Accounting Theory
Exam Answer Key
Course Introduction
Accounting Theory explores the conceptual foundations and frameworks that underpin accounting practices and standards. The course examines the evolution of accounting thought, the role of regulation, and the social, economic, and ethical implications of accounting choices. Students analyze various accounting theories, such as positive accounting theory, normative theory, and critical perspectives, to understand how accounting information influences decision-making and affects stakeholders. The course also covers contemporary issues in accounting research, providing a critical appreciation of the development and application of accounting principles in a global context.
Recommended Textbook
Understanding Australian Accounting Standards 1st Edition by Janice Loftus
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Page 2
Chapter 1: Accounting Regulation and the Conceptual Framework
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Q1) Which measurement base uses the discounted future net cash inflows or net cash savings that are expected to arise in the normal course of business in measuring the value of an asset?
A) Historical cost
B) Current cost
C) Present value
D) Realisable value
Answer: C
Q2) Which of the followings are the recognition criteria of elements of financial statements?
\(\begin{array}{ll}
I.\text { Existence of economic benefits}&III.\text { Probable occurrence }\\
II.\text {Reliable measurement }&IV.\text { Control by the entits}\\
\end{array}\)
A) I and II
B) II and III
C) II and IV
D) I and III
Answer: B
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Chapter 2: Application of Accounting Theory
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Q1) Normative theories:
A) prescribe what should be the case based on a specific objective.
B) are based on what is happening in the world.
C) explain why people behave in certain ways.
D) predicts unobserved phenomena.
Answer: A
Q2) The problem of 'underinvestment' arises when managers are reluctant to undertaken projects with positive net present value because:
A) managers prefer less risk than do lenders.
B) the projects lead to increased funds available to lenders.
C) it would adversely affect managers' bonus payments.
D) managers prefer to maintain a greater level of funds within the entity.
Answer: B
Q3) The followings are the limitations of inductive reasoning, except:
A) it does not attempt to improve current practices.
B) it may result in a logically valid, but not sound arguments.
C) it does not question the appropriateness of the observed actions.
D) it has a tendency of maintaining the existing state of affairs.
Answer: B
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Page 4
Chapter 3: Shareholders Equity: Share Capital and Reserves
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Q1) Which of the following is not a reason that companies may undertake a share buy-back?
A) as a defence against a hostile takeover
B) to manage the capital structure
C) to increase the worth per share of the remaining shares
D) as a way to efficiently manage surplus funds
Answer: A
Q2) In relation to an asset revaluation surplus, an entity
A) is not able to use this surplus for the payment of future dividends
B) is able to use this surplus for the payment of future dividends
C) is not able to transfer this surplus to any other reserve account
D) can transfer the surplus to current period profit or loss when the asset is disposed of
Answer: B
Q3) Whether a dividend is paid by a company depends on the decisions made by the:
A) creditors of the company;
B) International Accounting Standards Board;
C) auditors of the company;
D) directors of the company.
Answer: D
Page 5
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Chapter 4: Fair Value Measurement
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Q1) Which are the two most common measures used in Accounting Standards?
A) fair value less costs to sell and cost
B) value in use and cost
C) cost and fair value
D) net realisable value and fair value.
Q2) Which of the following disclosure are required under AASB 13?
A) the valuation techniques used to measure fair value
B) the level of the fair value hierarchy within which the fair value measurements are categorised
C) quantitative information about the significant unobservable inputs used in the fair value measurement
D) all of the options are correct.
Q3) Where a liability is held as a corresponding asset by another entity the fair value of the liability is determined by:
A) applying a present value technique to measure the liability
B) applying the cost approach to valuing the liability
C) measuring the fair value of the corresponding asset
D) determining the amount required to settle the present obligation
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Chapter 5: Revenue
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Q1) Using the relative fair value approach the amount of revenue recognised in relation to the on-call advice is:
A) indeterminable based on the facts provided
B) $1000
C) $2167
D) $2600
Q2) The revenue that would be recorded by TelCo at the inception of the agreement is:
A) $166
B) $833
C) $1500
D) $3000
Q3) Which of the following is NOT excluded from the scope of AASB 118 Revenue?
