Difficulty: Basic Learning Objective 7.3: Explain the development of reporting for corporate social responsibility and sustainable development A-Head: Development of reporting for corporate social responsibility and sustainable development AACSB: 3 – Analytical thinking 26. Research has found that in Australia, environmental disclosures in annual reports tend to be: A. all positive.

B. mostly negative in nature.

C. about half positive and half negative.

D. mostly positive in nature.

Answer: D Difficulty: Basic Learning Objective 7.3: Explain the development of reporting for corporate social responsibility and sustainable development A-Head: Development of reporting for corporate social responsibility and sustainable development AACSB: 3 – Analytical thinking 27. Which of the following statements in relation to the outcomes of the major studies undertaken in relation to CSR disclosures is incorrect?

A. Voluntary disclosures have increased considerably since the mid-1970s.

B. Companies appear to be using CSR disclosures as part of their public relations.

C. Only small companies make CSR disclosures.

D. When disclosures first commenced, companies were very sensitive to public criticism.

Answer: C Difficulty: Moderate Learning Objective 7.3: Explain the development of reporting for corporate social responsibility and sustainable development A-Head: Development of reporting for corporate social responsibility and sustainable development AACSB: 3 – Analytical thinking 28. What is the accounting standard on corporate social responsibility in Australia?

A. AASB 111.

B. AASB 101.

C. AASB 110.

D. There is no Australian standard on corporate social responsibility.

Answer: D Difficulty: Moderate Learning Objective 7.3: Explain the development of reporting for corporate social responsibility and sustainable development A-Head: Development of reporting for corporate social responsibility and sustainable development AACSB: 3 – Analytical thinking 8 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

29. In 2018 in Australia, voluntary disclosures in annual reports relating to social responsibility accounting can be described as: A. occasional.

B. rare.

C. becoming more common.

D. universal.

Answer: C Difficulty: Basic Learning Objective 7.3: Explain the development of reporting for corporate social responsibility and sustainable development A-Head: Development of reporting for corporate social responsibility and sustainable development AACSB: 3 – Analytical thinking

LO 7.4 Explain triple bottom line reporting Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

30. Triple bottom line reporting refers to reporting in the three areas of: A. pollution, climate, recycling.

B. economic prosperity, environmental quality, social justice.

C. physical resources, energy, human resources.

D. none of the above.

Answer: B Difficulty: Basic Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 33. What is the essence of triple bottom line reporting?

A. pollution control.

B. social responsibility.

C. sustainable development.

D. wealth creation.

Answer: C Difficulty: Moderate Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 34. Which statement concerning triple bottom line reporting is not correct?

A. It means that the need for goods and services should be met without destroying natural or social capital.

B. It only deals with things that can be measured.

C. Companies tend to report favourable news rather than unfavourable news.

D. The phrase was coined by John Elkington.

Answer: B 9 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Basic Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 35. Which of these is regarded as a benefit of triple bottom line reporting for companies practicing it?

A. Encouragement of a value driven culture.

B. Better management of risk.

C. Attracting better staff.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 36. Which of these is not a broad guideline that it would be desirable for triple bottom line reporting to follow?

A. Be balanced, including negatives as well as positives.

B. Have external verification.

C. Be independent of other financial reports.

D. None of the above, i.e., all are broad guidelines.

Answer: C Difficulty: Moderate Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 37. The major challenge seen for triple bottom line reporting is: A. Not everything can be measured financially.

B. The production of each of the three parts of the report.

C. Environmental activities are often measured negatively.

D. The integration of economic prosperity, social justice and environmental quality.

Answer: D Difficulty: Moderate Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 38. Which of the following statements in relation to triple bottom line (TBL) reporting is correct? TBL reporting: A. can only be used by companies.

B. can and is being used by at least one Australian council.

C. is not supported by the Australian government.

D. All of the above statements are correct.

Answer: B Difficulty: Moderate Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking 10 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

39. Once there is a complete move to sustainability reporting, TBL: A. will still be required.

B. may have to be extended.

C. may have to be modified.

D. will be absorbed by sustainability reporting.

Answer: D Difficulty: Moderate Learning Objective 7.4: Explain triple bottom line reporting A-Head: Triple bottom line reporting AACSB: 3 – Analytical thinking

LO 7.5 Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

40. Which of the following is an independent institution whose mission is to develop and disseminate globally applicable Sustainability Reporting Guidelines?

A. The Global Reporting Initiative (GRI).

B. The Group of Eight.

C. The United Nations.

D. The World Bank.

Answer: A Difficulty: Basic Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 41. The form of the report recommended by the Global Reporting Initiative include: A. an organisation profile.

B. a description of governance structure and management systems.

C. a vision and strategy statement.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 42. The sustainability reporting framework that is the most widely accepted standard for corporate sustainability reporting around the world is: A. the ASX corporate governance principles.

B. the global reporting initiative (GRI).

C. the balanced scorecard.

D. none of the above.

11 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Answer: B Difficulty: Moderate Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 43. Which of these is a standard disclosure for sustainability reporting recommended by the Global Reporting Initiative?

A. Disclosure of strategy.

B. Disclosure of the management approach used.

C. Disclosure of performance indicators.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 44. Which statement about the effect of the Global Reporting Initiative (GRI) and strategic decision-making is not true?

A. The GRI broadens management perspectives.

B. Management must consider questions such as how the perception of the company can be improved or damaged in the longer term.

C. Strategic decision-making is less difficult than short-term decision-making as more options become available when looking to the longer-term.

D. SWOT analysis is an approach that can be applied to strategic decision-making.

Answer: C Difficulty: Moderate Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 45. Under the GRI Guidelines for General Standard Disclosures, which of the following would not be reported under governance?

A. The process for appointing executives responsible for environmental issues.

B. Processes followed for consultation between the executive body and the stakeholders.

C. The composition and process selection for directors.

D. A listing of all organisations constituting the group in the consolidated report.

Answer: D Difficulty: Complex Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 46. The specific standards classifications used by the GRI for disclosure does not include: A. economic.

B. environmental.

12 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

C. governance.

D. social.

Answer: C Difficulty: Basic Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 47. Which of the following statements relating to integrated reporting is incorrect?

A. There are no similarities at all between the integrated and GRI frameworks.

B. The framework for integrated reporting appears to be more aligned with traditional accounting principles than with the GRI framework.

C. Integrated reports give the impression of being more business oriented than socially or environmentally focussed.

D. Integrated reports appear to target the financial providers.

Answer: A Difficulty: Complex Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking 48. The GRI Guidelines relating to reporting content covers the areas of sustainability context and: A. materiality.

B. completeness.

C. shareholder inclusiveness.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 7.5: Outline the Global Reporting Initiative (GRI), and discuss its main framework in broad terms A-Head: The Global Reporting Initiative (GRI) AACSB: 3 – Analytical thinking

LO 7.6: Outline integrated reporting and its relationship with sustainability reporting using the GRI Standards Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.  49. What are the unique features of the IIRC framework that are different from GRI Guidelines?

A. Focuses on long-term strategy only.

B. Aimed at providers of financial capital.

C. Contains detailed guidelines on content of reports.

D. All of the above.

Answer: B 13 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 7.6: Outline integrated reporting and its relationship with sustainability reporting using the GRI Standards A-Head: Integrated Reporting AACSB: 3 – Analytical thinking 50. The benefits of adopting integrated reporting as stated by participating companies are: A. integrated management.

B. more clarity on business issues.

C. improved stakeholder relationships.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 7.6: Outline integrated reporting and its relationship with sustainability reporting using the GRI Standards A-Head: Integrated Reporting AACSB: 3 – Analytical thinking 51. As stated in Real World 7.7, IIRC has listed The Crown Estate’s integrated reporting as one of the leading practices that can be an example to others. Based on this company, some examples of created value that can be included in integrated reports are: A. average training hours per employee.

B. amount of capital spent on developments.

C. yearly increase in net profit.

D. all of the above.

Answer: D Difficulty: Complex Learning Objective 7.6: Outline integrated reporting and its relationship with sustainability reporting using the GRI Standards A-Head: Integrated Reporting AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

52. IIRC is a global coalition that promotes communication about value creation as the next step in the evolution of reporting.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 7.6: Outline integrated reporting and its relationship with sustainability reporting using the GRI Standards A-Head: Integrated Reporting AACSB: 3 – Analytical thinking 53. Integrated reports are prepared based on strict standards and guidelines, not on principles.

A. True B. False Answer: B 14 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 7.6: Outline integrated reporting and its relationship with sustainability reporting using the GRI Standards A-Head: Integrated Reporting AACSB: 3 – Analytical thinking 54. Traditional financial statements show historic data and meet compliance requirements; however, they are not able to provide a holistic view of company value.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 7.6: Outline integrated reporting and its relationship with sustainability reporting using the GRI Standards A-Head: Integrated Reporting AACSB: 3 – Analytical thinking

LO 7.7: Assess the importance of corporate social responsibility and sustainability reporting, and identify any issues that you see as critical to their success and implementation True/False: Write 'T' if the statement is true and 'F' if the statement is false.

55. A survey conducted by KPMG in 2017 found an increase in the number of world’s top companies that produce detailed reports on corporate social responsibility.

A. True B. False Answer: A Difficulty: Basic Learning Objective 7.7: Asses the importance of corporate social responsibility and sustainability reporting, and identify any issues that you see as critical to their success and implementation A-Head: Assessment of Corporate Responsibility and Sustainability Reporting AACSB: 3 – Analytical thinking

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

56. In 2018, Ceres produced a report called Turning Point: Corporate Progress on the Ceres Roadmap for Sustainability. The sustainability points outlined in the report include: A. climate change risk.

B. renewable energy.

C. human rights.

D. all of the above.

Answer: D 15 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 7.7: Asses the importance of corporate social responsibility and sustainability reporting, and identify any issues that you see as critical to their success and implementation A-Head: Assessment of Corporate Responsibility and Sustainability Reporting AACSB: 3 – Analytical thinking

16 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Atrill, Accounting 8e Chapter 8: Analysis and interpretation of financial statements LO 8.1 Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison and identify the key aspects of financial performance and financial position that are evaluated by the use of ratios.

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. The incorrect statement concerning financial ratios is: A. A ratio expresses the relationship between two figures appearing in the financial statements.

B. Ratios are easy to interpret but difficult to calculate.

C. Ratios adjust for scale of operations and allow comparisons between businesses of different sizes.

D. None of the above, i.e., all are true statements.

Answer: B Difficulty: Moderate Learning Objective 8.1: Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison and identify the key aspects of financial performance and financial position that are evaluated by the use of ratios.

A-Head: Financial ratios AACSB: 3 – Analytical thinking 2. Ratios should not be used in isolation because: A. different ratios may give contradictory messages.

B. their behaviour is interrelated.

C. a decision will often have a number of aspects.

D. all of the above.

Answer: D Difficulty: Moderate Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 8.1: Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison and identify the key aspects of financial performance and financial position that are evaluated by the use of ratios.

A-Head: Financial ratios AACSB: 3 – Analytical thinking 3. What is a good benchmark to compare business performance during a given period?

A. budgeted performance.

B. past performance.

C. competitor's performance.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 8.1: Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison and identify the key aspects of financial performance and financial position that are evaluated by the use of ratios.

A-Head: Financial ratios AACSB: 3 – Analytical thinking 4. Which ratios measure the degree of risk associated with borrowing money from outsiders to finance the business?

A. gearing ratios.

B. investment ratios.

C. liquidity ratios.

D. efficiency ratios.

Answer: A Difficulty: Basic Learning Objective 8.1: Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison and identify the key aspects of financial performance and financial position that are evaluated by the use of ratios.

A-Head: Financial ratios AACSB: 3 – Analytical thinking 5. Which ratios are specifically concerned with assessing the returns and performance of shares held for investment purposes?

A. liquidity ratios.

B. gearing ratios.

C. investment ratios.

D. efficiency ratios.

Answer: C Difficulty: Basic Learning Objective 8.1: Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison and identify the key aspects of financial performance and financial position that are evaluated by the use of ratios.

A-Head: Financial ratios AACSB: 3 – Analytical thinking

2 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Short answer: Write the word or phrase that best completes each statement or answers the question 6. Place the key steps in financial ratio analysis in order of occurrence. i. Select the ratios considered appropriate and carry out the calculations. ii. Interpret and evaluate what the ratios reveal. iii. Identify the users and their information needs.

Answer: The correct order of occurrence is as follows: iii (identify the users and their information needs), i (select the ratios considered appropriate and carry out the calculations), and ii (interpret and evaluate what the ratios reveal).

Difficulty: Basic Learning Objective 8.1: Explain the importance of ratios in analysing financial performance, identify the possible bases for comparison and identify the key aspects of financial performance and financial position that are evaluated by the use of ratios.

A-Head: Financial ratios AACSB: 3 – Analytical thinking

LO 8.2 Identify the main ratios used to analyse profitability, and apply these ratios to a business.

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

7. A firm has total assets of $800,000 and total liabilities of $200,000. If profit after tax and interest is $150,000, the return on shareholders' funds is: A. 9%.

B. 8%.

C. 12.5%.

D. 25%.

Answer: D Difficulty: Basic Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 8 – Application of knowledge 8. From the following information, calculate Todd Ltd's rate of return on ordinary shareholders' funds.

Ordinary share capital $600,000.

Retained profits and reserves $200,000.

180,000 fully paid $2.00 10% Preference shares.

Net profit after tax and before preference dividend $276,000.

A. 30.0%.

B. 16.0%.

C. 20.0%.

D. 26.0%.

Answer: A 3 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 8 – Application of knowledge 9. A firm has total assets of $900,000 and total liabilities of $400,000. There are no preference shareholders. Earnings before interest and taxes are $100,000. Interest is $21,000 and taxes are $34,000. The return on ordinary shareholders' funds is: A. 8.0%.

B. 12.5%.

C. 9.0%.

D. 3.8%.

Answer: C Difficulty: Moderate Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 8 – Application of knowledge 10. Which ratio is considered to be the primary measure of overall profitability as it assesses how effectively the business has used its funds?

A. return on capital employed.

B. gross profit margin.

C. return on ordinary shareholders' funds.

D. operating profit margin.

Answer: A Difficulty: Moderate Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 3 – Analytical thinking 11. Operating profit before interest and taxation, divided by sales × 100/1 is the formula for: A. return on capital employed.

B. asset turnover period.

C. return on shareholders' funds.

D. operating profit margin.

Answer: D Difficulty: Basic Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 3 – Analytical thinking 12. R Co had a profit of $100,000 before tax, after deducting $18,000 in interest expense. R Co's non-current liabilities and equity total $1,000,000. Return on capital employed, before interest and tax is: A. 13%.

B. 11.8%.

C. 10%.

4 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

D. 9%.

Answer: B Difficulty: Basic Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 8 – Application of knowledge 13. Why is interest added back to profit before tax when calculating return on total assets?

A. Because interest rates vary over time.

B. To indicate to lenders that some risk is involved.

C. Because the efficient use of resources should be examined independently from the method of financing.

D. Both A and B. Answer: C Difficulty: Moderate Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

14. Calculate the return on capital employed if net profit before interest and tax is $440,000, shareholders' funds are $5,000,000 and long-term loans are $4,000,000.

Answer: 4.9% Difficulty: Basic Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 8 – Application of knowledge 15. If gross profit is $500,000, interest expense is $200,000, sales is $1,900,000 and total assets are $5,400,000, calculate the gross profit margin.

Answer: 26.3% Difficulty: Basic Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 8 – Application of knowledge 16. On what does the adequacy of the gross profit margin depend?

Answer: Selling and buying price Difficulty: Basic Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios 5 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

17. The formula for gross profit margin is gross profit divided by total equity.

A. True B. False Answer: B Difficulty: Basic Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 3 – Analytical knowledge

Essay: Write your answer in the space provided or on a separate sheet of paper.

18.

XXX Co Industry Average 2020 2021

2019 2022 Return on Capital Employed 12.6% 11.7% 10.8% 12% Operating Profit Margin 9% 9% 9% 8% Gross Profit Margin 30% 31% 33% 35% REQUIRED: Discuss what the above ratios reveal about the profitability of the firm XXX Co. Answer: The return on capital employed has declined over the three years and at 10.8% is below the industry average of 12%.

The reason for the decline in return on capital employed is difficult to determine without having access to the raw data the ratios are based on. If more information were available, we could analyse the ROCE by breaking it down into its two components of operating profit margin to sales revenue and sales revenue to long-term capital employed. If sales revenue is the issue, factors that could be responsible for the slow down in the volume of sales compared to long-term capital employed are poor performance by sales staff, a change in the product mix and a lack of efficiency in the use of assets, e.g., a build up of inventory or accounts receivable or recent investment projects that are not delivering profits at the rate of older projects.

The operating profit margin has remained constant and therefore is not the reason for the drop in ROCE. The operating profit margin is also above the industry average. However, while the operating profit margin has remained steady, there has been an increase in the gross profit margin, indicating that expenses have been proportionally increasing and have offset the improved gross profit margin trend.

The information available is limited and raises issues rather than providing answers. It would be useful to have the absolute figures available on which the ratio calculations are based. Further investigation should be carried out into the inventory turnover ratio and 6 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

the debtor's turnover ratio. Capital expenditure in the last 3 years should be scrutinised to establish that the funds have been used productively.

Difficulty: Complex Learning Objective 8.2: Identify the main ratios used to analyse profitability, and apply these ratios to a business.

A-Head: Profitability ratios AACSB: 1 – Written and oral communication [BLANK]

LO 8.3 Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

19. Which of these is not an efficiency ratio?

A. Asset turnover period.

B. Average settlement period for accounts receivable.

C. Current ratio.

D. Average inventory turnover period.

Answer: C Difficulty: Moderate Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 3 – Analytical thinking 20. SSS Ltd has provided information from its financial statements for the year ended 30 June 2021.

Sales (all on credit) $2,000,000 Gross profit on sales 1,000,000 Net profit 150,000 Cost of sales 1,000,000 Inventory at end of year 200,000 Accounts receivable at end of year 500,000 The company trades 365 days per year. The number of times SSS's inventory turned over for 2021 is: A. 2.0 times.

B. 5.0 times.

C. 5.5 times.

D. 2.2 times.

Answer: B Difficulty: Moderate Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 8 – Application of knowledge 7 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

21. SSS Ltd has provided the following information from its financial statements for the year ended 30 June 2021.

Sales (all on credit) $2,000,000 Gross profit on sales 1,000,000 Net profit 150,000 Cost of sales 1,000,000 Inventory at end of year 200,000 Accounts receivable at end of year 500,000 The company trades 365 days per year. The number of times SSS's accounts receivable turned over for 2021 is: A. 5.0 times.

B. 1.8 times.

C. 3.8 times.

D. 4.0 times.

Answer: D Difficulty: Moderate Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 8 – Application of knowledge 22. Using the information below find the average inventory turnover for Vox Ltd in days.

Sales $1,800,000 Cost of sales 1,200,000 Stock on hand start 360,000 Stock on hand end 312,000 A. 102.2 days.

B. 63.26 days.

C. 94.8 days.

D. 68 days.

Answer: A Difficulty: Basic Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 8 – Application of knowledge 23. The following information was extracted from the financial records of Ross Ltd for the year ended 30 June 2021: Cash Sales $1,800,000 Credit Sales 1,200,000 Accounts receivable 360,000 Cost of Sales 312,000 If there are 365 trading days per year, calculate for the managing director the number of days that accounts receivable are outstanding at 30 June 2021.

A. 86 days.

B. 51 days.

C. 114 days.

D. 46 days.

Answer: D Difficulty: Moderate 8 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 8 – Application of knowledge 24. What does the inventory turnover period ratio measure?

A. the liquidity of the firm.

B. how much the firm's current assets could decrease and still leave it able to pay its current liabilities.

C. profitability.

D. the average time an organisation holds inventory.

Answer: D Difficulty: Moderate Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 3 – Analytical thinking 25. Which statement is not correct?

A. A business will prefer a shorter settlement time for its accounts receivable rather than a longer settlement period.

B. An asset turnover figure of 1.5 times is preferred to a figure of 1.2 times.

C. A business will prefer a longer average inventory turnover time rather than a shorter turnover time.

D. None of the statements, i.e., all are correct.

Answer: C Difficulty: Complex Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 3 – Analytical thinking 26. U2 Ltd is considering whether to offer trade credit to A1 Ltd. The ratio from A1's accounts that will be most useful in assessing the firm's ability to repay its trade debts on time is the: A. average settlement period for accounts payable.

B. asset turnover period.

C. interest cover.

D. gearing Answer: A Difficulty: Complex Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 3 – Analytical thinking 27. Which of these is not an advantage of a shorter inventory turnover period?

A. It means fewer funds are tied up in inventory so more are available for use in the business.

B. It means less storage space is needed for inventory.

C. It means that management can have the cost advantage of buying in bulk.

D. It means that inventory is less likely to become obsolete or out of date.

9 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Answer: C Difficulty: Moderate Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 3 – Analytical thinking 28. Which statement concerning the average settlement period for accounts payable is correct?

A. Accounts payable provide a free source of finance for a business.

B. It is best to pay accounts payable as quickly as possible.

C. It is always best for the business to make creditors wait for their money for as long as possible.

D. A change in the accounts payable turnover period of 56 days to 65 days means that accounts payable are being paid faster.

Answer: A Difficulty: Complex Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

29. Which ratios are specifically concerned with assessing the efficiency with which assets have been used by the business?

Answer: Efficiency ratios Difficulty: Basic Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 3 – Analytical thinking

30. If the turnover period for accounts receivable is 8.1 times per annum, what is the average number of days it takes to collect cash from accounts receivable?

Answer: 45 days Difficulty: Basic Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 8 – Application of knowledge 31. Lucky Trading reported total sales amounting to $1,800,000 in the year 2021, of which 80% were on credit. At 31 December, customers owed $200,000. If the firm operates for 365 days a year, how long, on average, does it take to collect money from its debtors?

Answer: 51 days Difficulty: Moderate 10 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 8.3: Identify the main ratios used to analyse efficiency regarding usage of assets, and apply these ratios to a business A-Head: Efficiency ratios AACSB: 8 – Application of knowledge

LO 8.4 Identify the main ratios used to analyse liquidity, and apply these ratios to a business Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

32. Which of these ratios is not directly relevant to the evaluation of a company's shortterm liquidity position?

A. Operating profit ratio.

B. Current ratio.

C. Quick ratio.

D. Acid test ratio.

Answer: A Difficulty: Basic Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 3 – Analytical thinking 33. What does the current ratio measure?

A. use of assets.

B. liquidity.

C. investments.

D. profitability.

Answer: B Difficulty: Basic Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 3 – Analytical thinking 34. Dollar Ltd has a current ratio of 2:1. This means that: A. there is $2 of current assets for every $1 of current liabilities.

B. its current assets are half its current liabilities.

C. its current assets are insufficient to meet its current liabilities.

D. its current assets are equal to its current liabilities.

Answer: A Difficulty: Basic Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity 11 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 35. Because a company's inventory is less liquid than its other current assets when investors are assessing liquidity, they should examine the: A. debt-equity ratio.

B. accounts receivable turnover ratio.

C. acid test ratio.

D. current ratio.

Answer: C Difficulty: Moderate Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 3 – Analytical thinking 36. Solvent Ltd has a quick ratio of 1.2:1 and its current liabilities amount to $200,000. If it purchased $40,000 of inventory on credit, its new quick ratio would be: A. unable to be calculated.

B. higher.

C. unaffected by the transaction.

D. lower.

Answer: D Difficulty: Complex Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 3 – Analytical thinking 37. What does the acid test ratio eliminate from its calculation, because it is considered the least liquid of the current assets?

A. bank bills B. accounts receivable C. government securities D. inventory Answer: D Difficulty: Basic Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 3 – Analytical thinking 38. If Fuego Ltd has a current ratio of 2.5:1 and current assets are $600,000, how much are the company's current liabilities?

A. $300,000.

B. $240,000.

C. $360,000.

D. $200,000.

Answer: B Difficulty: Complex Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity 12 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 8 – Application of knowledge 39. If current assets exceed current liabilities, the payment of accounts payable will: A. decrease the current ratio.

B. increase the level of cash held.

C. increase the current ratio.

D. do none of the above.

Answer: C Difficulty: Complex Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 3 – Analytical thinking 40. Which of the following businesses would you expect to have the highest current ratio?

A. Service business that sells on credit.

B. Manufacturer.

C. Retailer.

D. Service business that sells for cash.

Answer: B Difficulty: Basic Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

41. Holidaze Ltd reports the following information: Net profit $30,000 Total assets 950,000 Current liabilities 285,000 Deferred liabilities 405,000 If current assets represent 60% of total assets, what is Holidaze Ltd's current ratio?

Show your work.

Answer: $950,000 total assets × 60% / $285,000 current liabilities = 200% Difficulty: Complex Learning Objective 8.4: Identify the main ratios used to analyse liquidity, and apply these ratios to a business A-Head: Liquidity AACSB: 8 – Application of knowledge

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LO 8.5 Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

42. What does financial solvency refer to the ability of an entity to do?

A. improve sales.

B. earn a high rate of profit.

C. meet its long-term obligations.

D. Both A and B. Answer: C Difficulty: Basic Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 3 – Analytical thinking 43. A company with a higher level of gearing will have: A. a high liabilities/total assets ratio.

B. a lower owners' equity/total assets ratio.

C. a higher owners' equity/total assets ratio.

D. Both A and B. Answer: D Difficulty: Complex Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 3 – Analytical thinking 44. What ratio helps to measure the risk involved in financing a business with borrowed funds?

A. asset turnover ratio.

B. current ratio.

C. interest cover ratio.

D. profit margin ratio.

Answer: C Difficulty: Basic Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 3 – Analytical thinking 45. Trendy Ltd's net profit after tax was $1,200 and its interest expense was $400.

Assuming corporate tax is $400, what is the company's interest cover ratio?

A. 1.8.

B. 3.0.

C. 5.0.

D. 1.2.

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Answer: C Difficulty: Moderate Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 8 – Application of knowledge 46. Which of these is not an advantage of using borrowed funds to finance a business?

A. Interest on borrowings is tax deductible.

B. Borrowing can be used to boost returns to owners, as long as the return on the funds exceeds the cost of interest.

C. Lenders do not dilute ownership interest in the business.

D. Interest on borrowing is a legal commitment that must be met.

Answer: D Difficulty: Complex Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 3 – Analytical thinking 47. Which of these are alternative measures of gearing?

A. Total liabilities/total assets.

B. Total liabilities/total owners' equity.

C. All are alternative measures of gearing.

D. Long-term liabilities/ total owners' equity.

Answer: C Difficulty: Basic Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

48. Using the formula, gearing ratio = long-term liabilities/ (shareholders' funds + longterm liabilities) × 100/1, calculate the gearing ratio from the following information.

Long-term liabilities $18m, Shareholders' funds $14m.

Answer: 56% Difficulty: Basic Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 8 – Application of knowledge

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Essay: Write your answer in the space provided or on a separate sheet of paper.

49.

Brad's Engineering Pty Ltd

Statement of financial positions as at 30 June Total Current Assets Total Fixed Assets TOTAL ASSETS Total Current Liabilities Long-term Liabilities TOTAL LIABILITIES NET ASSETS (Assets - Liabilities) SHAREHOLDERS' EQUITY Share capital Reserves and retained profits

2020 $ 11,080 75,000 $86,080 3,400 20,000 $23,400 $62,680

2019 $ 10,280 42,000 $52,280 1,960 8,500 $10,460 $41,820

40 000 22,680 $62,680

30 000 11,820 $41,820

Additional Information: 2020 2019 Net profit after interest & tax $10,860 $6,000 Interest expense 2,000 900 Taxation expense 3,000 1,500 REQUIRED: a) From the information provided above, calculate each of the following ratios for each of the years ending 30 June 2019 and 2020.

Gearing ratio. Use formula Interest cover ratio. Use formula b) Comment on the movements in the ratios over the two years and the adequacy of the level of gearing and interest cover.

Answer: Brad's Engineering Pty Ltd a) 2020 2019 $ $ Gearing ratio = 24% Interest cover ratio

17%

=

= = 7.9 times 9.3 times b) The increase in the gearing ratio from 17% in 2019 to 24% in 2020 indicates a greater reliance on long-term borrowings rather than shareholders' funds. However, the absolute level of gearing would not normally be considered high, even with the increase in borrowings in 2020. To further judge the gearing situation, the ratio results need to be compared with a yardstick such as industry average results.

The decrease in the interest cover ratio from a 9.3 times cover in 2019 to a 7.9 times cover in 2020 indicates a drop in the level by which profits cover fixed interest. However, the 16 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

absolute level of the interest cover at 9.3 times and 7.9 times, by normal standards, indicates a comfortable margin to cover fixed interest payments. Profits would have to fall considerably before Brad's Engineering Pty Ltd was unable to meet its interest obligations. To further judge the adequacy of the interest cover, the ratio results need to be compared with a yardstick such as the average interest cover typical for the industry.

Difficulty: Complex Learning Objective 8.5: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Financial gearing (leverage) ratios AACSB: 1 – Written and oral communication

LO 8.6 Identify the main ratios used to analyse investment performance, and apply these ratios to a business Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

50. Which of these ratios measure returns to shareholders?

A. Earnings per share.

B. Dividend yield.

C. Dividend payout ratio.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking 51. Dividend yield on ordinary shares is calculated as: A. annual dividend divided by earnings.

B. annual dividend divided by issued capital.

C. dividends per share divided by market price per share D. none of the above.

Answer: C Difficulty: Basic Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking 52. Use this data to calculate earnings per ordinary share (EPS) for Orange Ltd. Market price for each Orange Ltd share $7.80 Net Profit (after interest, tax) $6,400 Number of ordinary shares issued 15,000 A. $0.19.

B. $0.43.

C. $0.39.

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D. $0.61.

Answer: B Difficulty: Moderate Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 8 – Application of knowledge 53. The current market price of Fixit Ltd's ordinary shares is $5.00 each. If the latest earnings per share is $0.50, the company's price-earnings ratio is: A. 10 times.

B. 2.0 times.

C. 2.5 times.

D. 20 times.

Answer: A Difficulty: Moderate Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 8 – Application of knowledge 54. If the price-earnings ratio is 8 times, the earnings yield is: A. 8%.

B. 10%.

C. 80%.

D. 12.5%.

Answer: D Difficulty: Complex Learning Objective 8.6: Identify the main ratios used to analyse financial gearing (leverage), and apply these to a business A-Head: Investment ratios AACSB: 8 – Application of knowledge 55. Success Ltd has a price-earnings ratio of 5 and earnings per share of 22 cents. Its issued capital consists of 2,000,000 $1 ordinary shares. The market price per share is: A. $1.10.

B. $1.00.

C. $4.40.

D. none of the above.

Answer: A Difficulty: Moderate Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 8 – Application of knowledge 56. Blue Company reported: Share price Net profit Preference dividend Ordinary dividend Issued ordinary shares

$18 $3,000 $500 $1,000 1,000 shares 18

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Earnings per ordinary share is: A. $2.50.

B. $3.00.

C. $1.80.

D. $1.50.

Answer: A Difficulty: Moderate Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 8 – Application of knowledge 57. Blue Company reported: Share price $18 Net profit $3,000 Preference dividend $500 Ordinary dividend $1,000 Issued ordinary shares 1,000 shares The price-earnings ratio per ordinary share is: A. 1.8:1.

B. 5.0:1.

C. 7.2:1.

D. 3.0:1.

Answer: C Difficulty: Complex Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 8 – Application of knowledge 58. Which user would be interested in examining the results of the profitability and gearing ratios?

A. Shareholders.

B. Long-term lenders.

C. Potential investors.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking 59. Which of these is a factor that can influence the amount a company is prepared to distribute as dividends to its shareholders?

A. The availability of cash.

B. Investors expectations.

C. The need to retain funds within the business for future growth.

D. All of the above.

Answer: D Difficulty: Moderate 19 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking 60. Dividend yield is calculated as: A. market price per share/dividend per share.

B. dividend per share/market price per share.

C. dividend/ number of issued shares.

D. net profit/market price per share.

Answer: B Difficulty: Basic Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 8 – Application of knowledge

Short answer: Write the word or phrase that best completes each statement or answers the question.

61. If earnings per share is 30c and the market price of each share is $6, what is the priceearnings ratio?

Answer: 20:1 Difficulty: Basic Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking 62. If earnings per share is 85c, dividend per share is 50c, and the market price of each share is $9.35, what is the price-earnings ratio?

Answer: 11:1 Difficulty: Basic Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking 63. If the earnings yield is 6.67%, what is the price-earnings ratio?

Answer: 15:1 Difficulty: Basic Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking

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True/False: Write 'T' if the statement is true and 'F' if the statement is false.

64. Dividends announced during the period divided by the number of shares on issue is the formula for the return on dividends ratio.

A. True B. False Answer: B Difficulty: Basic Learning Objective 8.6: Identify the main ratios used to analyse investment performance, and apply these ratios to a business A-Head: Investment ratios AACSB: 3 – Analytical thinking

LO 8.7 Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

65. Which of these is not a limitation of ratio analysis?

A. Different accounting methods used by competitors.

B. Firms of different size cannot be compared.

C. One ratio is not enough information to make an overall judgement.

D. All are limitations.

Answer: B Difficulty: Complex Learning Objective 8.7: Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis A-Head: Other aspects of ratio analysis AACSB: 3 – Analytical thinking 66. The type of analysis being carried out when a company's gross profit ratio for three years is graphed and compared with the average industry gross profit ratio calculated over the same time period is: A. parallel analysis.

B. vertical analysis.

C. trend analysis.

D. gearing analysis.

Answer: C Difficulty: Complex Learning Objective 8.7: Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis A-Head: Other aspects of ratio analysis AACSB: 3 – Analytical thinking 67. Which of these is a limitation of financial ratio analysis?

A. Suitable yardsticks for comparisons are not always available.

B. Ratios have a restricted vision as they only assess the past.

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C. Year-end data is not necessarily typical of the position during the year.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 8.7: Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis A-Head: Other aspects of ratio analysis AACSB: 3 – Analytical thinking 68. Which of these is not considered a limitation of financial ratio analysis?

A. It does not consider qualitative factors.

B. Ratios are difficult to calculate.

C. There is no adjustment for the effects of inflation.

D. All of the above.

Answer: B Difficulty: Moderate Learning Objective 8.7: Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis A-Head: Other aspects of ratio analysis AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

69. Discuss the limitations of ratio analysis.

Answer: Answers will vary but would include some or all of the following with explanations: • Quality of financial statements • Inflation • Restricted view given by ratios • Basis for comparison • Financial position ratios Difficulty: Moderate Learning Objective 8.7: Identify a range of other issues relating to financial analysis, including the main limitations of ratio analysis A-Head: Other aspects of ratio analysis AACSB: 3 – Analytical thinking

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Atrill, Accounting 8e Chapter 9: Cost-volume-profit analysis and relevant costing LO 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. How are fixed costs best defined?

A. as fixed in relation to changes in activity over the relevant range of output.

B. as fixed for all time.

C. as fixed for 6 months.

D. as fixed for a given number of products.

Answer: A Difficulty: Basic Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 2. Which of these would be considered a fixed cost?

A. Cost of fuel for a transport company.

B. Laundry costs to wash towels used by a hairdresser.

C. Insurance premium.

D. Materials used in production.

Answer: C Difficulty: Basic Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 8 – Application of knowledge 3. How are fixed costs represented graphically?

A. the intersection of the total costs and total revenue lines.

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B. starting at zero and increasing as a straight line as activity increases.

C. starting at a given point and increasing as a straight line as activity increases.

D. a horizontal line, staying the same irrespective of the level of activity.

Answer: D Difficulty: Moderate Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 4. Semi-fixed costs are best defined as: A. having both fixed and variable elements.

B. varying over time.

C. costs ignored in cost-volume-profit analysis.

D. none of the above.

Answer: A Difficulty: Basic Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 5. An example of a variable cost is: A. Manager's salary.

B. Local government rates.

C. Cost of raw materials.

D. Rent.

Answer: C Difficulty: Basic Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 8 – Application of knowledge 6. Variable costs are best defined as: A. varying from period to period.

B. varying directly in proportion to the number of employees.

C. varying directly in proportion to the level of activity.

D. varying over time.

Answer: C Difficulty: Basic Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour.

A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 7. As output increases, variable costs per unit are: A. semi-fixed.

B. constant.

C. variable.

D. proportional to total costs.

Answer: B 2 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 8. Which of the following is an example of a semi-fixed (semi-variable) cost?

A. cost of telephone calls.

B. total telephone account, both calls and rental.

C. cost of telephone rental.

D. none of the above.

Answer: B Difficulty: Moderate Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 9. If total costs are $30,000 at an output of 3,000 units and $35,000 at an output of 3,500 units, variable costs per unit are: A. $10 per unit.

B. $20 per unit.

C. $15 per unit.

D. $12 per unit.

Answer: A Difficulty: Moderate Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 10. If total costs are $30,000 at an output of 2,000 units and $45,000 at an output of 3,500 units, and variable costs are $10 per unit, total fixed costs are: A. $15,000 B. $10,000 C. $20,000 D. $25,000 Answer: B Difficulty: Complex Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 8 – Application of knowledge 11. The method that can be used to separate semi-variable costs into their fixed and variable components is A) High-low method.

B) The line of best fit.

C) Linear regression method.

D) All of the above methods.

Answer: D Difficulty: Basic 3 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 12. If total costs are $90,000 at an output of 12,000 units and $105,000 at 15,000 units, fixed costs are: A. $15,000.

B. $10,000.

C. $5,000.

D. $20,000.

Answer: D Difficulty: Complex Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 8 – Application of knowledge

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

13. Depending on circumstances and business activities, labour costs can be fixed or variable.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

14. How are variable costs represented graphically?

Answer: starting at zero and increasing as a straight line as activity increases.

Difficulty: Moderate Learning Objective 9.1: Distinguish between fixed costs and variable costs, and explain the importance of a detailed understanding of cost behaviour A-Head: The behaviour of costs AACSB: 3 – Analytical thinking

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LO 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

15. The term 'relevant range,' means the range: A. over which costs are relevant.

B. where the firm will break-even.

C. of activity within which an entity would normally operate.

D. over which the firm has a margin of safety.

Answer: C Difficulty: Moderate Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: The behaviour of costs AACSB: 3 – Analytical thinking 16. If the sales output of a firm increases, what will be the impact on the break-even point?

A. Increase.

B. Reduce.

C. No change.

D. Equal the margin of safety.

Answer: C Difficulty: Moderate Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 3 – Analytical thinking 17. What does an operating loss indicate?

A. sales are less than break-even.

B. sales are greater than break-even.

C. sales are equal to break-even.

D. none of the above.

Answer: A Difficulty: Basic Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 3 – Analytical thinking 18. How is the break-even point represented graphically?

A. the intersection of total costs and total revenue lines.

B. starting at zero and increasing as a straight line as activity increases.

C. starting at a given point and increasing as a straight line as activity increases.

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D. a horizontal line, staying the same irrespective of the level of activity.

Answer: A Difficulty: Basic Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 3 – Analytical thinking 19. Sand Art sells ceramic pots. The pots sell for $30 each with variable costs totalling $25 per pot. Fixed costs are $50,000. The number of pots that have to be sold to break even is: A. 10,000 pots.

B. 8,000 pots.

C. 2,000 pots.

D. 7,000 pots.

Answer: A Difficulty: Basic Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 8 – Application of knowledge 20. Sand Art has increased its selling price to $35. All other costs remain constant (variable costs $25 per pot and fixed costs $50,000). The number of pots that have to be sold to break even is: A. 7,000 pots.

B. 4,000 pots.

C. 5,000 pots.

D. 6,000 pots.

Answer: C Difficulty: Basic Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 8 – Application of knowledge 21. The vertical axes on a break-even chart and a profit-volume chart respectively are: A. profit: sales revenue and costs.

B. volume of output: volume of output.

C. sales revenue and costs: profit.

D. fixed costs: sales revenue.

Answer: C Difficulty: Moderate Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 3 – Analytical thinking

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Short answer: Write the word or phrase that best completes each statement or answers the question.

22. The statement of financial performance for LA Blues is: Sales $300,000 Variable Expenses $200,000 Contribution Margin $100,000 Fixed Expenses $20,000 Profit $80,000 If the break-even point in sales dollars is $62,500, what is the margin of safety?

Answer: $17,500 Difficulty: Moderate Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 8 – Application of knowledge 23. Eagle Co sells T-shirts. If the sales price per shirt is $10, the variable production costs are $7.00 per shirt and the fixed costs are $21,000 p.a., calculate the break-even point in sales dollars.

Answer: $7,000 Difficulty: Moderate Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 8 – Application of knowledge 24. If sales revenue totals $84,000, selling price is $6 per unit, variable costs are $2.50 per unit and fixed costs are $48,000 per annum, the profit that will be earned is: Answer: $1,000 Difficulty: Basic Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 8 – Application of knowledge 25. What is the break-even point?

Answer: The break-even point is the point at which total costs are equal to total revenue.

Difficulty: Basic Learning Objective 9.2: Apply the distinction between fixed and variable costs to explain and apply break-even analysis A-Head: Break-even analysis AACSB: 3 – Analytical thinking

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LO 9.3: Explain and apply the concept of contribution and contribution margin Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

26. Selling price per unit less variable costs per unit is known as: A. contribution margin.

B. direct cost.

C. avoidable cost.

D. all of the above.

Answer: A Difficulty: Basic Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 27. Which of the following statements is correct?

A. contribution margin contributes to profits.

B. contribution margin contributes to fixed costs.

C. contribution margin contributes to variable costs.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 28. Contribution per unit is best described as: A. the difference between total costs per unit and revenue per unit.

B. the difference between semi-fixed costs per unit and revenue per unit.

C. the difference between variable costs per unit and revenue per unit.

D. the difference between total fixed costs per unit and revenue per unit.

Answer: C Difficulty: Basic Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 29. Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces.

Sales price per unit $6.00 Variable cost per unit $3.00 Fixed costs per annum $9,000 30. Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces.

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Sales price per unit Variable cost per unit Fixed costs per annum

$6.00 $3.00 $9,000

31. Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces.

Sales price per unit $6.00 Variable cost per unit $3.00 Fixed costs per annum $9,000 Refer to the table above. The break-even point in units is: A. 1,800.

B. 5,500.

C. 1,285.

D. 3,000.

Answer: D Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 8 – Application of knowledge 32. Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces.

Sales price per unit $6.00 Variable cost per unit $3.00 Fixed costs per annum $9,000 Refer to the table above. The sale of 6,000 photo frames would result in: A. a loss of $2,000.

B. a profit of $6,000.

C. a profit of $9,000.

D. a loss of $3,000.

Answer: C Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 8 – Application of knowledge 33. Sales Extraordinaire sells one particular photo frame. It estimates that it can sell as many frames as it produces.

Sales price per unit $6.00 Variable cost per unit $3.00 Fixed costs per annum $9,000 Refer to the table above. Increasing the sales price to $8.00 and having a sales volume of 3,000 photo frames would result in: A. a profit of $6,000.

B. a loss of $1,000.

C. breaking even.

D. a profit of $1,000.

Answer: A Difficulty: Complex 9 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 9 3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 8 – Application of knowledge 34. The organisation more likely to be highly operationally geared is: A. Internet service provider.

B. Vehicle manufacturer.

C. Takeaway food outlet.

D. Hairdresser.

Answer: B Difficulty: Basic Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 35. High operating gearing refers to: A. an activity with relatively high fixed costs compared with its variable costs.

B. an activity with relatively high variable costs compared with its fixed costs.

C. an activity with relatively low fixed costs compared with its variable costs.

D. an activity with fixed costs equal to its variable costs.

Answer: A Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 36. A venture is said to be risky when the: A. actual level of activity is less than the planned level of activity.

B. actual level of activity is greater than the planned level of activity.

C. planned level of activity is only slightly above the break-even point.

D. none of the above.

Answer: C Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 37. Unique Tables manufacture coffee tables made of recycled timber. Market research has suggested that there will be strong demand for the tables. Due to this, management is debating whether to lease a new turning machine to meet increased production. To assist in their decision-making, the management accountant has supplied the following information: Blank Without With

Expected level of sales

turning machine

turning machine

1,500 units

1,500 units

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Sales price per unit

$150

$150

Variable costs per unit

$120

$110

Fixed costs

$7,500

$15,000

Refer to the table above. At the current level of sales, which of the following results are achieved?

A. Without the turning machine profit of $45,000.

With the turning machine profit of $52,500.

B. Without the turning machine profit of $30,000.

With the turning machine profit of $22,500.

C. Without the turning machine profit of $37,500.

With the turning machine profit of $45,000.