A) Accounting for share of joint venture revenue.
B) Subscriptions
C) Revenue arising from primary production activities
D) Revenue arising from oil and gas exploration
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Chapter 6: Provisions, Contingent Liabilities and Contingent Assets
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Q1) Which of the following statements is correct?
A) A present obligation is an example of a legal obligation.
B) A legal obligation is an example of a constructive obligation.
C) A constructive obligation is an example of an equitable obligation.
D) An equitable obligation is an example of a present obligation.
Q2) The June 2005 Exposure Draft issued in relation to proposed changes to AASB 137:
A) will be issued as a standard applicable for reporting periods ending on or after 1 June 2014
B) has been withdrawn by the AASB
C) is still under consideration by the AASB
D) is already applicable
Q3) Which of the following is an example of a provision falling within the scope of AASB 137?
A) accruals
B) onerous contracts
C) employee benefits
D) future operating losses
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Page 8
Chapter 7: Income Taxes
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Q1) Which of the following disclosures are optional under AASB 112?
A) the major components of income tax expense
B) the aggregate current tax or deferred tax that arises relating to items that are charged or credited directly to equity
C) the amount of deductible temporary differences and unused tax losses, for which no deferred tax asset is recognised in the statement of financial position
D) a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis of calculating the applicable tax rate.
Q2) Differences between the carrying amounts of an entity's net assets determined under accounting standards and accrual accounting, and the tax bases of those net assets determined under the Income Tax Assessment Act, are described as:
A) temporary differences
B) permanent differences
C) tax losses
D) the current income tax liability.
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Chapter 8: Financial Instruments
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Q1) A financial liability classified as fair value through profit and loss must be:
I \(\quad\)a derivative (except for a derivative that is a financial guarantee contract or a \(\quad\)\(\quad\)hedging instrument)
II \(\quad\)acquired principally for the purpose of selling it in the near term III\(\quad\) part of a portfolio of identified financial instruments that are managed together
\(\quad\)\(\quad\)and for which there is evidence of a recent actual pattern of short-term profit-taking
IV \(\quad\)designated as such up on initial recognition
A) I, II and III
B) I, III and IV
C) I, II and IV
D) II, III and IV
Q2) Which of the following categories of financial instruments is NOT subsequently measured at amortised cost?
A) Held-to-maturity investments
B) Loans and receivables
C) Other financial liabilities
D) Available-for-sale financial assets
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Page 10
Chapter 9: Share-Based Payments
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Q1) A share-based payment transaction in which the entity receives goods or services as consideration for equity instruments of the entity is classified in AASB 2 Share-based Payment as
A) an equity-settled share-based payment transaction
B) a cash-settled share-based payment transaction
C) a liability-settled share-based payment transaction
D) an "other" share-based payment transaction
Q2) Which of the following is within the scope of AASB 2 Share-based Payment.
A) Transactions in which the entity receives or acquires goods or services as part of the net assets acquired in a business combination to which IFRS 3 Business Combinations applies.
B) Transaction in which the entity receives or acquired goods or services under a contract which is within the scope of AASB 139 Financial Instruments: Recognition & Measurement.
C) Transactions with employees in the employee's capacity as a holder of equity instruments of the entity.
D) Cancellation, replacement or modification of share-based payments arising because of a business combination or restructuring.
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Chapter 10: Translation of the Financial Statements of Foreign Entities
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Q1) Post acquisition date retained earnings that are denominated in a foreign currency are:
A) translated into the functional currency using the rate current at the latest end of reporting period;
B) translated into the functional currency using the average rate since acquisition date;
C) translated into the functional currency using the rates at the end of each year since acquisition date;
D) balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.