D. None of the above.

Answer: C Difficulty: Complex Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 8 – Application of knowledge 38. Unique Tables manufacture coffee tables made of recycled timber. Market research has suggested that there will be strong demand for the tables. Due to this, management is debating whether to lease a new turning machine to meet increased production. To assist in their decision-making, the management accountant has supplied the following information: Blank Without With turning machine

turning machine

1,500 units

1,500 units

Sales price per unit

$150

$150

Variable costs per unit

$120

$110

Fixed costs

$7,500

$15,000

Expected level of sales

Refer to the table above. As the level of sales increases above 1,500 units, the level of profit would increase: A. at the same rate with or without the turning machine.

B. at a faster rate with the turning machine.

C. at a faster rate without the turning machine.

D. none of the above.

Answer: B Difficulty: Complex Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 11 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

39. Unique Tables manufacture coffee tables made of recycled timber. Market research has suggested that there will be strong demand for the tables. Due to this, management is debating whether to lease a new turning machine to meet increased production. To assist in their decision-making, the management accountant has supplied the following information: Blank Without With turning machine

turning machine

1,500 units

1,500 units

Sales price per unit

$150

$150

Variable costs per unit

$120

$110

Fixed costs

$7,500

$15,000

Expected level of sales

Refer to the table above. The operating gearing for Unique Tables is: A. insignificant.

B. higher without the turning machine.

C. higher with the turning machine.

D. equal in both cases.

Answer: C Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 40. Which of these is a limitation in applying break-even analysis?

A. Stepped fixed costs.

B. The possibility of non-linear relationships.

C. Multi-product businesses.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 41. On a profit-volume chart, the slope of the graph is equal to: A. profit per unit.

B. variable costs per unit.

C. contribution margin per unit.

D. fixed plus variable costs per unit.

Answer: C Difficulty: Complex Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 12 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

42. On a profit-volume chart, the output where the graph line crosses the axis is the output where: A. profit equals zero.

B. the firm breaks even.

C. fixed costs are zero.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 43. The contribution margin is so called because it contributes to: A. variable costs.

B. fixed and variable costs.

C. fixed costs and profit.

D. fixed costs.

Answer: C Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 44. Variable costs per unit are also known as: A. marginal costs.

B. break-even costs.

C. activity costs.

D. semi-variable costs.

Answer: A Difficulty: Basic Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

45. When contribution margin per unit increases, break-even output increases.

C. True D. False Answer: B Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking

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Short answer: Write the word or phrase that best completes each statement or answers the question.

46. Describe the margin of safety.

Answer: The margin of safety is the difference between the actual output and the breakeven output.

Difficulty: Basic Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 3 – Analytical thinking 47. Tassie Devil World is a small zoo displaying native animals. The entrance fee is $15 per person. Variable costs of running the zoo are $8 per visitor and fixed costs are $200,000 per annum. The number of visitors that would be needed to make a profit of $20,000 per annum is: Answer: 31,429 Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 8 – Application of knowledge

Essay: Write your answer in the space provided or on a separate sheet of paper.

48. Explain the weaknesses of break-even analysis Answer: Answers may vary but should include some/all of the following aspects with explanation: • Non-linear relationships • Stepped fixed costs • Multi-product businesses Difficulty: Moderate Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 8 – Application of knowledge 49. Opal Incorporated sold 30,000 units of its product last year with the following results: Sales revenue $900,000 Variable Costs 630,000 Contribution Margin 270,000 Fixed Costs 190,000 Operating Profit $80,000 The company expects variable costs to increase by $3 per unit this year.

REQUIRED: 14 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

a) Assuming the unit sales price remains constant, compute the unit contribution margin for this year. b) Given the expected change in variable costs, how many units will have to be sold this year to earn the same operating profit as last year?

Answer: a) Unit sales price ($900,000 / 30,000 units)$30 Unit variable costs ($630,000 / 30,000 units) + $3 $24 Unit contribution margin $6 b) Desired unit sales = ($190,000 + $80,000) / $6 = 45,000 units Difficulty: Complex Learning Objective 9.3: Explain and apply the concept of contribution and contribution margin A-Head: Contribution AACSB: 8 – Application of knowledge

LO 9.4: Define and distinguish between relevant costs, outlay (historic) costs and opportunity costs Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

50. Information necessary for decision-making includes: A. qualitative information only.

B. quantitative information only.

C. information reported in financial reports only.

D. both quantitative and qualitative information.

Answer: D Difficulty: Basic Learning Objective 9.4: Define and distinguish between relevant costs, outlay (historic) costs and opportunity costs A-Head: Relevant cost, outlay cost and opportunity cost AACSB: 3 – Analytical thinking 51. Relevant costs for decision-making are those costs that: A. vary amongst alternatives.

B. represent fixed costs only.

C. are the same for all alternatives.

D. none of the above.

Answer: A Difficulty: Basic Learning Objective 9.4: Define and distinguish between relevant costs, outlay (historic) costs and opportunity costs A-Head: Relevant cost, outlay cost and opportunity cost AACSB: 3 – Analytical thinking 52. A marginal analysis of two or more possible courses of action takes into account: A. all the revenue received from each course of action.

B. all of the costs involved in each course of action.

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C. only the fixed costs involved in each course of action.

D. only the costs that vary with each course of action.

Answer: D Difficulty: Basic Learning Objective 9.4: Define and distinguish between relevant costs, outlay (historic) costs and opportunity costs A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

53. For short-run decisions, fixed costs can normally be deemed to be irrelevant.

A. True B. False Answer: A Difficulty: Basic Learning Objective 9.4: Define and distinguish between relevant costs, outlay (historic) costs and opportunity costs A-Head: Relevant cost, outlay cost and opportunity cost AACSB: 3 – Analytical thinking

LO 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

54. L Ltd can subcontract out one of its components at $18 each. The business can produce the component internally for a total cost of $19 including the allocation of fixed costs at $5 per component. L Ltd has spare capacity. Should it make the component internally or contract it out?

A. Subcontract as the total cost of subcontracting at $18 is cheaper than the cost of $19 for internal production.

B. Make the component as the variable cost of $14 ($19-$5) for internal production is cheaper than the $18 cost of subcontracting.

C. Subcontract as it will be easier.

D. None of the above.

Answer: B Difficulty: Moderate Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 55. Which of these is not a relevant qualitative factor in deciding to outsource a product rather than continue making it?

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A. Loss of in-house expertise and specialisation.

B. Loss of control over quality.

C. The quality of other products.

D. The reliability of supply.

Answer: C Difficulty: Basic Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking 56. Action Toys Pty Ltd usually sell 30,000 toys per annum. This year, they have excess stock of 10,000 toys; they usually retail the toys at $35 per unit. Their variable cost per unit is $20 and their annual fixed costs are $30,000. They have received 'a one time only expression of interest' from an overseas retail chain to purchase 7,500 units at $29 per unit. What would be the best advice you could provide to Action Toys?

A. Do not accept the order, as it is not worthwhile pursuing 'a one time only expression of interest.'

B. Do not accept the offer, as a loss will be incurred.

C. Do not accept the order, as the variable cost plus the fixed costs per unit amount to $30 per unit.

D. Accept the offer, as it will lead to a $9 per unit contribution to fixed costs.

Answer: D Difficulty: Moderate Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 57.

Computers Expertise Ltd provides three services, the details for which are as follows: Blank Basic Secretarial Expert Sales price per unit $20 $30 $50 Variable cost per $10 $12 $15 unit(paper, transport, etc.)

Labour time per 1 hour 2 hours 5 hours unit Annual fixed costs $20,000 Blank Blank The demand for all service is unlimited. The ability to provide the service is limited by the availability of qualified staff and therefore the labour time available.

Refer to the table above. Which product is the most profitable?

A. Expert, because it has the highest contribution margin.

B. Expert, because it has the highest sales price.

C. Secretarial, because it is the most pleasurable for staff.

D. Basic, because it provides the highest dollar contribution per labour hour.

Answer: D Difficulty: Moderate Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of 17 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 58.

Computers Expertise Ltd provides three services, the details for which are as follows: Blank Basic Secretarial Expert Sales price per unit $20 $30 $50 Variable cost per $10 $12 $15 unit(paper, transport, etc.)

Labour time per 1 hour 2 hours 5 hours unit Annual fixed costs $20,000 Blank Blank The demand for all service is unlimited. The ability to provide the service is limited by the availability of qualified staff and therefore the labour time available.

Refer to the table above. The demand for Secretarial Service is very strong, however, Computer Expertise does not have sufficient labour hours available to meet the demand.

An employment agency is able to supply qualified staff to provide the Secretarial Service.

What is the maximum price Computer Expertise should be prepared to pay per hour?

A. $9.

B. $18.

C. $30.

D. $12.

Answer: A Difficulty: Complex Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 59. Management's concern about 'scarce resource' is primarily due to: A. social and environmental reasons.

B. the desire to maximise total revenue.

C. the desire to minimise total costs.

D. the desire to make the most efficient use of scarce resources.

Answer: D Difficulty: Basic Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking 60. A business may prefer to make a product that it could subcontract at a cheaper price because: A. they may be concerned that having gained their business, the subcontractor could increase the price charged.

B. by subcontracting the business, they may find supply is less reliable.

C. by subcontracting the business, they may lose control over quality.

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D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking 61. Xon Company needs 1,000 components for one of its products. It can subcontract production of the components to the Eon Company for $40 each. The business can produce the components internally for a total variable cost of $30 per component. Xon Company has spare capacity. What will be the impact on Xon's profit if Eon's offer is accepted?

A. $1,000 increase.

B. $10,000 increase.

C. $10,000 decrease.

D. $1,000 decrease.

Answer: C Difficulty: Basic Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 62. Screen Saver Industries has spare production capacity due to the cancellation of a customer order. An overseas retail chain has offered the business an order for 300 units at a price of $25 each. The variable cost of the units is $20 each and the fixed costs are $3 per unit. What will be the impact on Screen Savers profit if the special order is accepted?

A. $1,500 increase.

B. $1,500 decrease.

C. $600 increase.

D. $600 decrease.

Answer: A Difficulty: Basic Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge Use the information below to answer the following questions.

Travel Made Easy Ltd provides three services: International travel, Interstate travel, and Holiday Packages. The results for the year were as follows: Blank International interstate Packages Total Revenue $200,000 $200,000 $100,000 $500,000 Variable costs 50,000 60,000 40,000 150,000 Contribution 150,000 140,000 60,000 350,000 Fixed costs 90,000 90,000 90,000 270,000 Net Profit $60,000 $50,000 ($30,000) $80,000 The Fixed costs have been shared equally between the three functions.

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63. Refer to the table above. Management is contemplating closing the Holiday Packages service; this would involve a cost saving of $40,000 per annum, namely, the variable costs. The fixed costs are not expected to change. The best advice to management is: A. close the service, and the business would make a profit of $110,000.

B. do not close the service, because profit would decrease by $60,000.

C. close the service and save $40,000.

D. do not close the service, because profit would decrease by $90,000.

Answer: B Difficulty: Complex Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 64. Refer to the table above. Assume that Travel Made Easy can sublet the space occupied by the Holiday Packages for $50,000 per annum. The best advice to management is: A. to close the service and save $40,000.

B. do not close the service, because profit would decrease by $10,000.

C. do not close the service, because profit would decrease by $40,000.

D. to close the service, and the business would make a profit of $130,000.

Answer: B Difficulty: Complex Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 65. Which is the approach to take in the short-run when considering the most efficient sales mix where there is a limiting factor?

A. Remove the limiting factor.

B. The sales price per unit for each alternative.

C. A comparison of the contribution margin per limiting factor for each alternative.

D. A comparison of the contribution margin for each alternative.

Answer: C Difficulty: Complex Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking 66. A Business makes three different products, the details of which follow: Product code A1 A2 A3 Selling price $50 $46 $40 Variable cost $20 $24 $16 Weekly demand-units 50 40 60 Machine time per unit 4 hours 4 hours 6 hours The maximum machine time available is 350 hours per week. How many machine hours should be spent manufacturing product A3?

A. 35 machine hours.

B. 240 machine hours.

C. 120 machine hours.

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D. None.

Answer: D Difficulty: Complex Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge 67. Why may management justifiably hesitate to close a service: A. because of emotional attachment to providing the service.

B. because closing one service may lead to a decline in the demand of other services.

C. because the loss made in providing one service can be compensated by the profit made by providing other services.

D. all of the above.

Answer: B Difficulty: Complex Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking 68. Where several products are produced and there is a scarce factor, what is the rule for deciding on the optimum product mix?

A. produce only the product with the highest contribution margin.

B. produce only the product with the highest contribution margin per unit of scarce factor.

C. produce as much as can be sold of the product with the highest contribution margin per unit of scarce factor, and use any remaining resource to produce the product with the next highest contribution margin per unit of scarce factor etc.

D. produce equal quantities of all products.

Answer: C Difficulty: Complex Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking 69. In which of these short-term decision areas are fixed costs generally irrelevant?

A. Make or buy decisions.

B. Closing a department.

C. Accepting or rejecting a special order.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 3 – Analytical thinking

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Essay: Write your answer in the space provided or on a separate sheet of paper.

70. The following information relates to component AHB2 manufactured by Aquarius Electronics.

Internal Manufacturing cost: Direct materials $30 (per unit) Direct labour 18 Variable manufacturing overhead 9 Fixed manufacturing overhead 17 74 External acquisition price (per unit) $54 REQUIRED: a) Based on the financial data presented, should Aquarius continue to manufacture the part or source it from the external supplier? b) What other factors need to be taken into account?

Answer: a) Per unit: ● Costs avoided (saved by buying externally) (variable costs) $57 ● Cost of buying externally $54 ● Net cost savings per unit to buy externally $3 Therefore, the economic conclusion is to buy externally and save $3 per unit. b) However other factors need to be considered in the decision: ● !"#$%&'()*+,%-.%+#$%/0-1'2+%3'//)*$1%$4+$05()), ● !"#$%2-5+*5'*+,%-.%3'//),%-.%+#(+%/0-1'2+ ● !"#$%/-33*6*)*+,%-.%+#$%$4+$05()%/0*2$%0*3*57%*5%+#$%.'+'0$ ● !"#$%/-33*6*)*+,%-.%+#$%*5+$05()%/0*2$%-.%8(5'.(2+'0$%.())*57%*5%+#$%.'+'0$ ● !9+#$0%*8/(2+3%-5%-/$0(+*-53%(51%3+(..%-.%(2&'*0*57%+#$%/0-1'2+%$4+$05()),%0(+#$0%+#(5%*5+$05()%

8(5'.(2+'0$: Difficulty: Moderate Learning Objective 9.5: Explain and apply the concept of relevant costing to a range of decision-making situations A-Head: Marginal analysis/relevant costing AACSB: 8 – Application of knowledge

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Atrill, Accounting 8e Chapter 10: Full costing LO 10.1 Explain the nature of full costing, and the reasons why this information is useful to managers.

Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. What does full cost represent?

A. only semi-variable costs.

B. variable costs.

C. both fixed and variable costs.

D. fixed costs.

Answer: C Difficulty: Basic Learning Objective 10.1: Explain the nature of full costing, and the reasons why this information is useful to managers.

A-Head: The nature of full costing AACSB: 3 – Analytical thinking 2. Full product costs comprise: A. non-production costs only.

B. both production and non-production costs.

C. production costs only.

D. all costs except warrantee costs.

Answer: B Difficulty: Basic Learning Objective 10.1: Explain the nature of full costing, and the reasons why this information is useful to managers.

A-Head: The nature of full costing AACSB: 3 – Analytical thinking 3. Which of the following statements is correct?

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A. Full costing takes into account all resources sacrificed to achieve a specific objective.

B. Full costing only takes into account manufacturing costs.

C. Only variable costs are required to determine the selling price for a product.

D. Full costing cannot be used in the service industries.

Answer: A Difficulty: Moderate Learning Objective 10.1: Explain the nature of full costing, and the reasons why this information is useful to managers.

A-Head: The nature of full costing AACSB: 3 – Analytical thinking 4. Anything for which a separate measurement of cost is desired is called a: A. cost unit.

B. job.

C. article.

D. fixed cost object.

Answer: A Difficulty: Basic Learning Objective 10.1: Explain the nature of full costing, and the reasons why this information is useful to managers.

A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking 5. A cost unit can be: A. a product.

B. a department.

C. a job.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 10.1: Explain the nature of full costing, and the reasons why this information is useful to managers.

A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking

LO 10.2 Deduce the full cost of a unit of output in a single or multi-product – (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multiservice) environment Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

6. In full costing overhead, costs are: A. economically identifiable with the cost object.

B. always fixed costs.

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C. not economically identifiable with the cost object.

D. Both B and C. Answer: C Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking 7. The approach to deriving full costs in an operation where only identical products are produced is: A. (total cost times percentage allocated to each unit) divided by total units.

B. total cost divided by total units.

C. (total units times percentage allocated to each unit) times total cost.

D. total units times total cost.

Answer: B Difficulty: Basic Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking 8. What costing system is used to assign costs to a distinct, identifiable job or service?

A. average costing system.

B. material control system.

C. process costing system.

D. job costing system.

Answer: D Difficulty: Basic Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking 9. A printing firm that produces newsletters, advertising brochures and other small documents for individual clients is operating what type of costing system?

A. Process costing.

B. Job costing.

C. Periodic costing.

D. None of the above.

Answer: B Difficulty: Basic Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and

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discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 10. The classification of a cost as either direct or indirect depends primarily on: A. the computer tracing system within the organisation.

B. the definition of the cost object.

C. the knowledge of the accountant.

D. the type of business.

Answer: B Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking Jan runs a successful hairdressing salon in the CBD. The type of costs incurred in providing services to clients are: i. Hairdressers' salaries ii. Shampoo and Conditioner (no individual records kept of usage) iii. Colour and Perm Solutions (individual records kept of usage per client) iv. Electricity and Gas v. Depreciation of equipment 11. Refer to the information above. The direct costs incurred in providing a haircut only to a client would be: A. all costs mentioned above.

B. hairdresser salary.

C. hairdresser salary, shampoo and conditioner and electricity and gas.

D. hairdresser salary, shampoo and conditioner.

Answer: B Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 12.

Jan runs a successful hairdressing salon in the CBD. The type of costs incurred in providing services to clients are: i. Hairdressers' salaries ii. Shampoo and Conditioner (no individual records kept of usage) iii. Colour and Perm Solutions (individual records kept of usage per client) 4 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

iv. Electricity and Gas v. Depreciation of equipment Refer to the information above. What would the indirect costs incurred in providing a haircut only to a client be?

Answer: shampoo and conditioner, electricity and gas, and depreciation of equipment Difficulty: Moderate Learning Objective 10. 2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 13.

Jan runs a successful hairdressing salon in the CBD. The type of costs incurred in providing services to clients are: i. Hairdressers' salaries ii. Shampoo and Conditioner (no individual records kept of usage) iii. Colour and Perm Solutions (individual records kept of usage per client) iv. Electricity and Gas v. Depreciation of equipment Refer to the information above. The direct costs incurred in providing a perm to a client would be: A. all costs mentioned above.

B. hairdresser salary, shampoo, and conditioner.

C. hairdresser salary, colour and perm solution.

D. hairdresser salary.

Answer: C Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 14.

Jan runs a successful hairdressing salon in the CBD. The type of costs incurred in providing services to clients are: i. Hairdressers' salaries ii. Shampoo and Conditioner (no individual records kept of usage) iii. Colour and Perm Solutions (individual records kept of usage per client) iv. Electricity and Gas v. Depreciation of equipment Refer to the information above. The indirect costs incurred in providing a perm to a client would be: A. all costs mentioned above.

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B. shampoo and conditioner, electricity and gas.

C. shampoo and conditioner, electricity and gas, colour and perm solution.

D. shampoo and conditioner, electricity and gas, depreciation on equipment.

Answer: D Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 15.

Scott's Fencing constructs paling fences. During last month, the fencing division erected 4,000 metres of fencing. The costs incurred by the division were as follows: Palings $4,000 Posts $5,000 Nails (no usage records) $500 Cement (no usage records) $500 Wear and tear on equip. $2,000 Refer to the table above. The full cost associated with constructing the 4,000 metres of fencing is: A. $12,000.

B. $9,500.

C. $9,000.

D. $10,000.

Answer: A Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 16.

Jamie's Fencing constructs paling fences. During last month, the fencing division erected 4,000 metres of fencing. The costs incurred by the division were as follows: Palings $4,000 Posts $5,000 Nails (no usage records) $500 Cement (no usage records) $500 Wear and tear on equip. $2,000 Refer to the table above. The cost per metre of fencing is: A. $2.25.

B. $2.75.

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C. $2.50.

D. $3.00.

Answer: D Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 17.

Jamie's Fencing constructs paling fences. During last month, the fencing division erected 4,000 metres of fencing. The costs incurred by the division were as follows: Palings $4,000 Posts $5,000 Nails (no usage records) $500 Cement (no usage records) $500 Wear and tear on equip. $2,000 Refer to the table above. The total direct costs incurred in erecting the 4,000 metres of fencing is: A. $11,000.

B. $9,000.

C. $9,500.

D. $10,000.

Answer: B Difficulty: Basic Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct – (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 18. What is the difference between selling price and profit?

A. direct cost.

B. variable cost.

C. full cost.

D. fixed cost.

Answer: C Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking 19. What does an overhead recovery rate represent?

A. a rate at which jobs will be charged with overheads.

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B. a rate at which jobs are charged labour costs.

C. a rate at which jobs are charged to clients.

D. a rate at which jobs use overhead.

Answer: A Difficulty: Basic Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 4 – Analytical thinking Oswald Ltd manufactures a wide range of leather suitcases. The following costs are expected to be incurred by the company during June: Indirect labour cost $26,000 Direct labour time 10,000 hours Depreciation on equipment $20,000 Rent and Rates $13,000 Direct labour costs $98,000 Heating, lighting and power $ 4,000 Machine time 8,000 hours Indirect materials $ 5,000 Consumables $ 2,000 Direct materials used $50,000 Production estimate 1,000 suitcases 20. Refer to the table above. Total indirect costs are: A. $72,000.

B. $39,000.

C. $59,000.

D. $70,000.

Answer: D Difficulty: Complex Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge Oswald Ltd manufactures a wide range of leather suitcases. The following costs are expected to be incurred by the company during June: Indirect labour cost $26,000 Direct labour time 10,000 hours Depreciation on equipment $20,000 Rent and Rates $13,000 Direct labour costs $98,000 Heating, lighting and power $ 4,000 Machine time 8,000 hours Indirect materials $ 5,000 Consumables $ 2,000 Direct materials used $50,000 8 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

Production estimate

1,000 suitcases

21.

Refer to the table above. The overhead recovery rate (rounded), using direct labour hours as the allocation base, is: A. $3.90 per DLH. B. $7.20 per DLH. C. $7.00 per DLH. D. $5.90 per DLH. Answer: C Difficulty: Complex Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge

Oswald Ltd manufactures a wide range of leather suitcases. The following costs are expected to be incurred by the company during June: Indirect labour cost $26,000 Direct labour time 10,000 hours Depreciation on equipment $20,000 Rent and Rates $13,000 Direct labour costs $98,000 Heating, lighting and power $ 4,000 Machine time 8,000 hours Indirect materials $ 5,000 Consumables $ 2,000 Direct materials used $50,000 Production estimate 1,000 suitcases 22. Refer to the table above. The full cost of producing the suitcases for May is: A. $220,000.

B. $218,000.

C. $207,000.

D. $187,000.

Answer: B Difficulty: Complex Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge

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Oswald Ltd manufactures a wide range of leather suitcases. The following costs are expected to be incurred by the company during June: Indirect labour cost $26,000 Direct labour time 10,000 hours Depreciation on equipment $20,000 Rent and Rates $13,000 Direct labour costs $98,000 Heating, lighting and power $ 4,000 Machine time 8,000 hours Indirect materials $ 5,000 Consumables $ 2,000 Direct materials used $50,000 Production estimate 1,000 suitcases 23. Refer to the table above. The management accountant at Oswald Ltd, wants to revise his estimates and use machine hours as the allocation base to determine the overhead recovery rate. The revised overhead recovery rate (rounded) per machine hour will be: A. $4.88 per MH. B. $9.00 per MH. C. $7.38 per MH. D. $8.75 per MH. Answer: D Difficulty: Complex Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge Fingers Ltd, a graphic design service, has received an inquiry from a potential customer for a quotation for a web-page design. The pricing policy of the business is based on the budgeted financial data for the coming financial year. The data for the coming year is shown below: Sales $550,000 Direct materials 50,000 Direct labour 300,000 Variable overhead 5,000 Advertising for business 5,000 Depreciation on equipment 30,000 Administration 27,000 Interest 10,000 Profit before tax 133,000 Other relevant information: Management has budgeted for 20,000 direct labour hours.

Overhead is applied based on direct labour hours. An estimate for the direct costs of the job to be quoted on is shown below: Direct materials $400 Direct labour (100 hours) $1,500 24. Refer to the table above. Total budgeted direct costs for the year are: A. $350,000.

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B. $340,000.

C. $375,000.

D. $300,000.

Answer: A Difficulty: Basic Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge Fingers Ltd, a graphic design service, has received an inquiry from a potential customer for a quotation for a web-page design. The pricing policy of the business is based on the budgeted financial data for the coming financial year. The data for the coming year is shown below: Sales $550,000 Direct materials 50,000 Direct labour 300,000 Variable overhead 5,000 Advertising for business 5,000 Depreciation on equipment 30,000 Administration 27,000 Interest 10,000 Profit before tax 133,000 Other relevant information: Management has budgeted for 20,000 direct labour hours.

Overhead is applied based on direct labour hours. An estimate for the direct costs of the job to be quoted on is shown below: Direct materials $400 Direct labour (100 hours) $1,500 25. Refer to the table above. Total budgeted indirect costs for the year are: A. $117,000.

B. $77,000.

C. $72,000.

D. $57,000.

Answer: B Difficulty: Moderate Learning Objective: Deduce the full cost of a unit of output in a single or multi-product (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge Fingers Ltd, a graphic design service, has received an inquiry from a potential customer for a quotation for a web-page design. The pricing policy of the business is based on the budgeted financial data for the coming financial year. The data for the coming year is shown below: Sales $550,000 Direct materials 50,000 Direct labour 300,000 Variable overhead 5,000 11 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

Advertising for business 5,000 Depreciation on equipment 30,000 Administration 27,000 Interest 10,000 Profit before tax 133,000 Other relevant information: Management has budgeted for 20,000 direct labour hours.

Overhead is applied based on direct labour hours. An estimate for the direct costs of the job to be quoted on is shown below: Direct materials $400 Direct labour (100 hours) $1,500 26. Refer to the table above. The budgeted overhead recovery rate based on direct labour hours is: A. $5.85 per DLH. B. $5.60 per DLH. C. $2.85 per DLH. D. $3.85 per DLH. Answer: D Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service. environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge Fingers Ltd, a graphic design service, has received an inquiry from a potential customer for a quotation for a web-page design. The pricing policy of the business is based on the budgeted financial data for the coming financial year. The data for the coming year is shown below: Sales $550,000 Direct materials 50,000 Direct labour 300,000 Variable overhead 5,000 Advertising for business 5,000 Depreciation on equipment 30,000 Administration 27,000 Interest 10,000 Profit before tax 133,000 Other relevant information: Management has budgeted for 20,000 direct labour hours.

Overhead is applied based on direct labour hours. An estimate for the direct costs of the job to be quoted on is shown below: Direct materials $400 Direct labour (100 hours) $1,500 27. Refer to the table above. The recommended quote for the job is: A. $2,285.

B. $2,460.

C. $2,195.

D. $2,485.

Answer: A Difficulty: Complex

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Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge Fingers Ltd, a graphic design service, has received an inquiry from a potential customer for a quotation for a web-page design. The pricing policy of the business is based on the budgeted financial data for the coming financial year. The data for the coming year is shown below: Sales $550,000 Direct materials 50,000 Direct labour 300,000 Variable overhead 5,000 Advertising for business 5,000 Depreciation on equipment 30,000 Administration 27,000 Interest 10,000 Profit before tax 133,000 Other relevant information: Management has budgeted for 20,000 direct labour hours.

Overhead is applied based on direct labour hours. An estimate for the direct costs of the job to be quoted on is shown below: Direct materials $400 Direct labour (100 hours) $1,500 28. Refer to the table above. If the budgeted direct labour hours change to 25,000 hours, what will be the revised quote?

Answer: $2,208 Difficulty: Complex Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge 29. Which of these is not another name for overhead costs?

A. Fixed costs.

B. Common costs.

C. Indirect costs.

D. None of the above, i.e., all are other names for overhead costs.

Answer: A Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking 30. The base for allocating overhead costs most commonly used in practice is: 13 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

A. Direct labour cost.

B. Direct labour hours.

C. Machine hours.

D. Units produced.

Answer: B Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking 31. If the overhead applied to a job is $800 and the overhead recovery rate is $20 per direct labour hour, how many direct labour hours were used for the job?

A. 900 hours.

B. 25 hours.

C. 30 hours.

D. 40 hours.

Answer: D Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge

Fill in the blank: Select the word or phrase that best completes each statement.

32. Although [Blank] costs are important in management decision-making, they cannot be directly related to individual cost units.

A. overhead B. direct C. material D. fixed Answer: A Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 3 – Analytical thinking

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Short answer: Write the word or phrase that best completes each statement or answers the question.

33. Nugyen Pty Ltd estimates its overhead costs will be $300,000 for the coming year and it will use 20,000 direct labour hours over the same period. How much overhead will be charged to a job that uses 25 direct labour hours? Show your work.

Answer: $300,000 overhead costs / 20,000 total estimated DL hours × 25 DL hours for the job = $375 Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge

Essay: Write your answer in the space provided or on a separate sheet of paper.

34. A service business expects to incur overheads totalling $20,000 next month. The total direct labour time worked is 1,600 hours and total machine hours are 1,000. During next month, the business expects to do just two large jobs. Information concerning each job is as follows: Job1 Job2 Direct Labour hours 700 900 Machine hours 700 300 REQUIRED: a) Calculate the overhead recovery rate for the month using direct labour hours. b) Compute how much of the month's overhead will be charged to each job.

Answer: a) Overhead recovery rate = = $20,000/1,600 hrs = $12.5 per direct labour hour b) Job 1 $12.5 × 700 DLH = $8,750 Job 2 $12.5 × 900 DLH = $11,250 Difficulty: Moderate Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 8 – Application of knowledge [BLANK] 35. Ace Ltd makes trailers for boats. Management have decided they would like to implement a full cost recovery system as detailed below.

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Direct materials and direct labour are the only costs that can be traced directly to jobs.

All other costs will be recovered using an overhead recovery rate based on direct labour cost. Profit (mark-up) will be 12% of full costs.

Annual Budget Forecast $ Sales (as per invoices) 230,000 Direct Materials 50,000 Direct Labour 60,000 Variable Overheads 2,400 Advertising for Business 4,000 Rent of Premises 10,000 Depreciation 20,000 Administration expenses 12,000 REQUIRED: a) Calculate the overhead recovery rate to apply overhead to jobs. b) Provide a quotation (full cost estimate plus mark-up) for the following job.

An initial examination of the job identifies the following direct costs: Direct materials $9,000 Direct labour $6,000 Answer: a) Total overheads = ($2,400 + $4,000 + $10,000 + $20,000 + $12,000) = $48,400 Overhead recovery rate = = b) Job Quotation Direct materials Direct Labour Overheads

$48,400/$60,000 = $0.807 per direct labour $ $ 9,000 6,000 4,840 ($6,000 × $0.807) $19,840 2,381 $22,221

+ Profit Margin 12% Total Quotation Difficulty: Complex Learning Objective 10.2: Deduce the full cost of a unit of output in a single or multiproduct (or service) environment, differentiate between direct and indirect costs, and discuss the problem of charging overheads to jobs in a multi-product (multi-service) environment A-Head: Deriving full costs in a single or multi-product or -service operation AACSB: 1 – Written and oral communication

LO 10.3 Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

36. When revenues and costs are dealt with on a departmental basis, each department is known as a: A. overhead centre.

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B. cost centre.

C. job centre.

D. collection centre.

Answer: B Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 3 – Analytical thinking 37. Which of the following is an example of a product cost centre?

A. corporate headquarters.

B. payroll department.

C. accounts payable department.

D. machining department.

Answer: D Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge 38. An example of a service cost centre is: A. finished goods department.

B. machining department.

C. payroll department.

D. assembly department.

Answer: C Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge 39. To what are service cost centre costs assigned?

A. production cost centres.

B. corporate headquarters.

C. individual customers.

D. units of output directly.

Answer: A Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 3 – Analytical thinking Ace Ltd, a tennis racquet manufacturer, has broken the production process into three lines, each in a different department: framing, stringing, and finishing. The following information relates to each department for the month of April: FRAMING STRINGING FINISHING Direct Costs $20,000 $30,000 $66,000 Indirect Costs $10,000 $20,000 $30,000 17 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

Labour Hours 2,000 hrs 5,000 hrs 3,000 hrs Machine hours 500 hrs Production for April is 10,000 racquets 40. Refer to the table above. What is the total overhead for the organisation?

A. $30,000.

B. $10,000.

C. $20,000.

D. $60,000.

Answer: D Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge Ace Ltd, a tennis racquet manufacturer, has broken the production process into three lines, each in a different department: framing, stringing, and finishing. The following information relates to each department for the month of April: FRAMING STRINGING FINISHING Direct Costs $20,000 $30,000 $66,000 Indirect Costs $10,000 $20,000 $30,000 Labour Hours 2,000 hrs 5,000 hrs 3,000 hrs Machine hours 500 hrs Production for April is 10,000 racquets 41. Refer to the table above. The overhead recovery rate for stringing and finishing based on direct labour hours is: A. $6; $11.

B. $4; $10.

C. $10; $22.

D. $5; $ 3.

Answer: B Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge Ace Ltd, a tennis racquet manufacturer, has broken the production process into three lines, each in a different department: framing, stringing, and finishing. The following information relates to each department for the month of April: FRAMING STRINGING FINISHING Direct Costs $20,000 $30,000 $66,000 Indirect Costs $10,000 $20,000 $30,000 Labour Hours 2,000 hrs 5,000 hrs 3,000 hrs Machine hours 500 hrs Production for April is 10,000 racquets 42. Refer to the table above. The overhead recovery rate for framing based on machine hours is: A. $4.

B. $5.

C. $2.

18 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

D. $20.

Answer: D Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge Ace Ltd, a tennis racquet manufacturer, has broken the production process into three lines, each in a different department: framing, stringing, and finishing. The following information relates to each department for the month of April: FRAMING STRINGING FINISHING Direct Costs $20,000 $30,000 $66,000 Indirect Costs $10,000 $20,000 $30,000 Labour Hours 2,000 hrs 5,000 hrs 3,000 hrs Machine hours 500 hrs Production for April is 10,000 racquets 43. Refer to the table above. The direct unit cost per racquet for April is: A. $11.60.

B. $9.60.

C. $16.70.

D. $17.00.

Answer: A Difficulty: Moderate Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge 44. Which statement concerning overhead costs is not true?

A. If overhead is segmented, say on a departmental basis, different bases can be used by the different departments to charge overhead to jobs.

B. There is no 'correct' basis for charging overhead to jobs.

C. It is possible to charge the overhead of one department to different jobs using different allocation bases.

D. None of the above, i.e., all are true statements.

Answer: C Difficulty: Complex Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 3 – Analytical thinking 45. An example of a product cost centre for a furniture manufacturer is: A. Human resources.

B. Canteen.

C. Accounting.

D. Assembly.

Answer: D Difficulty: Basic

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Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge 46. The following information is available on departmental overhead recovery rates for Major Manufacturing: Machining Department $47.50 per machine hour Assembling Department $16.90 per direct labour How much overhead will be applied to job X 123 if it uses 13 machine hours and 20 direct labour hours?

A. $955.50.

B. $33.

C. $64.40.

D. $1169.70.

Answer: A Difficulty: Moderate Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 8 – Application of knowledge

True/False. Write 'T' if the statement is true and 'F' if the statement is false.

47. A cost centre through which jobs do not pass is known as a non-job cost centre.

A. True B. False Answer: B Difficulty: Basic Learning Objective 10.3: Explain the advantages of segmenting overheads, and use this approach to apply overheads on a departmental basis A-Head: Segmenting the overheads AACSB: 3 – Analytical thinking

LO 10.4 Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

48. Under both the traditional approach to full costing and activity-based costing, there is no difference in the: A. total costs.

B. assignment of overhead costs.

C. unit cost.

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D. Both A and B. Answer: A Difficulty: Complex Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 49. By the end of the 20th Century, the manufacturing sector had fundamentally altered from the sector in the 1920s. The sector is now characterised by the following features, except for: A. low levels of depreciation.

B. a highly competitive international market.

C. capital-intensive and machine-paced production.

D. a high level of overheads relative to direct costs.

Answer: A Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 50. How does activity-based costing view overhead costs?

A. as the responsibility of each department.

B. as unimportant in the development of full costs.

C. as rendering service to cost units.

D. as caused by activities which 'drive' the costs.

Answer: D Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 51. All of the statements regarding activity-based costing are correct except: A. it provides better information for decision-making.

B. it is used by the majority of businesses in Australia.

C. it provides more accurate product costs.

D. it is costlier than alternative systems.

Answer: B Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 52. Activity-based costing is likely to be most beneficial to firms with which characteristics?

A. Has a multi-product range that use resources differently.

B. Manufactures a single product.

C. Has a multi-product range that use similar processes.

D. Is set-up as a public company.

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Answer: A Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 53. Which of these are possible cost drivers under activity-based costing?

A. Number of deliveries.

B. Hours of storage of raw materials.

C. Number of set ups of machinery.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 8 – Application of knowledge 54. Activity-based costing can be used in: A. a non-profit organisation.

B. a service organisation.

C. a manufacturing organisation.

D. any of the above.

Answer: D Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 55. What is the formula for the overhead recovery rate using an activity-based costing system?

A. overhead cost divided into relevant cost driver.

B. overhead cost divided by the number of products.

C. overhead cost divided into labour hours.

D. overhead cost divided by relevant cost driver.

Answer: D Difficulty: Basic Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 8 – Application of knowledge 56. The focus in activity-based costing is on: A. activities.

B. direct costs.

C. services.

D. products.

Answer: A Difficulty: Basic 22 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 57. In general, in recent times compared to the past, overhead as a percentage of a firm's total costs: A. has decreased.

B. B has remained the same.

C. C. has increased.

D. cannot tell Answer: C Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 58. When determining full costs the treatment of direct costs under activity-based costing: A. is the same as under traditional costing.

B. relies upon identifying appropriate cost drivers.

C. must be related to activities.

D. Both B and C. Answer: A Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 59. The approach to overhead costs under activity-based costing is that: A. overheads provide service to cost objects.

B. overheads can be traced to cost objects.

C. overheads happen.

D. overheads are caused by activities.

Answer: D Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 60. What is an advantage of activity-based costing compared to traditional costing?

A. it is cheaper to implement.

B. overhead allocation is objective rather than arbitrary.

C. linking overheads to cost drivers results in a fairer and more accurate costing.

D. all of the above are advantages.

Answer: C Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) 23 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

AACSB: 3 – Analytical thinking 61. What does the break-even price represent?

A. variable costs plus mark-up.

B. full costs.

C. direct costs.

D. direct costs plus mark-up.

Answer: B Difficulty: Complex Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Segmenting the overheads AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

62. Name two features that characterised the manufacturing sector in Britain at the time of the industrial revolution.

Answer: Answers may vary but should include two of the following: a relatively uncompetitive market, direct labour-intensive and direct labour-paced production, and a low level of overheads relative to direct costs.

Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

63. Discuss the changes in how the manufacturing industry has been characterised with regards to costing and pricing Answer: Answers may vary but should include the following ideas explained: • Changes from direct labour-intensive and direct labour-paced production to capital-intensive and machine-paced production • Changes from a low level of overheads relative to direct costs to a high level of overheads relative to direct costs • Relatively uncompetitive market to a highly competitive and international market Difficulty: Moderate Learning Objective 10.4: Explain the principles of activity-based costing (ABC), apply cost drivers, and compare ABC with the traditional system of total absorption costing A-Head: Activity-based costing (ABC) AACSB: 3 – Analytical thinking 24 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

LO 10.5 Identify and explain the main uses of full cost information, and the main criticisms of full costing, and apply the concepts of relevant costing and full costing appropriately to several decision-making situations Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

64. Which of these is not a use of full cost information?

A. Pricing.

B. Income measurement.

C. Short-term decision-making.

D. None of the above, i.e., all are a use of full cost information.

Answer: C Difficulty: Moderate Learning Objective 10.5: Identify and explain the main uses of full cost information, and the main criticisms of full costing, and apply the concepts of relevant costing and full costing appropriately to several decision-making situations A-Head: Uses and criticisms of full costing AACSB: 3 – Analytical thinking 65. How do both Australian and International standards require inventory to be valued?

A. at full cost.

B. at variable cost.

C. at manufacturing full cost.

D. at direct cost.

Answer: C Difficulty: Moderate Learning Objective 10.5: Identify and explain the main uses of full cost information, and the main criticisms of full costing, and apply the concepts of relevant costing and full costing appropriately to several decision-making situations A-Head: Uses and criticisms of full costing AACSB: 3 – Analytical thinking 66. Which of the following statements is incorrect?

A. The use of full costs is criticised, because it focuses on past costs.

B. Full costs are useful in decision-making, because this approach focuses on future costs.

C. Full costing can lead to incorrect decision-making, because it can distort figures.

D. Actual costs do not always follow the direction that the recovery rate may suggest.

Answer: B Difficulty: Moderate Learning Objective 10.5: Identify and explain the main uses of full cost information, and the main criticisms of full costing, and apply the concepts of relevant costing and full costing appropriately to several decision-making situations A-Head: Uses and criticisms of full costing AACSB: 3 – Analytical thinking 25 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695 / Atrill / Accounting / 8e

67. Which type of pricing approach with a supplier use in a competitive market?

A. Cost plus.

B. Target pricing.

C. Target costing.

D. Market price.

Answer: D Difficulty: Moderate Learning Objective 10.5: Identify and explain the main uses of full cost information, and the main criticisms of full costing, and apply the concepts of relevant costing and full costing appropriately to several decision-making situations A-Head: Uses and criticisms of full costing AACSB: 3 – Analytical thinking

True/False. Write 'T' if the statement is true and 'F' if the statement is false.

68. Full costs are calculated in advance to assist management in determining profit during the year and in setting prices.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 10.5: Identify and explain the main uses of full cost information, and the main criticisms of full costing, and apply the concepts of relevant costing and full costing appropriately to several decision-making situations A-Head: Uses and criticisms of full costing AACSB: 3 – Analytical thinking

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Atrill Accounting 8e Chapter 11: Budgeting LO 11.1 Explain the relationship between corporate objectives, long-term plans and budgets, and also between planning and control Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. What is the main way in which budgets provide a means of control in an organisation?

A. by allowing senior management to control lower level managers.

B. by allowing actual performance to be compared to budget targets.

C. by allowing budget targets to be set at maximum performance.

D. by allowing management to control the budget targets.

Answer: B Difficulty: Basic Learning Objective 11.1: Explain the relationship between corporate objectives, long-term plans and budgets, and also between planning and control A-Head: Planning and control AACSB: 3 – Analytical thinking 2. If the principal objective of a firm is to enhance wealth, the most important budget target to meet is: A. profit.

B. sales.

C. bank balance.

D. production.

Answer: A Difficulty: Moderate Learning Objective 11.1: Explain the relationship between corporate objectives, long-term plans and budgets, and also between planning and control A-Head: Using budgets for control AACSB: 3 – Analytical thinking

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LO 11.2 Define a budget, set out the main components of the budget-setting process, explain how the various budgets interlink, and identify the main uses of budgeting Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

3. How is a budget best defined?

A. as a forecast for a future period of time.

B. as a prediction for a future period.

C. as a non-financial plan for a future period of time.

D. as a financial plan for a future period of time.

Answer: D Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 4. A budget system that always provides plans for a full 12 months into the future is known as: A. advance budget.

B. yearly budget.

C. future budget.

D. rolling budget.

Answer: D Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 5. There is often a limiting factor that stops a business from achieving its objectives to the maximum extent. In most instances the limiting factor is: A. the ability of the business to advertise its products.