Q2) When translating into the functional currency monetary liabilities are translated using the:
A) exchange rate current at the date the item was first recorded;
B) exchange rate prevailing at the end of the last reporting period;
C) closing exchange rate;
D) exchange rate current at end of reporting period.
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Page 12
Chapter 11: Employee Benefits
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Q1) Which of the following types of employee benefits are required to be measured at their nominal value?
A) long service leave
B) defined benefit post-employment benefits
C) accumulating non-vesting sick leave
D) defined contribution employment benefits
Q2) AASB 119 requires short-term employee benefits to be measured at:
A) future value
B) nominal value
C) present value
D) fair value
Q3) AASB 119 adopts which method to determining long service leave obligations?
A) units of production method
B) the actuarial method
C) the bi-nominal method
D) projected unit credit method
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13
Chapter 12: Inventories
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Q1) AASB 102 requires separate disclosure of:
A) where there has been abnormal wastage which has been expensed
B) details of inventory pledged as security for loans
C) interest costs which have been capitalised into the cost of inventory
D) details of key terms of purchase
Q2) Ming Limited had the following items of inventory at reporting date: \(\begin{array}{lccc}\text { Item } & \text { Quantity } & \text { Cost/unit \$ } & \text { NRV/unit } \\
& & \$ & \$ \\
\text { Refrigerators } & 10 & 100 & 95 \\
\text { Stoves } & 20 & 80 & 85 \end{array}\)
The adjustment necessary at reporting date is:
A) DR Inventory $ 50; B) DR Inventory $100;
C) CR Inventory $ 50; D) CR Inventory $0.
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14
Chapter 13: Property, Plant and Equipment
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Q1) Troubadour Limited had an existing revaluation surplus in respect to an item of Plant that had been derecognised. An appropriate journal entry to transfer the surplus to retained earnings would include:
A) DR Gain on revaluation - OCI
B) CR Asset revaluation surplus
C) DR Retained earnings
D) CR Retained earnings.
Q2) When applying a revaluation measurement model to assets, the model:
A) applies to the entire class of non-current assets;
B) may only be applied to current assets;
C) is applied permanently and may not be changed;
D) is applied to individual assets within a class of non-current assets.
Q3) A change in accounting policy from the revaluation model to the cost model requires a retrospective adjustment to the:
A) revenue in the profit and loss statement
B) expenses in the profit and loss statement
C) opening balance of retained earnings
D) other comprehensive income.
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15
Chapter 14: Leases
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Q1) The main concerns about the current accounting standard relating to leases include:
I the dividing line between finance and operating leases is hard to define in a principled way
II obligations under cancellable operating leases are little different from borrowings, but are not recognised as liabilities
III assets used in the business that are held under operating leases are not shown on the statement of financial position, thereby understating return on assets
IV leases are scoped out of the financial instruments standards, leading to inconsistencies between leases and similar transactions
A) I and II
B) II and III
C) III and IV
D) I and IV
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16
Chapter 15: Understanding Australian Accounting Standards
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Q1) Which of the following statements is correct?
A) AASB 138 requires disclosures about an entity's intangible assets, with disclosures being made on an asset by asset basis
B) Disclosures about the useful lives of intangibles are required with explanations being required where assets are assessed to have finite useful lives
C) Where the cost model is used, specific disclosures are required including assumptions made on estimating fair values
D) Separate disclosures are required for internally generated intangibles
Q2) A key characteristic that separates assets such as property, plant and equipment from intangible assets is:
A) separability
B) length of useful life
C) lack of physical substance
D) reliability.
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17
Chapter 16: Impairment of Assets
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Q1) The impairment test must be applied to tangible assets:
A) at each balance date
B) every three years
C) at each reporting date including interim reporting dates such as half-year
D) only if there is an indication that the asset may be impaired
Q2) Where an asset is measured using the cost model, any impairment loss is:
A) accumulated in a separate 'accumulated impairment losses' account
B) set off against the balance of revenue
C) taken directly to equity
D) added to the balance of the accumulated depreciation account.