B. the unrealistic goals of production managers.

C. the unrealistic objectives set by management.

D. the ability of the business to sell its products.

Answer: D Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 6. The master budget would typically consist of a budgeted: 2 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

A. statement of financial position and statement of cash flows.

B. statement of comprehensive income, statement of financial position and statement of cash flows.

C. statement of comprehensive income and statement of financial position.

D. statement of comprehensive income and statement of cash flows.

Answer: B Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 7. What is the best description of the role of the budget committee?

A. setting goals for individual departments.

B. predicting the budget.

C. supervising and taking responsibility for the budget setting process.

D. predicting the economic environment for the period.

Answer: C Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 8. In which order do the following steps in the budget setting process actually occur? i. Co-ordinate the budget. ii. Identify the limiting factor. iii. Monitor performance relative to budget.

A. ii, iii, i.

B. ii, i, iii.

C. i, ii, iii.

D. iii, i, ii.

Answer: B Difficulty: Moderate Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 9. What is the group which oversees the budgeting process within an organisation?

A. estimates committee.

B. board of directors.

C. budget committee.

D. variance committee.

Answer: C Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of 3 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 10. Coordination between budgets refers to a situation when: A. activities of one department match and are complementary to those of other departments.

B. different parts of the organisation operate at cross-purposes.

C. more than one entity in an industry adopts similar goals.

D. a plan comes together with industry and government targets.

Answer: A Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 11. One of the approaches to setting budgets is known as the 'top down' approach. This is best described as: A. production budget set first and working from this to other budgets.

B. budget targets set at the lowest level of management.

C. setting the sales forecast and working from this to other budgets.

D. budget targets set by senior management.

Answer: D Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 12. When preparing its sales forecast, an organisation can use the 'bottom-up' approach.

What is one of the features of this approach?

A. operating personnel are motivated to prepare realistic budgets and accept them as benchmarks in performance evaluation.

B. multiple levels of managers and salespersons are involved in the forecasting process.

C. it often involves negotiations between departments.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 13. Budgets are said to be useful in promoting forward thinking and identification of shortterm problems, because: A. management can foresee future promotion opportunities.

B. management can react to problem areas as they occur.

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C. potential problem areas can be identified early enough to allow management to explore ways of overcoming the problem.

D. all of the above.

Answer: C Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 14. Budgets are generally regarded as having several areas of usefulness. Which of these is not one of them?

A. They can be used to allocate direct expenses.

B. They tend to promote forward thinking.

C. They help coordinate the various sectors of the business.

D. They can facilitate control within the business.

Answer: A Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 15. What does management by exception refer to in the budgeting process?

A. rewarding exceptional effort.

B. delegating responsibility, leaving management free for other things.

C. concentrating most of management's efforts on those who do not achieve the budget.

D. motivating staff to boost the reputation of the business.

Answer: C Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 16. Which statement is not correct?

A. The existence of budgets tends to provide motivation to improve performance.

B. Unrealistic targets have adverse effects on managers' performance.

C. Setting demanding, but achievable, targets is a better motivator than setting undemanding targets.

D. The 'top down' approach to budgeting tends to improve motivation.

Answer: D Difficulty: Moderate Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts 5 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

AACSB: 3 – Analytical thinking 17. How can a budget help in decision making?

A. by identifying excesses or shortages of cash.

B. by predicting purchase requirements for raw materials.

C. by identifying future resource constraints.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 18. What is the typical overall time period for which a budget is set?

A. two years.

B. twelve months.

C. three months.

D. five years.

Answer: B Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking 19. Which statement about the uses of budgets is not true?

A. They can assist in identifying short-term problems.

B. They can provide a system of authorisation for managers to spend up to a particular limit.

C. They are mainly used to set prices.

D. None of the above, i.e., all are true statements.

Answer: C Difficulty: Moderate Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

20. Describe a master budget.

Answer: A master budget is a summary of a number of interrelated budgets.

Difficulty: Basic Learning Objective 11.2: Define a budget, set out the main components of the budgetsetting process, explain how the various budgets interlink, and identify the main uses of 6 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

budgeting A-Head: Budgets and forecasts AACSB: 3 – Analytical thinking

LO 11.3 Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

21. What is a common feature of most budgets?

A. the budget period is broken into months.

B. a columnar format.

C. a section for non-cash expenses such as doubtful debts and depreciation.

D. Both A and B. Answer: D Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 3 – Analytical thinking 22. Budget formats can best be described as: A. the same from one business to the next.

B. conforming to accounting standards.

C. subject to management choice in style and layout.

D. none of the above.

Answer: C Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 3 – Analytical thinking 23. Which outlay does not appear in the cash budget?

A. monetary drawings.

B. repayment of loan.

C. interest on bank loan.

D. depreciation.

Answer: D Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB 8 – Application of knowledge

7 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

24. Xon Company is planning to purchase fixed assets at a cost of $200,000. The planned delivery date is 1st February 2021. A deposit of $20,000 is to be paid on 1/11/20. The amount that will appear in the cash budget for November 2020 is: A. $190,000 outflow.

B. $200,000 outflow.

C. $20,000 outflow.

D. $20,000 inflow.

Answer: C Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge Use the information below to answer the following questions.

Sales in December were $960,000. Projected sales for the first quarter of 2018 are: January$1,080,000 February$1,300,000 March$1,280,000 Sales are 20% cash and 80% on credit. Debtors pay in the month following the sale.

25. Refer to the table above. Calculate total cash collected from sales for the month of March.

A. $1,296,000.

B. $1,456,000.

C. $1,216,000.

D. $256,000.

Answer: A Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 26. Refer to the table above. Calculate the cash collected from accounts receivable in the month of February.

A. $1,080,000.

B. $1,200,000.

C. $960,000.

D. $864,000.

Answer: D Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 27. Refer to the table above. What will be the balance of accounts receivable on 1 March?

A. $1,200,000.

B. $1,280,000.

C. $1,040,000.

D. $864,000.

8 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

Answer: C Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 28. Refer to the table above. Calculate the total cash sales for the three months, January, February and March.

A. $256,000.

B. $960,000.

C. $2,848,000.

D. $732,000.

Answer: D Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 29. If the opening balance of cash for one month is $20,000, cash receipts are estimated to be $398,000 and cash payments are estimated as $300,000, the opening cash balance at the beginning of the next month is: A. $69,000..

B. $109,000.

C. $118,000 D. cannot be calculated.

Answer: C Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 30. The Talent Agency had the following estimates for the six months ending 31 December 2021.

Cash balance 1.1.15 (Overdraft) ($9,150) Cash receipts from commissions $85,000 Cash payments for expenses 82,300 Proceeds from the sale of motor vehicle 6,500 Borrowing 5,000 Depreciation on equipment 2,600 The estimated cash balance at 31 December 2021 is: A. $3,450.

B. $5,050.

C. $3,950 (overdraft).

D. $2,100 (overdraft).

Answer: B Difficulty: Moderate Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data 9 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 31. How many of the following items would be included in a cash budget?

Dividends paid to shareholders.

Doubtful debts.

Purchase of fixed asset for cash.

Bonus share issue.

A. 1.

B. 2.

C. 3.

D. 4.

Answer: B Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 32. If a firm had credit sales of $1,550,000 for March and collected its sales 30% in the month of sale and 70% in the month following the sale, how much of March sales would be collected in cash in March?

A. $465,000.

B. $375,000.

C. $875,000.

D. $1,250,000.

Answer: A Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 33. The expense that does not appear in a cash budget is: A. Rent.

B. Wages.

C. Supplies.

D. Taxation provided.

Answer: D Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge Use the information below to answer the following questions.

Crystal Computers owns a chain of seven shops selling computer goods. In the past the company maintained a healthy cash balance. However, this has fallen in recent months, and at the end of September 2021 it had an overdraft of $100,000. In view of this, its managing director has asked you to prepare a cash forecast for the next six months. You have collected the following information: 10 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

Cash Sales forecast Cash Purchases Wages and Salaries Rent Rates Other Expenses Refurbishing Shops

Oct. $000 250 180 40

Nov. $000 200 160 40

25

25

245

225

Dec. Jan. $000 $000 250 350 130 40 50 40 80 25 80 285

Feb. $000 200 50 40

March $000 80 60 45

25

25

60 25

185

115

190

34. Refer to the table above. The projected cash balance at the end of October is: A. ($245,000).

B. $6,000.

C. ($5,000).

D. ($95,000).

Answer: D Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 35. Refer to the table above. The projected cash balance at the end of November is: A. ($120,000).

B. ($25,000).

C. $25,000.

D. ($100,000).

Answer: A Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge Use the information below to answer the following questions.

Jackson Bottle Yard, a recycling glass company, has supplied the following information in relation to their actual sales in 2020 and planned sales for the first quarter of 2021.

Cash $ 2020 Actual Sales for 50,000

November

December 2021 Estimated Sales for January 35,000 February 48,000 March 62,000

Credit

Total $

$

25,000 35,000 15,000

25,000

40,000

18,000 22,000

75,000 20,000 30,000 40,000

Past records indicate that expected receipts collected from debtors will be: 11 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

60 per cent in the month of sale 40 per cent in the month following the sale 36. Refer to the table above. What is the projected cash inflow from accounts receivable in January?

A. $43,000.

B. $28,000.

C. $20,000.

D. $15,000.

Answer: B Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 37. Refer to the table above. What is the projected cash inflow from accounts receivable in February?

A. $32,000.

B. $48,000.

C. $26,000.

D. $18,000.

Answer: C Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 38. Refer to the table above. What is the total cash expected to be collected from all sales in March?

A. $50,000.

B. $58,000.

C. $62,000.

D. $36,000.

Answer: B Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 39. If the opening cash balance at the beginning of the month is $27,500, total cash inflows for the month are $38,000 and total cash outflows are $98,000 the opening cash balance at the beginning of the next month is: A. $32,500 (deficit).

B. $12,500 (surplus).

C. $67,500 (surplus).

D. cannot be calculated.

Answer: A Difficulty: Moderate Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple 12 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

40. A statement of financial position involves a projection of future cash receipts and cash disbursements.

A. True B. False Answer: B Difficulty: Basic Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

41. Bluebird Ltd has provided the estimates below for the July-September quarter in 2021.

July August September $ $ $ Sales 13,000 14,000 15,000 Purchases 9,400 8,000 10,000 Operating expenses 3,600 6,400 5,000 You are also given the following additional information: • 35% of sales are cash sales, the remaining 65% credit sales are collected as follows: o 30% in the month of sale o 40% in the month after sale o 28% 2 months after sale o 2% lost in bad debts • Sales in the months of May and June were $11,000 and $10,000 respectively.

• Operating expenses include depreciation each month of $900. All expenses and purchases are paid for in the same month they are incurred.

• The firm expects to sell some old machinery for $7,000 in August. New machinery worth $9,500 will be purchased in September.

• The cash balance on 1st July 2021 is $5,700.

REQUIRED: a. Prepare a schedule of receipts from accounts receivable showing the collections in the three months July to September. b. Prepare a cash budget for Bluebird Ltd for the three months July to September.

Answer: a. Accounts Receivable Collection Schedule May

Credit Sales 7150

May

June July 2002

Aug

Sept

13 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

June July August September Total

6500 8450 9100 9750

2600 2535 7137

1820 3380 2366 2730 3640 2925 7930 8931

b. Bluebird Ltd. Cash Budget for July to Sept 2021 July _ Aug Sept Receipts Cash sales 4550 4900 5250 Receipts from accs receivable 7137 7930 8931 Sale of machinery _ 7000 Total receipts 11687 19830 14181 Payments For Purchases 9400 8000 10000 Operating expenses 2700 5500 4100 Purchase of machinery _ 9500 Total payments 12100 _ 13500 23600 Net cash inflow (413) 6330 (9419) Opening cash balance 5700 _ 5287 11617 Closing cash balance 5287 11617 2198 Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge 42. Records of Recycling Ltd contain the following data: Opening bank balance $35,000 Sales Purchases May $60,000 $20,000 June 70,000 30,000 July 80,000 25,000 All sales are on credit. Records show that 80% of the customers pay during the month of the sale, 15% pay in the month after the sale, and the remaining 5% pay in the second month after the sale. Purchases are all paid the following month at a 1% discount. Cash disbursements for operating expenses in July were $8,000.

REQUIRED: Prepare a cash budget for July.

Answer: Cash Budget for July Cash Receipts July sales (80% of $80,000) $64,000 June sales ((15% of $70,000) $10,500 May sales (5% of $60,000) 3,000 Total cash receipts $77,500 Cash Payments June purchases ($30,000 × 99%) $29,700 Operating expenses 8,000 Total cash payments $37,700 Increase in cash 39,800 14 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

Opening cash balance 35,000 Closing cash balance $74,800 Difficulty: Complex Learning Objective 11.3: Explain the importance of cash budgeting, and prepare a simple cash budget from relevant data A-Head: Preparing the cash budget AACSB: 8 – Application of knowledge

LO 11.4 Construct a range of other budgets from relevant data Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

43. The debtor's budget shows the planned amount owing from credit sales. The closing balance of the accounts receivable account is calculated as follows: A. (opening balance plus sales) less cash receipts.

B. (opening balance less sales) less cash receipts.

C. (opening balance less sales) plus cash receipts.

D. (opening balance plus sales) plus cash receipts.

Answer: A Difficulty: Moderate Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 3 – Analytical thinking 44. The Gel Company, hair products wholesaler, budgeted $180,000 of credit sales and $30,000 of cash sales for June. All merchandise is marked up to sell at 125% of its invoice cost. What is the budgeted cost of sales for June?

A. $168,000.

B. $132,500.

C. $136,000.

D. $127,500.

Answer: A Difficulty: Complex Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 8 – Application of knowledge 45. What is the calculation of closing inventory for a finished goods inventory budget?

A. (opening balance plus inventories manufactured) less sales of finished goods.

B. (opening balance plus sales of finished goods) less inventories manufactured.

C. (opening balance plus inventories manufactured) plus cash sales of finished goods.

D. none of the above.

Answer: A Difficulty: Basic Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 8 – Application of knowledge 15 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

Use the information below to answer the following questions.

Patiomaster Products manufactures patio furniture. The estimated numbers of sets to be sold for the last three months of 2020 is: Month Sales October 10,000 November 7,000 December 5,000 January 6,000 Finished goods inventory at the end of September is 2,000 units. Finished goods inventory is set at 30 percent of next month's sales.

46. Refer to the table above. What will be the amount of total production for October 2020?

A. 9,400 units.

B. 7,800 units.

C. 10,100 units.

D. 8,400 units.

Answer: C Difficulty: Moderate Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 8 – Application of knowledge 47. Refer to the table above. How many sets of patio furniture will be produced in December 2020?

A. 7,200 units.

B. 6,200 units.

C. 5,200 units.

D. 6,400 units.

Answer: C Difficulty: Moderate Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 8 – Application of knowledge 48. Refer to the table above. If a patio set costs $100 to produce, what will be the cost of sales in the budgeted statement of comprehensive income for the period October to December 2020?

A. $1,800,000.

B. $2,200,000.

C. $1,900,000.

D. $1,500,000.

Answer: B Difficulty: Moderate Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 8 – Application of knowledge 49.

If credit sales are and cash collected from credit sales is:

Jan. Feb. $5,000 $6,000

March $5,500

April $6,200

$4,800

$6,000

$5,500

$5,000

16 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

When do debtors pay their accounts?

A. One month after the sale.

B. Two months after the sale.

C. In the month of sale.

D. One month before the sale.

Answer: A Difficulty: Moderate Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 8 – Application of knowledge

Short answer: Write the word or phrase that best completes each statement or answers the question.

50. Leonard Company is preparing its second quarter production budget. Projected sales in units are 600 for April, 680 for May, and 750 for June. Leonard's policy is to have finished goods inventory equal to 20 per cent of the next month's projected unit sales.

What should be the production quota for May? Show your work.

Answer: 680 sales in May – 680 × 20% May sales produced in April + 750 sales in June × 20% = 694 units Difficulty: Complex Learning Objective 11.4: Construct a range of other budgets from relevant data A-Head: Preparing other budgets AACSB: 8 – Application of knowledge

LO 11.5 Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

51. Managements interest in variances is due to: A. the need to gain the information that may assist them to put things back in control.

B. the desire to gain the maximum information.

C. the need to compensate employees.

D. the desire to check all details.

Answer: A Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 52. What does flexing the budget mean?

17 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

A. revising the budget sales figure to match actual sales.

B. ignoring previously set targets.

C. revising the original budget estimates to produce a budget based on the actual volume of activity.

D. revising the budget to reflect changes in management behaviour.

Answer: C Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking Use the information below to answer the following questions.

Flexed Budget for April Actual for April Output 40,000 units 40,000 units Sales $500,000 $400,000 Raw materials $100,000 $88,000 Labour $250,000 $180,000 Overheads $325,000 $375,000 53. Refer to the table above. The adverse (unfavourable) sales variance of $100,000 is best explained by: A. a decrease in price of the units sold.

B. the sales manager failing to sell the budgeted units.

C. an increase in expenses.

D. none of the above.

Answer: A Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 54. Refer to the table above. Which of these variance calculations is correct for Raw materials, Labour and Overheads respectively? Note: F - Favourable, U - Unfavourable (adverse).

A. 12,000U; $70,000F; $50,000U. B. $12,000F; $70,000F; $50,000U. C. 12,000U; $70,000U; $50,000F. D. none of the above.

Answer: B Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 8 – Application of knowledge 55. An adverse variance is best described as a: A. combination of variances.

18 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

B. variance where labour efficiencies have occurred.

C. variance where the actual performance falls short of the budget target.

D. variance where actual performance exceeds the budget target.

Answer: C Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 56. The adverse (unfavourable) variance is: A. Budgeted payment for rent $12,000, actual rent $11,500.

B. Budgeted payment for interest $1,000, actual interest $1,000.

C. Budgeted payment for wages $42,000, actual wages $45,000.

D. Budgeted receipts from accounts receivable $60,000, actual receipts $65,000.

Answer: C Difficulty: Basic Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 8 – Application of knowledge 57. If actual income is $48,500 and budgeted income is $56,000 and actual utilities is $5,000 and budgeted utilities is $5,500, the variances are respectively: Note: F Favourable, U - Unfavourable (adverse).

A. $7,500F; $500F. B. $7,500F; $500U. C. $7,500U; $500F. D. $7,500U; $500U. Answer: C Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 8 – Application of knowledge 58. The reconciliation between budgeted profit and actual profit can be summarised as: A. budgeted profit minus all favourable variances plus all adverse variances equals actual profit.

B. budgeted profit plus all favourable variances minus all adverse variance equals actual profit.

C. actual profit plus all favourable variances minus all adverse variance equals budgeted profit.

D. actual profit plus all favourable variances plus all adverse variances equals budgeted profit.

Answer: B Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, 19 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 59. The total direct materials variance is best explained by: A. the variance cannot be explained unless the budget is flexed to actual production.

B. better use of materials by the production manager.

C. a change in price of the raw materials.

D. the production manager failing to control the material usage.

Answer: A Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 60. The change in the price of raw materials multiplied by the actual materials bought calculates which variance?

A. Materials price variance.

B. Sales price variance.

C. Materials usage variance.

D. Labour price variance.

Answer: A Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 61. Which of the following could be the cause of a favourable materials price variance?

A. The price of materials in the original budget was set too high.

B. A discount on the purchase of materials.

C. Well-trained production workers.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 62. Which of the following could not be a possible cause of an adverse (unfavourable) materials usage variance?

A. Faulty machinery.

B. Poor quality materials.

C. An increase in the price of the raw materials.

D. Inexperienced workers.

Answer: C 20 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking Use the information below to answer the following questions.

Budget for April Actual for April Output 40,000 units 40,000 units Sales $400,000 $400,000 Raw materials $80,000 $88,000 Labour $200,000 $180,000 Overheads 225,000 305,000 63. Refer to the table above. The raw materials variance can best be described as: A. an adverse variance resulting from excessive use of raw materials and/or an increase in their price.

B. an adverse variance resulting from a rise in the price of raw materials.

C. an adverse variance resulting from excessive use of raw materials.

D. a favourable variance resulting from efficient use of raw materials.

Answer: A Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 64. Refer to the table above. The labour variance can best be described as: A. an adverse variance resulting from excessive use of labour and/or a rise in the hourly rate of pay.

B. a favourable variance resulting from the efficient use of labour and/or a reduction in the hourly pay rate.

C. being caused by an increase in the pay rate for labour.

D. being caused by more efficient labour.

Answer: B Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 65. The variances which management should investigate each month are: A. Only favourable variances.

B. Only adverse (unfavourable) variances.

C. All variances management deems significant.

D. All variances.

Answer: C Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, 21 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 66. Where there is a significant favourable variance management is best advised to: A. ignore it, because it does not cause immediate concern.

B. investigate, because it may mean that targets are unrealistically low.

C. investigate it to find out why things are not going according to plan.

D. Both B and C. Answer: D Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 67. Where there is an insignificant adverse variance, management is best advised to: A. ignore it, as the cost of investigation may outweigh the benefit.

B. investigate immediately and in full detail.

C. keep the variance under review.

D. ignore it, as it may be compensated by an insignificant favourable variance.

Answer: C Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 68. Budget targets should be: A. achievable.

B. easy.

C. challenging and achievable.

D. loose and achievable.

Answer: C Difficulty: Basic Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking 69. The original budget was set at 15,000 units and estimated variable overheads at $345,000 ($23 per unit). If actual output is 16,000 units, calculate the variable overhead total and unit cost that would be shown in a budget flexed to actual output.

A. $345,000; $23.

B. $361,000; $23.50.

C. $345,000; $22.50.

D. $368,000; $23.

Answer: D 22 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 8 – Application of knowledge 70. If actual sales are $96,000 and budgeted sales are $87,000 and actual advertising paid is $6,100 and budgeted advertising is $7,300, the variances are respectively are: Note: F - Favourable, U - Unfavourable (adverse).

A. $9,000F; $1,200F. B. $9,000U; $1,200U. C. $9,000F; $1,200U. D. $9,000U; $1,200F. Answer: A Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 8 – Application of knowledge 71. If budgeted profit is $11,000, favourable variances are $3,100 and unfavourable variances are $7,450, actual profit (loss) is: A. $21,550 profit.

B. $6,650 profit.

C. ($450) loss.

D. $15,350 profit.

Answer: B Difficulty: Moderate Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 8 – Application of knowledge 72. What variance does the difference between the actual cost of the direct labour hours worked and the planned cost of the direct labour hours measure?