Q3) During 2013 Sacco Limited, estimated that the carrying amount of goodwill was impaired and wrote it down by $50 000. In 2014, the company reassessed goodwill was decided that the old acquired goodwill still existed. The appropriate accounting treatment in 2014 is:
A) reverse the previous goodwill impairment loss
B) recognise the revalued amount of goodwill by an adjustment against the asset revaluation surplus account
C) ignore the reversal as it is prohibited by AASB 136 Impairment of Assets
D) increase goodwill by an adjustment to retained earnings.
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Page 18
Chapter 17: Accounting for Mineral Resources
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Q1) The journal entry required to recognise depreciation on a drilling rig that is being used in the exploration phase of a mining project is:
A) DR \(\quad\)Depreciation expense - drilling rig \(\quad\)\( \quad \mathrm{xx} \)
\( \mathrm{CR} \)\(\quad\) Accumulated depreciation - drilling rig\(\quad\) \( \mathrm{xx} \)
B) DR Intangible E&E asset\(\quad\)\(\quad\)\(\quad\)\(\mathrm { xx }\)
CR Accumulated depreciation - drilling rig\(\quad\)\(\quad\)\(\mathrm { xx }\).
C) DR Intangible E&E asset\(\quad\)\(\quad\)\(\quad\)\(\mathrm { xx }\)
CR Accumulated depreciation - drilling rig\(\quad\)\(\quad\)\(\mathrm { xx }\)..
D) \(\begin{array} { l l l }
\text { DR } & \text { Intangible E\&E asset } & \mathrm { xx } \\ & \mathrm { CR } \quad \text { Depreciation expense - drilling rig } & \mathrm { xx } \\ \end{array}\)
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19
Chapter 18: Agriculture
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Q1) AASB 141 requires that biological assets be measured as follows:
A) on initial recognition and at the end of each reporting period at fair value less costs to sell
B) on initial recognition and at the end of each reporting period at its fair value less costs to sell, except where the fair value cannot be measured reliably
C) at fair value-less estimated costs to sell at the point of harvest
D) at fair value less costs to sell at the point of harvest
Q2) 26 It is common for companies applying AASB 141 to:
A) attempt to 'bury' the fair value movements attributable to agricultural assets in 'other expenses'
B) separately disclose the fair value movements attributable to agricultural assets in the statement of profit or loss and other comprehensive income or the notes
C) disclose the fair value movements attributable to agricultural assets as part of 'abnormal' items
D) remain silent in the financial statements about the fair value movements attributable to agricultural assets, but highlight such items in 'financial commentaries'
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Chapter 19: Financial Statement Presentation
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Q1) At reporting date for Year 1, Elpha Limited had a loan from its bankers that it expected to settle within three months. The loan term was renegotiated after reporting date and before the authorisation date of the financial statements, and the repayment date was extended by two years. For Year 1 financial statement presentation purposes this loan is classified by Elpha Limited as:
A) a non-current liability
B) a current liability
C) a contingent liability
D) an off-statement of financial position liability.
Q2) Where an accounting estimate has been revised materially the item is:
A) to be accounted for retrospectively;
B) not required to be recognised in the current period;
C) to be accounted prospectively;
D) to be adjusted in the comparative numbers of previous periods.
Q3) The following are normally presented in a statement of financial position as current items:
A) deferred tax liabilities
B) accounts payable
C) deferred tax assets
D) goodwill.
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Chapter 20: Statement of Cash Flows
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Q1) AASB 107 Statement of Cash Flows, requires that investing and financing transactions that do NOT require the use of cash or cash equivalents should be:
A) excluded from a Statement of Cash Flows
B) included in a Statement of Cash Flows before operating, investing and financing activities
C) presented in the Statement of Cash Flows after operating activities and before investing and financing activities;
D) presented in a Statement of Cash Flows after the operating, investing and financing activities have been presented.
Q2) Which of the following descriptions best describes cash flows from investing activities? Those activities that relate to:
A) changing the size or financial structure of an entity
B) altering the composition of the debt of an organisation
C) the acquisition or disposal of non-current assets
D) restructuring the working capital components of a business.
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22
Chapter 21: Earnings Per Share
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Q1) A company issues bonus shares for no consideration on 1 August 2014. For the reporting period ended 30 June 2015, the calculation of:
A) only basic earnings per share must be adjusted retrospectively for all periods that are presented in the financial statements
B) only the diluted earnings per share must be adjusted retrospectively for all periods that are presented in the financial statements
C) both basic earnings per share and diluted earnings per share must be adjusted retrospectively for all periods that are presented in the financial statements
D) both basic earnings per share and diluted earnings per share may be adjusted retrospectively at the option of the entity for all periods that are presented in the financial statements
Q2) Any errors or adjustments resulting from changes in accounting policies that are accounted for retrospectively requires:
A) a retrospective adjustment to basic earnings per share only
B) a retrospective adjustment to diluted earnings per share only
C) no retrospective adjustment to either basic or diluted earnings per share
D) a retrospective adjustment to both basic and diluted earnings per share
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Chapter 22: Operating Segments
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Q1) AASB 8 Operating Segments is applicable for financial reporting periods _____ on or after 1 January 2009. Early adoption is _______.
A) ending, not permitted;
B) ending, permitted;
C) beginning, not permitted;
D) beginning, permitted.
Q2) AASB 8 Operating Segments applies to:
I. public companies
II. listed entities
III. entities in the process of listing
IV. any entity who voluntarily chooses to apply it
A) I, II and III only;
B) II, III and IV only;
C) I, II and IV only;
D) I, III and IV only.
Q3) Additional segments must be identified as reportable segments until at least:
A) 75% of total entity revenue is included in reportable segments;
B) 75% of total entity assets are included in reportable segments;
C) 75% of total entity liabilities are included in reportable segments; D) 75% of total entity equity is included in reportable segments.
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Chapter 23: Operating Segments
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Q1) David is the general manager of Awesome Limited and is considered to be the member of key management personnel. The following transactions occurred between David and Awesome Limited:
David purchased a product of Awesome Limited on normal trading terms; David received remuneration from Awesome Limited amounting to $100 000; Awesome Limited issued 20 000 options to David, which can be converted into Awesome Limited's shares if target profit margin of 25% is achieved in the next three years. Which of the above transactions must be disclosed as related party transactions?
A) The purchase of product and David's remuneration.
B) David's remuneration and the grant of options.
C) The purchase of product and the grant of options.
D) All of the above transactions are related party transactions.
Q2) The minimum disclosures for related party transactions include the followings, except:
A) provision of doubtful debts related to outstanding balances;
B) the amount of transactions;
C) the amount of the outstanding balances and commitments;
D) the key management personnel of the related party.
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Chapter 24: Business Combinations
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Q1) Oliveira Limited estimated that the net present value of future cash flows from Equipment acquired in a business combination is $15 000. The cost of replacing the Equipment is estimated to be $18 000. The Equipment has been independently appraised at a value of $14 000. A similar item of Equipment cost the acquirer $19 000 last year. The fair value at which the Equipment will be recognised when recording the business combination is:
A) $14 000
B) $15 000
C) $18 000
D) $19 000.
Q2) In order for a tangible asset to be recognised by an acquirer under a business combination it must be probable that future economic benefits will flow to the acquirer and:
A) its fair value can be measured reliably
B) it must be a non-current item
C) it must be measured using the present value method
D)it may not be a non-monetary asset.
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Chapter 25: Consolidation: Principles and Accounting Requirements
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Q1) When preparing consolidated financial statements, adjustments for pre-acquisition equity and inter-entity transactions are recorded:
A) in the accounting records of the parent entity
B) in the accounting records of the subsidiary
C) on a consolidation worksheet
D) in the accounting records of the reporting entity.
Q2) If the tax rate is 30%, what would be the amount of Business Combination Value Reserve that must be recognised at the acquisition date?