A. The direct labour efficiency variance.

B. The direct labour rate variance.

C. The total direct labour variance.

D. None of the above.

Answer: B Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking

23 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

73. An adverse (unfavourable) labour efficiency variance could be caused by machine breakdowns.

A. True B. False Answer: A Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

74. Prepare a flexible cost budget for 8,000, 9,000 and 10,000 units of output, given the following data: Variable costs: Direct materials $5 Direct labour 4 Variable manufacturing overhead 8 Budgeted fixed manufacturing overhead $90,000.

Answer: Variable cost per unit 8,000 units Direct materials $5 40,000 Direct labour 4 32,000 Variable manufacturing 8 64,000 overhead Total variable costs 17 136,000

9,000 units 45,000 36,000 72,000

10,000 units 50,000 40,000 80,000

153,000

170,000

Fixed manufacturing 90,000 90,000 90,000 overhead Total costs $226,000 $243,000 $260,000 Difficulty: Complex Learning Objective 11.5: Use a budget as a means of exercising control over the business, explain and apply flexible budgeting, and calculate a series of variances between budget and actual to help control activity A-Head: Using budgets for control AACSB: 8 – Application of knowledge

24 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

LO 11.6 Identify the limitations of the traditional approach to control through budgets and standards Choose the one alternative that best completes the statement or answers the question.

75. Which of these is not a limitation of the traditional approach to control through budgets?

A. The difficulty of separating the causes of variances into controllable or uncontrollable factors.

B. The difficulty of creating clear lines of demarcation between areas of responsibility of various managers.

C. The expense of preparing a budget is too great for the average business.

D. None of the above, i.e., all are limitations.

Answer: C Difficulty: Basic Learning Objective 11.6: Identify the limitations of the traditional approach to control through budgets and standards A-Head: Limitations of the traditional approach to control AACSB: 3 – Analytical thinking 76. Budget targets should be: A. unachievable so that there is always an incentive to do better.

B. targets derived from experience set at reasonable levels of performance.

C. set to the highest possible standard of performance.

D. goals set by management to ensure that targets can be easily met.

Answer: B Difficulty: Moderate Learning Objective 11.6: Identify the limitations of the traditional approach to control through budgets and standards A-Head: Limitations of the traditional approach to control AACSB: 3 – Analytical thinking 77. Where budget targets have proven to be unrealistically optimistic, management is best advised to: A. revise budgets to match actual results.

B. revise budgets into the realm of achievability.

C. insist that junior management conforms to budgets.

D. ignore budgets and allow managers to use their own initiative.

Answer: B Difficulty: Moderate Learning Objective 11.6: Identify the limitations of the traditional approach to control through budgets and standards A-Head: Limitations of the traditional approach to control AACSB: 3 – Analytical thinking 78. Which budget criticism can be dealt with by adapting and improving budgeting practices?

A. All can be dealt with by adapting and improving budgeting practices.

25 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

B. Budgets can be seen as a bureaucratic exercise in cost cutting.

C. Bottom-up budgeting can lead to budget padding to make targets easier to achieve.

D. Budgets can make people feel undervalued.

Answer: A Difficulty: Basic Learning Objective 11.6: Identify the limitations of the traditional approach to control through budgets and standards A-Head: Limitations of the traditional approach to control AACSB: 3 – Analytical thinking

26 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488626616 / Kozier / Fundamentals of Nursing Vol 2 / 5e

Atrill, Accounting 8e Chapter 12: Capital investment decisions LO 12.1 Identify the essential features of investment decisions, and state the four common capital investment appraisal methods Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. It is important to get investment decisions right for which of the following reasons?

A. Large amounts of resources are often involved.

B. They may affect the business for many years.

C. They can be difficult and/or expensive to 'bail-out' of once started.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 12.1: Identify the essential features of investment decisions, and state the four common capital investment appraisal methods A-Head: Features of investment decisions and associated appraisal methods AACSB: 3 – Analytical thinking 2. Which of the following is not a method for appraising potential investments?

A. Payback method.

B. Return on assets.

C. Accounting rate of return.

D. Net present value.

Answer: B Difficulty: Basic Learning Objective 12.1: Identify the essential features of investment decisions, and state the four common capital investment appraisal methods A-Head: Features of investment decisions and associated appraisal methods AACSB: 3 – Analytical thinking 3. Which method for appraising investments is regarded as the 'superior' method?

A. PP Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

B. ARR C. NPV D. IRR Answer: C Difficulty: Moderate Learning Objective 12.1: Identify the essential features of investment decisions, and state the four common capital investment appraisal methods A-Head: Net Present Value (NPV) AACSB: 3 – Analytical thinking

LO 12.2 Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

4. What investment decision method takes the average profit and expresses it as a percentage of the average investment?

A. Accounting Rate of Return.

B. Net Present Value.

C. Payback.

D. Internal Rate of Return.

Answer: A Difficulty: Moderate Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 3 – Analytical thinking 5. Timothy Moore, Managing Director of Tiles Ltd, has received a report from his Finance Manager recommending four investment projects for his approval. However, the firm has only sufficient funds to invest in one project. The firm's rate of return is 6%. The Accounting Rate of Return for each project is: A - 12%, B - 9%, C - 13%, D - 15%. Short will select: A. Project A. B. Project B. C. Project C. D. Project D. Answer: D Difficulty: Basic Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 8 – Application of knowledge 6. To calculate the Accounting Rate of Return, it is necessary to determine annual profit.

Annual profit is calculated on a/an: 2 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. accrual basis.

B. cash basis.

C. market value basis.

D. current cost basis.

Answer: A Difficulty: Moderate Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 3 – Analytical thinking 7. The decision rule for the accounting rate of return method of assessing investment projects is to accept all projects with: A. a positive return.

B. the highest return.

C. the highest return subject to a minimum required return.

D. none of the above.

Answer: C Difficulty: Moderate Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 3 – Analytical thinking 8. What is a disadvantage associated with the use of the accounting rate of return method for assessing investment opportunities?

A. it is a method that is not widely understood by business.

B. it is based on an accrual approach rather than cash flows.

C. it ignores the time value of money.

D. Both B and C. Answer: D Difficulty: Moderate Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 3 – Analytical thinking 9. All of the investment appraisal methods below use cash flows exclusively except: A. accounting rate of return.

B. payback.

C. internal rate of return.

D. net present value.

Answer: A Difficulty: Moderate Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 3 – Analytical thinking Use the information below to answer the following questions.

Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 3 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: 2018

2019

2020

2021

2022

$m

$m

$m

$m

$m

Sales

1.5

1.3

1.4

1.2

1.1

Costs (including depreciation)

1.0

1.0

1.0

1.0

1.0

Profit before tax 0.5 0.3 0.4 0.2 0.1 Depreciation has been calculated on a straight-line basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.

10. Refer to the table above. The accounting rate of return is: A. 40%.

B. 80%.

C. 50%.

D. 30%.

Answer: B Difficulty: Complex Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 8 – Application of knowledge

Short answer: Write the word or phrase that best completes each statement or answers the question.

11. Container Ltd, a manufacturing firm, is considering investing $120,000 in a new mainframe computer. It is estimated that net cash flow per year will be $30,000 and the computer will have a 10-year useful life and zero residual value. The machine will be depreciated on a straight-line basis. What is the accounting rate of return? Show your work.

Answer: [$30,000 cash flow – ($120,000 investment / 10 years)] / [($120,000 – $0 residual value) / 2] = 30.0% Difficulty: Complex Learning Objective 12.2: Demonstrate an understanding of the 'accounting rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Accounting rate of return (ARR) AACSB: 8 – Application of knowledge

4 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

LO 12.3 Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

12. What is the assessment method widely used in practice which enables managers to screen investment projects to determine which projects can recoup their investment outlay the fastest?

A. internal rate of return method.

B. accounting rate of return method.

C. payback method.

D. net present value method.

Answer: C Difficulty: Basic Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking 13. Gardall Ltd, a printing business, intends purchasing a new computerised printing machine for $900,000. The annual cash flows from the new machine are expected to be $150,000 per year. The machine has an eight-year useful life. The payback period is: A. 8 years.

B. 6 years.

C. 5 years.

D. 5.33 years.

Answer: B Difficulty: Moderate Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 8 – Application of knowledge 14. The statement that is a disadvantage of the payback method of investment evaluation is: A. It disregards the time value of money.

B. It disregards the post payback period cash flows.

C. It is based on cash flows.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking 15. Louka is considering setting up a business selling free-range chickens. He estimates his establishment costs will be $600,000 and his net cash flows for the first five years 5 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

will be $100,000 in year 1, $200,000 in year 2, stabilising at $300,000 in year 3. The payback period for the investment is: A. 3.2 years.

B. 3 years.

C. 5 years.

D. 3.8 years.

Answer: B Difficulty: Moderate Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking 16. What is the decision rule for the payback method of investment appraisal?

A. choose the project with the longest payback period.

B. choose the project with the shortest payback period.

C. choose the project where the payback period is longer than a hurdle period.

D. below a maximum period, accept the project with the shortest payback period Answer: D Difficulty: Basic Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking 17. Kahlia is considering purchasing a new button holer for her business. She estimates the machine will cost $90,000 and will be paid for in cash. Her cash savings from the first 4 years of operation of the machine will be $20,000 in year 1, $30,000 in year 2, $35,000 in year 3 and $35,000 in year 4. The payback period for the machine is: A. 3.14 years.

B. 3.86 years.

C. 4 years.

D. 2.66 years.

Answer: A Difficulty: Moderate Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking 18. Which of these is not generally regarded as an advantage of the payback method?

A. It emphasises early cash flows which have greater certainty.

B. It emphasises liquidity.

C. It minimises having to forecast too far into the future.

D. It avoids having to take into account the time value of money.

Answer: D Difficulty: Moderate Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking 6 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Use the information below to answer the following questions.

Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: 2018

2019

2020

2021

2022

$m

$m

$m

$m

$m

Sales

1.5

1.3

1.4

1.2

1.1

Costs (including depreciation)

1.0

1.0

1.0

1.0

1.0

Profit before tax 0.5 0.3 0.4 0.2 0.1 Depreciation has been calculated on a straight-line basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.

19. Refer to the table above. The payback period is: A. between years 2 and 3.

B. between years 4 and 5.

C. between years 3 and 4.

D. between years 1 and 2.

Answer: D Difficulty: Complex Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 8 – Application of knowledge

Short answer: Write the word or phrase that best completes each statement or answers the question.

20. Discuss the problem with the payback period method?

Answer: Answers may vary but should include some/all of the following: • • •

PP ignores the timing of the cash flows PP may ignore relevant information PP favours projects with a short payback period but this doesn’t encompass all types of risk.

• Managers are required to select a maximum acceptable payback period but this is often not based on guidelines or objectivity.

Difficulty: Moderate Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking 21. Name two advantages of the payback method.

Answer: Answers may vary but should include two of the following: it is easily understood, it is simple, and it emphasises the short-term.

Difficulty: Moderate 7 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective 12.3: Demonstrate an understanding of the 'payback' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Payback period (PP) AACSB: 3 – Analytical thinking

LO 12.4 Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

22. The potential benefits forgone by rejecting one alternative while accepting another is known as a/an: A. past cost.

B. cost/benefit cost.

C. opportunity cost.

D. deprivation cost.

Answer: C Difficulty: Basic Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 23. The time value of money is an important concept in investment decisions as it takes into account that: A. a dollar received today is more valuable than a dollar received tomorrow.

B. a dollar received today is equal to a dollar received tomorrow.

C. a dollar received tomorrow is more valuable than a dollar received today.

D. it takes time to earn profits.

Answer: A Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 24. Which of the following would be a reason for preferring $100 now rather than $100 in one year's time?

A. Risk.

B. Interest lost.

C. The effects of inflation.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) 8 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 25. You have won a special type of lottery where you are to receive $250,000 in 4 years' time. The current interest rate is 6%. How much is the lottery win worth in today's dollars?

A. $200,000.

B. $158,400.

C. $255,010.

D. $198,000.

Answer: D Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 26. An investor has the opportunity to invest at 15 per cent per year. Would they prefer to have $20,000 in a year's time or have any of the following sums now?

A. $15,000.

B. $16,000.

C. $17,500.

D. $15,667.

Answer: C Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 27. If you banked $27,778 today at an interest rate of 20%, in two years’ time you would have: A. $40,000.

B. $36,000.

C. $33,334.

D. $27,778.

Answer: A Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 28. After appraisal of an investment opportunity, the Net Present Value was calculated as $3,000. This indicated that the project's return is: A. the opportunity rate.

B. equal to the market rate of return.

C. greater than the company's rate of return.

D. greater than the discount rate used in the analysis.

Answer: D Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses 9 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 29. Using the Net Present Value method, the decision rule for projects when finance is not a restriction is: A. select the project where the cash inflows are greatest in the early years of the project.

B. select the project with the largest cash inflows.

C. take on all projects with a positive NPV. D. select the project with cash flows equal to the initial investment.

Answer: C Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 30. What is the factor in Net Present Value analysis that normally involves the least degree of uncertainty?

A. the future cash flows.

B. the cost of the initial investment.

C. the life of the project.

D. the discount rate.

Answer: B Difficulty: Moderate Use the information below to answer the following questions.

Han Ltd supplies chilli paste to large supermarket chains. The company is currently considering scrapping the old processor and investing in a new processor. Information about the investment is as follows: Initial investment in processor $105,000 Operating cash flows over next 5 years: Cash receipts $80,000 Cash payments $40,000 Residual value of processor in 5 years $5,000 Required rate of return 8% Depreciation per annum $20,000 31. Refer to the table above. What is the annual net cash flow for years 1-4?

A. $10,000.

B. $30,000.

C. $40,000.

D. $20,000.

Answer: C Difficulty: Basic Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 32. Refer to the table above. What is the annual net cash flow in year 5?

A. $30,000.

10 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

B. $50,000.

C. $35,000.

D. $45,000.

Answer: D Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 33. Refer to the table above. The net present value (rounded) of the investment is: A. $68,125.

B. $66,500.

C. $67,000.

D. $71,000.

Answer: A Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 34. Refer to the table above. Using the Net Present Value approach the management of Han Ltd will make which of the following decisions?

A. Accept the investment proposal and purchase the new processor.

B. Retain the current processor and buy the new processor.

C. Retain the current processor.

D. Increase the residual value of the processor.

Answer: A Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 35. When a new investment requires an increase in working capital (e.g., accounts receivable, inventory) the analysis should incorporate this by: A. recording a cash outflow in Year 0 and a cash inflow at the end of the project.

B. recording a cash inflow at the end of the project.

C. evenly dividing the amount of working capital as a cash outflow for each year of the investment.

D. doing nothing as there is a nil impact on cash flows.

Answer: A Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking Use the information below to answer the following questions.

Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000, have a life of 5 years, and a nil residual value. It will be ready for operation on 31 11 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

December 2017. The following statement of comprehensive income figures for the new binoculars are forecast: 2018

2019

2020

2021

2022

$m

$m

$m

$m

$m

Sales

1.5

1.3

1.4

1.2

1.1

Costs (including depreciation)

1.0

1.0

1.0

1.0

1.0

Profit before tax

0.5

0.3

0.4

0.2

0.1

Depreciation has been calculated on a straight-line basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.

36. Refer to the table above. The annual depreciation charge for the project is: A. $300,000.

B. $250,000.

C. $150,000.

D. $200,000.

Answer: C Difficulty: Basic Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 37. Refer to the table above. The annual cash outflow for the project is: A. $850,000.

B. $700,000.

C. $750,000.

D. $650,000.

Answer: A Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 38. Refer to the table above. The net present value (rounded) is: A. $984,000.

B. $883,000.

C. $1,019,900.

D. $860,500.

Answer: C Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 39. If the net present value analysis of a project resulted in a positive value and the company did not accept the project, it could be assumed that: 12 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. qualitative factors outweigh the benefit of the investment.

B. the net initial investment cannot be recovered.

C. the return is greater than that required by the company.

D. all of the above.

Answer: A Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 40. Which of the following does the Net Present Value method of investment appraisal not address?

A. the whole of the relevant cash flows.

B. qualitative factors.

C. the timing of the cash flows.

D. None of the above, i.e., all matters are addressed.

Answer: B Difficulty: Basic Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 41. On what should the decision to invest in a project be based?

A. both financial and quantitative information.

B. both non-financial and qualitative information.

C. both financial and non-financial information.

D. none of the above.

Answer: C Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 42. Which of these costs would not be relevant to an investment decision to replace an existing asset with a newer model capable of increasing production?

A. Disposal value of existing asset.

B. Carrying amount of asset to be replaced.

C. Trade-in value of existing asset.

D. Future operating costs of existing asset.

Answer: B Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 43. Depreciation is a non-cash expense, but it affects cash flows from an investment because: A. it affects the amount of tax paid.

13 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

B. it affects the cost of the investment.

C. it affects the scrap value of the investment.

D. all of the above.

Answer: A Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 44. Manosteel Ltd is considering the purchase of a new machine for $100,000. It is to be depreciated on a straight-line basis and is estimated to have no residual value at the end of a useful life of 10 years. The tax rate is 30 per cent. What will be the annual cash tax saving in relation to depreciation expense?

A. $3,000.

B. $100.

C. $300.

D. $10,000.

Answer: A Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 45. The following data was given for three projects being considered by Manosteel Ltd. Only one project can be accepted due to funding limitations.

Project IRR NPV Payback A 16% $ 18,000 7 yrs B 18%% $100,000 5 yrs C 15%% $ 95,000 10 yrs Which project is the best given that Manosteel's required rate of return is 14%?

A. Project A. B. Project B. C. Project C. D. All projects should be accepted, as all have a positive Net Present Value and an Internal Rate of Return greater than the required rate of return.

Answer: B Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 46. TG Industries is considering investing in a fleet of six delivery vehicles. The annual running costs are expected to total $90,000 per vehicle, including the driver's salary.

The vehicles are expected to operate for a total of five years. At present TG industries uses a commercial carrier for its deliveries. The commercial carrier is expected to charge a total of $680,000 for each of the next five years to make the deliveries. What is the estimated net annual cash cost saving on delivery vehicle running cost if TG industries invests in the fleet of six vehicles?

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A. $90,000.

B. $400,000.

C. $310,000.

D. $140,000.

Answer: D Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 47. What discount rate should be used in Net Present Value assessments?

A. the specific cost of capital associated with funding a particular project.

B. the government bond rate.

C. the weighted average cost of capital of the business.

D. the expected rate of return required by ordinary shareholders.

Answer: C Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 48. In capital investment decision-making, what does PV stand for?

A. Payback value.

B. Profit vesting.

C. Present value.

D. Purchasing value.

Answer: C Difficulty: Basic Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 49. Which of these factors influences the returns required by investors from an investment project?

A. Interest foregone.

B. Inflation.

C. Risk premium.

D. All are influences.

Answer: D Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking 50. What is the formula for net present value per $1 of investment?

A. Net Present Value/Investment.

B. Net cash flows/ Investment.

C. Present value of inflows/initial investment.

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D. Present values of inflows/present value of outflows.

Answer: A Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking

Fill in the blank: Select the word or phrase that best completes each statement.

51. The required rate of return is the [BLANK] acceptable percentage return on an investment after taking into account the [BLANK] of the investment.

A. minimum; opportunity cost B. maximum; opportunity cost C. maximum; risk D. minimum; risk Answer: D Difficulty: Moderate Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

52. Depreciation is not included in Net Present Value analysis because it is a non-cash item.

A. True B. False Answer: A Difficulty: Basic Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 3 – Analytical thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

53. The Square Package Group is thinking of buying, at a cost of $220,000, some new packaging equipment that is expected to save $50,000 in costs per year. Its estimated useful life is 10 years and it will have zero disposal value. The required rate of return is 16%. Ignore income tax issues.

REQUIRED: Compute the following: 16 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

a) Net present value b) Payback period Answer: a) Net present value = ($50,000 × 4.833) - $220,000 = $241,650 - $220,000 = $21,650 b) Payback period = $220,000/$50,000 = 4.4 years Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge 54. The following information relates to three mutually exclusive projects.

Project A Project B Project C Initial cash outlay $40,000 $40,000 $40,000 Net cash inflows: Year 1 3,000 16,000 12,000 2 7,000 13,000 12,000 3 11,000 10,000 12,000 4 15,000 7,000 12,000 5 19,000 4,000 12,000 Salvage value Year 5 8,000 Nil 2,000 REQUIRED: Compute the net present value of each project at a discount rate of 10%.

Answer: Year PV factor 10% Project A Project B $ $ PV PV 0 1 (40,000) (40,000) (40,000) (40,000) (40,000) 1 0.909 3,000 2,727 16,000 14,544 12,000 2 0.826 7,000 5,782 13,000 10,738 12,000 3 0.751 11,000 8,261 10,000 7,510 12,000 4 0.683 15,000 10,245 7,000 4,781 12,000 5 0.621 27,000 16,767 4,000 2,484 14,000 Total +3,782 +57

Project C $ PV (40,000) 10,908 9,912 9,012 8,196 8,694 +6,722

Net Present Value: Project A + $3,782 Project B + $57 Project C + $6,722 Difficulty: Complex Learning Objective 12.4: Demonstrate an understanding of the 'net present value' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Net present value (NPV) AACSB: 8 – Application of knowledge [BLANK]

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LO 12.5 Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

55. If the Net Present Value of a project is $1,000 after using a discount rate of 8%, then one can conclude that the Internal Rate of Return is: A. 8%.

B. greater than 8%.

C. between 8% and 10%.

D. less than 8%.

Answer: B Difficulty: Complex Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 8 – Application of knowledge 56. Courtmaster provides superturf for tennis courts. The company has recently investigated investing in a new machine, which will speed up the laying of the superturf. The old machine has a remaining life of 5 years, and the new equipment has a value of $150,000 with a five-year life. The expected additional cash inflows are $35,000 per year. In what range is the internal rate of return for the new machine?

A. 4 - 6%.

B. 2 - 4%.

C. 6 - 8%.

D. 8 - 10%.

Answer: A Difficulty: Complex Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 8 – Application of knowledge 57. Wishlist recently purchased a new packaging machine for $678,026. The machine has a remaining useful life of 10 years. Net cash flow per year will be $120,000. The internal rate of return is: A. 16%.

B. 12%.

C. 24%.

D. 20%.

Answer: B Difficulty: Complex Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 8 – Application of knowledge

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58. What is the main disadvantage of the Internal Rate of Return method?