A) $42 000
B) $45 000
C) $52 500
D) $60 000
Q3) When a dividend is paid by a wholly-owned subsidiary out of pre-acquisition equity, the parent entity recognises:
This is explained more in Chapter 26.
A) a reduction in the investment in the subsidiary
B) a decrease in share capital
C) an increase in dividend income
D) a decrease in dividend revenue.
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Chapter 26: Consolidation: Intragroup Transactions
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Q1) The followings are the key questions to consider when determining the appropriate consolidation adjustment entries, except:
A) Does the transaction involve parent entity selling assets to subsidiary, or subsidiary selling assets to parent entity?
B) What is the tax effect of the adjustments made?
C) What has been recorded by the legal entities?
D) Is this a prior period or a current period transaction?
Q2) If a dividend is paid out of profits that are earned after the acquisition date, it is known as:
A) a final dividend
B) a post-acquisition dividend
C) a temporary dividend
D) a pre-acquisition dividend.
Q3) When eliminating an intragroup service which of the followings would appear in the consolidation worksheet entry?
A) Dr Services expense
B) Dr Services revenue
C) Cr Income tax expense
D) Cr Deferred tax liability
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Page 28
Chapter 27: Consolidation: Non Controlling Interest
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Q1) Which of the following statements is correct?
I made a change to the original question, as the original question is very similar to Q22.
A) The NCI is not entitled to share the group's profit.
B) Transactions that do not affect profit will not give rise to an adjustment to the NCI.
C) All intragroup transactions have an impact on the NCI share of equity.
D) When parent entity sells inventory to its subsidiary, a consolidation adjustment needs to be recorded to reduce the NCI.
Q2) The non-controlling interest columns on a consolidation worksheet are used to:
A) adjust the amounts that have been recorded for intragroup revenue transactions
B) adjust the amounts that have been recorded for intragroup services
C) eliminate the recorded amounts of the non-controlling investment in the subsidiary
D) compile the amounts of non-controlling interest and parent share of particular line items.
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Chapter 29: Joint Arrangements
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Q1) A joint operation holds Equipment with a carrying amount of $1 200 000. The two joint operators participating in this arrangement share control equally. They also depreciate Equipment using the straight-line method. The Equipment has a useful life of 5 years. At reporting date each joint operator must recognise the following entry, in relation to depreciation, in its records:
A) DR Depreciation $240 000;
B) DR Depreciation $120 000;
C) DR Investment in joint operation $240 000;
D) DR Assets in joint operation $120 000.
Q2) Tasman Ltd's initial contribution entry will include a debit to the Cash in JO account of:
A) $1 000 000;
B) $1 500 000;
C) $2 000 000;
D) $3 000 000.
Q3) As part of its initial contribution entry A Ltd will record a:
A) Debit against the Services Receivable in JO account of $32,000;
B) Debit against the Plant in JO account of $54,000;
C) Credit against the Plant of $120,000;
D) Credit against the Gain on Sale of Plant of $18,000.
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Chapter 30: Associates and Joint Ventures
Available Study Resources on Quizplus for this Chatper
26 Verified Questions
26 Flashcards
Source URL: https://quizplus.com/quiz/70198
Sample Questions
Q1) For the purposes of equity accounting for an investment in an associate, it is presumed that the investor has significant influence over the other entity where the investor holds:
A) between 1% and 5% of the voting power of the investee;
B) between 5% and 10% of the voting power of the investee.
C) 20% or more of the voting power of the investee;
D) 50% or more of the voting power of the investee;
Q2) Where there are transactions between the investor and associate that result in an unrealised profit, the investor's share of the associate's profit is:
A) not affected at all regardless of whether the transaction is an upstream or downstream one;
B) affected only if the transaction is an upstream one;
C) affected only if the transaction is a downstream one;
D) affected regardless of whether the transaction is an upstream or downstream one.
To view all questions and flashcards with answers, click on the resource link above.