A. it ignores the scale of projects, which could lead to wrong decision-making.

B. it is difficult for management to incorporate it into decision-making.

C. it is too simplistic.

D. all of the above.

Answer: A Difficulty: Moderate Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 3 – Analytical thinking 59. Projects can have multiple internal rates of return due to: A. all positive cash flows.

B. all negative cash flows.

C. both positive and negative cash flows at different points during its life.

D. none of the above.

Answer: C Difficulty: Complex Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 3 – Analytical thinking 60. What is a problem with the Internal Rate of Return method?

A. it ignores the time value of money.

B. it has difficulty handling projects with unconventional cash flows.

C. it ignores the timing of cash flows.

D. all of the above.

Answer: B Difficulty: Complex Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 3 – Analytical thinking 61. An advantage of the Internal Rate of Return method over the Net Present Value method of investment appraisal is that: A. the IRR is easier to calculate than the NPV. B. the IRR method is more well known that the NPV method.

C. the IRR is expressed in percentage terms whereas the NPV is expressed in absolute terms.

D. all are advantages.

Answer: C Difficulty: Complex Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 3 – Analytical thinking 62. Which statement is true?

19 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. The Internal Rate of Return method assumes that cash reinvested in the course of the life of the project earns at the same rate as the project.

B. The Net Present Value method assumes that the reinvestment rate is at the cost of capital.

C. Both the Internal Rate of Return and the Net Present Value methods assume that the reinvestment rate is at the cost of capital.

D. Both A and B. Answer: D Difficulty: Complex Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

63. The Internal Rate of Return is the discount rate that makes the Net Present Value zero.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 12.5: Demonstrate an understanding of the 'internal rate of return' method with respect to the formula, decision rule, and strengths and weaknesses A-Head: Internal rate of return (IRR) AACSB: 3 – Analytical thinking

LO 12.6 Identify and deal with a range of practical issues relating to investment appraisal Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

64. Relevant cash flows for investment decisions are: A. expected cash flows that will not differ between alternatives.

B. expected cash flows that will differ between alternatives.

C. actual cash flows that differ between alternatives.

D. actual cash flows that do not differ between alternatives.

Answer: B Difficulty: Moderate Learning Objective 12.6: Identify and deal with a range of practical issues relating to investment appraisal A-Head: Some practical points AACSB: 3 – Analytical thinking 65. Which of the following are practical issues that need to be considered when using investment appraisal methods?

20 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. Irrelevant costs.

B. Taxation.

C. Interest payments.

D. Both B and C. Answer: D Difficulty: Moderate Learning Objective 12.6: Identify and deal with a range of practical issues relating to investment appraisal A-Head: Some practical points AACSB: 3 – Analytical thinking 66. Which of the following statements is incorrect?

A. It may be very difficult to quantify all factors that impact on an investment decision.

B. Investment decisions are made easier as cash forecasts are always correct.

C. The validity of assumptions made in relation to an investment proposal may influence the final decision.

D. The results from using an investment appraisal method is only one input into the final decision.

Answer: B Difficulty: Moderate Learning Objective 12.6: Identify and deal with a range of practical issues relating to investment appraisal A-Head: Some practical points AACSB: 3 – Analytical thinking

LO 12.7 Describe investment appraisal in practice, and explain the need to link it with strategic planning Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

67. The finding from surveys of the methods of business investments that is true is: A. there is a tendency for larger businesses to use the discounting methods.

B. businesses generally only use one method to assess each investment decision.

C. the payback method is hardly used in practice.

D. All of the statements are true.

Answer: A Difficulty: Complex Learning Objective 12.7: Describe investment appraisal in practice, and explain the need to link it with strategic planning A-Head: Investment appraisal in practice AACSB: 3 – Analytical thinking 68. Refer to Real World 12.6 Techniques used in practice box (pg.555) for survey referenced. The method of investment appraisal found in surveys to be used by 94% of Australian companies is: A. Internal rate of return.

B. Accounting rate of return.

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C. Net Present Value.

D. Payback.

Answer: C Difficulty: Complex Learning Objective 12.7: Describe investment appraisal in practice, and explain the need to link it with strategic planning A-Head: Investment appraisal in practice AACSB: 3 – Analytical thinking 69. Which method of investment appraisal has been found in surveys to be the least popular with Australian businesses?

A. Net Present Value.

B. Accounting rate of return.

C. Internal rate of return.

D. Payback.

Answer: B Difficulty: Moderate Learning Objective 12.7: Describe investment appraisal in practice, and explain the need to link it with strategic planning A-Head: Investment appraisal in practice AACSB: 3 – Analytical thinking 70. What is the first step when beginning the investment process?

A. Determine the NPV of potential projects.

B. Determine the risks involved in potential projects.

C. Determine the investment funds available.

D. Identify profitable project opportunities.

Answer: C Difficulty: Complex Learning Objective 12.7: Describe investment appraisal in practice, and explain the need to link it with strategic planning A-Head: Investment appraisal in practice AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false 71. Evaluating the proposed project is an important stage in the investment decisionmaking process of a business.

A. True B. False Answer: A Difficulty: Moderate Learning Objective 12.7: Describe investment appraisal in practice, and explain the need to link it with strategic planning A-Head: Investment appraisal in practice AACSB: 3 – Analytical thinking 72. All business activities and projects involve risks, but there are methods to completely eliminate them.

A. True 22 Copyright ©2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

B. False Answer: B Difficulty: Moderate Learning Objective 12.7: Describe investment appraisal in practice, and explain the need to link it with strategic planning A-Head: Investment appraisal in practice AACSB: 3 – Analytical thinking

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Atrill, Accounting 8e Chapter 13: The management of working capital LO 13.1 List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. Which item is not part of working capital?

A. cash.

B. inventory.

C. accounts receivable.

D. plant.

Answer: D Difficulty: Basic Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The nature and purpose of working capital AACSB: 3 – Analytical thinking 2. Which changes would increase a firm's net working capital, all other things remaining constant?

A. Decrease in inventories.

B. Increase in accounts payable.

C. Increase in accounts receivable.

D. All of the above.

Answer: C Difficulty: Basic Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The nature and purpose of working capital AACSB: 3 – Analytical thinking 3. Which business is likely to have the heaviest investment in working capital?

Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. wholesaler.

B. manufacturer.

C. service business.

D. retailer.

Answer: B Difficulty: Basic Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The nature and purpose of working capital AACSB: 3 – Analytical thinking 4. Which statement concerning working capital is not true?

A. It is possible to have too much working capital.

B. It is possible to have too little working capital.

C. The greater the working capital the better.

D. There is an 'ideal' level of working capital.

Answer: C Difficulty: Basic Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The nature and purpose of working capital AACSB: 3 – Analytical thinking 5. Working capital for a manufacturer normally makes up [BLANK] percentage of total assets.

A. an unimportant B. fifty C. a huge D. a significant Answer: D Difficulty: Basic Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The nature and purpose of working capital AACSB: 3 – Analytical thinking 6. Working capital is a measure of a firm's: A. equity.

B. liquidity.

C. gearing.

D. profitability.

Answer: B Difficulty: Moderate Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The nature and purpose of working capital AACSB: 3 – Analytical thinking 7. A decline in the level of working capital will: A. leave risk unchanged.

B. working capital is not related to risk.

C. reduce risk.

2 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

D. increase risk.

Answer: D Difficulty: Moderate Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The Management of Inventories AACSB: 3 – Analytical thinking 8. Management of working capital is important because it affects the firm's: A. profitability.

B. risk.

C. liquidity.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 13.1: List the items that make up working capital, discuss the nature and importance of working capital, and illustrate the working capital cycle A-Head: The Management of Accounts Receivable (Debtors) AACSB: 3 – Analytical thinking

LO 13.2 Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

9. Which items comprise inventory?

A. work-in-process.

B. finished goods.

C. raw materials.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 10. What is an advantage of holding inventory?

A. no interruptions to production.

B. ability to buy before prices rise.

C. sales are not lost because things are out of stock D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories 3 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 11. Which of these is not a cost of holding insufficient levels of inventory?

A. Extra inventory storage costs.

B. Lost production because of shortages of raw materials.

C. High transportation costs on rush deliveries of inventory.

D. Loss of sales.

Answer: A Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 12. Which is one of the most difficult inventory costs to measure?

A. ordering costs.

B. interest costs.

C. stock out costs.

D. carrying costs.

Answer: C Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 13. Which of these is not considered a cost of holding inventory?

A. Opportunity cost of having funds tied up in inventory.

B. Risk of bad debts.

C. Cost of storage and handling.

D. Risk of obsolescence.

Answer: B Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 14. Which of the following is not a procedure or technique for managing inventory?

A. payback method.

B. economic order quantity model.

C. the ABC system of control.

D. financial ratios.

Answer: A Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 15. If sales are $950,000, the cost of sales is $600,000 and average inventory is $65,000, the average time taken to sell inventory in days is: 4 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A. 11 days.

B. 23.6 days.

C. 39.54 days.

D. 33 days.

Answer: C Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 8 – Application of knowledge 16. Annual demand for product W is 120,000 units and the lead-time for orders is four weeks. Demand is steady throughout the year. Assuming no buffer stock is held, at what level of inventory should the company reorder product W? A. 39,000 units.

B. 2,250 units.

C. 58,500 units.

D. 9,230 units.

Answer: D Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 8 – Application of knowledge 17. The economic order quantity model is concerned with answering the question: A. How much inventory should be held?

B. What should be the size of an inventory order?

C. What is the cost of ordering inventory?

D. All of the above.

Answer: B Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 18. Which statement concerning the economic order quantity (EOQ) model is not correct?

A. The lower the level of inventory held, the greater the number of orders required.

B. A decrease in the number of orders increases the overall cost of ordering inventory.

C. The more inventory that is held the higher the cost of holding inventory.

D. None of the above, i.e., all are correct statements.

Answer: B Difficulty: Complex Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 19. Because of uncertainty of demand, a firm may choose to hold an additional amount of inventory called: A. safety stock.

5 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

B. economic order quantity stock.

C. reorder stock.

D. transit stock.

Answer: A Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 20. What is an assumption of the economic order quantity model?

A. instantaneous delivery of orders.

B. demand is constant over the planning period.

C. constant carrying and ordering costs.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 21. Orange Company expects demand for a product to be 12,005 units annually. It costs $5 per unit to hold inventory for one year. Order costs are $50 per order. The economic order quantity is: A. 600 units.

B. 490 units.

C. 240 units.

D. 1,200 units.

Answer: B Difficulty: Complex Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 8 – Application of knowledge 22.

Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.

Refer to the information above. The economic order quantity for raw materials is: A. 7,071 units.

B. 10,000 units.

C. 1,000 units.

D. 100 units.

Answer: A Difficulty: Complex Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 8 – Application of knowledge 6 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

23.

Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.

Refer to the information above. How often should the company place an order?

A. Every 25 days.

B. Every 10 days.

C. Every 19 days.

D. Every 5 days.

Answer: D Difficulty: Complex Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 8 – Application of knowledge 24. The statement that is not true concerning the just-in-time inventory management system is: A. The problem of holding inventory is shifted to the supplier.

B. The aim of the system is to eliminate the need for the business to hold inventory.

C. The approach is a theoretical one only and has not really been tried in practice.

D. For the system to work, there must be a close relationship between the business and its supplier.

Answer: C Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 25. If inventory is turned over 8 times a year, what is the inventory turnover period in days?

A. 7 days.

B. 46 days.

C. 19 days.

D. 70 days.

Answer: B Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 8 – Application of knowledge 26. What does it mean if inventory turnover changes from 4 times a year to 5 time a year?

A. on average, inventory is being sold faster.

B. on average, it is taking longer to sell inventory.

C. inventory turnover is too slow.

D. inventory turnover is faster than the industry average.

Answer: A Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques 7 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 27. Which statement concerning inventory is not true?

A. Regular physical stocktakes are part of the efficient management of inventory.

B. Electronic point of sale systems greatly assist in the management of inventory.

C. All categories of inventory should always be subject to the same degree of control.

D. None of the above, i.e., all are true statements.

Answer: C Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 28. The ABC system of managing inventory: A. is a method of applying different levels of inventory control based on the value of each category of inventory.

B. is the activity-based costing system.

C. is a simple system of managing inventory based on three codes.

D. none of the above.

Answer: A Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 29. In relation to the economic order quantity model: A. the higher the price paid for inventory, the more frequently it should be ordered.

B. the higher the price paid for inventory, the less frequently it should be ordered.

C. the price paid for inventory does not directly affect the frequency of inventory ordering.

D. none of the above is true.

Answer: C Difficulty: Complex Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 30. Which of the following is not and assumption of the economic order quantity model?

A. there are no discounts for bulk purchases.

B. no buffer inventory is required.

C. demand does not fluctuate seasonally.

D. the amount of inventory held is constant over the period.

Answer: D Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories 8 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 31. Sales forecasts to help determine the amount of inventory to be held can be based on all of the following except: A. the use of statistical techniques.

B. the judgement of sales staff.

C. the rate of inflation.

D. none of the above, i.e., all can be used to determine sales forecasts.

Answer: C Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

32. What is the formula for the average inventory turnover period in days?

Answer: (Average inventory held/Cost of sales) × 365 Difficulty: Basic Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 3 – Analytical thinking 33. Chocolate Ltd uses 18,000 litres of chocolate syrup each year. The cost of holding its chocolate syrup inventory is $0.50 per litre per year. The cost of ordering the syrup is $150 per delivery. The firm uses chocolate syrup at a constant rate throughout the year. What is the economic order quantity for chocolate syrup? Show your work.

Answer: Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 8 – Application of knowledge

Essay: Write your answer in the space provided or on a separate sheet of paper.

34. Wonderland has a plant that manufactures computer chips. Expected demand for these chips in March 2018 is 52,000 units. Wonderland estimates the cost per purchase order to be $25. The monthly holding cost for one chip is 5c.

REQUIRED: a) i) Compute the economic order quantity for the chips. ii) Compute the number of orders in March 2018. b) List the motives for holding cash in a business.

9 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

c) Name at least four factors that influence the length of the credit period in a business.

Answer: a) i) EOQ = 7,211 units ii) Number of deliveries in March = 52,000/7,211 = 8 (round up) b) Motives for holding cash: precautionary, transactionary, speculative. c) Factors affecting length of credit period: • credit terms within the industry • degree of competition • bargaining power of customers • risk of non-payment • marketing strategy of the business • capacity of business to offer credit.

Difficulty: Moderate Learning Objective 13.2: Demonstrate the importance of inventory, and the techniques available to manage this asset efficiently A-Head: The management of inventories AACSB: 1 – Written and oral communication [BLANK]

LO 13.3 Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

35. Credit should be granted to customers in which circumstance?

A. If the benefits exceed the costs.

B. If bad debts can be minimised.

C. If sales can be increased.

D. If others in the industry grant credit.

Answer: A Difficulty: Basic Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 36. Credit policy is composed of: A. credit terms.

B. collection policies.

C. vetting of customers before offering credit.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 10 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

37. Which of the following is not one of the 'five C's' of deciding which customers should be granted credit?

A. Character.

B. Capacity.

C. Capability.

D. Capital.

Answer: C Difficulty: Complex Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 38. Which of the following will affect the length of the period of credit granted to customers?

A. the degree of competition within the industry.

B. the bargaining power of particular customers.

C. typical credit terms operating within the industry.

D. all of the above.

Answer: D Difficulty: Basic Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 39. A firm has annual credit sales of $2m, an average debtor's balance of $400,000 and works 365 days a year. The average settlement period for accounts receivable is: A. 150 days.

B. 15 days.

C. 73 days.

D. 54.7 days.

Answer: C Difficulty: Moderate Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 8 – Application of knowledge 40. A firm has annual credit sales of $5,000,000 and an average collection period of 52 days. What is their average accounts receivable balance, assuming a 365-day year?

A. $142,857.

B. $712,329.

C. $486,111.

D. None of the above.

Answer: B Difficulty: Complex Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 8 – Application of knowledge 11 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

41. Extending the credit period granted, with all other components of the credit policy remaining unchanged, will most likely cause: A. a decrease in sales.

B. a decrease in bad debts.

C. a decrease in accounts receivable.

D. none of the above.

Answer: D Difficulty: Moderate Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivables (debtors) AACSB: 3 – Analytical thinking 42. A firm has daily credit sales of $50,000, and its average collection period is 50 days. Its average accounts receivable balance is: A. $2,500,000.

B. $1,000,000.

C. $1,000.

D. $50,000.

Answer: A Difficulty: Complex Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 8 – Application of knowledge 43. Which of the following is not necessarily true? Increasing the cash discount which a firm offers to its debtors for prompt payment will: A. reduce the average collection period.

B. increase the net profit of the firm.

C. reduce average accounts receivable.

D. All of the statements are true.

Answer: B Difficulty: Complex Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 44. Which of the following is not a useful measure of the quality of accounts receivable?

A. Bad debts as a percentage of sales.

B. The amount owed by the debtor.

C. Average collection period.

D. Aging of debtors' accounts.

Answer: B Difficulty: Moderate Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 45. When trying to assess the credit standing of a customer, a financial analyst could use 12 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

which of the following sources?

A. Credit ratings and reports from credit agencies.

B. Financial statements of the credit applicant.

C. Other suppliers.

D. All of the above.

Answer: D Difficulty: Complex Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 46. Improving cash flow in relation to debtors and accounts payable respectively, requires: A. slowing collections and slowing payments.

B. speeding up collections and speeding up payments.

C. slowing collections and speeding up payments.

D. speeding up collections and slowing payments.

Answer: D Difficulty: Basic Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 47. An increase in the effort put into collection of accounts receivable will result in [BLANK] in the investment in accounts receivable, [BLANK] in bad debts expense, and [BLANK] in collections expenditure.

A. a decrease; an increase; a decrease B. an increase; a decrease; an increase C. a decrease; a decrease; an increase D. a decrease; an increase; an increase Answer: C Difficulty: Complex Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 3 – Analytical thinking 48. A company wishes to reduce the amount of working capital it requires to finance its operations. Which of the following would be the least effective way of reducing working capital requirements?

A. Increase the efforts to collect overdue debtor's accounts.

B. Refuse to sell on credit to any customer.

C. Offer a discount for early payment by debtors.

D. Increase the payment time for accounts payable.

Answer: B Difficulty: Complex Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) 13 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 – Analytical thinking 49. If the planned level of sales is $146,000 and the planned average collection period is 40 days, the planned average level of accounts receivable will be: A. $3,650.

B. $14,600.

C. $18,500.

D. $16,000.

Answer: D Difficulty: Moderate Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 8 – Application of knowledge

Short answer: Write the word or phrase that best completes each statement or answers the question.

50. You are looking at a proposal from a customer for the supply of certain goods on credit. What factors should you take into account before deeming them creditworthy?

Answer: Answers will vary but may include the following: • Discussing the 5 C’s of credit: capital, capacity, collateral, condition, character.

• They could discuss the sources of information that can be gathered to assess the customer’s ability and willingness to pay: trade references, bank references, annual accounts, credit agencies, other suppliers.

Difficulty: Moderate Learning Objective 13.3: Discuss the provision of credit to customers, and use various management tools to monitor and control the resulting asset A-Head: The management of accounts receivable (debtors) AACSB: 8 – Application of knowledge

LO 13.4 Explain the reasons for holding cash, and the basis of its management and control Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

51. Which of the following is the most useful tool for managing cash?

A. Cash budget.

B. Quick ratio.

C. Current ratio.

D. Aging of debtors.

Answer: A 14 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking 52. The firm's operating cash cycle is: A. the time period between the cash outlay for the purchase of inventory and the ultimate receipt of cash from the sale of goods.

B. the time period between when inventory is purchased and resold.

C. the time between when sales are made and cash received.

D. the time between cash receipt and cash payment.

Answer: A Difficulty: Complex Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking 53. Which statement is not true?

A. A firm should always have a surplus holding of cash.

B. If a firm has a cash deficit, it may need to reschedule its cash payments.

C. If a firm has a cash deficit, it may need to arrange to borrow money.

D. If a firm has a cash surplus, it should make the best use of the surplus.

Answer: A Difficulty: Moderate Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking 54. Calculate the operating cash cycle if the inventory turnover period is 21 days, the debtor's turnover period is 37 days and the creditor turnover period is 40 days.

A. 18 days.

B. -18 days.

C. 93 days.

D. 53 days.

Answer: A Difficulty: Moderate Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 8 – Application of knowledge 55. Which statement concerning the operating cash cycle is true?

A. It is possible to have a negative operating cash cycle.

B. The longer the operating cash cycle, the greater the amount of working capital required.

C. Reducing the time period for which inventory is held shortens the operating cash cycle.

D. All of the statements are true.

Answer: D 15 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking 56. Calculate the operating cash cycle in days if all sales are for cash, inventory is turned over 8 times a year and creditors are paid on average 5 times a year.

A. -27.4 days.

B. 52.1 days.

C. 125.1 days.

D. 27.4 days.

Answer: D Difficulty: Moderate Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 8 – Application of knowledge 57. Which of these is not a way in which the length of the operating cash cycle can be reduced?

A. Cut back on the average time inventory is held.

B. Impose tighter controls on accounts receivable to encourage prompt payment.

C. Reduce the time taken to pay accounts payable.

D. None of the above, i.e., all are ways in which the length of the operating cash cycle can be reduced.

Answer: C Difficulty: Complex Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking 58. The holding of cash to meet the firm’s day-to day commitments means that cash is being held for a: A. transactionary motive.

B. precautionary motive.

C. speculative motive.

D. none of the above.

Answer: A Difficulty: Moderate Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking 59. Which of the following is not a fast and efficient method of transmitting cash that businesses can use to settle their accounts receivable?

A. cheque.

B. direct debit.

C. bank transfer.

D. all of the above.

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Answer: A Difficulty: Basic Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

60. The motive behind the holding of cash balances to protect the firm from unforeseen cash requirements is known as the precautionary motive.

A. True B. False Answer: A Difficulty: Basic Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking 61. The operating cash cycle is measured as inventory turnover period + accounts receivable turnover period.

A. True B. False Answer: B Difficulty: Moderate Learning Objective 13.4: Explain the reasons for holding cash, and the basis of its management and control A-Head: The management of cash AACSB: 3 – Analytical thinking

LO 13.5 Summarise the key aspects of management of accounts payable Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

62. Which statement concerning trade credit is not true?

A. A discount of 1% offered for prompt payment of amounts owning to creditors is hardly worth taking.

B. Trade credit is an important source of finance for most businesses.

C. Trade credit is generally regarded as a 'free' source of finance.

D. Credit can be a more convenient method of paying for goods than cash.

Answer: A Difficulty: Moderate Learning Objective 13.5: Summarise the key aspects of management of accounts payable A-Head: The management of accounts payable (creditors) AACSB: 3 – Analytical thinking 17 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

63. Violet Pty Ltd usually takes 50 days to pay its suppliers. In order to encourage prompt payment, supplier T offers Violet Pty Ltd a 1.5% discount for payment within 10 days.

What is the annual percentage cost of the discount to Violet Pty Ltd? A. 20%.

B. 18.25%.

C. 13.7%.

D. 2%.

Answer: C Difficulty: Complex Learning Objective 13.5: Summarise the key aspects of management of accounts payable A-Head: The management of accounts payable (creditors) AACSB: 8 – Application of knowledge 64. Total purchases are $150,000 and credit purchases are 80% of total purchases. If accounts payable at the beginning of the period are $15,000 and at the end of the period are $13,000, the average settlement period for accounts payable, in days, is: A. 50 days.

B. 74 days .

C. 49 days.

D. 42.6 days.

Answer: D Difficulty: Moderate Learning Objective 13.5: Summarise the key aspects of management of accounts payable A-Head: The management of accounts payable (creditors) AACSB: 8 – Application of knowledge 65. If accounts payable are paid 10 times a year, what, on average, is the accounts payable turnover period in days?

A. 20 days.

B. 12 days.

C. 36.5 days.

D. None of the above.

Answer: C Difficulty: Moderate Learning Objective 13.5: Summarise the key aspects of management of accounts payable A-Head: The management of accounts payable (creditors) AACSB: 8 – Application of knowledge 66. Gordon Enterprises usually takes 60 days to pay its suppliers. In order to encourage prompt payment, supplier Y offers Flash Enterprises a 2% discount for payment within 10 days. What is the annual percentage discount forgone if Flash Enterprises does not take up the discount offer?

A. 11%.

B. 1.5%.

C. 9.1%.

D. 14.6%.

Answer: D Difficulty: Complex Learning Objective 13.5: Summarise the key aspects of management of accounts payable A-Head: The management of accounts payable (creditors) AACSB: 8 – Application of knowledge 18 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

67. Which statement concerning trade credit is true?

A. One business's trade creditor is the other's trade debtor.

B. In a period of inflation, it is better to pay off goods bought on credit faster.

C. In most businesses, an extra charge is made to those who choose to pay on credit.

D. All of the statements are true.

Answer: A Difficulty: Moderate Learning Objective 13.5: Summarise the key aspects of management of accounts payable A-Head: The management of accounts payable (creditors) AACSB: 3 – Analytical thinking

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Atrill, Accounting 8e Chapter 14: Financing the business LO 14.1 Categorise sources of finance, and explain the main sources of internal finance Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

1. Which of the following would decrease a firm's internal sources of finance?

A. delay payments to accounts payable.

B. increase inventory levels.

C. retain more profits.

D. cut the dividend rate.

Answer: B Difficulty: Moderate Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking 2. Dividend policy is influenced by: A. the desire of a company for growth.

B. the difficulty of obtaining funds from other sources.

C. the perceived preference of shareholders for dividend income.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking

Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

3. Select the incorrect statement concerning retained profits as a source of finance.

A. Retaining profits has no effect on who controls the business.

B. The business does not have to wait to receive the funds when using retained profits.

C. There is more scrutiny when retained profits are used for investment than when shares are issued.

D. There are no costs associated with retaining profits.

Answer: C Difficulty: Moderate Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking 4. Select the correct statement.

A. To remain competitive, it is usually best for a firm to take longer to collect money owing by accounts receivable.

B. By lessening control over accounts receivable, it may be possible for the firm to make accounts receivable balances available for other purposes.

C. By exercising tighter control over accounts receivable, it may be possible for a firm to release funds for other purposes.

D. None of the statements is correct.

Answer: C Difficulty: Moderate Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking 5. Which of the following could result from paying accounts payable more quickly?

A. lower the buyer's credit rating.

B. lower the number of discounts foregone.

C. lead to refusal of credit by suppliers.

D. damage relationships with suppliers.

Answer: B Difficulty: Moderate Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking 6. Which of these is not an internal source of finance?

A. Retained earnings.

B. A reduction in inventory levels.

C. An increase in the bank overdraft.

D. None of the above, i.e., all are internal sources of finance.

Answer: C Difficulty: Basic Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance 2 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

AACSB: 3 - Analytical Thinking 7. Which statement about retained profits and dividends is true?

A. Dividends and retained profits are two sides of the same coin.

B. In Australia, industrial companies, on average, pay out about 30% of their earnings as dividends.

C. On average, dividends are a relatively small component of return on shares compared to capital gains.

D. All of the statements are true.

Answer: A Difficulty: Complex Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking 8. Long-term and short-term finance tends to be differentiated by: A. the amount of finance raised.

B. the period of time the finance has to be repaid.

C. whether the finance is debt or equity.

D. whether the finance is internal or external.

Answer: B Difficulty: Basic Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking 9. Which of the following statements relating to inventory levels and finance is correct?

A. Money tied up in inventories is an opportunity cost.

B. Businesses have to balance money invested in inventory to ensure no missed sales whilst not over-investing.

C. Overstocked businesses may find it is difficult to sell the inventory due to poor buying decisions.

D. All of the above statements are correct.

Answer: D Difficulty: Basic Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking 10. Which of the following is correct when considering retained profits as a form of financing?

A. Businesses either pay out all their retained earnings on dividends or they pay none at all.

B. Companies can only pay out 50% of their retained profits on dividends so there is always money available.

C. Financing is immediate as retained profits are already held by the company.

D. All of the above statements are correct.

Answer: C Difficulty: Complex 3 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective: 14.1 - Categorise sources of finance, and explain the main sources of internal finance A-Head - Sources of Finance AACSB: 3 - Analytical Thinking

LO 14.2 Identify and explain the main external sources of finance available Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

11. The firm's financial structure relates to how the firm: A. finances its assets.

B. manages its accounts receivable.

C. meets its daily financial payments.

D. all of the above.

Answer: A Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 12. Which of these is not a long-term source of finance?

A. Finance lease.

B. Trade credit.

C. Ordinary shares.

D. Mortgage.

Answer: B Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 13. Which statement regarding preference shares is correct?

A. Preference shares typically carry voting rights.

B. Preference shares continue to be a major source of new finance for companies.

C. Preference shareholders do not have the right to receive dividends prior to dividends being paid to ordinary shareholders.

D. Dividends paid on preference shares are not normally tax deductible to the business.

Answer: D Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking

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14. The statement concerning ordinary shares that is not correct is: A. ordinary shares normally have voting rights.

B. a growth company has the option of not paying a dividend to its shareholders.

C. dividends depend on profits.

D. limited liability means that the potential for returns is limited.

Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 15. Which of the following is a difference between ordinary and preference shares?

A. Preference shareholders receive priority of payment above ordinary shareholders on the winding up of the company.

B. Preference shares offer investors a lower level of risk than ordinary shares.

C. Preference dividends are paid before ordinary dividends.

D. All are differences.

Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 16. Which of the following statements are true?

A. Shareholders have the protection of limited liability.

B. In most insolvent companies, ordinary shareholders receive little or nothing back on winding up.

C. Shareholders have a legal entitlement to be paid a dividend once a year.

D. Both A and B. Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 17. An advantage of financing through an issue of ordinary shares rather than with borrowing is: A. it involves lower transaction costs.

B. it does not require a fixed periodic repayment.

C. it does not dilute proportional ownership.

D. All of the above are advantages.

Answer: B Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 18. Preference shares which allow the investor to receive dividends in arrears, when the 5 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

company declares and pays a dividend, are called: A. cumulative preference shares.

B. redeemable preference shares.

C. participating preference shares.

D. none of the above.

Answer: A Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 19. Why are preference shares no longer a major source of new finance for companies?

A. They are too risky.

B. Their dividends are not tax deductible.

C. Interest rates over the past few years have been at an all-time low.

D. Both B and C. Answer: D Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 20. A long-term form of finance that is divided into units, is evidenced by a trust deed and is secured by a floating charge over the assets of a company is a: A. loan.

B. share.

C. debenture.

D. mortgage.

Answer: C Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 21. A form of debt finance which pays low or zero interest is called a: A. eurobond.

B. deep discount bond.

C. financial derivative.

D. convertible loan.

Answer: B Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 22. Equity finance differs from debt finance as: A. dividends are tax deductible, unlike interest on debt.

B. its claim on assets has priority over debt.

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C. it is permanent financing whereas debt is not.

D. all of the above are differences.

Answer: C Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 23. The use of debt finance can lead a business to have [BLANK] returns and [BLANK] risk.

A. higher; lower B. lower; lower C. higher; higher D. none of the above Answer: C Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 24. An advantage of financing operations with equity rather than debt is: A. the legal requirement to repay the principal.

B. the tax deductibility of interest expense on debt.

C. the legal requirement to pay interest D. none of the above.

Answer: D Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 25. For an investor investing in ordinary shares, it is normally considered riskier than investing in: A. debentures.

B. unsecured notes.

C. preference shares.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 26. A mortgage is a form of loan that is secured by a charge over: A. inventories.

B. freehold property.

C. accounts receivable.

D. none of the above.

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Answer: B Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 27. Covenants imposed on a loan may include: A. a requirement to submit regular financial information.

B. limitations on dividend payments.

C. maintenance of a certain level of liquidity.

D. all of the above.

Answer: D Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 28. A long-term lease that cannot be cancelled and that transfers virtually all the rewards and risks of ownership to the lessee is called: A. a direct lease.

B. a leveraged lease.

C. an operating lease.

D. a finance lease.

Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 29. Which of the following is an advantage of lease financing?

A. Flexibility.

B. Reasonable cost.

C. Saving in cash flow.

D. All of the above.

Answer: B Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 30. A type of short-term financing used by many firms is: A. bank overdraft.

B. accounts receivable.

C. unsecured notes.

D. leasing.

Answer: A Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance 8 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 31. Which of the following is not a type of short-term debt finance?

A. Bank overdraft.

B. Factoring of accounts payable.

C. Invoice discounting.

D. None of the above.

Answer: B Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 32. Which of these is an advantage of bank overdrafts as a form of finance?

A. They are legally payable on demand.

B. They are easy to arrange.

C. They are a flexible form of borrowing.

D. Both B and C. Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 33. The form of short-term finance where another entity takes over the firm's debtors' accounts for a payment of around 85% of the accounts balance is known as: A. bills receivable.

B. discounting.

C. debt factoring.

D. none of the above.

Answer: C Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 34. Which of the following statements is false with respect to debt factoring?

A. it can be seen as an indication that the business is in healthy financial shape.

B. it outsources control of accounts receivable to specialists in collection and credit.

C. it provides a quicker source of cash than waiting for customers to pay.

D. all of the above.

Answer: A Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 9 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

35. Which statement is correct?

A. Long-term liabilities should be used to finance long-term assets.

B. Short-term assets should be financed by long-term liabilities.

C. Short-term liabilities should be used to finance long-term assets.

D. None of the above.

Answer: A Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 36. An advantage of short-term over long-term borrowing is: A. lower costs.

B. no need to repay.

C. flexibility.

D. all of the above.

Answer: C Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 37. A disadvantage of short-term debt over long-term debt is: A. less flexibility.

B. greater frequency of re-funding.

C. a greater likelihood of penalties for early repayment.

D. All are disadvantages.

Answer: B Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 38. A loan provided by a financial institution based on a proportion of the face value of credit sales outstanding, is known as: A. a secured loan.

B. bank overdraft.

C. factoring.

D. invoice discounting.

Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 39. The statement concerning invoice discounting that is not true is: A. the responsibility for collecting the trade debts outstanding remains with the business.

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B. it is currently a more important source of funds to businesses than factoring.

C. it is more expensive than factoring.

D. it is a more confidential form of finance than factoring.

Answer: C Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 40. Which factor should be taken into account when deciding between debt and equity finance?

A. The effect on earnings per share.

B. The security available.

C. The purpose of the finance.

D. All of the above.

Answer: D Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 41. Which of these is correct concerning the difference between an operating and a finance lease?

A. Under a finance lease, the customer takes immediate possession of the asset, while under an operating lease, the customer must wait for possession until the full cost is paid.

B. Under an operating lease, the lessee carries the risks and rewards, whereas with a finance lease, these are transferred to the lessor.

C. The asset will be carried and depreciated on the books of the lessee in an operating lease, and on the books of the lessor in a finance lease.

D. A finance lease is a long-term lending arrangement, while an operating lease is a short-term arrangement.

Answer: D Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 42. Loan capital which can be converted into equity capital at the option of the holder is known as: A. preference shares.

B. convertible preference shares.

C. convertible loan stock.

D. warrants.

Answer: C Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available 11 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 43. Which of the following is not an illiquid asset used as backing for bonds?

A. Inventory.

B. Music royalties.

C. Ticket sales to sporting events.

D. Credit card receipts.

Answer: A Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 44. Which of the following statements about securitisation is incorrect? Securitisation: A. capitalises the future cash flows arising from illiquid assets.

B. does not have any inherent problems to make it problematic.

C. is an illegitimate business practice for raising finance.

D. may also be used to assist in managing risk.

Answer: C Difficulty: Complex Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 45. What are the advantages of supply chain financing to the buyer?

A. reduction in receivables and increase in cash.

B. ability to negotiate longer payment terms.

C. competitive advantage.

D. all of the above.

Answer: B Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 46. Fintech lenders are more appealing to small and medium businesses because they: A. offer traditional financial services as well as novel ones.

B. offer loans more readily and more quickly.

C. often offer loans that are unsecured.

D. all of the above.

Answer: D Difficulty: Moderate Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking

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True/False: Write 'T' if the statement is true and 'F' if the statement is false.

47. Ordinary shareholders have the right to receive arrears of dividends.

A. True B. False Answer: B Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking 48. Investors for crowdlending have higher risks because crowlending has higher returns from profit than crowdfunding.

A. True B. False Answer: B Difficulty: Basic Learning Objective: 14.2 - Identify and explain the main external sources of finance available A-Head – External Sources of Finance AACSB: 3 - Analytical Thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

49. Discuss the advantages and disadvantages of a company issuing long-term debt, e.g., debentures, compared to raising funds through an issue of shares.

Answer: The possible advantages of issuing long-term debt, for example debentures, compared to raising funds through an issue of shares are: a) Compared with a share issue, the ownership base is not permanently diluted. b) Interest paid is tax deductible, whereas dividends are not tax deductible. c) Long-term debt arrangements, like debentures, can be traded in the market place and it is possible to buy them back early at a favourable price if market interest rate have increased.

The possible disadvantages of issuing long-term debt (e.g., debentures) compared to raising funds through an issue of shares, are: a) Interest has to be paid periodically (quarterly; half yearly; annually). b) The debt has to be repaid. c) The interest rate is fixed and therefore the firm is locked into higher rates if market rates fall. d) Additional reporting requirements may be imposed. e) Restrictive operating covenants may be imposed. For example, reducing the ability to sell assets; imposing restrictions on divided payments; requiring certain levels of interest coverage; limiting the relative level of debt that can be held; specifying the accounting rules to be used.

A-Head – External Sources of Finance Learning Objective: 14.2 - Identify and explain the main external sources of finance 13 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

available Difficulty: Moderate AACSB: 1 – Communication 50. What parties are involved in the hire purchase type of financing?

Answer: The supplier, the customer and a financial institution.

A-Head – External Sources of Finance Learning Objective: 14.2 - Identify and explain the main external sources of finance available Difficulty: Basic AACSB: 1 – Communication

LO 14.3 Explain the relationship between gearing and the financing decision Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

51. The use of debt finance by a company (gearing) has a potential impact on which of the following?

A. The return obtained by the shareholder.

B. The variability of net profit.

C. Risk associated with the company.

D. All of the above.

Answer: D Difficulty: Basic A-Head – Gearing and the Long-Term Financing Decision Learning Objective: 14.3 - Explain the relationship between gearing and the financing decision AACSB: 3 - Analytical Thinking 52. A firm with low business risk could safely consider finance using: A. no debt.

B. little debt.

C. high debt.

D. none of the above.

Answer: C Difficulty: Moderate A-Head – Gearing and the Long-Term Financing Decision Learning Objective: 14.3 - Explain the relationship between gearing and the financing decision AACSB: 3 - Analytical Thinking 53. Gearing refers to the use of: A. financing through preference shares.

B. debt financing.

C. equity financing.

D. none of the above.

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Answer: B Difficulty: Basic A-Head – Gearing and the Long-Term Financing Decision Learning Objective: 14.3 - Explain the relationship between gearing and the financing decision AACSB: 3 - Analytical Thinking 54. Gearing increases earnings per share when the return on assets exceeds which of the following?

A. return on sales.

B. firm's return on shareholders' equity.

C. dividends paid.

D. the after tax cost of debt.

Answer: D Difficulty: Complex A-Head – Gearing and the Long-Term Financing Decision Learning Objective: 14.3 - Explain the relationship between gearing and the financing decision AACSB: 3 - Analytical Thinking 55. Which of the following best describes the 'trade-off' theory?

A. Maintaining the cost of borrowing at the same level as the cost of equity.

B. Balancing the WACC and the cost of borrowings.

C. Balancing the benefits received from interest being a taxable expense with the cost of possibly going bankrupt.

D. None of the above is a good description.

Answer: C Difficulty: Complex A-Head – Gearing and the Long-Term Financing Decision Learning Objective: 14.3 - Explain the relationship between gearing and the financing decision AACSB: 3 - Analytical Thinking

LO 14.4 Explain the ways in which long-term equity finance can be raised Multiple choice: Choose the alternative(s) that best completes the statement or answers the question.

56. If a shareholder in a public company purchases shares on the Australian Securities Exchange, the capital of the company will: A. decrease by the amount obtained for the shares.

B. remain the same.

C. decrease by the fair value of the share.

D. increase by the amount obtained for the shares.

Answer: B Difficulty: Basic Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised 15 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 57. What is venture capital?

A. capital offered to take advantage of opportunities with greater than normal risk.

B. capital offered only to large companies.

C. capital offered only to owners of established businesses.

D. none of the above.

Answer: A Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 58. Which of the following businesses would probably not be of interest to providers of venture capital?

A. Mature businesses that are not expanding rapidly.

B. Businesses promising low returns but which are low-risk.

C. Businesses which are suffering declining sales.

D. All of the above.

Answer: D Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 59. The offer of new shares to existing shareholders at a discount on market price, in proportion to the amount of their current holding, is known as: A. a rights issue.

B. a bonus issue.

C. an option.

D. a preference issue.

Answer: A Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 60. The current market price of a company's shares is $10. The company is planning to make a 1 for 10 rights issue at a subscription price of $8. You hold 100 shares at the time the rights issue is to be made. If you exercise your rights, what is the total number of shares you will now own?

A. 110.

B. 100.

C. 108.

D. 111.

Answer: A Difficulty: Basic 16 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 61. The current market price of a company's shares is $10. The company is planning to make a 1 for 10 rights issue at a subscription price of $8. You hold 100 shares at the time the rights issue is to be made. What will the ex-rights share price be?

A. $9.46.

B. $8.00.

C. $9.82.

D. $8.80.

Answer: C Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 62. When making an issue of shares to the public: A. it is generally easy to set the price at which the shares will be issued.

B. it is generally difficult to set the price at which the shares will be issued.

C. if the share price is set too low, the issue will be undersubscribed.

D. if the share price is set too high, the issue will be oversubscribed.

Answer: B Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 63. Which of the following statements best represents a tender issue of shares?

A. the investors must state in advance the amount they are willing to pay for the shares.

B. the investors must state in advance the number of shares they are willing to purchase.

C. the issuer must state in advance the amount it expects to receive for the shares D. Both A and B are correct.

Answer: A Difficulty: Complex Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 64. What is the name given to investors, typically wealthy, successful individuals, who are prepared to make investments in new businesses and provide advice?

A. godfathers.

B. business angels.

C. philanthropists.

D. humanitarian.

Answer: B 17 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 65. Which of these is a disadvantage of Australian Securities Exchange listing?

A. Requirements for additional financial disclosure.

B. Closer monitoring by financial journalists and analysts.

C. The high cost of listing.

D. All are disadvantages.

Answer: D Difficulty: Basic Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 66. Why might small businesses prefer backing from business angels?

A. They may be prepared to accept lower returns on their investment.

B. They generally have little to offer in the way of business experience, so they will not interfere with the running of the business.

C. They are often in a position to make financial decisions quickly.

D. Both A and C. Answer: D Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 67. Small businesses are more likely to obtain long-term finance from: A. debentures.

B. ASX listing.

C. private equity.

D. none of the above.

Answer: C Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking

True/False: Write 'T' if the statement is true and 'F' if the statement is false.

68. The minimum share value a company must have to be listed on the Australian Securities Exchange is $1 million.

A. True B. False Answer: A 18 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking

Short answer: Write the word or phrase that best completes each statement or answers the question.

69. What is the most important difference between a bonus share issue and a rights issue, from the issuing company's point of view?

Answer: They have different effects on cash flow.

Difficulty: Complex Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking 70. Explain the underlying rationale of the Australian Securities Exchange.

Answer: The underlying rationale of the Australian Securities Exchange is to enable investors to sell their shares easily and to enable companies to raise new capital.

Difficulty: Moderate Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking

Essay: Write your answer in the space provided or on a separate sheet of paper.

71. Purple Ltd has 10 million ordinary shares which were issued at 80 cents each. The shares are currently valued on the stock exchange at $1.60 per share. The directors of Purple Ltd have decided to make a one-for-eight rights issue at $1.50 per share.

REQUIRED: a) Calculate the price of a share following the rights issue. b) Calculate the value of the rights offer on a per share basis.

Answer: a) Ex-rights price = weighted average of share price before the rights issue + the price of the rights shares = price of 8 shares before the rights issue (8 × $1.60c ) = $12.80 + price of taking up one right share 1.50 $14.30 divided by 9 = $1.59 per share. b) As the price of each share, in theory, should be $1.59 following the rights issue, and the previous price of a share was $1.60, the value of the rights offer, per share, will be the difference between the two values, i.e., $1.59 - $1.60 = 1c per share.

Difficulty: Complex 19 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e

Learning Objective: 14.4 - Explain the ways in which long-term equity finance can be raised A-Head – Raising Long-Term Equity Finance AACSB: 3 - Analytical Thinking

20 Copyright © 2021 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488625695/Atrill/Accounting/8e